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Presents at Citi’s 8th Annual Small
Neil A. Doshi Citigroup Inc, Research Division
Today, we’re very happy to have Electronic Arts and from EA we have CFO, Eric Brown. Eric, thanks for joining us.
Thank you very much, Neil. It’s a pleasure to be with you here this afternoon. Before I lead off, I’d like to remind attendees and listeners to the webcast that before making any investment decisions in Electronic Arts, you should review the risk factors filed in our most recent Forms 10 Q and 10 K.
A quick agenda, I’m going to spend some time talking about industry trends in interactive entertainment, EA’s strategy through last fiscal year. Then I’ll give you an update on where we are as of the end of the first half of our fiscal ’12 year, which is the quarter ended September and spend a bit more time about our overall FY ’12 strategy and initiatives going ahead.
Some interesting trends in terms of the market that we operate in. So globally, a couple of key takeaways. The interactive entertainment industry, overall, was in growth mode. We’d estimate over last 3 years, it’s a 6% top line growth and 21% growth in all things digital. Traditional packaged goods, we see about a minus 7% CAGR here but if you drill down into the packaged goods software market what you find is that there’s growth in the high definition section of the packaged goods software market so specifically, the Xbox 360, PS3 and traditional PC off by a minus 18% to 19% decline in standard definition software, which include the Nintendo Wii platform and the dedicated PSP and DS handhelds. Mobile is also in growth mode here, high single digit and console digital or console downloadable content is also in growth mode, about a 31% CAGR, actually the strongest growth rate within the digital sector overall.
If you look at the video game marketplace of 5 plus years ago, we used to sell into about a 200 million user core base, defined as people that played video games on dedicated game consoles and the PC. Today, we actually see a significant increase in the number of people playing games across the world and it’s a function of the proliferation of devices. So we’d estimate that if you include people that are playing games in social networks, it’s 300 million plus gamers worldwide, if you include smartphones, it’s 400 million plus people playing games worldwide and Internet and browser based games, over 1 billion people playing.
Now clearly, there’s some overlap within these categories, but I think you get the idea that with the advent of more gaming capable platforms, and a browser is indeed a gaming platform, it makes gaming more accessible to individuals versus the core base that we saw 5 plus years ago. The data here is backed up by a count of average devices per gamer. This is North American data and what’s interesting here is that over the course of about 1.5 years, the average number of gaming devices used by people in the United States went from just over 2.0, call it 2.1, gaming devices per consumer to 2.7. The way to think about this is the following. Just a short time ago, people were gaming on 2 platforms called the PC plus pick your console. Now they’re gaming on PC, console and probably a mobile, an iOS powered device. And so again, this just underscores the trend that we see of more gaming capable devices driving adoption to a larger number of worldwide gamers.
Within mobile and social, there are a couple pretty important trends to call out. On the left, what we’ve done is looked at the data from the top 100 grossing iOS games and what you can see here is that the vast majority of the games being sold and played today on iOS devices are casual games. So these aren’t hard core shooters necessarily. These are casual that are more approachable games, they’re played in shorter sessions. And if we look at social games on the Facebook platform, this is data surfaced out of the top 250 Facebook games as of this month, fully 85% of games are casual in nature on the Facebook platform. So again, thinking about trends in digital where we’re seeing growth in social games, we’re seeing growth in mobile games, the casual genre is key to being successful on these platforms.
Within mobile itself there are some pretty interesting trends. First of all, again, it’s a high growth industry. Here we see a 3 year CAGR of about 14%, but we see a market that is soon to be absolutely dominated by smartphones. We can go from $1.5 billion industry, which is 2/3, 1/3 smartphone feature phone and we expect it to be 90 plus percent smartphones by calendar year ’13.
Now on the right hand side, you can see EA mobile revenue breakdowns. So we started with a very strong incumbent position on feature phones, we had about 90% of our revenue on feature phones back in FY ’09. We finished last fiscal year at 40 60, still more on feature phones. But midway through this year, we’re actually past the 50 50 tipping point, so we’re at about 56% smartphones versus 44% feature phone revenue. And what we’re doing is repositioning our mobile game portfolio as rapidly as possible to address smartphones recognizing that we started with the strongest incumbent leadership position in legacy feature phones. So an interesting platform transition directly within mobile itself.
Okay, now through the end of fiscal ’11, EA had 3 principal strategies focusing on fewer, better, bigger packaged goods titles; number two, building all aspects of our digital business; and number three, driving cost efficiencies to produce an increase in operating income leverage. Our scorecard in our actions are depicted here. You can see that from FY ’09, we actually had 67 major packaged goods titles. This year, based on our most recently released SKU plan, we’ll have cut that SKU count down by a full 2/3 to 22 titles. At the same time, our average non GAAP net revenue per title is going up dramatically from $55 million to $134 million and, in fact, giving rise to very good leverage in terms of R
And the other thing that we’ve been doing a very good job on is increasing the average quality of our games and some of the scorecards that we use to measure our business is the number of our titles that we receive a Metacritic score of 80 or better. Metacritic is an independent third party rating service for video games and other content. In fiscal ’09, we had 22% of our 67 titles that received a Metacritic of 80 or better. If you look at our first half fiscal ’12 scorecard, we’re up to 44% of our games rated 80 or better. So a doubling, as it were, of the percent of high quality games in our overall portfolio.
Our digital trajectory is illustrated here, and we’re operating off the base of about $424 million back in fiscal ’09. This year, at the midpoint of the guidance that we gave in our last call, I’m not updating the guidance just commenting on it, we’re at about $1.175 billion expected non GAAP digital revenue. So it’s pretty sharp growth with most of it coming organically.
If we drill down a little bit on the first half of the fiscal year, so this would be our September ended quarter. 6 months comparison year over year, digital overall was up about 20%. The highest growth rates on the areas of extra content, Free to Play, so this includes, for example, content from our FIFA Ultimate Team game mechanic. So this was basically additional digital content that we sell to a user who’s playing the FIFA game on disc on their traditional 360 and PS3 console. It also includes microtransaction revenue from our very successful Sims Social Facebook game.
Full game downloads are driven by a couple things. First of all, titles, Battlefield: Bad Company 2, which is a game we launched over 1.5 years ago continues to perform well as a full game download, as does Dragon Age 2, a game we launched roughly 1 year ago. Also, it’s supported by our digital direct distribution strategy Origin, which I’m going to cover in just a few moments here. Mobile revenue growth is high single digits, 9% and again, what we’re working through is that feature phone to smartphone transition and subscription, digital advertising and other are up about 8% year over year for the first 6 months.
Now looking to FY ’12 and beyond, our strategy involves the following: Number one, we’re really focused on our key intellectual property or brands. We’ve just recently introduced Battlefield 3, it’s been in the marketplace for about 2.5 weeks and we sold in, in excess of 10 million units and as of last week, we’ve sold through approximately 6 million units. Need for Speed The Run was just released in North America today. It launches in Europe in a couple of days’ time, too early to comment obviously on the eve of its release. Star Wars: The Old Republic is our entry into the MMO space in partnership with Lucas. This game will launch simultaneously in North America and Europe December 20 of this year, just in time for the Christmas holidays. And the last major title that we have on deck for this fiscal year in our March ending quarter is Mass Effect 3, the highly acclaimed sequel to Mass Effect, the Mass Effect 2 are produced by the BioWare team.
In terms of platform game changers, number one, the Sims Social, this is a game that didn’t exist 3 most ago. We launched it in August. It moved quickly to the 3 and 2 chart ranking positions in terms of Facebook games. Currently, it sits at 3 in terms of daily average users. This is a perfect example of EA taking a pre existing intellectual property or brand, the Sims, which has been in the marketplace for over a decade, taking the expertise in terms of social games design and mechanic from the Playfish team, taking the best from both sides of those studio organizations and bringing to market an extremely successful social game title. Sims Social just represents one game launch in the social space; EA is committed to bringing more titles into the social space in the future.
Origin, I referred to this earlier. Origin is EA’s direct to customer digital delivery system, which wraps content delivery around its social network. A friends list, an achievements tracking mechanism, integrated e commerce, et cetera. It’s a way for EA to bring great content direct to the consumer’s desktop to establish a one to one relationship and to capture the traditional physical packaged goods retail margins stack. We’re also investing heavily in talent. I’ve already referred to the great collaboration that we witnessed between the Sims team and the Playfish team to bring Sims Social to the marketplace. The Battlefield team in launching Battlefield 3 has heralded a new generation of engine technology with the Frostbite 2 engine tech. The FIFA team has demonstrated success in the packaged goods and the digital front. Overall, our sports titles by way of reference through the October time frame, total revenue for our first 4 sports titles launched this year were up about 20% year over year. So that includes 4 titles: FIFA, Madden, NCAA and NHL Hockey.
Now in the future, what we’re looking to do is change and modify the way in which we talk about metrics. In the past, and up until today, we’ve talked about more of a packaged goods centric model where success is measured as retail selling prices times quantity, or P times Q. Increasingly as all of our franchises have some type of digital component, and we have many franchises that are purely digital, we’ll be talking in the context of rate and quantity and quality of customer acquisition, multiplied by the level of customer engagement, multiplied by the level of monetization. So we refer to this internally as our AEM framework, acquisition, engagement, monetization and so if we’re able to get leverage on any one of those variables, we’re going to produce more revenue, more bottom line profit from our digitally enabled portfolio.
We’re entering the peak selling season. We do about 40% of our revenue in this all important December quarter. I mentioned Battlefield 3 is off to a great start, 10 million units sold as of the end of October. 5 million sold through at the end of October. Since then, we’ve updated that to approximately 6 million units sold through and still counting. Talked about the differentiated features based on the Frostbite 2 engine tech. Also, wrapped into Battlefield 3 is Battle Log. It’s an embedded social network for the game, which allows you to measure your progress, to post your achievements, to invite friends to your games, to create challenges, et cetera and ultimately it’s accessible through other interfaces outside the traditional console or PC. There’ll be upcoming, for example, in the iOS, an application that allows you to view and manage your stats and your soldier profile for the Battlefield 3 property.
Star Wars is coming up in about a month’s time with simultaneous launch date in North America and Europe on 12/20. To give you a sense of the interest level, we have over 2 million people who have double opted in to Star Wars so that is they registered as being interested and giving us permission to contact to them. Of those,1.6 million people have also volunteered to do free testing for us. We continue to expand the scalability. We started with thousands of testers, moved to tens of thousands; by the end of this month of November, we’ll be at 100,000 plus testers and beyond.
Need for Speed launched today in North America, launches in 2 days in Europe. Need for Speed is a car racing game and it’s built on the Frostbite 2 engine tech, which is also used in Battlefield 3. And so the interesting point here is that a, it’s incredibly good state of the art technology and it’s great leverage of the R that went into Frostbite 2.0. The fact that we could have a first person shooter on one hand, leading edge in Frostbite 2.0 and then a couple of weeks later, launch a Need for Speed to run racing car racing game on Frostbite 2.0 illustrates the power and the flexibility of that technology.
Digital revenue progress to date, this is measured each quarter on a trailing 12 month basis. So we’re targeting at the midpoint of the guidance just in excess of $1.1 billion of non GAAP digital revenue. So as of the our scorecard as of the end of the September quarter, is $904 million on a trailing 12 month basis, this is before we head into the all important peak season, so it’s a 37% growth rate. For the most recent quarter, we grew 30% year over year and you can see, for example, how strong growth has been on downloadable content, pertaining to high definition console products.
If we break out the revenue by mode, again, highest growth segment is the extra content or microtransaction, Free to Play content at 74% growth year over year, TTM basis. Full game downloads, this is basically being facilitated by our Origin client delivery service, which has been in the marketplace for approximately 5 months since we launched the E3. Mobile, about 14% growth rate business, again, on a trailing 12 month basis year over year and subscriptions, digital advertising, all of that ancillary digital revenue streams is growing at a strong 28% basis.
One of the things we like to talk about is the synergy that we get between having a very good high quality packaged goods portfolio on high definition platforms, so PC, 360 and PS3. The evolution of our digital revenue for the FIFA franchise is depicted here. This year, as we look to the end of fiscal ’12, we have booked on an actual non GAAP basis, $77 million of extra digital revenue in FIFA ’11, so this of the game we launched 12 months ago. We expect to do about another $5 million of the remaining 6 months for a total of $82 million, cumulative lifetime in FIFA ’11 digital revenue.
When we first produced this slide and the forecast for FIFA 6 months ago, rather than $82 million, we were estimating approximately $63 million. So this forecast has gone up, not just in terms of actuals, in fact, we’ve realized most of the revenue at the $77 million. It’s gone up by about 30% in just 6 months, illustrating the traction that we’re getting off of downloadable content for FIFA. Now this is admittedly the best example downloadable content attached that we have in the portfolio. Needless to say though, the $82 million here is net revenue to EA, which accrues at a very high margin rate. Similarly, on Battlefield: Bad Company, you can see the evolution of digital revenue. 3 years ago, Battlefield: Bad Company 1 had minimal digital revenue, PC full game download. Battlefield 1943, an interim release, was a downloadable full game downloadable console game. So we never printed a single 360 or PS3 disc. We sold net $20 million in revenue there. And currently, we booked about $61 million of Battlefield: Bad Company 2 to date, another $3 million forecasted for a total expected $64 million of non GAAP revenue digital expected from the Battlefield franchise.
Not clear yet where Battlefield 3 will end up, but we have as at least as equally broad and aggressive a downloadable content plan for Battlefield 3 as we did for the predecessor Battlefield: Bad Company 2 title.
I touched upon Sims Social on Facebook. I think that the success we’ve had there is a function of 3 key factors: Number one, exceptionally strong brand loyalty to the Sims; it’s been out in the marketplace for over a decade, it’s a PC centric product. Exceptional game quality and design. Again, we had a kind of internal partnership approach to us, taking the expertise from the talented Playfish team, measure it melding that with the talent and the creativity of the Sims and Maxis team. And we had a very innovative approach to marketing. We’re able to put this game into the 3 position without spending money in acquisition marketing. It’s all done through viral marketing, activating the preexisting Sims community, et cetera.