We, and the rest of the financial world, are still trying to figure out exactly how to interpret EA's Q1. Without adjusting for one time expenses, the company outperformed analyst expectations. If you adjust, though, they blew the quarter.
As of 5pm, it looks like the consensus is now the latter: ERTS is trading down afterhours, and Reuters has officially declared it a miss:
The Redwood City, California-based company posted an adjusted loss of 42 cents per share, worse than Wall Street's average target of a 35 cent loss, according to Reuters Estimates.
As expected from the conference call, the company had no comment on the Take-Two acquisition. But there was one surprise -- Q2 EPS will be a loss. Analysts were predicting a $0.09 gain per share, so this is a pretty big miss. The company didn't elaborate or give specifics, though.
In the meantime, it looks like revenue their core businesses -- console games, and co-publishing/distribution (like Rock Band, which is owned by Viacom) are up, by 35% and 338% respectively y/y.
Guidance
2009:
Revenue: $5-$5.3B, in line with analyst estimate of $5.15B
EPS: $1.30-$1.70, in line analyst estimate of $1.59
Q2:
From call: Q2 should be a loss. Analysts are estimating a $0.09 EPS, so that's worse than estimate.
Call Notes:
5:01: Call starts, standard disclaimers
5:04: Strong sales of Rock Band. Bottom line overperformance reflection. areas that will determine Fiscal 09 – EA Sports, Release Slate, Nintendo Platforms, Digital Direct to consumer product
5:08: Catching up now: We have both quantity and quality for Nintendo Platform.
5:10: Direct to consumer is up 21% y/y. Pogo is doing real well
5:10: Just launched the Sims store, up to a great start. We delivered a solid Q1, on balance we're tracking on each of the four drivers for our FY09 plan.
5:11: Several titles stood out: Battlefield Bad Company sold 1.6 mn in the quarter, UEFA 08 sold more than 1 million, NASCAR sold nearly half a million, Boom Blox sold 450,000. Rock Band sold 850,000 copies.
5:12: Distribution growth and console revenue helped account for a 99% North American revenue growth.
5:13: Europe revenue was driven by Euro UEFA.
5:13: GAAP gross margin was up 5 points y/y.
5:14: Non-GAAP marketing and sales expense was up due to increased advertising, because 7 titles were released vs. 3 titles y/y.
5:14: Non-GAAP R&D expenses were up too.
5:15: Gross accounts receivable were $455 million vs. $299 million y/y.
5:17: As a percentage of trailing 9 month non-GAAP revenue, reserves were 6%, down two points.
5:17: Industry outlook: Software sales up 38% in NA and 28% in Europe. EA's software sales should be up 20% for NA and Europe, up from 15% last year.
5:18: Confirming guidance for the full year (see above).
5:19: We know expect Tiberium to ship in FY10, in digital direct to consumer, we continue to expect to generate $435M, up y/y. Wireless non-GAAP will be $135M up 20% y/y. Non-GAAP R&D will increase 30% y/y. BioWare and Pandemic acquisitions. Profit margins on casual label should increase y/y.
5:21: Income taxes for FY09 -- GAAP tax rate range of 40-55%. Rate will fluctuate quarter to quarter.
5:22: Projecting a non-GAAP loss for the fiscal Q2.
5:24: EA Sports: Pleased with quality and innovation. The early reviews on Madden are strong, confident we'll beat last year's metacritic rating. Expect quality and innovation to take a leap forward. On NCAA Football, pre-orders were down 20%, but sell through is the same. Pre-orders are down for Madden too. Can't be 100% sure but we're hopeful for Madden that quality will prove the indicator for sales.
5:26: Been making strides to drive our business digital direct to consumer. This year we cut back on our PC sports games but only for a year. Re-tooling titles to take advantage of online. Working on subscription programs for loyal EA Sports gamers.
Q/A:
Q: On the catalogue side, weaker than expected. What did it represent for the quarte,r and what's the expectations for the year. What's your thesis for why pre-orders are tough?
A: Catalogue, we had stronger front-line sales and slightly down catalogue sales. Those things offset each other a bit. We've seen a little bit of softness in catalogue in the industry because of such a strong frontline. Sports: watching this very closely. Consumers are feeling less pressed to place pre-orders. We've never done anything to spur pre-orders. For NCAA we were down on pre-orders but sales are flat year to year.
Q: On the second quarter rough guidance, is it an operating loss or net income loss?
A: Specifically a Non-GAAP EPS loss.
Q: How much wiggle room have you baked in when you're targeting a 20% y/y growth for FY09?
A: We're factoring in operating expense control, and titles that may not make it out next year. Starting with Mercenaries this year, there's a number of things that are new and incremental this year different than last year. Quality and depth in our lineup take a qualitiatve shift starting in the second half of this year.
Q: Had the largest quarterly loss in history of the company, is it the old strategy phasing itself out?
A: In terms of the quarter, we're in a 12-month business. Quarters are a little bit hard to use as a predictive measure. This quarter we made some accounting shifts. For those tracking GAAP it's particularly complicated because of revenue recognition.
Q: Sports on Wii
A: Tremendous potential for EA Sports on the Wii Platform.
Q: Frustrated with the pace of Take-Two acquisition?
A: Not putting out new information regarding the process with the FTC or our interaction with Take-Two. Can't go forward today.
Q: Segment your R&D headcount between low and high cost locations.
A: Ended the quarter with just under 7,200 people in R&D -- 16% in low-cost locations.
Q: In your forecast, you talked abotu sales and marketing coming down as a percent of revenue. Large of a mix of new products, how do you launch all this new stuff and keep the ad budget as a lower percentage of revenue?
A: Broad point about marketing and sales as a percent of revenue is scale. We're adding north of a billion in revenue so percentages is down. We're looking to get more efficient with our marketing. Like Spore, launching the creature creator as an advance release. Revenue generating prequel to the game itself. Looking to see what we can do with viral, online, etc.
Q: Spore, how many users were paying/nonpaying. How much are the Madden pre-orders down?
A: We did not and have not released the breakdown between paying and nonpaying. We're pleased by what we've seen, shows us two-thirds male, one third female. It was a PR program it wasn't really a business move, it was sort of a self-paying program. We're in better shape three weeks out (on Madden) then we were with NCAA, but no specific numbers. Demo is coming out soon. When we look at the activities over the next two weeks we're incredibly optimistic.
Q: Increased your market growth expectations but no flow through to sales, why?
A: Believe our forecasts are accurate.
Q: Next Rock Band?
A: Coming in this second quarter.
Q: What percentage of total revenue is sports and what percentage of sports is Madden?
A: We don't break that out. We are finding a better media mix with our sports titles in terms of advertising. At the analyst day we did show the rough shape of the topline -- sports is approximately a quarter of total revenue.
Q: Can we expect an update on sales before the NPD updates?
A: No.
Q: On FIFA, pushed that out to the holiday quarter? How much dollars did it contribute last year?
A: FIFA was always planned for Q3, it did come in Q2 last year but in the final week.
Q: Heroes Battlefield taking longer than originally thought, what's going on?
A: Decided to increase the social networking features in the game. Still progressing much like we expected for it.
Q: How exactly are you reducing costs? Sales and marketing line is much higher than what we were looking for.
A: Savings we did realize were salaries, benefits, outside contracted services.
Call Ends.
