Electronic Arts Inc (EA) — Q3 2016 Earnings Call Transcript

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, who 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 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 the 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 the 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 the 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. 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, which is 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, marking 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 storytelling. 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 $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 vs. 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, and we’re excited to have a new Titanfall experience coming from our friends at Respawn. 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.

I just had one on digital downloads, this past holiday season. With season industry data points indicating that AAA launches really inflected higher in terms of digital. But digital downloads were just a bit lighter than we expected for you. Blake I know you obviously commented that Star Wars was a much more heavily gifted title during the holiday season, which I think makes a lot of sense, given 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 it fair to assume that the attached rate would be comparable to that of Battlefield 4? Thanks.

Sure, let me start with full-game downloads 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 gotten 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. My guess is that that will be less so next year because Battlefront tends to skew less towards gift giving and more towards PC, where there is a very hardcore PC audience as the Battlefield audience, and they tend to obviously do more 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 the gift giving, we would be very surprised if 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 the 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.

This is Chris on for Steven, congrats on the quarter. Two quick questions from our end: you said you sold in 13 million units of Battlefront and that 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, do they have the same propensity to try new games, maybe new genres that they've not played before, just like EA Access?

We just launched Origin Access, so it's still too early to gather significant data. However, we're very optimistic about what we've observed with EA Access, which influenced our decision to introduce Origin Access. The titles offered are different since not all of our games are for PC. We expect to see some varied player dynamics, but we're hopeful for similar trends as those in EA Access, as it's encouraging to see players expanding their interests beyond a single franchise. Could you please repeat your first question for me?

Yes, so you guys sold in 13 million units of Battlefront and 1 million of that were bundled. 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. 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.

Was wondering if you can comment on the progress of the next Titanfall, and with that, the overall relationship with Respawn, and 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 would be helpful. Thanks.

So, I'll take the Titanfall question. Again, it's really early to start talking about the details of Titanfall at this juncture, and that wasn't the 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 faith in that entire team to build a spectacular game and are really looking forward to sharing more details in the months ahead.

Regarding competitive gaming, we recognize a significant opportunity moving forward. We've been involved in this space for several years, especially with FIFA through the FIFA Interactive World Cup. We're excited about the finals of the Madden Challenge series at the Madden Bowl this Thursday in the Bay area. However, we view this differently than some other publishers currently in the market. We see it as a tool and platform for increasing player engagement. More play sessions are beneficial for Electronic Arts and our players. Our focus has been player-first, fostering community. This is clearly an entertainment medium with a lot of excitement, and our diverse portfolio, especially in sports titles like FIFA and Madden, along with our Battlefield franchise, is well positioned for building a meaningful business in the coming years.

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

I’ll start by discussing discounting overall. During the holiday season, especially between Black Friday and Christmas, we usually see significant discounting. This strategy helps drive volume, particularly for those purchasing new consoles for the first time, as they often want to quickly build up their software library. We believe that discounting enhances customer engagement, and we communicate this perspective to our retail partners while also supporting their efforts through specific programs each year. We’ve maintained this approach consistently over the years. Additionally, we are implementing discounts on the digital front to ensure that pricing remains aligned across both physical and digital sales, avoiding any discrepancies. Our strategy to drive volumes through discounting remains stable year after year. This year, our discounting programs closely mirrored those from last year, as well as those of our industry partners, showing little variation between years. Concerning sales reserves, we establish them at the beginning of each quarter based on anticipated sales, and we utilize these reserves throughout the quarter as part of a structured plan. It’s important to ensure we have adequate reserves to cover costs over time, and we continue to set up these reserves each quarter. Importantly, these reserves do not affect our forecast margins, as they are already factored into our financial projections.

Thanks. I believe Andrew mentioned that you are attracting a new type of demographic to Star Wars. Could you provide more details on that? What does the demographic breakdown of the game look like, and what new demographic are you attracting to the EA trend? Thanks.

Yes, I can take that. So what we have seen is really there are two groups that have either come for the first time 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 become 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 who are of gaming age who may not have gotten into the first-person shooter universe yet because of the nature of the content, 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. 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. We’re looking now at how we continue to provide content and experiences that engage those two new groups so that we maintain relationships with them over time.

This is Ryan on for Justin. First off on Star Wars, congratulations on this shipment. I’m 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. I'm 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 really the specific Star Wars title, or is there any reason for us to think that EA won’t continue to see the benefit on the margin side from the industry going digitally and into 4Q and then in this fiscal year '17?

I don’t see any signs of that; this change in mix isn’t related to the Star Wars Battlefront opportunity, especially considering the movie was released. December was a prime time for Star Wars gifts, and typically people prefer a physical package under a tree or amongst other gifts rather than just a digital code, which influenced this shift. In the next Battlefront, we might see a similar situation, but we don't have any details on timing for ourselves or the industry or how the excitement around Star Wars will be when it returns. Currently, nothing indicates that our digital progress is slowing down. In fact, looking at our non-Star Wars products, each one has shown growth, both in digital sales and full-game downloads along with digital engagement. Specifically, Ultimate Teams demonstrates that players are increasingly planning and engaging with these titles over time. Regarding our Star Wars guidance, we won’t provide individual breakdowns, but we expect to sell more than the 13 million units since we've already reached that benchmark. We sold more in the third quarter, so we might surpass our original fourth-quarter expectations. However, I want to remind everyone that there are ongoing foreign exchange headwinds amounting to $40 million that may not be factored into some models. Additionally, we recognize there are global economic challenges present, which have not significantly affected us, but we are being cautious with our guidance given that situation. Looking ahead to next year's guidance, our title lineup includes core and traditional sports titles. Notably, in Q1, the only title launching is Mirror’s Edge, in addition to our catalog and live services business. We'll provide comprehensive full-year guidance during our next earnings call in May. As you consider Q1 guidance for next year, please keep in mind the persistent foreign exchange headwinds affecting us, as well as the fact that last year we benefitted from a $30 million one-time revenue boost from FIFA Online 3 at the start of Q1, which was high-margin revenue. These are key points for your models to consider. We’re enthusiastic about the upcoming slate; you can typically expect a Battlefield release in the third quarter. We haven’t announced when Titanfall or Mass Effect Andromeda will be available, but you should anticipate those toward the latter half of the year since the second quarter is largely focused on our sports titles.

And then if I can add one last follow-up, there was 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.

A couple of questions: one, I know you guys touched on Madden NFL Mobile, it did really well this quarter, wondering what are some of the learnings, 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 your overall 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; onboarding, how someone will get into the title; the game mechanics itself, so actually what do you do while you're playing the game; and then how we run the servers that actually surround 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 onboards 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 are tied to the passion players have for the real world of the NFL and a very engaging format on an ongoing basis. During the weekend games and the week leading up to those games, all of those opportunities present learnings 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 loss leader to drive traffic into their stores and that tends to be physical copies. But in the rest of our sports portfolio, we tend to see strong digital full game sales; really Star Wars was the only Gen4 title that 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?

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 the device. 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.

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 down. We’ve got a 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, Canada, Romania, Australia, and many in China. Many of those have obviously become lower dollar cost. We try to report each quarter what the actual dollar costs are and you’ve seen some continued investments. Our goal is to try to keep R&D expenses around 22% to 23% of revenue line, which means even if our revenues are growing, we’re clearly continuing to invest in R&D. We think that’s very important for our future. You will see marketing expenses bounce around depending on the title and the quarter. So this quarter, our marketing expenses were up, and if you FX adjust them, that was driven by the fact that we had a fairly large title this year that we didn’t have in last year’s third quarter. This year's Star Wars, while 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 the 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 of 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.

So Ultimate Team is 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. 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 marketplace issue that we saw. We are currently forecasting that we will have a stronger fourth quarter than we did last year. Because obviously, we corrected some of 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 leaned last quarter last year. But clearly the business continues to grow and we’ve 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, and the UK, 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 do you think about limiting the number of SKUs going forward? Thanks.

We are down to less than 15 major SKUs, and that feels like a good size for the business. We are obviously announcing that we’re investing in some action-based 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 to grow genre and grow our revenue base with more titles, both digital live services titles as well as traditional console titles. Part of that is 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 marketplace for broader titles, addressing wider audience terms that 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 that 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 thing that we’re cutting back on today because we've brought the total number of titles down to a very perfect level for us now.

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 it's not going to be meaningful for a number of years, is it possible that we will get any of those what you've defined as 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, and 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 conservatism 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 it 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. 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 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 at across our studios right now.

Two questions. Blake, can you discuss the macro environment and what you are observing as we approach 2016? Additionally, we've noticed that Amazon is launching a promotion for Prime members, where they will provide a 20% discount on large AAA games shortly after they become available for pre-order. Can you clarify whether your company is contributing to this promotion or if it's solely an initiative by Amazon? How do you anticipate this could affect digital sales, considering these offers are mainly for physical discs?

On a macro environment, we've mentioned a couple of times our caution 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 would say we have a level of conservatism about 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 consistently 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 is now almost 50% higher than previous console cycles. So, all of that is very positive. All the gameplay 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 forecasts 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 with how Amazon operates. We don't have much say or view on the 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.

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?

So, what we're seeing is more and more we need to be close to our players. And what you have seen from the last couple of years in almost all of our actions, whether it relates to development, 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. We see this as an opportunity to do just that: get close to our players, invite them into 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 members of the ESA and will have meeting rooms at E3 this year. So, what we see we’re doing is augmenting the overall E3 experience. We are excited about 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 simultaneous events in London. So, in some ways we are trying to do a more geographically spread way to introduce people to our new product.

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 is this sustainable with the improvements there? Or maybe talk about some of your plans with mobile.

I'll begin with Star Wars. One crucial aspect we follow, which is part of our agreement with Lucas and Disney, is that any game set in the Star Wars universe must respect the established canon. This means we cannot introduce elements from the future into the past unless it's merely a reference. Since I don't yet know the exact storyline of Rogue One, I can't speculate on how it might influence our games. The timeline of our current Battlefront game is also tied to the historical Star Wars canon, being set 30 years before the latest movie, which restricts our options for new content. However, we'll continue to align closely with the Star Wars narrative as new films are released, allowing us to incorporate new characters and vehicles. Regarding mobile gaming, similar to our console business, the mobile market can be somewhat inconsistent depending on the release of new titles. However, like most live services, it should become more stable compared to past console trends over time, although there may still be fluctuations quarter to quarter.

Yes on the Star Wars play, I’ll just 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 Wars games. We have seen that across console, PC, and mobile. 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 our titles typically have very long lifespans. The Sims FreePlay, The Simpsons Tapped Out, Real Racing 3 have continued to grow over a number of years. 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 marketplace 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.