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    EA Discusses Q3 2013 Results - Earnings Call Transcript: SimCity is "Profitable"


    John S. Riccitiello - Chief Executive Officer and Executive Director

    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.


    Blake J. Jorgensen - Chief Financial Officer and Executive Vice President


    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.


    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.


    Peter Robert Moore - Chief Operating Officer

    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.


    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.


    John S. Riccitiello - Chief Executive Officer and Executive Director

    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.


    Ryan Gee - BofA Merrill Lynch, Research Division

    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?

    Blake J. Jorgensen - Chief Financial Officer and Executive Vice President

    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.


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    User Feedback

    I always get nervous whenever EA (or anyone) says "DLC".


    Imagine you are in a pizza restaurant. You buy pepperoni pizza. You pay full price for it. You open the pizza box and you don't see the pepperoni. The pepperoni is actually "there" but you don't see it because it is "invisible". You need to pay extra money to "see" the pepperoni.


    Would you go back to that restaurant again?



    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.

    100,000 people playing the beta and pre - ordering is good news for EA. But, I wonder if EA's Chief Operating Officer Moore is aware of the big Beta EULA controversy last week.


    Anyway, good luck to EA. Time will tell if their business strategy will work or not.  

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    I suppose this bit of future fiction is supposed to say something to "investors" but what it says to me is desperation.  3Q13 is the end of September 2013.  Hasn't arrived on my calendar.


    Just more hype, in my view.  As the courts would say "mere puffing".

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    Apparently it will only cost $9.99 to have in game advertising removed.




    WHAT I`VE READ... if it´s true..i can pay to grief my neighbohood lol


    I'd be a bit skeptical of this article.  It seems to be a little bit too over the top to reflect reality, at least IMO.

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    Apparently it will only cost $9.99 to have in game advertising removed. http://www.p4rgaming.com/?p=1240
    You do realize that none of that is true (aside from there being an in-game store)? This article looks to be about as factual as something from The Onion.
    Always be careful about the source and validity of information. Many of these websites are simply after a public reaction, and to fuel controversy. (Although the main article is valid).

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    "SimCity or Dead Space 3, which run at higher margins than some of our other titles"

    Basicly stated, we made this alot more expensive than its needed, EA basterds..

    "Margin (on sales) is the difference between selling price and cost."

    For thos with les background knowledge on business. They literaly state that the cost is low compared tot he price its selling, giving it a higher margin for profit. They made the starting sale this expensive on purpose and hype it to get as many fools to buy it.

    Outrages honestly...


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