The world’s dominant video game company turns in an nice Q4, beating revenue and EPS estimates. EA (ERTS) actually posted a net loss but there were one-time costs related to the accounting of deferred net revenue.
Not surprisingly, CEO John Riccitello didn’t mention Take-Two (TTWO) on the conference call, and it wasn’t brought up until the very end of the Q/A. Even then, Riccitello didn’t say anything except congratulate the team at Rockstar, which he has been assiduously wooing, on their success:
“It’s a spectacular game, I enjoy playing it.”
Revenue: $1.13 billion, 84% increase y/y, better than analyst estimate of $834.82 million
EPS (adjusted): $.09, 50% increase y/y, beats consensus of $0.00
Operating income: -$37 million, 48% increase y/y
Revenue: $4.02 billion, 30% increase y/y, better than analyst estimate of $3.09 billion
EPS (adjusted): $1.06, 36% increase y/y, better than analyst estimate of $0.94
Operating income: -$487 million, 1349% decrease y/y
Notes from the Call:
5:01: Call starts, standard disclaimers
5:03: John Riccitello, CEO: Welcome John Pleasants, COO, Eric Brown, CFO (first call for both)
5:04: No mention of TTWO in agenda
5:06: One of goals was to grow direct to consumer digital business, including mobile and microtransactions.
5:07: Was able to reduce costs by headcount and other cost cutting.
5:07: Acquisition of BioWare brought 10 new titles that are in development.
5:08: in FY 09 we expect to add $1 billion in non-GAAP revenue. Increase non-GAAP operating by 100%. Plan doesn’t include any contribution from Take-Two.
5:09: First new IP from EA Sports since 2002, Facebreaker.
5:09: EA Casual: Concentrating on the Wii, BoomBlox.
5:10: EA Games: Greatest revenue growth, Spore, Need For Speed, and more.
5:11: Eric Brown, CFO: Successfully launched 6 brand new wholly owned games, 2 of which hit top 10 for the year.
5:14: Wireless business grew by 7% in FY 08.
5:16: PC revenue down during 4Q because of success of Command & Conquer release last year.
5:17: Europe revenue up 20% y/y for the quarter. Asia up 36%.
5:18: Sales and Marketing costs up 10% – personnel realated.
5:19: Acquisition of BioWare and Pandemic added 770 people to R&D. 16% of R&D headcount is in a low-cost areas, up 4 points y/y.
5:22: Industry combined software sales will grow 15%-20% in calendar 2008 in North America and Europe.
5:23: Only providing annual guidance from here on because business is hit driven and even y/y quarter comparisons don’t make sense. Annual results will be the best measure. Update guidance each quarter.
5:24: Growth will come from EA studios with more than 15 new launches. Shipping 135 SKUs in FY 09, up 35 from last year.
5:28: Profits will be lower in first half of 09 than current Street expectations.
5:30: Roughly double non-GAAP operating income in FY 09 over FY 08.
5:32: 19 SKUs in the first quarter compared to 14 last year.
5:33: EA Games: Great reflection on how the label structure works. Confederation of autonomous creative teams. Integrated BioWare and Pandemic studios, and they’ll be launching 6 titles in FY 09. Rock Band in Europe and on Wii in North America coming out.
5:36: Back to John: FY 08 was a year of huge change. Had a plan to bring EA back to topline growth and we’re right where we said we’d be.
Q: Remind us the contribution of BioWare and Pandemic for FY 09.
A: Announced the transaction last year we said it would be adding $300 million in revenue. Said it would be neutral on the income line. Consistent with model we had when we completed the transaction.
Q: Gain further leverage in low-cost areas?
A: Yes. We’ve been expanding presence in Shanghai, India, and Romania. We expect to continue to progress in that area.
Q: Unbundle the forecast for software into PC and console?
A: We made a conscious decision to simplify our industry guidance. We’re not going to unbundle it for you. I certainly recognise thebox side of PC has been soft. If it hadn’t been for the Sims and WoW it would be a pretty dismal sector. But growth in microtransactions and online is big on the PC.
Q: Willing to break down FY 08 sales per label and guidance per label?
A: In terms of the y/y rank order for growth: Games, Casual, Sports, Sims. Sims is in a transition year as we introduce Sims three at the end of calendar 08.
Q: Why no quarterly guidance?
A: We’ve received input from a number of our institutional investors and there’s a trend toward annual guidance. We’ve adopted a multi-year business plan and we want to align our guidance with that.
Q: Demand for Spore?
A: It’s high, and will get higher in June when we release creature creator.
Q: New titles as a portion of revenue?
A: Haven’t prepared an answer. 15 new wholly owned IP is a big step up in new IP. Part of it is triggered by the acquisitions, but a great deal is pure investment in our core studios.
Q: R&D spending, higher than we expected in the quarter and higher than we thought going forward, investing lot of money in something specific?
A: Y/y should be flat next year. We’re fully incorporating cost of acquisitions, instead of treating them as EA partners.
Q: Fiscal 2011: Comment on where we would see the maximum leverage points as we go from this year to then.
A: Can give you rough shape. More than $6 billion in revenue, pre-tax income of $1.5 billion. Biggest issue is going to be topline growth and we’re very confident in that. In terms of leverage, you can clearly look to the R&D line. We want it to be below 25%.
Q: Year is very back-end loaded. Is it a better competitve environment given the front-loaded 2008?
A: We’re going to gain share in the back-end of the year. We implemented the label structure last July and what we’re talking about is the first of our titles that are coming from that reorganization. When you’re going through a dramatic change agenda, some of these things have a longer fuse than others.
Q: How many points can you pick up on R&D in low-cost areas in FY 09?
A: There is a rather substantial pickup planned for the year.
Q: How long will relationship with Rock Band maker last?
A: Multi-year relationship. Teamwork between MTV, Harmonix, and EA has been tremendous. We’re very bullish and the teamwork is great.
Q: Update us on your thoughts relative to Take-Two?
A: Our offer currently stands at $25.74/share. Our valuation took fully into account GTA. It’s a spectacular game, I enjoy playing it. Congratulations to Rockstar team. Timing is in SEC hands about anticompetitive. That’s all I can comment on in the moment. — John Riccitello
Q: Probability that releases will come out on time?
A: Job one was to change performance on delays. We feel very good about the slate and the predictability. Our product plans are very tight. Making big improvements on timeliness.
6:07: Call Ends
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