Electronic Arts Inc. (EA) Q3 2016 Earnings Report, Transcript and Summary

Good afternoon. My name is Doris and I will be your conference operator today. At this time, I would like to everyone to the Q3 Fiscal Year '16 EA Earnings Conference Call. [Operator Instructions] After the speaker's remarks there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to your host Mr. Chris Evenden, Vice President of Investor Relations. Sir please go ahead.

Thank you, Doris. Welcome to the EA's fiscal 2016 third quarter earnings call. With me on the call today are Andrew Wilson, our CEO, Blake Jorgensen, our CFO and 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. A couple of quick notes on upcoming events; we’re holding our Investor Day on Tuesday, May 17th, at our Redwood City at headquarters. This will be a great opportunity for members of the financial community to hear from our senior management team and meet with them in an informal environment. In addition, Blake will be presenting at the Morgan Stanley conference on Tuesday, March 1, and our Q4 and year-end earnings call is scheduled for Tuesday, May 10th. 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 today, January 28, 2016, and disclaims any duty to update them. 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 Andrew.

Thank you, Chris. Q3 FY'16 was a great quarter for Electronic Arts. Across all key platforms, we delivered amazing new experiences for our players and live services that enabled them to play more of the games they love. Non-GAAP revenue and earnings were above our guidance for the quarter, and we are raising our full-year non-GAAP guidance as we continue our strong momentum into the final quarter of the year. Our highlights from the holiday quarter capture how players are engaging across the increasing breadth and depth of games and services from Electronic Arts. Q3 was a breakthrough quarter for our partnership with Disney and Lucasfilm on the Star Wars franchise. With Star Wars Battlefront, our team at DICE delivered a game with amazing visual fidelity, unmatched authenticity and true Star Wars action fantasies that are fun for fans of all ages. It became the largest launch ever for a Star Wars game, and exceeded our guidance for the full year. The journey is just beginning for Battlefront fans. Earlier this week, we announced our first free content update as well as the four expansion packs to come for Star Wars Battlefront, and there are many new experiences in development for every player in the growing community. Star Wars fans are deeply engaged in our experiences on mobile and PC as well. On mobile, Star Wars Galaxy of Heroes quickly built a strong player base after it launched in November, reaching the top 5 most-downloaded iOS games in more than 130 countries. On PC, our Star Wars, The Old Republic community has grown to the highest subscriber level in nearly three years, driven by the latest digital expansion, Knights of the Fallen Empire. More great content is on the way for players in each of these experiences, as well as new Star Wars titles for multiple platforms in development across the company. Continuing the mobile momentum, Madden NFL Mobile is a cultural hit that topped the U.S. App Store charts over the holiday period. Player engagement is thriving, with monthly active players up nearly 50% year-over-year and our live events driving two and a half times more games played over the previous year. Madden NFL Mobile continues to illustrate the opportunity for sports games on mobile devices. Just as we’ve demonstrated on other platforms, great sports experiences will ignite fans’ unbridled commitment to the teams and sports they love, driving deep engagement over time. Building on the success of Madden NFL Mobile, we are excited to bring more compelling EA SPORTS experiences to our players on mobile devices. As the top game publisher on PlayStation 4 and Xbox One consoles in the western world for calendar year 2015, EA continues to captivate players with some of the world’s biggest and most popular franchises. Madden NFL 16 was the number one sports title in the U.S. and FIFA 16 was the number one title across all genres in Europe for calendar year 2015. Player engagement continues to grow across our entire EA SPORTS portfolio, with monthly active players growing more than 10% year-over-year in the third quarter. And the return of Need for Speed delivered for racing car and car culture enthusiasts, with more than twice as many monthly active players in Q3 compared to our previous game. Live services are at the core of how we help our players connect with each other and stay engaged in their favorite games longer. Our EA SPORTS Ultimate Team services continued to engage more fans year-over-year in Q3, driven in part by new experiences like FUT Draft in FIFA 16 and Draft Champions in Madden NFL 16. We also continue to see long-term engagement across Battlefield 4 and Battlefield Hardline. In Q3, our players logged more than 150 million hours of Battlefield gameplay. Our subscription programs represent a key opportunity to connect players to even more great games. EA Access continues to grow in subscribers, and more than 60 % of those players have used EA Access to try a game they haven’t previously played. Based on the success of EA Access, we’ve just launched Origin Access, expanding our subscription programs to the PC platform. Early reaction for Origin Access has been equally positive, and it’s clear that our global player base sees value in this innovative approach to playing more games. EA Access and Origin Access are great examples of how EA is working to help players with one of the more compelling challenges in entertainment today. In a world that sees more competition than ever for our players’ time, we are focused on delivering services that reduce friction and barriers to discovery, allowing them to maximize the time they have to play their favorite games or try something new. Through deeper relationships, we can help more players connect to vibrant communities, access more games and content, and engage in experiences that are meaningful, personal and fun. In Q3, we captivated players with stunning new experiences and more great content for the games and services they love. Now, I’ll hand the call over to Blake for a deeper look at our financials.

Thanks, Andrew. EA’s non-GAAP net revenue was $1.803 billion, which was $28 million above our guidance. The quarter’s revenue was 26% higher than the prior year’s, primarily driven by Star Wars Battlefront and Need for Speed, but also by growth across the breadth of our portfolio, including Ultimate Team, mobile and catalog. Star Wars Battlefront surpassed our full fiscal year guidance of 13 million units, which includes over 1 million units bundled with consoles. On a constant currency basis, revenue would have been up 35% year on year. Our non-GAAP digital net revenue for the quarter increased 16% year-over-year to a record $807 million, 45% of this quarter’s revenue. It was also a record for the trailing twelve month period which was up 11% to $2.42 billion. Breaking down our digital revenue into its key components highlights the performance of each of these businesses this quarter. Extra content and free-to-play contributed $360 million, up 15% over the prior year. The principal driver of the growth was Ultimate Team. In particular, FIFA Ultimate Team showed strong growth, up 8% year-on-year, or 18% year-on-year at constant currency. Madden Ultimate Team and Hockey Ultimate Team also grew. Finally, FIFA Online 3, our PC free-to-play title in China and Korea, continues to perform well and is tracking to our expectations. Mobile generated 162 million in the quarter, up 17% year-on-year. Our big launch during the quarter was Star Wars Galaxy of Heroes, and it has performed extremely well, a great start for our newest live service. In addition, Madden NFL Mobile was in the top three grossing apps in the U.S. on the iOS app store through the important Christmas period and peaked at number one on Christmas Day. The two join our broad portfolio of strong revenue-generating titles, which also includes SimCity BuildIt, The Sims FreePlay, The Simpsons Tapped Out, Need for Speed No Limits, and Real Racing 3 Full game PC and console downloads generated $195 million, up 39% over the prior year, driven by Star Wars Battlefront, offset by FX. Star Wars Battlefront was our largest digital launch ever, although it did lean more towards physical copies over the full quarter as holiday gift-giving became the dominant driver of purchases. Note that revenue from the large number of copies sold bundled with consoles is counted as physical revenue even though they are distributed as digital codes, and this revenue will be recognized in the fourth quarter. Subscriptions, advertising, and other digital revenue contributed $90 million, down 10% from last year, due to the natural decline in the recognition of Battlefield 4 Premium revenue. However, EA Access is delivering strong, sustained growth, and we launched a similar PC subscription service, Origin Access, in January. Our most recent update to Star Wars, The Old Republic has fueled subscriber growth with its rich content and deep story-telling. Moving on to gross margin, our non-GAAP gross margin for the quarter was 70.4%, down from last year’s 72.8% and 110 basis points below our guidance. The decrease from last year was driven largely by mix, with Dragon Age: Inquisition last year compared to the royalty-bearing Star Wars Battlefront this year. We had factored into guidance our expectation that Star Wars Battlefront would be a strong gift-giving title, but it skewed even more physical than we had anticipated. The other significant driver of the margin shortfall versus guidance this quarter was also a positive, the strong performance of our royalty-bearing console and mobile games, which triggered greater royalty expenses than expected. Our non-GAAP operating expenses for the quarter were $511 million, down 10 million year-on-year, driven by FX. At constant currency, OpEx would have been up $22 million, driven chiefly by increased investment in marketing to support the bigger launches this quarter compared to a year ago. The improvement on guidance was driven by phasing and continued cost control. The resulting non-GAAP diluted EPS was $1.83 per share, which is $0.08 better than guidance due to our strong top line performance and continued cost management. Our cash and short-term investments at the end of the quarter were $3.23 billion, or approximately $10.42 per share. 51% of this cash and short-term investment balance is held onshore. This is down from 57% held onshore last quarter, the difference being partly driven by stock repurchases and settlements of early redemptions of our convertible notes. During Q3, we settled 95 million in early conversions of our convertible notes. Through December 31, we redeemed 293 million of the 633 million total and as of yesterday we’ve received notices for an additional $177 million to settle in Q4. We have updated the dilution table on our website accordingly. We also repurchased 1.8 million shares at a cost of $126 million, leaving $672 million in our two-year $1 billion buyback program we began in May 2015. The current rate of repurchases keeps us on track to complete the full $1 billion in that time. Net cash provided by operating activities for the quarter was $889 million. This is, by a significant margin, the largest quarterly operating cash flow ever generated in the history of the company and $207 million more than last year. On a trailing twelve month basis, operating cash flow was a $1.025 billion. Turning to guidance, we expect our fourth quarter non-GAAP net revenue to be $875 million, 21 million lower than last year’s. The decline is driven by the absence of last year’s Battlefield Hardline, offset by Plants versus Zombies Garden Warfare 2, UFC 2 and Unravel this year. Sales of our new titles have been strong and we believe continued weakness in game sales for last generation consoles will continue to be a headwind. Finally, we expect FX to impact sales by around $40 million in the quarter compared to last year. Non-GAAP gross margin is forecast to be 76%, 60 basis points above last year’s. We expect our Q4 non-GAAP operating expenses to be $500 million, down slightly year-on-year, driven by FX and partially offset by increased investment in R&D. This results in a non-GAAP diluted EPS of $0.40 per share, as compared to $0.39 last year. Our Q4 GAAP net revenue is expected to be $1.275 billion, as compared to $1.185 billion in the prior year. GAAP earnings per diluted share is expected to be $1.46, as compared to $1.19 in the prior year. I would like to highlight one item related to income taxes that is not included in this GAAP guidance. As a result of our GAAP earnings in the U.S. over the last two years, in the fourth quarter we may record a material income tax credit due to a reversal of a significant portion of the valuation allowance we have against our U.S. deferred tax assets. This would significantly increase our GAAP earnings per share, but would have no effect on non-GAAP earnings or cash flow. Our Q4 outlook would result in a full-year non-GAAP revenue of $4.517 billion and non-GAAP EPS of $3.04 per share. This is an increase from our previous guidance of $4.5 billion and $3 per share respectively. Our anticipated operating margin remains at 28%. Our Q4 GAAP guidance implies full-year GAAP revenue of $4.363 billion, and fully diluted GAAP EPS of $2.23. Regarding cash flow for the full fiscal year, we are maintaining our operating cash flow guidance at approximately $1.2 billion and free cash flow guidance of at least $1.1 billion, as capital expenditure is tracking below our 100 million estimate for the year. Despite the considerable uncertainty around the state of the world’s economy, we remain confident in our ability to continue to grow earnings and cash flow. Q3 was another strong quarter for Electronic Arts and a new high-water mark for cash generation. Our strategy is to assemble a broad portfolio of games, leveraging both wholly-owned and licensed IP. This builds a deep catalog that sells for years and provides the right balance of innovation and predictability for long-term earnings and cash flow growth. Now, I’ll turn the call back to Andrew.

Thanks, Blake. FY'16 has been a groundbreaking year so far for Electronic Arts on so many fronts. Stunning new games, dynamic services, and new opportunities to connect and celebrate the passion for play we share with our players. Amazing game experiences begin with creativity and innovation, and we are focused on delivering that to players wherever they want to play. Leveraging the powerful Star Wars IP, we’re now connected with players in live services across three games, on three platforms, and three business models. In Star Wars Battlefront, an HD console experience, we are building a major franchise with passionate fans. In Star Wars Galaxy of Heroes, a free-to-download game on mobile, we have a successful new live service. And in Star Wars: The Old Republic, we’ve demonstrated the longevity of an experience that has great IP and content that continues to deliver enjoyment for our players. In Q4, we will go live with three new titles that further reflect the creativity, innovation and variety in our experiences today. Unravel launches on February 9, bringing Yarny’s journey to life in the charming and beautiful world crafted by our partners at Coldwood Interactive. On February 23, Plants vs. Zombies Garden Warfare 2 goes live, with all of its over-the-top action and hilarious characters ready for new and existing fans of this beloved franchise. Then on March 15, we return to the Octagon, with EA SPORTS UFC 2 set to debut featuring new fighters, new physics and new modes for fight fans around the world. Looking ahead to FY17, we will introduce breakthrough games from some of our biggest and most popular franchises. In Q1, we’ll begin with the creative and innovative Mirror’s Edge Catalyst from DICE launching in May. A great line-up of EA SPORTS titles are in development for next year, and we look forward to sharing more about these new experiences in the months ahead. An all-new Battlefield game from DICE will arrive in time for the holidays, we’re excited to have a new Titanfall experience coming from our friends at Respawn and of course, Mass Effect Andromeda from the team at BioWare will launch later in the fiscal year. Players in our live services will continue to experience engaging new content, expansions and updates, and we’ll have more new mobile titles as well. Competition runs deep in the DNA of Electronic Arts, and we’re thrilled to share that passion with our players through our new Competitive Gaming Division, led by Peter Moore. For years we have experienced the energy of competitive gaming through events and tournaments for our EA SPORTS and Battlefield communities. As the global gaming audience grows, we are working to deliver a best-in-class program of competitions that are accessible, engaging and entertaining at all levels, celebrating the talent and skill of our players. We are already underway, with players competing in the Madden NFL Live Challenge that culminates with the finals here in San Francisco during Super Bowl week. We’re excited to have Peter and the team unveil more of our plans as we get into FY17. From our new titles to our live services, new programs like Origin Access to new frontiers like competitive gaming, Electronic Arts continues to focus on putting our players first in everything we do. Games deliver on a fundamental human need for entertainment, and for each of us that means something unique and personal. A need to connect, to compete, to explore, to improve, to challenge, to share. We are focused on understanding these needs for every player, building stronger relationships so we can fulfill them at the right place and time, and unlocking the full potential of play through amazing new experiences. The commitment we have to our players continues to transform Electronic Arts, and galvanizes our efforts to deliver disruptive and innovative new ways to play. Now Blake, Peter and I are here for your questions.

[Operator instruction]. Our first question is from the line of Chris Merwin.

I just had one on digital downloads, this past holiday season, with season industry data points to share the AAA launches really inflected higher in terms of digital. But digital downloads were just a bit lighter than we have expected for you. Blake I know you obviously comment of that Star Wars was a much more heavily gifted title during the holiday season, which I think makes a lot of sense, giving the younger audience. So next year when you release Battlefield 5 are you expecting to see more of an inflection in digital downloads, and is one point of gross margin expansion per year still the right target going forward? And just a second quick question, just wondering if you would mind telling us how engagement has been trending for Star Wars relative to maybe Battlefield 4 and when we think about the DLCs you’ll be selling for that title is its fair to assume that the attached rate would be comparable to that Battlefield 4? Thanks.

Sure let me start with full-game download and Andrew might want to talk a little about this Battlefield, the Battlefront engagement. First, I’ll remind you that full-game downloads generated 195 million, up 39% year-over-year. So while we might not have done as many on Star Wars as we thought we could do, that’s still a big number and many of our other titles are obviously skewing heavily towards full-game downloads. Since you couldn't have got a number of that side in a quarter without that. We were surprised that more gift giving was done with Star Wars which obviously impacted the digital downloads and my guess is that that will be less so next year because Battlefront tends to skew less towards gift giving and more towards PC, there is a very hardcore PC audience as the Battlefield audience and they tends to obviously to more physical -- digital downloads than physical. So we should tend to see a return to that gross margin, guidance that we have talked about in the past. We will obviously give you detailed gross margin guidance in May for the full year. But based on what we know about the Star Wars title and gift giving we would be very surprised that we didn’t shift back to the improvement in gross margin that we saw.

And on engagement, engagement has been strong, it's been a great game to play across most of generation, so the audience is much wider than a traditional Battlefield audience which is great for us. We’re introducing new people to Electronic Arts and to games and to the first person shooter genre, we have just announced our first batch of free content and our four maps that will form part of the premium service and we expect strong engagement with that going forward.

Our next question is from the line of Stephen Ju.

This is Chris [ph] on for Steven, congrats on the quarter. Two quick questions from our end, you said you sold in 13 million units of Battlefront and the 1 million of them were bundled, wondering if you guys are seeing any excess inventory in the channel. And then can you touch a bit on what you've seen so far with Origin Access's, subscribers have the same propensity to try new games, maybe new genres that they've not played before just like EA Access?

So, on Origin Access feeds that we just rolled it out, so it's very early days and it's hard to get any data yet. So, more to come on that. But we -- obviously we're very excited about what we've been seeing in EA Access and that was part of the reason we decided to rollout Origin Access. It's a different group of titles because not all of our titles are PC titles. So, we'll probably see some different dynamics between players but we hope to see similar dynamics that we've seen in EA Access because it's exciting to see obviously people broaden their interest in more games than simply one franchise. On your first question, the -- can you'll be back and just repeat again your -- what's you're looking for there?

Yes, so you guys, you've sold in 13 million unit Battlefront and 1 million of that was consistent in the bundles. Do you guys have any excess inventories in that channel?

No, we're very comfortable with where the channel is. We actually had a very strong sell-through during the quarter as well as sell-in and there are some accounts obviously that are replenishing in there -- as they get through their January timeframe and we're very comfortable with where the channel inventory is now.

Our next question is from the line of Colin Sebastian.

Was wondering if you can comment on the progress of the next Titanfall and with that the overall relationship was reached on for instance, the opportunities to expand that relationship to cover other titles. And then I was hoping Peter if you could expand on the e-sports opportunity, how large you guys think this could be, how impactful could it be to the overall business over the near term and then the longer term as well, that will be helpful. Thanks.

So, I'll take the Titanfall question. Again it's really early start talking about the details of Titanfall at this juncture and that wasn't purpose of raising it, what I would say having seen the game is it's looking fantastic, our relationship with Respawn is extremely strong, we had great fight in that entire team to build a spectacular game and are really looking forward to sharing more details in the month ahead.

With regards to competitive gaming, I mean obviously we see a great opportunity going forward here, I'll remind you and I know you know this that we've been doing this for a number of years whether it’s been our involvement with FIFA with the FIFA Interactive World Cup. As was mentioned in the prepared remarks we're looking forward to the finals of the Madden Challenge series at the Madden ball on Thursday night here in the Bay area, but we also see this maybe a little bit differently than maybe some of our publishing brethren, they're in the marketplace right now and we see this as a tool and a platform to increase engagement. More and more session days with games is good for Electronic Arts, it's good for our players, we've taken a very player-first view on this and which we're building community. It's clearly an entertainment medium, I think there's a lot of excitement around it and I can't think of anybody that's better served with the diversity of our portfolio when you think about sports titles in particular, FIFA and Madden as well as our Battlefield franchise have been able to build a meaningful business over the next couple of years.

Our next question is from the line of Brian Fitz.

Jay [ph] in for Brian. Just another question on Star Wars, so just wondering how much of the mix shift towards physical discs, do you attribute to heavy promotional activity like GameStop’s $40 sale. So, I'm just curious about how those kinds of retail promotions, how effective are they in terms of attracting new users, and just on the same subject I know you take a 20% reserve on gross revenue for each in the shipped. I'm just curious if you could quantify the impact to your P&L and GameStop who offers discounts like we saw, how's the impact -- how does this impact gross margin? Thanks.

So, I'll comment firstly to this discounting in general, this is a business that in the holiday timeframe between Black Friday and Christmas is traditionally done a lot of discounting. It's a way of driving volume particularly when people are now buying -- who're buying for the first time the new console offerings often they want to build up their software inventory pretty quickly and we found the discounting helps drive people into the engagement. We obviously shared that view with the retailers and we help support the retailers in that, each year with specific programs and I think we've done that year-over-year and it really doesn't impact that. We're also doing discounting on the digital side as we try to keep the two aligned. We don't want to have a disconnect between pricing in one area and pricing in another. And so you'll tend to see us drive volumes through discounting and it's pretty consistent year-in, year-out. I would say this year our programs were very similar to what you saw last year or similar to what we've seen with all of our other industry partners and titles that they may have had, there wasn't a lot of different between years. On the sales reserve we take the sales reserves upfront at the start of each quarter and anticipation of what our selling is going to be and we use those sales reserve during the quarter on a very formalize planned method . So all this sales get planned well in advance. We need to make sure that we have the appropriate reserves in place to help pay for those overtime. And so we will be setting up sales reserves each quarter as we go in those cannot impact margins or margins that we forecast because they’re already build into the numbers.

Thanks and then if I could I believe that Andrew mentioned that you are attracting a new type of demographic to Star Wars, I am just wondering for any sort of color on that. What the -- who are the new players, what is the demographic breakdown look like of that game? And what types of new -- what's the new demographic your attracting to the EA trend? Thanks.

Yes, I can take that. So what we have seen is really there is two groups that have either come for the first on or have come back to gaming. The first group is people quite frankly of my generation or my vintage, who have been gamers in the past, have for whatever reason moved away from it and particularly moved away from cool FPS shooters because they’ve became very hard and complicated and quite rightly brutal to play online. They’ve come back in a lot of the Star Wars IP and the commitment and the passion they have around that from their youth. At the same time they now have kids, we are of game playing age who may not have got into the first person shooter universe yet because of the nature of the content sort of some of those games. And so we’re seeing fathers and sons play, we are seeing mothers and daughters play because of the broad appeal and so the big groups that we’ve added is kind of a huge demographic, it’s typically younger than we have seen before as well as an older demographic that we may have had interaction with some years ago, but had lapsed out in recent years particularly from the first person shooter universe. And we’re looking now at how we continue to provide content and experience that engage those two new groups so that we maintain relationship with them overtime.

Our next question is from line of Justin Post.

This is Ryan on for Justin. First of on Star Wars congratulations on this shipments, wondering if you could talk about how demand is looking in early 4Q? And then maybe how much you expect that title to contribute either digitally or physically or combined during the quarter? And then you highlighted some of the titles that you guys are working on especially for next year, wondering how you are thinking about spacing for all those titles, Battlefield, Mass Effect, Titanfall and maybe Mirror’s Edge is in there as well? And then lastly, just going to the digital in the mix shift, is it fair to say that really this digital mix shift away from full-game download is one time in nature and just really the specific Star Wars titled, or is there any reason for us you think that EA won’t continue to see the benefit on the margin side from the industry going digitally and in into 4Q and then in this fiscal '17?

I don’t think there is any indications of that, this mix shift isn’t anything about a Star Wars, Battlefront opportunity remember the movie was out. All things Star Wars for the month of December and it was the perfect gift giving opportunity. And typically with gift someone wants to have a package under a tree or and a gift pile somewhere versus that digital code and that was the driver of the shift. We could see when we do the next Battlefront, we could see something like that but we have no idea on exact timing for ourselves for the industry and exactly how the buzz around Star Wars will be when that comes again the next time around. So right now I would say nothing would imply to us that the digital journey is slowing in any way. And in fact if we look all of our non-Star Wars products every one of them we’re up, digitally and full-game download and the digital engagement associated with. If you look at Ultimate Teams specific we gave you, that’s a clear sign that people are planning and engaging longer and longer around the titles. In terms of guidance, guidance on Star Wars, we not going to breakdown individual guidance, obviously we will end up selling more than the 13 million units since we’ve already got there. We did sell more in the third quarter, so we may ultimately sell in the fourth quarter than we originally part. But we’ll clearly sell more overall and that’s build into our guidance for the fourth quarter. I’ll remind people about fourth quarter though, don’t forget that there was a continued FX headwinds, headwind that we called out that’s $40 million of headwinds, I’m not sure everyone’s modeling that into their models. And we’re not ignoring the fact that there is an economic headwind out there around the world that hasn't really impacted us, but we’re being conservative when we give our guidance around watching that closely. In terms of next year's guidance, the title slate that we talked about are the core titles along within traditional sport titles. The one thing to note is Q1 the only title we have in Q1 is Mirror’s Edge, plus all of our catalog business and live services business. But our core console title will be Mirror’s Edge and if you are doing -- we’ll give you real full year guidance in May when we sit down to do the next earnings call, but as you starting to think about guidance for Q1 in next year don't forget about the continued FX headwinds which are impacting us as well as in Q1 one specific item, remember that last year in Q1 we had a $30 million benefit, one-time benefit from FIFA Online 3 as we started that up and we had deferred revenue all into Q1. So, that was high profit revenue that came into Q1. Couple of basic things for your model but things to remember. But we're excited about the rest of the slate, you should assume that a Battlefield would come typically in the third quarter when we normally have it, we're not yet announcing when Titanfall or Mass Effect Andromeda will come, but you should assume that’s in the back half of the year as well because of second quarter is so dominated by our sports titles.

And then if I can add one last follow-up, it's a nice pickup in mobile revenue, do you guys happen to have an updated MAU figure that you could share?

We don't, but we probably will in the next quarter.

Our next question is from the line of Arvind Bhatia.

A couple of questions, one I know you guys touched on Madden NFL Mobile, did really well this quarter, wondering what are some of the learning's Andrew, in particular that maybe you could apply to FIFA Mobile and other titles specifically. And then wondering if you guys are willing to share the mix of full game, digital downloads on some of the key titles during the quarter. And for any of you I guess just reluctant thoughts on virtual reality and your efforts there currently? Thank you.

I'll take the Madden Mobile one, as we think about all of our mobile games, you really think about them on four vectors; discovery, how someone will find the title whether that's through an App Store or through social representation, on boarding, how someone will get into the title, the games like mechanic itself, so actually what do you do while you're playing the game and then how that how do we run the servers that actually surrounds that game to make it new and interesting, fun and dynamic, and engaging on a moment-to-moment day-to-day basis. As we look at what we've done with Madden NFL Mobile over the last couple of years you will have seen we’ve fundamentally overhauled all four of those vectors since we first launched Madden on mobile devices. We now believe we have landed in a place that has a game that is very social in nature, has a game that onboard the new players and a broad demographic of players, we have a game mechanic that feels right for mobile devices and our change of delivering live events that's tied to the passion of players have for the real world of the NFL and a very engaging forum on an ongoing basis. But during the weekend games and the week leading up to those games, all of those opportunities present learning for us as we take these types of things to our other sports games on mobile and we expect to be able to do well in those areas.

Arvind your second question was about trends in full game downloads, we clearly continue to see them trending upwards, we see titles running anywhere between 20% and 30% plus, we've always seen FIFA skew lower because in Europe many retailers use that as a loft leader to drive traffic into their stores and that tends to be a physical copy, but in the rest of our sports portfolio we tend to see strong digital full game, really Star Wars was the only Gen4 title than indexed lower than average because of the gift-giving issues. So, we're very comfortable with continuation of where that trend is going industry wide.

And then on VR?

Sorry, virtual reality, sorry, the context of VR?

Just wondering if your -- what's your investments are currently and how you're viewing sort of the opportunity this year and perhaps for the next couple of years, if you have any titles currently in development and any early thoughts there?

Sure, and I’ll echo what we've talked about on some previous calls which is we believe that VR is going to be an important part of that industry. We do believe it's a number of years out before it's a meaningful part of our industry but right now we're investing at a core engine level, we've talked about Frostbite as we move to a single engine for the company and that team is working to ensure that they can output virtual reality experiences regardless of device. And then we have a few key game teams around the company who are doing targeted experiments as it relates to very engaging virtual reality experiences in the context of particular genres. I would expect that we would start to surface some of those over the coming years. And that we would start to build that into a more fully fledged experience over time.

Our next question is from the line of Mike Olson.

You had an obviously big launch with Star Wars in the quarter, and no doubt that had some marketing and other expenses. And yet the overall OpEx was basically down year over year, so the cost containment efforts continue to remain strong. How do you think about OpEx going forward with a lot of these incremental titles coming in fiscal 2017? Is there a reason to think that OpEx will start to creep higher? Is that kind of a reasonable multi-year run rate going forward where we are at this year?

I think peer dollar OpEx is got -- we’ve got an benefit this year of FX on our OpEx line because many of our studios are outside the U.S. so we have a large base obviously in Sweden, in Canada, in Romania, in Australia, many in China, many of those have obviously coming at lower dollar cost. We try to report each quarter with the actual dollar costs are and you’ve seen some continued investments. Our goal to try to keep R&D expenses around to 22% to 23% of revenue line, which means even if our revenues is growing, we’re clearly continuing to invest in R&D we think that’s very important for our future. You will see marketing expenses bounced around depending on the title and the quarter. So this quarter our marketing expenses were up in -- if you’ve -- FX adjust them and that was driven by the factor that we had a fairly large title this year that we didn’t have in year's third quarter. This year's Star Wars is obviously last year our large title was Battlefront Hardline in the fourth quarter. Until you get some of that timing differences but you’ll continue to see general increases in our OpEx with goal to try to target, R&D around the 22% to 23%, we’re trying to push marketing expenses down into the 13% range and hold G&A in that 8% to 7% range if possible. So that’s you’re going to see as a percentage revenue and hopefully will continue to be reflected in our business going forward.

Okay. And then just one quick one. Is there any detail you can give on the timing of the first monetized Star Wars expansion pack? Is that in the month of March, and if so, can you say that early or late in the month?

I can’t tell you much more than March, but I would assume that much of that revenue will probably fall in the first quarter versus the fourth quarter but it’s hard to see right now.

Okay. That answers the question. Thank you.

Our next question is from the line of Drew Crum.

So Ultimate Team up 13% in the quarter, it seems like an impressive number, given the comp. And I think you guys had some pull-forward recognized in the second quarter. So what is Ultimate Team up year to date and can you comment on the expectations on Ultimate Team going forward? And then I have a follow-up.

Yes, I don’t have the year-to-date number with me here. But it's fairly consistent with what it was in the quarter, just off the top of my head and we’re continuing to see that. Remember we had a slowdown in FIFA Ultimate Team in the fourth quarter last year as we put the price banding and to address the inflation in the market place issue that we saw. We are currently forecasting that we will have a stronger fourth quarter that we did last year. Because obviously we corrected some those price and coin farming issues. So we should continue to see strong growth of Ultimate Team through the year and probably for the full year clearly exceed because it's a lean last quarter last year. But clearly the business continues to grow and we done a good job of bringing new users in. So we’re not taxing the existing users, but it gets harder and harder to grow the business at the size that it’s at. So we’ll see what it looks like for next year. The other thing to really remember as you’re looking at it is realize that a huge portion of the ultimate team audience for FIFA is outside the U.S. large markets like France, Germany, UK and so all of those markets have a headwind from FX in them that we’re clearly seeing in the growth numbers. So as I mentioned today 18% on a constant currency basis for ultimate team or for FIFA and that’s a pretty impressive growth rate on a business of that size.

Got it. Okay, thanks. And aspirational number on R&D as a percentage of revenue, how important is culling less profitable or non-profitable titles in the portfolio? Do you have an opportunity to do that going forward? How you think about limiting the number of SKUs going forward? Thanks.

We are down to less than 15 majors SKUs, and that feels like a good size of the business and we are obviously announcing that we’re investing in some action base SKUs by bringing people like Jade Raymond and Amy Hennig into our organization to help build those and those are obviously a few years out in our SKU plan, but clearly we want to try grow genre and grow our revenue based with more titles both digital live services titles as well as traditional console titles. Part of -- to do that part of it we have to be restless that we don’t spend a lot of money on smaller titles, we size them correctly, but we also want to continue to look for ways to bring new interesting titles to the market. Look at Unravel as a perfect case of that. We are trying to address the market place for broader titles addressing wider audience in terms of the types they are and the types of games people want to play. We are also trying to build enough product to be able to effectively run subscription based businesses and the requires a great portfolio which we have and we'll continue to add to. So, we'll always cull but there's not a certain things that cut back on today because we've brought the total number of titles down to a very perfect level for us now.

Our next is from the line of Ben Schachter.

So there's been a lot of pretty positive commentary, including Star Wars beating and getting reorders in 4Q, but then you don't see that really flow through for the fiscal year guidance. I was wondering if you could just talk more about why, and is it all weakness in prior gen, is it all FX, is there anything else going on there that we should know about. Secondly, FIFA in China, can you just talk about how meaningfully we should be thinking about that business for FY2017? And then finally, of course, I have to ask another VR question. And understanding that is not going to be meaningful for a number of years, is it possible that we will get any of those what you've defined the VR experiments or small experiences, any chance we will get those in calendar 2016?

Ben, I guess I would remind people that we did raise full year guidance, that's the third time this year we've raised full year guidance, we've got a track record I think of 10 quarters in a row of beating our guidance. I think we've exhibited some conservative in how we operate the business which we think is the prudent thing to do and we're sitting with FX headwinds and a lot of uncertainty in the economy. You put all that together, I don't think that signals anything negative about the fourth quarter, it signals the way we've been approaching the business and operating the business and that's what we're going to continue to do. In terms of FIFA Online 3 in China, the key there is we're continuing to see very positive reactions, but we also have a very long-term view there. So, that continued level that we've talked about 10 million to 15 million a quarter is still consistent with where we are and when we do give you guys guidance in the May timeframe, we'll update that number if it looks like it should be updated, but all is very positive in that and our partner TenCent continues to be extremely happy. With that maybe I'll let Andrew hit the VR question, to say more to say of that we already said but.

Not a lot more to say at this point, no announcement as to launch times or servicing the experiments at this stage, but as we go into calendar '16 as we start to come closer to our EA play events in LA and in London we'll be talking more about our full title slide and some of the new in development products that we have running it across our studios right now.

Our next question is from the line of Neil Doshi.

Two questions. Blake, can you talk a little bit about the macro environment and kind of what you guys are seeing as we move into calendar 2016? And then secondly, we've noticed -- I think Amazon announced that they are putting out a promotion for Prime members. So every time a large AAA game it goes up for sale on preorder, a couple weeks after, they're going to give a pretty hefty 20% discount. Can you talk about whether you guys are helping to fund that or if that's something that Amazon is just kind of taking on their own? And how you think that could potentially impact digital sales, since those are primarily for physical discs. Thanks.

On a macro environment we've mentioned a couple of times our cautioned because of the macro environment, we have not seen anything in our business or heard anything from other players in the business that would imply any economic slowdown in entertainment software. I then say we have a level of conservatism about the, just the global economy which at some point in time there is trouble in the global economy that would impact everybody probably. I think our business seems to be operating pretty consistent as it has been over the last couple of years. The console purchases are up through the end of calendar year '15, our estimate is 55 million units out there which has exceeded virtually everyone's forecast for the year and now almost 50% higher than previous console cycle so, all of that is very-very positive, all the game play we're seeing and the engagement and things like Ultimate Team we're seeing is positive. We’re just conscious of the fact that there's a lot of storm clouds out there, we want to be careful that we don't get ahead of ourselves or the economy in our forecast for the business and that's what you're hearing. The second part of the question was the Amazon issue, we do not fund the Amazon discount, that comes out of Amazon’s own pocket and I think that's fairly consistent how Amazon operates and we don't have much say or view on pricing of anyone in the marketplace, that's their job not our job. For us if it brings new game players into the business then we're excited, but we don't really have much more to say or control over their pricing strategy.

Our next question is from the line of Doug Creutz.

You guys announced your EA Play event a few days ago and obviously you made the interesting decision to not have a booth on the floor of E3 this year. Just curious as to your thinking about why do that? If I recall, one of your major competitors made a similar decision several years ago, ultimately decided it was not the way to go. Is there anything that's changed that's led you to that decision? Thanks.

So, what we're seeing is more and more we need to be close to our player. And what you have seen from last couple of years in almost all of our actions whether it relates to development or marketing or sales is attempts by us and endeavors by us to get as close as possible to our players and get direct feedback from them. We believe that’s the single best way to ensure that we are making games that they want to play. And then we’re making some of the best games in the industry. And we see this as an opportunity to do just that get close to our players, invite them in an environment where they feel comfortable to play games, give us feedback. And interact socially as they do whether through social networks or with their friend or what have you. We continue to be member of the ESA and we will have meeting rooms at E3 this year. So what we see we’re doing is augmenting the overall E3 experience. And we are excited by what we’re going to be able to do as it relates to EA Play and we are excited for what the industry is going to be able to do as it relates to E3 more broadly.

And to add to that we are also doing a simultaneous events in London and so in some ways we are trying to do a more geographically spread way to introduce people to our new product.

Our next last question is from the line of Eric Handler.

Thanks for taking my question just under the wire there. Two things for you, first, with Star Wars, obviously you are not making a Star Wars movie game, but you got nice leverage off of The Force Awakens this December. How are you thinking about what you can do with Star Wars Battlefront next December, when the first spinoff movie comes out, Rogue One. Is there much you can do around that to keep monetization levels high? And then secondly, looking at your mobile business, after the first two quarters of the year, mobile is really stagnant. You got strong growth in the third quarter with Madden and Star Wars. I'm just seeing as we think about the mobile business going forward, is this sort of the inflection point where we start seeing some reacceleration of revenue or [Audio Gap] sustainable is the improvements there? Or maybe talk about some of your plans with mobile.

So I’ll start with Star Wars, I don’t know Andrew might want to chime in mobile piece. On Star Wars, the one thing that we are adhering to, and I think this is part of our arrangement with Lucas and Disney, is you can't make a game in Star Wars that violates the canon of Star Wars mainly you can't take something from the future and bring it back into the past unless it's a reference. Not knowing yet exactly what the storyline in Rogue One is going to be, I can't comment on how that could come in to the extent that it's in the future around our current Battlefront game is also a paced based on the historical Star Wars canon, which is 30 years before the most recent movie than will limit our ability to bring some new content into that. But more to come there obviously, we’re trying to stay tightly connected to the Star Wars beat for future movies and we we’ll obviously in future Star Wars games be able to tap to new characters and vehicles and so far. But in our current game and for that manner the DLC associated with that current game obviously we’ll have to be careful that we don’t violate the cannon. On mobile, obviously mobile the one thing remember is like our console business, mobile will always be a little choppy based on when new title come at. But like most live services they should be smoother than the historical beats around console business. So overtime it helps to smooth that out, but there is still maybe some jumps up and then do the quarters.

Yes on the Star Wars play, I’ll just to add a little. I mean what we have seen is that the movie or the content of the movie itself hasn't impeded the engagement in various Star War games. We have seen that across console PC and the mobiles. And we would expect that as more great Star Wars films come out, we would see more great engagement in Star Wars content more broadly again not just in Battlefront but in Star Wars The Old Republic and our mobile game Galaxy of Heroes. As we think about mobile, just to add to Blake’s point I think he’s absolutely right. The one other thing that we would point to is as we look at our mobile portfolios our titles typically have very long life spans. The Sims FreePlay, The Simpsons Tapped Out, Real Racing 3 have continued to grow over a number of years. And as we think about launching new titles, we’re taking a little more time and being a little bit more calculated about how we launch, but we’re doing so with a view that we are putting experiences into the market place that will live for many years and drive engagement and profitability for a number of years to come. And so as we look at the year to come, as we look at what we’ve done with Star Wars and Madden and some other titles that are coming again to shoot. Our expectation is that we’re able to grow the overall business with them.

Alright thank you everyone. We will see you next quarter.

Thank you gentlemen this does conclude today's conference call you may now disconnect.