Electronic Arts Inc. (EA) Q3 2013 Earnings Report, Transcript and Summary

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

Thank you. Welcome to EA's Fiscal 2013 Third Quarter Earnings Call. With me on the call today are John Riccitiello, our CEO; Blake Jorgensen, CFO; and Peter Moore, our COO. Frank Gibeau, our President of Labels, will be joining us for the Q&A portion of the call. Please note that our SEC filings and our earning 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 January 30, 2013, and disclaims any duty to update them. Throughout this call, we will discuss both GAAP and non-GAAP financial measures. The comparable Q3 GAAP measures for certain non-GAAP measures to be discussed are: net revenue of $922 million; digital net revenue of $321 million; gross margin of 53.5%; operating expenses of $532 million and resulting loss per share of $0.15. 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. In the third quarter of fiscal year '13, EA's non-GAAP revenue was $1.18 billion, below expectations and guidance. The revenue shortfall was a result primarily of a miss with our Medal of Honor title, with stronger-than-expected sector headwinds for console packaged goods. Our Q3 non-GAAP diluted earnings per share was $0.57, above the midpoint of our guidance. We managed to deliver our Q3 EPS by driving our 3 brands aggressively, particularly FIFA, Battlefield and Need for Speed, via good digital growth and aggressive cost controls. The 2 leaders that did much to deliver the EPS in Q3 are here with me today. Peter and his team drove hard on revenues, while Blake marshaled the troops on the cost side. Blake will explain more about the cost savings shortly while Peter will outline the hits and misses on the revenue side. At the sector level, we continue to see strong industry growth in most digital areas: mobile, PC and console DLC. The console packaged goods market is a different story. We saw an approximate 20% decline in calendar year '12, and consumers are behaving in a way which reflects a console transition. Overall volumes are down. We're seeing some great unit volumes on a few winning titles. The losers are getting hit hard. Console transitions are difficult, but historically, they initiate periods of strong growth and for the companies ready to step up, these transitions represent significant opportunity. Near term, EA will complete the fiscal year with a strong lineup of Q4 titles. These include some of my favorite franchises: Dead Space 3, Crysis 3 from Crytek Studios; the return of an industry classic, SimCity; and finally, an incredible game for smartphones and tablets, Real Racing 3. Beyond Q4, we see a bright light at the end of the tunnel. For EA, digital remains a winner, and our investments are generating strong growth. We're also investing in Gen4 console technologies and content. We've signaled that we're working on the next editions of our 2 biggest franchises in Battlefield and FIFA. And we look forward to discussing these programs and many others with you when we provide our fiscal '14 guidance in May. With that, I'll hand off to our CFO, Blake Jorgensen.

Thanks, John. First, I'd like to start with some details of the gaming sector during the quarter. We estimate that the worldwide video game market grew in the mid-single-digit percentages for 2012. The digital market grew more than 25% over the prior year, with the mobile business being a significant contributor. The packaged goods market proved to be more challenging than initially anticipated, contracting about 20% relative to 2011. We encountered 2 major challenges this quarter: First, Medal of Honor performed well below our expectations; second, the packaged goods market underperformed in Q3 versus going in estimates. To counter these issues, we took proactive steps to drive revenue on thriving titles like FIFA, Battlefield 3 and Need for Speed. We also reduced spending on headcount, variable compensation, contractors, marketing, advertising and other general and administrative expenses. These actions, combined with the higher-than-anticipated gross margin resulting from strong digital sales, enabled us to hit the upper end of our non-GAAP EPS guidance range, despite generating revenue below our forecasted non-GAAP revenue range. Total Q3 non-GAAP net revenue was $1.18 billion, which was approximately 9% below the midpoint of our guidance. Compared to the same period last year, net revenue was down 28% due to the tough comp of Battlefield 3 and the launch of Star Wars: The Old Republic. Peter will provide more detail on our Q3 revenue and title performance but here are a few highlights. During the quarter, we saw strong performances from FIFA and Need for Speed. Madden was up over last year, and both NCAA Football and NHL were down. Hockey, we believe, driven -- or hockey's lockout drove the NHL reduction. The packaged goods side of the catalogue was up over 16%, driven by the continued success of FIFA and Battlefield 3, and we had strong growth on the digital side. EA's Q3 non-GAAP digital net revenue increased 8% year-over-year to $407 million. The underlying growth is understated because we are deferring the Battlefield Premium revenue, and if we included it in this quarter's result, digital revenue growth would have been 15%. The trailing 12-month for digital net revenue was nearly $1.5 billion, representing a year-over-year growth of 37%. Breaking the digital revenue down by type for Q3 shows the following: First, full game downloads contributed $44 million, down 57% compared to the same period last year. Full game downloads have typically been driven by PC products such as Battlefield and Star Wars, and this quarter, we did not have any PC-centric titles. The majority of our Q3 digital revenue full game downloads came from FIFA, Medal of Honor and Need for Speed. We believe that full game downloads will grow in the future. Extra content and free-to-play contributed $185 million, up 50%, led by FIFA and Madden Ultimate Teams and Star Wars: The Old Republic. These revenues relate to businesses on PCs or consoles, where consumers pay for additional digital content, including virtual characters, map packs and microtransactions associated with browser-based games or MMOs like Star Wars. As a reminder, on November 15, we launched our free-to-play option for Star Wars: The Old Republic. Very early indications have been positive, and we are pleased with the initial results but it's still too early to know how successful this will be in the long term. Our mobile business, including handhelds, generated close to $100 million for the quarter, and was up 18% over the prior year. The major portion of this revenue was driven by smartphones and tablets, which accounted for $79 million, up $100 million, growing 36% year-over-year. Some of this growth was due to the success of The Simpsons: Tapped Out on the iOS platform. We are actively developing Android applications for our key brands to address that growing market as well. Based on industry estimates, there's over 1 billion smartphones and over 200 million tablets being used currently. We continue to focus on this segment due to the evolution and the sharp growth of the smartphone and tablet markets. And last, subscriptions, advertising and other digital revenue contributed $79 million, growing 18% over the same period last year. The current year includes a full quarter of Star Wars subscription, but it was offset by a decline in other licensing digital revenues. As a reminder, the non-GAAP revenue continues to exclude our Battlefield 3 Premium subscription service. For the third quarter, Battlefield 3 Premium generated $28 million in sales, bringing the total premium revenue for the first 3 quarters to approximately $108 million. We will recognize these sales as revenue in the fourth quarter when we release the fifth expansion pack entitled End Game. And as another reminder, all of the development and delivery costs have been recognized in the previous quarters. I'd like to point out that all these digital revenue types have no physical goods, costs and there are no associated price protections. Eliminating these expenses provide greater savings, resulting in higher margins. Also, consumers tend to purchase digital content over the course of their gameplay, extending the life of our brands. Lastly, these transactions are direct to consumers, helping us develop and foster our relationship with our gamers. The digital momentum continues to build and we see this as the future. Moving on to gross margin. Our non-GAAP gross margin was up almost 2% over our guidance, driven by the growth of our digital revenue. In our continued drive to improve gross margins over time, we are implementing our own digital distribution business, replacing third-party vendors. Taking full control of this process, combined with shipping fewer physical discs, has contributed to improved gross margin. We believe this trend will continue into 2014 and beyond. Operating expenses for the quarter came in approximately $70 million lower than expectations due to concentrated efforts to reduce spending as discussed earlier. We are being more critical with regard to expenses, concentrating our efforts on the highest value opportunities. In addition, we are focused on greater efficiencies in marketing and leveraging the power of our brands to reduce the need for incremental spend. We continue to reevaluate expenses and cut back where it makes sense. The resulting non-GAAP diluted EPS was $0.57 for the quarter, in line with our guidance and market consensus. Our cash, short-term investments and marketable securities at the end of the quarter were $1.5 billion or approximately $5 per share. Roughly 60% of this cash is held outside of the U.S. Net cash provided by operating activities for the quarter was $363 million, and on a trailing 12-month basis, operating cash flow was $378 million. Obviously, cash flow was impacted by the lower revenues in the quarter. During Q3, we repurchased 12.2 million shares at a cost of $157 million, bringing the total share repurchase under our current program to 20.6 million shares at a total cost of $265 million. As a reminder, the $500 million share repurchase program was initiated in August, and we continue to repurchase shares under this program. In summary, for Q3, we delivered non-GAAP EPS in line with our guidance, despite the revenue challenges. We were able to achieve this through favorable gross margin and focused efforts on reducing operating expenses. Now turning to guidance for Q4. Q4 has some encouraging elements that we can see: First, we will finally get to recognize a full year of the Battlefield Premium; second, we have strong momentum on the digital side of the business, with FIFA Ultimate Team and mobile leading the way; and finally, our biggest 3 titles shipping in the quarter, Dead Space 3, Crysis 3 and SimCity, are all finishing strong. However, there's a high level of uncertainty and challenges surrounding the upcoming quarter, because of the softness we just experienced in the holiday quarter. Additionally, we are also anticipating significant volatility that accompanies a perceived console transition. Also our first key launch for the quarter won't be until next week with Dead Space 3, and there have been no other major releases since December that could reveal any specific trends or developments in the market. And last, we've decided to move the launch of FUSE to Q1 of fiscal 2014. These factors are causing us to be more conservative, and therefore, we are widening and adjusting down our guidance for the quarter, and consequently for the year. GAAP revenue for the fourth quarter is expected to be between $1.115 billion and $1.215 billion as compared to $1.368 billion in the prior year. GAAP diluted EPS for the fourth quarter is expected to be between $0.92 and $1.12 per share, as compared to $1.20 per share in the prior year. Non-GAAP revenue for the quarter is expected to be between $1.025 billion and $1.125 billion, an increase over last year's $977 million. Gross margin for the quarter will benefit from the very high-margin Battlefield Premium revenue that had been deferred. Regarding operating expenses, we expect our total non-GAAP operating expenses to be less than $525 million for the quarter. For the quarter, we expect non-GAAP diluted EPS to be between $0.57 and $0.72 per share, as compared to $0.17 last year. So for the full year, GAAP revenue for the fiscal is expected to be between $3.703 billion and $3.803 billion, and GAAP diluted EPS is expected to be between $0.18 per share and $0.38 per share. Non-GAAP revenue for the fiscal year is expected to be between $3.778 billion and $3.878 billion, and non-GAAP EPS is expected to be between $0.86 per share and $1 a share. On cash flow for the fiscal year, we reconfirm our fiscal '13 capital expense projections of approximately $100 million, but we are adjusting our operating cash flow estimates to $350 million, reflective of our lower guidance. This implies an expected free cash flow generation of $250 million, more than double what we generated in fiscal '12. Regarding next fiscal year, our plan is to provide fiscal guidance for 2014 during our Q4 earnings call, where we'll be in a better position to share our insights. With that, I'll now turn the call over to Peter.

Thanks, Blake. Today, I'm going to offer an overview on the sector, some color on EA's Q3 performance and an update on the games and services we're offering in the current quarter. I'll start with the sector overview. The most obvious trend is the distinction between the performance of high-definition consoles, the PS3 and the Xbox 360, versus standard definition consoles, that is, earlier generations and the Nintendo Wii. Both are trending down, but standard definition is down 46% year-over-year in 2012 versus a 13% decline in our HD titles. That's an important distinction as EA's console titles are singularly focused on that HD audience. The next trend is the concentration of consumer dollars behind chart-topping hits in the packaged goods sector. In the holiday quarter of 2011, the top 10 titles accounted for approximately 40% of Western World industry revenue. In 2012, the top 10 captured nearly 50%. EA had 2 of the top 5 in 2012, FIFA 13 and Madden NFL 13. We also had more top 20 hits, 6 in 2012 versus 4 for the prior year. But as John mentioned a moment ago, this market dynamic results in a clear distinction between winners and losers, and in Q3, EA had both. The digital trends are extremely positive. We estimate that the global revenue from digital games and services grew by more than 25% year-over-year. Mobile game revenues on iOS and Android doubled in size in 2012. Digital revenue related to PC games, including full game downloads, PDLC, social gaming and subscriptions, grew at approximately 20%, as did the digital revenue related to console games. Now turning to EA in the holiday quarter, we struggled with 2 challenges: the slowdown that impacted the entire sector; and poor critical and commercial reception for Medal of Honor Warfighter. Medal of Honor was an obvious miss. The game was solid, but the focus on combat authenticity did not resonate with consumers. Critics were polarized and gave the game scores which were, frankly, lower than it deserved. This one is behind us now. We are taking Medal of Honor out of the rotation and have a plan to bring year-over-year continuity to our shooter offerings. To address the revenue gap, our global publishing organization moved quickly to align behind blockbuster brands with solid revenue streams, namely FIFA, Battlefield, Need for Speed and Madden. I'll start with FIFA, an EA franchise that has emerged as one of the world's top 2 or 3 games. The EA SPORTS team in Vancouver is absolutely crushing it on every format and in every market. Since FIFA 13 launched in September, we've sold through more than 12 million units. And in Europe, FIFA 13 was the #1 title in 2012, outselling all other games, including Call of Duty. The digital performance for this franchise is particularly impressive. The number of gamers that actually play FIFA Ultimate Team grew 61% over last year's offering. Additionally, the average revenue per paying user increased by approximately 30%. Both of these increases contributed to FIFA Ultimate Team revenue being up 136% year-over-year, and the holiday delivered the largest revenue day in the history of the service. Moving to Asia, FIFA World Class Soccer in Japan has delivered lifetime revenue of $80 million. And we're extremely optimistic about the early read on FIFA Online 3, which we have debuted in Korea in partnership with Nexon. After 2 successful closed trials, we went to open beta on December 17 and registered more than 2.4 million players in the first 4 weeks, a record for Nexon. Average daily users reached 440,000, which is 10% above our target. This one is tracking really well. Another Q3 success story was Need for Speed Most Wanted. Sell-through was up over 30% year-over-year, and outperformed the industry's other AAA racing titles. In this market, consumers are concentrating their choices. They don't buy 2 driving titles but they will buy the best one. Need for Speed is back in position as an annualized blockbuster. Next up, Battlefield 3. The core game launched 15 months ago and has captured more than 20 million players. Following the release of Aftermath in December, our fourth expansion pack, the Battlefield Premium service added over 0.5 million subscribers to exit Q3 with total subs of 2.7 million. This is a shooter franchise with unmatched ability to engage consumers, millions of fans who want more missions, more maps and more fun. Battlefield, along with FIFA, is now in position to become one of the top 2 or 3 game franchises in the industry. And no review of our blockbusters would be complete without mentioning Madden NFL. This year's game performed well this quarter, with year-over-year increases in both unit sales and revenue. This year's key innovation is real physics that drive incredibly fluid animations and fundamentally improved the game experience in Madden NFL 13. Beyond the AAA blockbusters, our mobile titles continue to perform well. The Simpsons: Tapped Out hit #1 top grossing app in the U.S. during the holiday period, climbing to 3.2 million daily active users. Both The Simpsons and Bejeweled Blitz have been charting well in the Apple App Store for several months; both will debut on Android later this quarter. In December, EA was once again the #1 iOS publisher worldwide, and December was the highest revenue generating month of 2012 for the App Store. Now turning to Q4. We have 3 top titles and 1 highly anticipated mobile game to finish out our fiscal year: First, Dead Space 3, a proven sci-fi horror franchise with a strong consumer base, will launch in the first week of February. This is our biggest and best Dead Space in the series, with a terrifying single player campaign and an entirely new to the series Co-op Gameplay mode. 30 media outlets listed Dead Space 3 on their best of 2013 list. The Dead Space 3 demo released earlier this month on Xbox 360 has generated 44% more downloads than the demo for Dead Space 2, and the PlayStation 3 demo launched last week. We're feeling really good about this one. Second, Crysis 3, from our partners at Crytek Studios, will ship on PC and consoles February 19 in North America and February 22 in Europe. Preorders are tracking roughly 40% ahead of Crysis 2. We opened the multiplayer beta last weekend, and we're getting a great response from gamers. Third, SimCity, a completely new version of the treasured classic, includes deep online features. More than 100,000 people played the SimCity beta last weekend, giving us a nice bump in preorders, and the critical reception is shaping up well. Watch for SimCity on March 5 in North America and March 8 in Europe. And finally, Real Racing 3 is a stunning driving game for iPhone, iPad and Android devices. Our Firemonkeys Studio did an awesome job with this one, bringing console quality graphics and fluidity to a mobile title. Real Racing 3 will ramp up to a full launch in North America on February 28. Three more shoutouts for games scheduled for release this spring. First, Tiger Woods PGA TOUR 14 will be released on consoles on March 26 in the U.S. and on the 28th worldwide; secondly, Army of Two: The Devil's Cartel, will be available on consoles on March 26 in the U.S. and in Europe on March 29; and finally, Ted Price and the Insomniac Studio are putting a lot of polish into their new game, FUSE. The extra work delivers a big payout for players and FUSE will be released in Q1, our spring quarter. I'll finish with a note on Origin. Our online portal for digital games and services continues to scale. Origin now boasts more than 39 million registered users, with over 2 million new registrations in January alone. And the team is preparing to launch Origin for the Mac next month, extending Origin to tens of millions of new gamers. Now back to John.

Thanks, Peter. Here's a quick summary of what we've told you today. First, Q3 was a disappointment on the revenue side. Medal of Honor didn't deliver, and we underestimated the overall softness in the console packaged goods sector. Helping to offset these challenges was the stellar performance on our 2 biggest brands: FIFA delivered on packaged goods and digital in Western markets and in Asia; and Battlefield 3 contributed strong packaged good sales in Q1 through Q3, and Battlefield 3 Premium is providing a big digital revenue positive in Q4. Second, our Q3 EPS performance was solid and at the upper end of our guidance. Looking forward, we feel we're in a position to capture and lead the next period of industry growth. We think we're perfectly positioned to take advantage of the trends we see coming, in digital and mobile, as well as on the console side of the business. In each of these growth opportunities, we're investing in the next generation of technology and content. We have the biggest brands. FIFA and Battlefield are proven blockbusters, they just keep growing and getting better. I believe that in the next 4 years, both will be among the top franchises that define the industry across all platforms and geographies. And we have several more blockbuster franchises right behind Battlefield and FIFA. We are building a digital platform for servicing our global network of more than 275 million users, a platform that enables profitable growth in digital with efficient cost structure. And we've got the best talent in the industry. EA is a rare company that can build global brands. We can nail it on console, nail it on mobile, and we've built a team that can turn the complexity of a digital platform into a competitive advantage for Electronic Arts. We believe fiscal '14 to be a point of departure, the starting point for a new era of gaming and a growth period for the best game companies. We're confident that EA's brand, platform and talent will separate us from our competition and allow us to lead in this new era. With that, Blake, Peter, Frank and I will take your questions.

. [Operator Instructions] Our first question comes from Edward Williams from BMO Capital Markets.

Just a quick question, first of all, on Medal of Honor. Can you talk a little bit about what you think drove the performance of Medal of Honor? And what steps so you can kind of take from that to prevent that from going forward? Then maybe you can provide a little bit of clarity on, Peter, on your comments on year-over-year continuity with first-person shooters?

I think Frank will take this one.

Sure, let me start with Medal of Honor. Look, we're a hit-driven business, where it's about what you can build in a certain period of time and really deliver for the marketplace. And frankly, we missed on Medal of Honor, and we take responsibility for that. I would be remiss if I didn't point out that the rest of our studios have performed pretty well. We released 11 games this quarter, over 80 in the year, more than any other third-party developer. And we also deliver about 94% of our titles on time. And Medal of Honor, I admit, definitely overshadows these achievements, but we're proud of our team overall. Now if you look at Medal of Honor as a specific case, it was really about a hit missing, but the rest of the studios have really performed and delivered on their goals. As it relates to the comments that Peter talked about in shooters, we've already talked a little bit about that we have a Battlefield title coming next year, but we're not in a position right now to talk about our development plans and our SKU plan long term. That will come in about 90 days when we get to show you some Battlefield stuff.

Brian Karimzad from Goldman Sachs.

A couple of questions, I guess, relating to costs. So the first one, I guess, it was somewhat refreshing to see that the absolute marketing expense came down about 20% year-on-year in the quarter; it had been tracking kind of flattish prior to that. So Blake, is it your sense this is something that's sustainable as we kind of think about things going forward? And maybe, do we kind of go back to the situation where 3, 4 years ago, you're able to get away with kind of a $600 million marketing expense base on a similar revenue base? And I have a follow-up.

Yes. So I'll hesitate to say it's a trend, because it's really driven more by the titles and the activity in the quarter. But we are spending a substantial amount of time, both with our core marketing teams as well as our digital teams here, trying to determine how best to spend each marketing dollar. A lot of work's being done on how to get more out of each dollar, and we're being conscious in a difficult market as to when we spend, and if we think volumes are coming down, we will correspondingly wind back some of our marketing spend associated with some of those volumes. I'd say hold off on putting too much of a trend in your models going forward, but know that we're going to try to keep pushing that down. But it's really going to be driven by the slate of titles going forward.

Okay. And I guess leading off of that, so you generally talk about having 8, 10 recurring franchises. I guess we efficiently got rid of one with Medal of Honor going away. But, and I know you guys don't like to talk about individual game profitability, but I think we can all back into the fact that FIFA and Battlefield probably represents substantially all, if not more, of the profit of the company, at least over the last year or 2. So as you move into next generation here with the console cycle, what's changed in your thinking about your approach to rationalization?

Yes, I think we're going to continue to try to maintain a smaller slate of titles than we had historically. Does that go up or down 1 titles or 2 a year, it depends. I'll let Frank or John comment to that. But at the end of the day, we're trying to build around franchises, so Battlefield and FIFA are great examples, but Madden and others are also examples on that. And the franchise build is -- try to build the profitability by not just having a big title, but by having a long digital life associated with that title. Battlefield's a great example. If you look at the Battlefield Premium service that's come along with that. We're now over 1.5 years outside of when that title was released. And as we've said, we'll book at least $108 million in the fourth quarter on revenue associated with that Battlefield Premium service. FIFA Ultimate Team's another great example. We're trying to create a world in which people are playing FIFA on many different devices in many places during the day. So a team may play at night on a console with their friends, and may then the next morning, update the scores in their Ultimate Team on their smartphone or their tablet, while they're going to work, the may play at work on their tablet or smartphone, they may arrange for a game late in the evening, or for that coming evening, and then get back together with their friends on the console. And all of that can be monetized through different methods of digital, which help drive that profitability versus having single -- one single packaged goods title that's really driving it.

So this is John. Let me add a little bit of that. So 2 thoughts. 10 franchises, Madden, FIFA, Sims, SimCity, Battlefield, FIFA, [indiscernible] I'm sorry about that, NHL, Dragon Age, Mass Effect, Need for Speed, so 10 titles, all profitable. So let me start by dispelling the notion that it's only Battlefield and FIFA that contribute to our profitability. We have a deep bench of highly profitable, great franchises. The second point that I would make is, you are correct that titles at the scale of FIFA and Battlefield are what drives your profitability inside of EA, and they're doing so increasingly for precisely the reasons Blake just outlined. And my view is that the top 5 franchises globally in the industry probably define half the industry's profitability or something close to that. I could be exaggerating a little bit, but I haven't calculated it that way. But I will assure you that -- we believe that FIFA and Battlefield have a shot at certainly remaining in the top 5, quite possibly being 1 and 2, if we're successful as we move through the next technology transitions we see coming. We do recognize as we move into what we determine or call Gen3, i.e., PlayStation 3, Wii, Xbox 360, we started weak, and we climbed forward, improved, but we lost market share coming into this transition, we climbed back. We think Battlefield and FIFA are going to help us lead as we move into the next set of technology opportunities and platform opportunities, and continue to get bigger. So you're right to believe that FIFA and Battlefield are vitally important to us. I think it's too simple to believe that's all that is important to us. I'm proud of the rest of the titles we have, and that's say, 10 or so titles, because it's through that, that we can be sure to have, from this point, 10 great years, 15 great years, not 1 generation of great years, defined by 1 or 2 franchises that may falter towards the end of an individual cycle.

Colin Sebastian from R.W. Baird. Gregor Schauer - Robert W. Baird & Co. Incorporated, Research Division: This is Gregor Schauer, I'm filling in for Colin, he's on another call at the moment. And I guess, maybe a bit of a tough question, but as you guys have mentioned, the biggest, say -- one of the biggest issues you guys are facing are just the secular headwinds as a result of the late stage of the console cycle. So to a certain extent, it seems that a lot is not in your control at the moment. And I guess, if one's anticipating, hopefully a positive and a good -- a well-selling new console, but in the event that the new consoles are not that competitive, what is plan B in that scenario? I mean, and I guess, that scenario could potentially involve the other platforms that are gaining penetration in the -- in this year or maybe evolving as console platforms. How do you -- is that something you can do a lot in terms of preparation for? Or what do you...

So this is John. Let me take that for you, just a little bit. So as a starting point, the data on game usage and game revenue is exceptionally clear. So we have added gamers to the universe of paying game customers in a dramatic way each year over the last several years, and there's absolutely nothing that I see that suggests that's going to slow down. The second thing is, that's been driving very substantial growth in what we referred to as digital. Over the last 12 months, we've generated 37% growth to get us to a $1.5 billion digital business over the last 12 months. I mean, I would -- I could make a reasonable argument that absent all of our packaged goods business, that $1.5 billion digital business growing at 37% might well be more valuable than the entirety of our current market cap, if I were to venture a guess. I -- you guys value it, I don't. But so I think that's a vital fact, growing massive opportunity business for us. But sitting on some pretty sound fundamentals, great brands, strong consumer franchises, great technology and compelling entertainment content. So I think we've got that. What drives that is a talent base that I think no one else in our industry has. Some folks -- and some of the social gaming companies are good at data, some companies that make simple console games are great at entertainment, not so great at monetization. I think we've got both here in that team. Now I think we've got a great story absent consoles. But as you might well expect, we know more about the roadmap and more about what's coming in consumer electronics in terms of the specifics of devices that would play games than you might otherwise be disposed to. The information we have, we remain bullish. It's why we have outlined our plan to invest, this past fiscal year, the current fiscal year, $80 million in that opportunity. So I think plan A is, explode along with the opportunities we see on digital and console, and plan B is console rip [ph] a little smaller, but we have high confidence in what we see coming.

Justin Post from Bank of America.

This is Ryan Gee calling in for Justin. I guess first, going back to the digital, it's solid substantially, quarter-over-quarter, and even if you go back and factor in the Battlefield 3, 15% growth. What else is driving that deceleration? And if we see that FIFA digital has pretty much doubled year-over-year, what else is driving down that growth? And then is there any sign that comps get better moving into the next quarter outside of FIFA -- I'm sorry, outside of the Battlefield 3 digital?

Yes, so this is Blake. The reminder is, that full game downloads are really PC-centric, and so, when you have a title like Battlefield, which was a substantially bigger title than anything we had in this quarter, and you have a title like Star Wars that starts up, so we had the startup of Star Wars in Q3 last year, those 2 combined, are primarily PC-based businesses, and that drove a huge amount of extra content -- or excuse me, or full game downloads during the quarter. So if you look at the slides that we distributed with our earnings package on Page 9, you can see it pretty clearly, $103 million in Q3, full game downloads, versus $44 million in this quarter. Almost all of that's driven by Battlefield and Star Wars startups in that quarter. Yes, the other is just pure math, right? We're now at north of $400 million a quarter in digital business. The law of averages, you can't keep growing that at the high percentage rates that we've been growing them at. Year-over-year growth, 37%, we're fairly confident we're going to continue to see growth because all components of that business, absent the product-driven growth in full game downloads, you're going to see a lot more growth coming out of that going forward.

Okay, great, and then another question. I know you guys didn't ever really quantify it, but it sounds like you're more optimistic on Battlefield 3 digital, it had some good sales in the quarter. And then SimCity, looks like that's tracking well for next quarter. Should we assume that maybe that 4Q benefit next quarter is maybe a little bit bigger? Again, you've never really quantified it, but should we expect to maybe a bigger benefit for next quarter than maybe we were modeling going into this quarter?

Well, you take Battlefield Premium, we know we disclosed today that $108 million will drop into the fourth quarter at a minimum, right, because that's, that game has been up through the third quarter. In the third quarter, we had $28 million generated from Battlefield 3 Premium. Obviously, we're down to the last expansion pack in that series in the quarter, so you might see that trend down a little bit. But you probably, if you did your math and you're somewhere in the $120 million to $130 million in the fourth quarter, you probably see that. I think the one thing to keep in mind is that as we mentioned, most of the costs for developing or delivering that product were incurred as the quarters went along, and so that revenue, when it comes into the fourth quarter, will be a very high gross margin. And so you're looking at the guidance, you might be asking the question, your gross margins must be relatively high compared to say, third quarter and that's indeed true, driven by both that Battlefield Premium as well as the owned IP from titles like SimCity or Dead Space 3, which run at higher margins than some of our other titles. So that's going to give you -- help give you your boosted gross margin, which will pencil out on the guidance that we just gave you guys.

Okay, great. And then, just one last big picture question, maybe for John. I know Nintendo came out today and was a little bit more cautious on its outlook for Wii U sales. Doesn't sound like this is a platform you guys are really pursuing aggressively early on. What does this really say about consumer's willingness to adopt the next gen consoles? We should have something new from Sony or Microsoft. So what does that say, just with Nintendo going through the struggles early on, on the Wii U?

Well, a couple of things. I'd first say, you never count Nintendo out. They've got some of the best IP probably in the game industry. When their marquee titles show up, that's when you usually see the bounce. I'm deeply respectful of the achievements they've had over the last several years and as I said, you just never really count them out. Having said that, I wouldn't say that we see much correlation between the results that Nintendo just shown with their console debut of the Wii U, and what we see coming. We see a pretty sharp distinction, and unfortunately, unable to go any further than that. Ours is an industry where a lot of devices come in and represent themselves as the next generation or the next generation after that. In many ways, we would argue that the gen -- what we're describing as Gen4 is yet to come. And it's with that, we're excited about, and that's what we're investing in. And frankly, we've been quite consistent with that for some time, recognizing the frustration or inability to articulate precisely why causes for you.

Brian Fitzgerald from Jefferies.

A couple of questions, guys. The first one, with the recent events that happened, any softness around first-person shooters or more mature rated games impact that you're seeing or potentially expect to see around Gun Club? And then just to follow on, what's your view of the media and political focus and how it pans out, maybe historically looking back at other hits than inside of happened [ph]?

All right, so I was hopeful we weren't going to do this question, but thanks for asking. So first off, no, we're not seeing softness on -- in the FPS sector. Secondly, I would say, I've got a somewhat unique advantage or vantage point here, working at EA and also chairing the ESRB and the ESA. Some reasonable exposure to the goings-on in Washington. I want to underline the first point. The game industry is a very mature, responsible industry, more so than you might otherwise imagine. First off, we're very confident in the quality of our content and the lack of actual factual linkage to any of the actual violence that takes place in America and markets around the world. So there's no doubt we, like you, were stunned and horrified by the violence in Connecticut or Colorado or other -- in many other places over the years. But there's been an enormous amount of research done in the entertainment field about looking for linkages between entertainment content and actual violence. And they haven't found any. And there -- I could give you long stories about how people in Denmark or U.K. or Ireland or Canada consume as much or more violent games and violent media as they do in the United States, and yet they have an infinitely smaller incidence of gun violence, but that's not really the point. The point is that direct studies that have been done, hundreds of millions of dollars of the research have been done, has been unable to find a linkage because there isn't one. And that went all the way up to the Supreme Court this past summer. A number of folks had summarized the available data, provided it to the Supreme Court, and the Supreme Court came out in favor of, basically stating that we deserve all the First Amendment right freedoms that are accorded to any media. And the key part of that, is I think, they were swayed by the evidence that was presented to them of all these studies. Now having said all of that, and with all, if you will, humility about the world we live in, we understand that while there may not be an actual problem, given all the finger-pointing going on in the press, there appears to be the perception of a problem, and we do have to wrestle with that. Ours is an industry with an association that has risen to that call many times before, and will, as we move forward. We're responsible, we're mature, we intend to be part of the solution. Our media reaches literally every American, and that can be used as a voice for good. And I think you'll hear more from Mike Gallagher, the head of the ESA and other industry participants, including ourselves, over how we can be part of a solution to this perception problem as opposed to, if you will, the butt of the joke. So quick summary, we're horrified, like you. It's not about games. There's a perception issue. We can be part of that solution, and we're ready to step up to do that.

I really appreciate your candid and thorough and sincere comments there.

Doug Creutz from Cowen.

We've seen in the past years some, most or all companies have some real success in mobile and somewhat social in the midcore genre. And I was just wondering where you guys are, with respect to that genre, what your plans are, do you view as an opportunity?

Yes, this is Frank. Absolutely, we are looking at the midcore segment for mobile. Real Racing is a good example of a game that appeals to a core gamer that's going to be coming out shortly on Android and iOS, and we have a number of titles planned going forward, that will start to reach that audience. We're big believers in it.

Any updates on Plants vs. Zombies 2?

We have nothing to announce at this time. The PopCap business is doing really well on mobile, Plants vs. Zombies being a key title in that mix. And we are looking at a great plan going forward from PopCap to grow the Plants vs. Zombies franchise.

Mike Hickey from National Alliance Security.

Valve at CES has this year created, I think, some noise with their official introduction of Steam Box. As Nintendo kind of fades a bit, maybe from this cycle, and there's uncertainty around Sony and Microsoft in terms of excitement, you think Valve could be a competitor within the home console market, moving forward?

This is John. First off, let me admit that I am squarely in the Gabe Newell fan club, really enjoy my conversations with him, certainly have enjoyed a whole lot of content they've produced, and at one time, and certainly even today, I'd say Portal represents one of my all-time favorite bits of game software that's ever been produced. Having said that, Valve really hasn't put enough information out there to suggest whether or not they've got the wherewithal to compete in console. There are lots and lots of issues. But large-scale success in game console usually goes with multiple billions of dollars of investment, both in content development, investments made across a blend of developers and publishers, retail relationships, online relationships, consumer marketing, chip fabrication, manufacturing, supply pipeline and the rest. So based on what they've said so far, it could be anything from a cool niche product that appeals to Gabe and his friends, and people like me, to a product that actually has the shoulders to give help -- lift our industry forward into what we're describing as Gen4. They need to give us -- put a few more breadcrumbs on the ground to tell us what path we're on. Good people, smart people, technologically innovative people. And right now, there's just not enough information out there to really answer.

Sean McGowan from Needham & Company. Sean P. McGowan - Needham & Company, LLC, Research Division: A couple of questions, if I can. First, more probably quicker, what do you think you could take away as learnings from your success with Simpsons for the mobile market? What's either in that title or monetization techniques that you think you can apply to other titles?

Well, The Simpsons brand was a great opportunity for us to bring a bunch of new thinking and new ideas related to episodic content to the market. So one of the things that really stood out for The Simpsons and was the key growth driver was the release of Treehouse of Horrors Packet at Halloween, and we have a commitment to ongoing, episodic theme-based content releases for The Simpsons. And so at its core, it's a hilarious game, working directly with the writers at Gracie really gave the game an edge and an attitude and authenticity that resonated with fans. And then the fact that we're committed to releasing and continuing to release high-quality, episodic content has really proven to be the growth driver there. Sean P. McGowan - Needham & Company, LLC, Research Division: Okay, and then, maybe for John or anyone, could you give us a little bit more specifics on what's driving the guidance for the fourth quarter? Is it just, you don't like what you kind of generally see out there? Or is there something more specific that says, "Here's something that we were expecting, and we knew were going to see a lot less of it?"

I think it's less specific than that, and Frank may -- Frank has actually provided a detailed explanation, and as Peter did on the -- their prepared comments, but I'll give you some color. I think most industry analysts were looking at the holiday quarter, the December quarter, expecting a rack of really good titles, headlined by things like a very rich and positive game coming out of Ubisoft, Assassin's Creed, Microsoft's entry, with Halo. Obviously, CoD, which is a stalwart of the industry and some of the biggest games in history. Together with strong entries like Need for Speed from EA, and the continued strength on FIFA and Madden, and expected that, that title slate would have resulted in much stronger performance that we had seen in the first half of the year, which was not supported by the same richness on the content side. Despite great games well marketed, the December quarter was weaker than we had anticipated going in. And that often happens when the consumer carries the expectation of a console transition. And another hallmark of a -- consumers behaving as if there's a transition afoot or coming, is when you start to see certain titles overperform and other titles underperform in relatively dramatic ways, and that's something else we saw in the December quarter. So when we look at that, it's both down and erratic. And now we're down and erratic and it's the end of January, and with the exception of a small title that was released from Capcom, there are no industry examples thus far this year in January that we can point to, to say, is the market up, down, or sideways, is it performing consistently with the December quarter, or is it going to trend down or up? We just don't have that information. And we're about to launch the first of 3 major packaged goods titles that will define our quarter. So we know we've got a fast boat, we just don't know how deep the water is right now. So we don't know precisely what to do with that. We're -- that's why we've widened the range a bit, to give us room to be sure we have the right answer. We think the content's great, we're anxious a little bit about the sector, and if the sector ends up a little bit smaller and more volatile, that gets us closer to the bottom end of the range, and if the sector performs better, our titles will go with it, we'll be at the upper end of the range.

Todd Mitchell from Brean Capital.

Just 2 quick questions and then a follow up. Just look, to clarify on Battlefield. Can I assume from the comments that you're dropping Medal of Honor, that you're going to annualize Battlefield? And the second question is related to the guidance for 4Q. It seems to me -- is there some kind of back end tax loading in the non-GAAP number versus what you were thinking before?

I'll take the first question, this is Frank. We are not announcing an annualization of Battlefield today. What we've said is that we will be launching a Battlefield game next year, and we're very excited to show you guys more detail on that coming soon. But we're not announcing an annualization of Battlefield at this time.

And on the guidance, I think what you were asking is there some tax benefit that's in our non-GAAP numbers, and no, you're pursuing the same...

No, just the opposite. Versus what you were thinking with your prior non-GAAP guidance for the full year, is the tax bill gone up?

No, we're assuming the same tax rate through the full year.

28%, right?

Yes, 28%, so...

Okay, all right. And then one last question, if you don't mind. In terms of your digital initiatives, there's a lot of acquisition, a lot of internal organic building. Could you just briefly discuss in terms of what's working and what's not working? Is there areas where you intend to sort of rethinking in, retrenching some of your investments, in sort of new digital revenue streams?

So, this is John, I'll take that question to close out today's call. First off, what's working for us is mobile. Digital downloads of full games, although that's obviously very confident with the success of individual titles, and our PDLC business and things like FIFA Ultimate Team, Madden Ultimate Team, and that's both selectable, PC and console. So we feel very, very good about, if you will, it's really console, PC and mobile. It's both the Premium business on a download, and it's a whole bunch of free-to-play models that are working really, really well for us. So that would capture individual examples, like FIFA Ultimate Team, doing really well. That's a microtransaction-based business, mostly related to console. A big part of Battlefield Premium is related to PC. And when I say free-to-play, titles like FIFA in Korea and Japan are both free-to-play but generating very substantial revenues or The Simpsons: Tapped Out is a free-to-play micro-transaction game. If you were to try to drop a grid, it would be Premium and free-to-play titles against both mobile, PC and console, and most of the console being add-on to core titles. So that's was working well for us. Absent from that list is social. Social hasn't done as well for us, and the overall sector is significantly softer, and we'd anticipate it going forward. I think another question you were getting at and one that I think is worth answering, is yes, we have made some M&A. We've acquired a number of companies. I would argue at this point in time, we have the IT we need and the channel access we need. We feel very good about the portfolio of digital assets we have. We think we're in a position to lead digital in the West, and perhaps, with great execution over time, take that lead into Asia because we're now seeing our titles resonate there. We didn't have the strength on smartphones. We did some acquisition to get there. We had good IT. We wanted the added strength of the PvZ brand and the Bejeweled brand and we feel great about the PopCap acquisition. But net-net, we've got a, if you will, a full house with the things that are working, PC, console, mobile, free-to-play, Premium. That's a great deck of cards or a great hand, and at this point, we're not going to trade anything. We like what we've got, and we're not looking to drop.

And with that, Angie, we'll wrap it up now.

Thank you. That does conclude today's conference. Thank you for your anticipation. You may now disconnect from the audio portion.