Electronic Arts Inc. (EA) Q2 2013 Earnings Report, Transcript and Summary

Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Mr. Rob Sison, Vice President of Investor Relations. Go ahead, you may begin.

Thank you. Welcome to EA's Fiscal 2013 Second Quarter Earnings Call. With me on the call today are John Riccitiello, our CEO; Blake Jorgensen, CFO; and Frank Gibeau, President of Labels. Peter Moore, our COO, will be joining us for the Q&A portion of the call. Please note that our SEC filings and our earnings release are available at ir.ea.com. In addition, we have posted earnings slides to accompany our prepared remarks. Lastly, after the call, we will post our prepared remarks, an audio replay of this call and a transcript. This presentation and our comments include forward-looking statements regarding future events and the future financial performance of the company. Actual events and results may differ materially from our expectations. We refer you to our most recent Form 10-Q for a discussion of risks that could cause actual results to differ materially from those discussed today. Electronic Arts makes these statements as of October 30, 2012, and disclaims any duty to update them. Throughout this call, we will discuss both GAAP and non-GAAP financial measures. The comparable measures for certain non-GAAP measures to be discussed are: for Q2, net revenue of $711 million; digital revenue of $320 million -- $324 million; gross margin of 37.4%; operating expenses of $630 million; and resulting loss per share of $1.21. During this call, unless otherwise stated, the financial metrics will be presented on a non-GAAP basis. Our earnings release and the earnings slides provide a reconciliation of our GAAP to non-GAAP measures. These non-GAAP measures are not intended to be considered in isolation from, as a substitute for, or superior to our GAAP results. We encourage investors to consider all measures before making an investment decision. All comparisons made in the course of this call are against the same period in the prior year unless otherwise stated. Now I'll turn the call over to John Riccitiello. John?

Good afternoon. And for those calling in or listening in from the East Coast, we hope you and your families are safe. EA delivered a very strong performance in the second quarter of fiscal '13. Our non-GAAP revenue was $1.08 billion in the quarter, higher than a year ago despite a significant headwind from the declining packaged goods channel. Non-GAAP diluted earnings per share was $0.05 above the midpoint of our guidance, making this our 11th straight quarter of meeting or beating guidance. And I'm proud to say that we are tracking towards another sharp increase in EPS in fiscal '13. Our performance in Q2 was led by very strong sales of our EA SPORTS titles, Madden NFL 13 and FIFA Soccer 13, consistent strength on smartphones and tablets and the breakaway success of our iOS game, The Simpsons: Tapped Out. Medal of Honor Warfighter shipped last week and the highly anticipated Need for Speed Most Wanted launched today in North America. While we are very pleased with the demand indicators on Need for Speed, the Metal of Honor launch is coming in below our expectations. Blake and Frank will provide more detail on these. We also continue to see overall choppiness in the sector. Digital games and services are surging, mobile is scaling nicely and free-to-play is bringing in millions of new consumers. The growth in social network gaming has slowed and console packaged goods are declining, which is typical for console games this late in the cycle. Despite the volatility and headwinds, EA is performing well. We've focused our title count and managed costs. We have diversified our platform partners and business model so that EA is less vulnerable to weakness in a single channel, platform or business model. We got more big franchises than any other publisher, and in most of these, we're performing very well. We are managing the ups and downs. Our Q1 and Q2 were better than expected. Our Q3 appears soft due mostly to Medal of Honor. We're expecting a strong finish in Q4, driven by a powerful slate of titles. Taken together, we are updating our fiscal '13 non-GAAP EPS guidance to a range of $1 to $1.15, down $0.05 from our original guidance, which reflects the weakness in Q3 associated with Medal of Honor. At the midpoint, our guidance is to deliver over 25% non-GAAP EPS growth and to beat the current street EPS estimate for our fiscal year. Next, I want to highlight our progress on 3 key strategies. By now, you will recognize these strategies as our mantra: brands, platform and talent. Our focus on brands centers on constantly improving the quality of our key franchises. We make fewer titles, but we make them bigger by making them better. We transformed the revenue model by adding digital content and services, which extends the relationship with consumers. This strategy is working for EA, and here is one key highlight to prove the point. Since we adopted the fewer, bigger, better brand approach in 2007, EA has delivered the 5 biggest revenue hits in our company's entire history. Our platform strategy is about taking our brands into new fast-growing digital channels and also building our own platform technology to facilitate growth from these platforms and on our own Origin service. We are building bridges to the next generation of games and technology. This strategy is delivering for us, and here's a proof point: inclusive of our successes on Battlefield 3 Premium, EA is currently tied for first in digital revenue among western gaming companies. Over the past 5 years, we have consistently grown our digital revenues, averaging annual growth of nearly 40%. Our third strategic initiative is talent. We are evolving our core capabilities to better address both the art and science of gaming. In addition to having the best creative talent in our studios, we are adding new DNA to build our engineering and analytic capabilities. We are building this capability to support network and platform technologies that will define the most profitable companies in years to come. To summarize, the game sector is in a volatile period of change and transition, awaiting new catalysts for even more rapid growth. EA is executing well in this environment and investing for strong growth in leadership in what comes next. Since the San Francisco Giants won the World Series, I'll use a baseball analogy. EA doesn't win every inning, but we put a lot of runs on the scoreboard, and we expect to finish the season at the top of the standings and to continue to do so for years to come. With that, I'll turn it over to our new CFO, Blake Jorgensen.

Thanks, John. Before I discuss the quarter, I'd like to make a few comments and observations about EA after my first 8 weeks on the job. First, I'm very excited to join this great company. The management team and all the people I've met are true leaders in the industry and extremely dedicated to developing and delivering world-class entertainment to consumers around the world. I'm fully aligned with the strategy of the company and believe we need to continue our journey of focus on those products and activities that generate the greatest shareholder returns. I joined EA because the company is now in the middle of an exciting transformation to a truly digital business that will allow us to grow and improve our profitability over time. My focus at EA will be to help lead the company in improving our operating margins, increasing the return on capital and generating greater key -- greater free cash flow for investors. In conversations with investors and analysts, I'll be direct and transparent, providing the information required to follow our business. I'll help people understand the changes in the financial results as we move further into the digital business, and I'll provide key metrics and guidance when they are appropriate for understanding our performance in future outlook. But I will stop providing metrics if they no longer provide useful information on our business performance. I look forward to working with each of you. And now let me turn to our business and quarterly performance. First, let me start with a brief review of the gaming sector for the quarter. We estimate that the worldwide video game sector grew in the high single-digit percentages. We are encouraged the digital market continues to grow more than 20% over the prior year as the packaged goods market slows. In addition, the mobile business continues to expand, while the social network game -- gaming growth has slowed recently. For EA, both FIFA Soccer 13 and Madden NFL 13 debuted as the top 2 best-selling titles for the western world in the month of September, and NHL 13 made the top 10 list. Additionally, we saw solid catalog performances from Battlefield 3 and the FIFA Soccer 12, as well as continued growth in our mobile business. Our Q2 non-GAAP net revenue was $1.08 billion, which was in line with our revenue guidance and 4% higher than the same period last year, driven by our FIFA, Madden and NHL titles. EA's Q2 non-GAAP digital net revenue increased 45% year-over-year to $314 million, and for the trailing 12 months, exceeded $1.4 billion, representing a year-over-year growth of 59%. For the quarter, each digital revenue channel demonstrated more than 30% growth versus the prior year. For example, extra content and free-to-play were up 34%, led by Battlefield 3, SimCity Social and Mass Effect 3. Full game downloads were up 46% with continued strong demand for Battlefield 3. Mobile business alone was approximately $88 million, up 60% over the prior year. Smartphone and tablet revenue accounted for $66 million of this quarter's revenue, growing at more than 120% year-over-year. The primary drivers include FIFA World Class Soccer in Japan and Bejeweled Blitz on a worldwide basis. The Simpsons: Tapped Out launched in mid-August and has led top-grossing applications in the Apple App Store for most of the month of October. Frank will provide more color on this business later. Subscriptions, advertising and other digital revenue grew 48%, driven by Star Wars: The Old Republic and other key properties. As mentioned on the last call, a free-to-play option for the Star Wars game will be available this quarter, and we will provide more insight regarding the results of this change in future calls. Also, the non-GAAP revenue continues to exclude our Battlefield 3 Premium subscription service. $43 million of Battlefield 3 Premium sales were generated in the September quarter, bringing the total premium revenue from this year to approximately $80 million. As a reminder, we will recognize these sales as revenue in the fourth quarter when we release the fifth expansion pack entitled End Game. A quick update on Origin. We now have over 30 million registered users, including 13 million mobile gamers to date, and revenue was up sharply year-over-year off a small base. Additionally, we have signed agreements with over 70 independent developers to publish their games on our platform, along with our own vast catalog of titles and new launches. Moving on to gross margin. Our non-GAAP gross margin was up 1% over prior year's results, driven by the growth of our digital business. Operating expenses for the quarter came in at $20 million lower than expectations due to the phasing of marketing expenses out of the quarter, slower-than-anticipated hiring and our focus on improving operating efficiencies. The resulting non-GAAP diluted EPS was $0.15 for the quarter, $0.05 above the midpoint of our guidance and market consensus. Now turning to cash. Our cash, short-term investments and marketable securities at the end of the quarter were $1.3 billion or approximately $4.21 a share. Roughly half that cash is held outside of the U.S. Net cash used in operating activities for the quarter was $28 million, and on a trailing 12-month basis, operating cash flow was $490 million, an increase of $183 million over Q1. During Q2, EA repurchased 8.4 million shares at a cost of $108 million. As a reminder, the $500 million share repurchase program was initiated in August, and we continue to actively repurchase shares under this program. In summary, for Q2, we delivered revenue in line with our guidance, and regarding non-GAAP EPS, we were able to over-deliver through favorable product mix, the management of our marketing and operating expenses. Now turning to guidance. GAAP revenue for the third quarter is expected to be between $900 million and $1 billion as compared to $1 billion -- $1.06 billion in the prior year. GAAP EPS for the third quarter is expected to be a loss between $0.71 a share and $0.57 a share as compared to a loss of $0.62 per share in the prior year. Non-GAAP revenue for the quarter is expected to be between $1.25 billion and $1.35 billion, a decline in comparison from last year's $1.65 billion, which included the launch of Battlefield 3 and Star Wars: The Old Republic. Both titles drove packaged goods and full game digital download revenue. Frank will provide an update on our third quarter titles in his section. Regarding our operating expenses, we expect our total non-GAAP operating expenses to be less than $600 million for the quarter, with marketing and sales down versus prior year due to fewer titles. For the quarter, we expect non-GAAP diluted EPS to be between $0.50 and $0.60 a share as compared to $0.99 a share last year. This reflects weaker-than-expected performance from Medal of Honor Warfighter and our decision to cancel our NBA title. For fiscal full year '13, GAAP revenue for the full year is expected to be between $3.85 billion and $4 billion, and GAAP EPS is expected to be a loss between $0.27 a share and $0.06 a share. Non-GAAP revenue for the fiscal year is now expected to be between $4.05 billion and $4.2 billion. Operating expenses are still expected to be approximately $2.2 billion while we continue to focus on cost management and efficiencies. We've lowered our non-GAAP EPS estimate to be between $1 and $1.15 a share. The $0.05 adjustment is coming out of the third quarter based on the guidance that I just provided. It is an offset -- it is offset by a benefit from a reduced share count due to our share repurchase program. Cash flow for fiscal '13. We reconfirm our operating cash flow and capital expense projections of at least $400 million and $100 million, respectively. This implies an expected free cash flow generation of over $300 million or 3x what we generated in fiscal '12. With that, I'll now turn the call over to Frank.

Thanks. Now that Blake has briefed you on our financial performance, I'm going to provide some context around our ongoing success with core products. I want to show that despite a couple of misses, we've got a great track record rolling out big hits. I'll start by providing some color around the outstanding performance of our EA SPORTS portfolio: Madden, NHL and FIFA are all meeting or significantly exceeding expectations. Madden NFL 13 just executed the biggest launch in 4 years. At the heart of this success is another big leap in product quality: a new gameplay engine that includes a huge physics upgrade and innovative online services such as Connected Career mode and Gridiron Club. These breakthrough improvements were noticed by critics who awarded Madden 13 an 86 at launch, our biggest year-over-year Metacritic jump in 4 years. NHL 13 has stunned critics and fans with its graphics and year-over-year innovations. The 84 on Metacritic has helped offset the headwinds related to a strike-impacted season. In September, we released FIFA 13, EA's biggest game of the year with more than 7.4 million units sold in the first 4 weeks. FIFA 13 launched with a 90 Metacritic and quickly became the #1 seller in more than 40 countries. FIFA Ultimate Team, a feature which allows fans to connect, to manage teams and trade players, is now one of the most popular online services in gaming worldwide. Today, more than 2.5 million people are actively engaged in FIFA Ultimate Team, up 34% year-over-year. Now consider 7 years into a console cycle, Madden and FIFA are tracking to their best performances ever. Another breakout hit in the fiscal quarter was The Simpsons: Tapped Out, a free-to-play mobile title which launched in August and was the #1 grossing game on iOS for most of the last 4 weeks. The game has registered roughly 17 million downloads and is generating meaningful revenue in more than 40 countries, including the U.K., Germany and France. This serves as another demonstration that mobile is rapidly scaling and that EA leads with sustained share growth. Now onto our expectations for Q3. I'll start with 2 franchises that have not met our expectations. The first is NBA live, which we elected to cancel this year. I'll address this in the context of our success on FIFA and Madden, where a spectacular core product sets us up for big opportunities with online services. This year's NBA Live did not meet that test. We take this situation seriously. EA SPORTS is committed to basketball, and we will publish a basketball game when we can match the quality of franchises like Madden NFL, NHL Hockey, Tiger Woods PGA TOUR and FIFA Soccer. Next, Medal of Honor Warfighter shipped last week to a critical reception that fell below our expectations. While we're disappointed with the critical response, we believe this is a good game with a receptive audience. The game finished the weekend in the #1 position in the U.K. We will continue to support the game through the holidays with sales execution and marketing. This includes a compelling content download tied to the December release of Sony Pictures' film, Zero Dark Thirty. While we're not pleased with the situation on either of these titles, we are confident in the hit potential of the games that will follow. Our highly anticipated racing game, Need for Speed Most Wanted, debuts this week, and the early reviews are strong. 2 of the most respected critical outlets, IGN and Game Informer, gave Need for Speed a 9 out of 10. And in the U.K., the Guardian awarded the game a perfect score. This spectacular open-world racing experience is enhanced by Autolog 2.0, an innovative social component which assembled an online community to advance players through the game. Edge Magazine said that Autolog is one of the most ambitious innovations in console gaming this generation. It's too early to celebrate, but Need for Speed Most Wanted launched today in North America with pre-orders well ahead of last year's game. Finally, 2 more positives in Q3. First, Battlefield 3 is still charting in the top 10, a full 12 months after it launched. The game has now sold-in more than 17 million copies. And in 5 months, our Battlefield 3 Premium service already has more than 2.1 million active subscribers. A steady stream of online content and services have extended the life cycle of this blockbuster and created a large and persistent ecosystem of fans who pour over every new download of the game. We keep them supplied with digital content and they keep playing. A new expansion pack Battlefield Aftermath, will be available for download this quarter, and another, Battlefield End game, is scheduled for Q4. Second, I want to direct your attention to the release of Real Racing 3 in December. This was the only game on stage when Apple unveiled the iPhone 5. We believe they chose Real Racing 3because the visuals are, quite frankly, incredibly close to what you see on current gen consoles. The EA FireMonkey studio that made this game has demonstrated an incredible mastery of the iOS format. If you want to understand why everyone is raving about mobile games, check out Real Racing 3 when it releases in December. That's our portfolio through Q3, and we're planning a big finish in Q4, which has historically been a strong quarter for EA. Here's a snapshot of the 3 titles we think will be big hits. In February 5, Dead Space 3 is coming to Xbox 360, PS3 and the PC. Each time our Visceral Studio releases a new game in this critically acclaimed sci-fi horror series, the game gets scarier and the audience gets bigger. In North America, presales for Dead Space 3 are up 28% over the same period before our last release on this franchise. In February, we will debut Crysis 3 coming to the Xbox 360, PS3 and PC. Helped by our partners at Crytek, this one follows Crysis 2, which was widely considered to be the best-looking console shooter of this generation. We believe Crysis 3 will set the bar even higher. Crysis 3 has cultivated a large audience in both Europe and North America and won several awards at E3 and Gamescom this year. This game has a lot of potential to be breakaway hit, and we're going to give it a blockbuster marketing campaign. And finally, SimCity, one of EA's flagship franchises, will launch on the PC and Mac on March 5. Consumer awareness is tracking ahead of our expectations for this breathtakingly cool new experience. We're really proud of this one and it shows. SimCity won scores of prestigious awards this summer, including Game Informers Best of Show at E3 and the Best PC Game Award at Gamescom in Europe. We can't wait to release this one in March. Now back to John.

Thank you, Frank. If you've been following our quarterly calls for the past few years, you'll note a certain consistency to our narrative. We promise to build our biggest brands and we have. We promise to drive our business to new digital revenue models, both on third-party platforms and on our own. We have. We have talked about investing in and transforming our talent base. We have. Delivering on these strategies, combined with aggressive cost control, has allowed us to deliver double-digit EPS growth these past 3 years, and we are on track to do it again this year in fiscal '13. We're consistent in delivering on our strategy and goals, and we are very serious about driving shareholder value. With that, Blake, Frank, Peter and I will take your questions.

[Operator Instructions] Our first question comes from Colin Sebastian of Robert Baird & Co. Colin A. Sebastian - Robert W. Baird & Co. Incorporated, Research Division: First, John, if we look out over the next 12 to 18 months, we may see new living room game platforms from Nintendo, Sony, Microsoft and potentially, even Apple. So I'm curious how EA is planning on distributing resources across each of these opportunities, and if there's any update to some of the financial framework you've provided before, and perhaps some of the progress to date on next-gen software development. And then secondly, just realizing that the Halo and Call of Duty have moved back in terms of monetization of digital, away from a premium or subscription model at least from the prior versions of games last year. Does that change at all your approach to the way you plan to charge for add-on content for future Battlefield titles?

I think we'll split this one up. I'll let Frank handle the second part and I'll take the first. So we signaled on our last call, we've investing some time in what we understand to be the future framework of, if you will, of opportunity. I would have to refer you directly to the companies you mentioned, Apple, Microsoft or Sony as to the particulars of their launch plans. But having said that, we've announced our investment, we believe we're going to get strong return on investment, and we are long-term believers in the opportunity of gaming in the living room with ever stronger devices driving that business. Now I guess in a word, we're not ready to make any announcements about next year. I would make these last observations. We're entering what is clearly the -- towards the tail end of a very long cycle. We've reached the bottom of our title count. We expect to increase slightly from here. And we see a lot of opportunity for the growth of our big franchises like Battlefield, FIFA, The Sims, SimCity, Madden, Need for Speed, Mass Effect, Dragon Age and others. We think it's an unparalleled portfolio, and we're putting the investment behind it to turn it into the biggest most profitable business in our sector.

This is Frank, I'll give you some color on the Battlefield Premium subscription service. The feedback that we have received since we launched that 5 months ago has been extremely positive because at its core is a great value for consumers. The opportunity to buy basically 5 expansion packs for the price of 4 with all of the additional services and components is seen by subscribers as a very good value for money, and in fact, our growth rate on that subscription is well ahead of our expectations and we're very pleased with it. We also operate the Ultimate Team style of monetization online, which is more micro-transaction-based, and that's mainly focused on our sports business. But we're seeing good success on both of those console online services and don't see any reason to modify them going forward.

Our next question comes from Edward Williams of BMO Capital Markets.

Just a quick question, if I could, on Medal of Honor and on NBA Live. What, in your opinion, really is kind of what drove the relative performance there? And how is it that you think you can kind of prevent that from occurring again?

Yes. This is Frank, I'll take those. We take product quality very seriously at Electronic Arts, and it's kind of lifeblood of what we do. And when we look at launches like Medal of Honor and NBA, we're not happy with the results there in terms of how they've been received, in the case of Medal of Honor, by the critics and reviewers, and in the case of NBA, it just didn't meet our standards of quality in order to go out and compete in basketball at a level that we felt was necessary and important for EA SPORTS. So in the case of basketball, we're committed to basketball, and we're going to be entering that category in the future, and it's going to be done in a way that we deliver a high-quality product. On Medal of Honor, we're disappointed with the critical reception. Our internal testing and mock reviews indicated that the game is better than the actual score that we have right now, and we believe that it is. However, we are seeing some folks out there that just don't like the game. We believe that it's going to find an audience. It's been -- had a good track record over the weekend in the U.K. We're going to continue to support the game going forward with marketing and additional content. And I think when you look at those 2 products and you take a step back and you look at the broader portfolio that Electronic Arts has been building, overall, we've got a quality record that's pretty remarkable inside the industry. I think no other studio has improved quality as dramatically as Electronic Arts over the last several years. And if you look at our recent track record, we've released the most popular FIFA game ever. We vastly improved Madden in terms of its quality. Battlefield 3 is a top 10 game and is past 17 million units. And today, we had a really good result with Need for Speed Most Wanted in terms of its release in the early critical reception. So we take quality very seriously. We're in a hit-driven business. And we don't reach our own high internal expectations, trust me, we're going to school on what happened and what occurred, and we're going to do better going forward.

So your thought at this point with regards to Need for Speed is that as far as the initial channel sale, that's been in line with your expectations and has not necessarily been affected by the Medal of Honor release?

Yes. Repeat that, Ed, I'm sorry?

With regards to Need for Speed, the release of the game and the initial expectations in the channel sale, that has not been affected by the Medal of Honor performance?

Not at all. I was just glancing the Metacritic right there, we're an 86 of about an hour ago. In fact, we've getting better reviewed than Assassin's Creed as it currently stands on the Metacritic point of view. Our retailers have had early glimpse of Need for Speed. Our sell-in is strong. Our demand metrics are definite. Purchase intent, for example, is strong and our pre-orders as was mentioned on the prepared remarks are the highest we've ever seen for the Need for Speed franchise. So all of the data indicates a very strong start. And this, of course, as you know too well, is a title with a very long tail that will sell well. So no issues whatsoever. I don't think retailers link game performances from franchise to franchise. They place their orders accordingly based on their pre-orders and what they think their consumers are going to pick up.

Okay. And then just the last question is, you have -- you built up about 30 million registered users for Origin based on your comments. Can you give us an idea as to how many of them you're actually able to monetize at this point?

As of the latest data I looked up this morning, about 4.4 million people have actually purchased on Origin. And our average sale on Origin, actually, is about $64, so people are buying multiple games. The breakup of that 30 million is, I think, mostly interesting is we're now seeing as many as 13 million who are accessing Origin via their mobile devices. So with the 70-plus developers that are now putting content on the platform with our own content itself and Medal of Honor debuted this week, obviously, our ability to be able to continue to drive strong commercial engagement, as well as community engagement is going to be key. And the metrics all point towards that being a very strong part of our business.

Yes. And over the next couple of years, you should watch Origin carefully. It's a big part of our strategic drive. You'll see a lot of interesting things coming there. We think it represents a huge opportunity for us.

The next question comes from Neil Doshi of Citigroup.

A quick question on the social gaming side. I Facebook noted on their earnings call that gaming, ex Zynga, was up 40%, and on your earnings call, you also noted that there was a little bit of slowdown on the social gaming side. Is this more of a structural issue regarding gaming on Facebook? Or are you seeing -- or is there some sort of execution issues with producing games for the Facebook platform? And then I have a follow-up as well.

Well, first off, I think it's always a little bit dangerous to try to answer the outcome of the game right in the middle of the event. So it's a little too early to call the social gaming business. But I think some pretty clear observations. One is when it was anticipated by some, the double, double and double again, 1 to 1.5 years ago, we were quite comfortable that it would double and that we'd start growing with the market. We never got to the second and the third double. So we were never quite as positive on it as some, although we are believers in it. Currently, it hasn't declined in the sector, but it is showing slow growth. The most recent quarter was up versus a year ago but down sequentially, but that down sequentially is probably more seasonal than anything. That's at the aggregate level. But my personal view is that Facebook has moved away from some of the game-based viral channels, and consequently has done a purposeful thing for the health of their own platform to diminish, if you will, the way a lesser game could spam people to death and generate revenue. So my second observation is that core games are doing better on that platform than some of the lighter things that are more traditionally defining the Facebook platform. I think a better way to think of it is this though. People are accessing Facebook games on either a mobile device or a PC. Think of them as mobile games and PC games, not so much as Facebook games. Assess it. What makes for a great mobile game will continue to be great. What makes for a great PC game will continue to be great. And there's a lot of opportunity with EA. We're growing rapidly on the PC side and rapidly on the mobile side, and we will continue to have entries on the Facebook side. We have reduced our SKU plans some there, but we continue to have a belief that it's an important part of our mix. I hope that gets added for you. Because the headlines are explode versus the hype, but it's certainly not dead. And we think if it is part of a mobile mix and part of a PC mix, and we continue to create entries. We have just announced yesterday, for example, a strong tie between our NHL franchise and Facebook, so it continues to be very useful and positive for us.

Okay. And on the digital revenue side, you've had very strong digital revenue, which is great. However, I guess on the gross margin side, we've seen margins kind of tick up modestly. Can you remind us what the margin profile as of your different digital revenue line items, and at what point do you think we'll start to see gross margins expand, I guess, more in line with the digital revenue growth?

I can take that. It's Blake here. We don't disclose the differences between our margins, but what we have said, I think, in the past is that digital business does allow us clearly to operate in higher gross margins. We'll continue to see that growth over time, and we're very focused on it as a way of driving profitability and really reaching a much higher operating margin target in the long run. I can't give you a good sense of timing yet because the business is growing so rapidly. It's difficult to predict, but we're very focused on trying to drive profitability through improvement in gross margin, and you're seeing that as you compare our business over the last couple of years.

And on the last call, we got this -- a very similar question -- or maybe it was 2 ago, we’ve seen better than a 12 point pickup on our gross margins over the last 4 years, and we attributed it then to really 2 factors. About half of it coming from exiting the distribution business, the old Rock Band business, the old -- we'd take a game in market, uptick for distributions stage. And the other half of it is due to mix towards digital. So we've seen a big pickup at the consequence of digital, and we expect to continue that. It's something that's been a key feature of our financial performance for the last 4 years.

And just remember when we talk about digital, we're talking about components of digital such as mobile, free-to-play and others. And so each of those have different gross margin perspectives. But in general, most of those will give us a gross margin pickup as we move forward.

The next question comes from Brian Pitz of Jefferies. Brian J. Pitz - Jefferies & Company, Inc., Research Division: John, I think you suggested sharp increases in EPS going forward. Can you please help us characterize the primary drivers of this trend? Also, mobile revenue is up 60% year-over-year. Would you give us a sense for the key drivers of mobile growth? And finally, it looks like you're taking down full year guidance by about $50 million on revenue, $0.05 on earnings, despite the beat. Can you give us a sense for the drivers? Is it Warfighter's softness? Any color would be great.

So in terms of our expectations for the future, we've been showing sharp double-digit profit growth really since we restructured 4 years ago. And even at the midpoint of our guidance now, we're showing 25% growth. We're doing it in a year when we're lapping Battlefield. So if you think about that, that's a pretty stunning reality. There's a composition shift in our P&L towards higher-margin businesses is the primary driver there. Because it's clear, right now, we're not seeing a lot of top line revenue growth in this tail end of console GEN 3 cycle. The second point that I would say to you is, we're pretty strong believers in revenue growth going forward. We think we've reached sort of an end of an era. We are reaching a tipping point relative to digital, and we've intimated, in many ways as we can, without getting ahead of ourselves that we are believers and it's worth investing in next-generation technology, some of which are invisible to all of you on the call. When you take top line growth together with the superior margin structure we've built around the advancing digital end of our business, we see the opportunity for continued margin expansion. But that's about as far as I'm going to get towards guiding you to years beyond this one. That's the framework. It's consistent with what I've said at E3 and other public speaking events. But we're not here on this call ready to talk about sort of fiscal '14, or fiscal '14 through '16 framing. We'll begin to do that over the course of the next few calls.

Why don't I try to hit on the next 2 parts of the question? One is the digital question, and then the second is the guidance question. So digital, just hitting on some of the points that we made in the prepared remarks. Keys to digital growth have been across a wide variety of options for us or opportunities for us. Extra content and free-to-play have been a big driver. Battlefield is a great example of that, SimCity Social as well. Free game downloads, up 46% when you look at Battlefield 3. The mobile business, up dramatically, up 60%, driven primarily by the new smartphone formats and tablets. For those who haven't tried The Simpsons game, I think it's critical to go out and give it a go. It's been one of the top grossing apps on the App Store and it's just a fabulous game. But Bejeweled Blitz, for example, one of the PopCap Games we acquired, is doing extremely well. And then FIFA, on the mobile business, smartphone business has been great, particularly as people are playing Ultimate Team. So that, plus a subscription business, continues to really drive the overall digital revenue. And as a reminder, we haven't booked any of the Battlefield 3 Premium sales, already north of $80 million this year, and will all get recognized at the tail end of the year. On guidance, I'd say it's a combination of conservatism and impact from Medal of Honor. Our guidance though as a reminder also is still above the street in most cases. Our revenue guidance came down $50 million at the top end and the bottom end of the range and is right on top of the street guidance, and then at the earnings level, we came down $0.05, but are still above where street guidance is. We're confident in that because of the back half of the year portfolio that Frank spoke to you about, as well as the improvements in gross margin and our ability to hold OpEx and that yields the guidance, but we think that's realistic relative to the disappointment in Medal of Honor. Brian J. Pitz - Jefferies & Company, Inc., Research Division: Great. Actually, my second question was more focused on mobile versus total digital, but it sounds like it was really Simpsons that was the key driver.

FIFA, Simpsons and Bejeweled, all 3 were big drivers.

And also Sims performed well on mobile for us as well. One thing to remember about mobile is, a few years ago, EA was pretty much a feature phone player, and we've completely transformed to putting leading microtransactions or free-to-play titles that monetize very well on smartphones. At this point, our focus has been iOS, and we've got a lot more coming. We feel very, very confident in that business.

The next question comes from Justin Post of Merrill Lynch.

Two questions for you. First, it looks like your guidance for Q4 obviously is very back-end loaded. I'm getting $0.70 to $0.75 versus $0.17 last year. Can you talk about the impact of Battlefield earnings-wise in Q4 and why you're confident that you can grow earnings with catalog for the industry being down so much? And then, John, maybe talk about just where we are in the cycle as you see all the hardware coming. I mean, is there a chance that packaged goods starts growing next year as an industry? Or can you give us any thoughts on -- with the new consoles coming, how you think about next year?

Justin, why don't I take the first part? The Q4, the reality is our differences between where we were originally guiding on Q4 versus where we're currently guiding aren't that different. We're up slightly versus our previous guidance, and that's really built on the strength of the fourth quarter titles, as well as just the continued strength in catalog. I don't think we're being overly optimistic. We've had a strong catalog business and it continues to perform really well, it tends to perform well in the back half of the year. Q3 is really where the big difference came, and we -- I did mention before, but realize that FIFA 13 did extremely well in Q2. We're assuming that, that may be pulling some of Q3's business and that, in combination with the NBA business and the Medal of Honor business, is really what's brought Q3 down. We haven't really moved much from Q3 to Q4. It basically stays the same because really, Q3 is where the big delta is.

And just 2 quick thoughts on Q4 and give you a little color. Q4 has essentially been rising with the increased performance of Battlefield. So we keep selling subscriptions well ahead of our initial expectations. 100% of the revenue drops into Q4, and it's 100% fully-owned IP with a very high margin. The second component is the only other thing that's comparable in our business with the Battlefield subscription business in terms of margin impact, it is in fact better it’s selling SimCity. It's a PC-based wholly-owned IP with a huge global audience. So there's a lot of owned IP in the quarter and it's very strong IP. And Justin, I would give you points for trying very hard to get one more pint of blood out of us relative to understanding what next-gen looks like. Once again, we're going to have to tell you that color on next-gen needs to come from the people producing it, and color on our own fiscal '14 and beyond, beyond what I've stated, is going to have to wait for a future call.

The next question comes from Sean McGowan of Needham. Sean P. McGowan - Needham & Company, LLC, Research Division: I was hoping you could give us a little update on where things stand with Star Wars: The Old Republic, the changes that you've made to the business model and how that's working, or anything you can give us on that. And then remind us on the Battlefield Premium. You've given us some great color on the revenue that's coming. What costs might have been deferred on that or might show up in Q4 against that revenue?

Yes, this is Frank, I'll start with the Star Wars question. As we announced in our last call, we are pivoting that business to open up a new free-to-play part of that business model. That starts this November. And so I think it's a little premature to be able to give you too much color on how that's going to go until we deploy it. In Blake's remarks, he mentioned that we'll have an update on a future call and give you guys some more information on how the free-to-play conversion went on Star Wars. So… Sean P. McGowan - Needham & Company, LLC, Research Division: How's the existing business going?

It's vibrant and positive in Star Wars. The game is continuing to release content. People continue to be subscribing to the product. So for that part of the business, the premium subscription side of the business is very stable, and we're excited about the potential and the free-to-play option. Sean P. McGowan - Needham & Company, LLC, Research Division: Okay. And the people hanging out, those that already signed up or are kind of staying?

Like I said, we feel good about stability in the community and people are excited about the new content, actually, we've been releasing. So yes.

And on your Battlefield question, we expense all of the costs associated with developing the extra content when it's developed, so that's been expensed in each quarter. So it's really the revenue that's getting recognized after all the packages have been delivered to the consumer. Sean P. McGowan - Needham & Company, LLC, Research Division: And there's no deferral of marketing costs?

No.

Think of Battlefield as a 4-quarter business in a way where all the costs or most of all the costs are in the first 3 quarters, and all of the revenues in the fourth.

You might have ongoing marketing costs that are associated with signing up new people, but for -- and those are relatively small because it's building off of the franchise. But for costs that are incurred in any of the quarter, the larger cost components are really the development, and all those have been in each of the quarters in which they occur. Sean P. McGowan - Needham & Company, LLC, Research Division: Got it. I just didn't know if there was some accounting principle that tried to match costs to revenue and you put it off. But you've answers the question.

Our next question comes from Doug Creutz of Cowen and Company.

Yes, a couple of short ones. I think your last SimCity major release was SimCity 4 back into 2003. And I wonder if you can just remind us how many units you sold of that? Second question is, I think it looks like you're guiding to about $1 billion in digital revenue in the back half of the year. And I was just wondering how you're anticipating that phasing between fiscal Q3 and fiscal Q4?

So on the revenue piece, we'll continue -- we won't split out a lot of detail on the forecast going forward. But you should consider the similar percentages in Q3 and Q4 that we've talked about before and the trends that we've continued to see and growth off of that level. So if you're looking at roughly $300-plus million in Q2 actuals going forward, you'll continue to see growth in those in Q3 and Q4. On the SimCity, we're just looking for the data right now, and I don't have it off the top of my head.

We don't we always carry it when it's a 7-year-old factor. It was in the low to mid-single millions units, but we'll look that up and get back to you, Doug. And just another factor on digital, just remember, the majority of Battlefield Premium is a digital revenue sale for us, again. So another observation to keep in mind there, it's lumpy relative to digital revenue in the fourth quarter because of the recognition of Battlefield Premium.

Our next question comes from Atul Bagga of Lazard Capital.

And I have 2 questions. Number one, on the digital title slate, I think in the last quarter call, you had highlighted you have 41 titles for in this slate -- for this year's pipeline. And in this earnings call, I think you were highlighting 31 titles. Can you talk about, are these 10 titles getting pushed out of fiscal '14 or these are getting canceled? Any color on this will be great. And second on the Battlefield, given the strong engagement that you're seeing with the users, strong catalog sales, would you ever consider making Battlefield as your annual franchise?

Atul, it's Peter. I can give you a little bit of color without too much detail, unfortunately, on the change from 41 to 31. It's a combination of pushing some stuff out into the next fiscal year, killing a few things that we didn't think were relevant in the marketplace today and a strong pivot towards mobile from social, in some instances, that would obviously push them back a quarter or 2. So no real changes other than those to the lineup, and obviously, we're getting completely focused on the mobile business as well, but taking care, as John mentioned earlier, of making sure that we deliver on major brands and social.

To be clear, the lion's share of that, and Peter's being careful, the stated plan, we’ve reduced our SKU count against Facebook social and [indiscernible] . So that's the primary issue. Frankly, the combination of factors in terms of revenue outcomes for titles from us and others in that arena and the cost required is not proven to be a great equation. You can make a block, but you can't make enough to feel great about the investments, so we have re-prioritized and taken some time.

And I'll take the question on Battlefield, this is Frank. We're committed to -- we're focused on building the next Battlefield experience right now, and our goal is to make a high-quality experience that grows the business. If we do that on an annual basis, that's not something that we've announced or are openly discussing at this point. We're really just focused on the next Battlefield.

Makes sense. And if I can have one more follow-up. You guys talked about NBA cancellation, some underperformance of Medal of Honor and you're taking down your revenue guidance by about $50 million. Can you talk what other puts and takes? Is it mostly the strength of FIFA? What are the things going on in the guidance? You talked about what's going down, but what's going up there?

Broadly, the over performance, we've talked about already, and I'll just bring you up to speed. We talked a lot about FIFA being positive. We've talked pretty sharp positive in the form of Battlefield and Battlefield Premium. We've talked about -- look, frankly, Need for Speed, relative to our initial expectations, looks very strong. Madden, with a solid entry this year and mobile across-the-board. So those are generally our upside scenarios. We've got what we think -- look, when you start the fiscal year, you don't know your fourth quarter title in terms of the exact quality that they're finishing at. Right now, what I've seen at Dead Space, what we've seen at Crysis, what we've seen on SimCity could do nothing other than bolster our confidence and the ability of those titles to deliver. We feel good about our numbers. But you're right, we've had -- I mean, the principal downside this year were Medal of Honor, NBA and frankly earlier, Star Wars has underperformed. But that's really the balanced equation.

Our last question will come from James Hardiman of Longbow Research.

Just to piggyback a little bit on the back-weighted guidance for the fourth quarter. Obviously, at any given point in time, your guidance is dependent on the releases that you have, obviously, given all the releases that are scheduled for the fourth quarter, maybe a little bit more risk. Can you go through some of the major titles that you have coming out in the fourth quarter and just talk about the risk that those releases could get pushed back? Are the major console titles pretty much etched in stone? Or is there some risks associated with some of these PopCap Games for the fourth quarter?

This is Frank, I'll try and give some additional color. If you go back to my remarks, I called out 3 key blockbusters for us in Q4 with SimCity, Crysis and Dead Space 3, all proven brands with great development teams working on those products, so we feel very good about the trajectory on those 3 games. And those are the primary drivers in the HD console PC business that we have. In mobile, continuing to see strong growth in there. Obviously, the smartphones are going to be very popular items at Christmas this year. We see that expansion in the installed base continuing to drive not only our new releases as exemplified by Real Racing 3, but also our catalog titles in future releases and updates for PopCap. As you might know, we've converted most of our, if not all, of our mobile business to a premium business model, so these are much more reflective of ongoing services that we are constantly updating. In the case of Simpsons, we did a little Treehouse of Horrors update around Halloween that drove tremendous growth inside the revenue inside that business. We're going to -- we're committed and going to continue to release timely updates of content inside the mobile business and is going to feel very much like an online service going forward. So I hope that gives you a little bit more color. And then of course, the Battlefield subscription premium. We still have 2 more releases of Battlefield content inside that subscription with Aftermath and End Game. That digital business continues to grow, and we're seeing continued and strong performance in FIFA Ultimate Team, which has gotten longer and longer legs over the years, where we see very high peaks in terms of our online community participation and revenue generation in Q4 and FIFA as the season in the Premier League, as an example, really heats up and we're continuing with releasing content. So it's a combination of proven brands that are related to new releases, as well as online services continuing to be updated and grown, coupled with, as Blake mentioned, a strong catalog business. Electronic Arts has a very diverse and deep catalog that always performs well for us at Christmas and in Q4.

Very helpful. And just a quick follow-up, gross margin guidance has really remained unchanged over the course of the year despite top line guidance coming down a bit. What's going on there? Does that say anything about the revenues that are being lost that were relatively low-margin revenues? Any way is it a function of better mix from Battlefield? How should I think about your ability to maintain that gross margin number?

Yes, I mean, I think as we mentioned, we're fairly confident in our ability to continue to drive gross margins. And clearly, as you're looking at guidance, you should view the gross margin guidance we've given in the past as definitely good and we'll probably exceed that. And that's being driven by the shift towards more digital business and a portfolio effect of higher fully-owned IP, particularly in the back half of the year where you get much higher gross margin in the fourth quarter based on the titles that Frank just talk about. So all that leaves us with fairly good confidence around the direction for gross margin, both in the near term, as well as longer term for the business.

All right. Well, thanks, everyone for joining us on the call. For those of you on the East Coast, stay safe, and we'll talk to you again in a quarter. Thanks very much.

This concludes today's conference. Thank you for your participation. You may now disconnect.