Q1 2020 Earnings Call
<unk> My name is Christine and I'll be your conference operator today.
At this time I would like to welcome everyone to the electronic Arts Q1, 2020, <unk> earnings Conference call.
Mr., Chris Evenden VP of Investor Relations you May begin your conference.
Thanks Christine.
Welcome to <unk> first quarter fiscal 2020 earnings call with me on the call today are Andrew Wilson, I'll see Ya I'd like children's and I'll see if I see.
Please note that our SEC filings our earnings release are available at <unk> Dot Com. In addition, we posted earnings slides to accompany our prepared remarks.
Lastly, after this call we will post the prepared remarks, an audio replay of this call a financial model transcripts and updated accounting effect here.
Well, that's what kinda our annual shareholder meeting will take place and says I always see eye care never shows.
And our Q2 fiscal 2020 earnings call is scheduled for Tuesday October 29.
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-K for a discussion of risks that could cause actual results to differ materially from those discussed today electronic arts makes these statements as of today July 15th 2019, and disclaims any duty to update them.
During this call the financial metrics with the exception of free cash flow will be presented on a GAAP basis. All comparisons made in the cost this quarter against the same period in the prior year unless otherwise stated now I'll turn the call Ive to Andrew.
Thanks, Chris we delivered a strong stopped at flight 20 slides, we're deeply engaged in a top franchises with growing communities, reaching new peaks engagement fueled by content in gum advancing a lot services.
As a result operating results significantly exceeded our expectations for the first quarter.
We're thrilled by the great experiences that plays out having you now getting us and we're looking forward to delivering a lot more throughout the fiscal year.
Interactive Entertainment continues to grow and expanding global play nice new platforms, new business models and more ways to play and watch our fueling tailwinds for the industry with this backdrop the core jobs growth he the depth and breadth of our portfolio with IP, our expertise in life services, our leadership and subscriptions and competitive getting the expands our reach and drive deeper engagement.
We're also continually strengthening our foundation of great talent and technology I will touch on some of these drivers with a few highlights here.
Let's start with apex legends, we have a massive global audience continuing to engage in these high quality free to play experience apex has tremendous gameplay at its core and we've built it to have longevity as a live service that will continue to drive engagement over time.
You know lots of us were delivering seasons of new content, a collection of new content and updates to begin to roll out at the start of each season and continue throughout the course of several weeks and months. We launched season two in early July including a robust auto parts offering a new character and additions to the environment and to date. It has outperformed our expectations with significant growth in daily and weekly active players in each season. There are endeavor events that are additional drivers of engagement such as they've been coming in the next few weeks that will bring new content and deliver.
One of the most fan requested features.
Since the launch of apex.
There will be more updates and in getting experiences in the weeks to come for season, two and season three is shaping up to be even bigger.
All of these elements the fantastic core gameplay sees IMMU content, an additional endeavor than our design content to continue to excite and engage the apex community over the long term.
Well, we're expanding into additional growth opportunities for apex legends esports will bring new drivers of social interaction and competition to the apex ecosystem.
Interest from teens broadcast partners and sponsors is strong and we've had great success with our first exhibition events, including a competition at the SBS that was broadcast on ESPN and ABDC will have around.
Eight teams from around the world participating in our first official competition in September our plans to bring apex legends to China and a worldwide mobile launch are also on course, and we will share more on our plans in the future.
You know EA sports portfolio.
Now franchises like Madden NFL FIFA are delivering for cool things innovating to reach new plays and leading our growth in sports looking first at Madden NFL, we continue to see deep year round engagement in the franchise live service event, and Todd and content with the NFL draft drug growth in new players joining Madden NFL 19 in Q1.
And also deepened engagement in Madden Ultimate team. We're now just days away from launching Madden NFL 20, the innovation in issues game like the new Superstar X factor abilities, new personalized create campaign and the more fluid core game play are all designed to appeal to new and existing football fans.
None NFL EA sports also continues to drive growing viewership.
Please now Madden NFL competitive ecosystem engaged four times more than non competitive as last season, and our events drug record broadcast and digital and digital viewership.
We're now looking to build on that success with the Madden NFL 20 Championship series, we're partnering with all 32 NFL teams how competitions are aligned with key big the NFL season.
And we're welcoming major sponsors, including Pizza hut sneakers and Starbucks.
Finally, the latest season about fan favorite Madden NFL mobile game launches tomorrow.
And this year the game is bringing back some of the classic modes that fans love as well as new innovation in social Coldplay and customization.
Through great experiences on console and PC the ever popular Madden NFL mobile game, and a leading E sports programming Madden NFL continues to reach and engage a wide audience of fans.
I'll pick a franchise had a strong had a very strong Q1, we played deeply engaged in our ultimate team loves service our biggest in game events team of the season at more than 3 million players looking to fight daily to play.
The highest end levels weve ever seen for this event.
E Sports FIFA is exploding as well without competitive modes growing faster than any other mode in funds.
Momentum is strong across our entire fee for E sports ecosystem and next week's FIFA World Cup finals will be the culmination of a season that has engaged 17 officially partners flights from 20 different nations more than 30 live events and more than 60 million total views to date.
Looking ahead to September FIFA 20 is set to expand FIFO platform with a brand new dimension of the game for players who want more personalization customization and community.
Volta football brings a street soccer experience of the franchise, where players can build their own characters express themselves and flight different forms of the sport in different environments around the world.
That's in addition to major advancements in the core experience design deliver the most authentic football game play we've ever produced.
Veeva 20, we'll have an unmatched breadth of top leagues teams and players, including the gain a continuing differentiator of the authenticity and how FIFA franchise. A licensing program is built on the strength of multi year relationships and careful consideration of the most important players teams and leagues that our fans love to see in the game from console to PC 12 feet for mobile games in the West and China to our FIFA online offerings in Asia Pacific continues to be the way that hundreds of millions of players around the world come together in a shared passion for socket.
Out in full launch service also continues to be a rich and rewarding experience for our players and a strong platform for growth.
The Sims four continues to be one of the great owned IP success stories about portfolio and were planning to add 420 to be our biggest yet of new content.
Knowing that we gave more fans a chance to get into the game through a one week promotion in may to download the bice getting for free.
Over 7 million players downloaded the game during that time. In addition to the base getting promotion total expansion and gave back down loans also increased 55% year over year in Q1.
We launched our seventh expansion pack autumn living in late June and it has already become one of the best selling packs for the Sims four.
We are fortunate to have an incredibly vibrant and creative Sims community on console PC and mobile and we continue to double down on his amazing franchise to reach new plants and open up exciting new dimensions of the Sims this year.
Subscription services are expanding across the industry as well, where a pioneer and a leader in this space, having just launched our subscription on a third major platform with the access on the Sony Playstation four we believe subscriptions can be transformative to the player experience and the gaming industry over the long term as they offer tremendous value and choice the players and greater flexibility in the games, we bring to market.
Our PC subscription or it includes more than 220 games 140 of which all from third party developers, we're continually adding to this with new games from EA from any developers seeking to expand their reach throughout the originals program and from our third party partners is ready to reach more players throughout services.
We're also working to expand our subscription to even more platforms.
Mobile continues to be a growth opportunity for US live services is a key aspect of our mobile business with franchise like Madden mobile FIFA mobile and this seems continue to drive strong ongoing engagement Star Wars Galaxy of heroes has grown to nearly 80 million plays locked to date.
Galaxy of heroes has the most deeply engaged community of all of our mobile games and we plan to continue delivering great new content and in game events to grow the audience. This year.
Weve also just started pre after testing for plans versus on Bes three in a market where discovery and acquisition can be challenging plans versus on these is one of the most beloved brands in gaming today, we've had more than a billion downloads worldwide at PBC games on mobile and we're looking forward to bringing something new to fans around the world will continue to prototype and develop more of a spok mobile projects as well as new concept for cross platform play.
The mobile space complex and competitive and our focus on bringing more innovation and unique new experiences to mobile players.
In addition to the franchise and lots of is that I've already mentioned, we'll be delivering many other new experiences to play throughout the remainder of this fiscal year. NHL 20 is launching in Q2 with hundreds of gameplay advancements as well as new competitive and multiplayer modes, we'll take that wraps up and you need to speed gain heading into gains come in a few weeks, we have plans, but plans versus somebody shooter title coming to console and PC later, this year and the excitement and anticipation for Star Wars jet are full in order has been strong coming out at EA play an eatery, whether again receive 45 award nominations and great Buzz from the flight community.
Responds track record speaks for the high quality games, they develop and that created a brand New Star Wars story that will be a lot of fun to play when it launches this holiday.
From the coal game to live services that extend and enhance the experience to new ways to engage through subscriptions and competitive gaming. Our focus continues to be on strong execution and delivering innovation quality and fun for plays that every time, we're fortunate to have some of the greatest and most creative talent in the industry driving our efforts to continually learn and improve with robust best in class technology power now efforts. We're also in a position to scale and evolve with the changing needs of our players.
Now I'll turn the call over to Blake. Thanks, Andrew we delivered operating results significantly above our expectations this quarter and that high level. Those results were driven by broad strength across our core franchises.
Apex legends continues to delight players and we are pleased with the impact of season two since its launch on July 2nd.
This quarter's results demonstrates how the power of our portfolio strategy combined with extra content deliver strong results even in relatively quiet quarters. Our report the specifics of our results on a GAAP basis, then use our operational measure of net bookings to discuss the dynamics of our business.
To compare this quarter's results to historically reported non-GAAP measures. Please refer to the relevant tabs in our downloadable financial model.
Yes, net revenue was $1.21 billion compared to $1.14 billion, a year ago and above our guidance by $79 million operating expenses were $607 million compared to $622 million a year ago, primarily driven by lower sales and marketing partially offset by continued investments in new IP. This was significantly below our forecast driven by timing of advertising spend.
Operating income was $415 million compared to $300 million, a year ago and above our expectations diluted earnings per share was $4.75 up over 400% year on year.
Underlying EPS was well above our expectations driven by net bookings gross profit and operating expenses.
Operating cash flow for the quarter was $158 million up $38 million from last year capital expenditures for the quarter were $45 million, resulting in a free cash flow of $113 million.
Operating cash flow for the last 12 months was $1.59 billion see our earning slides for further cash flow information.
During the quarter, we also repurchased 3.2 million shares at a cost of $305 million, leaving $979 million available in our buyback program, our cash and short term investments at the end of the quarter were $5.19 billion up 4% year on year.
Now I would like to turn to the key drivers of our business this quarter.
Net bookings for the quarter were $743 million or approximately flat year on year. It was $53 million above our guidance driven by strength across the board with strong performance from our core franchises and live services.
Digital net bookings were $701 million up $8 million on a year ago period on a trailing 12 month basis digital net bookings now represent 76% of our business compared to 69% a year ago.
Looking at each of the components of this quarter's digital bookings in term.
First live service that bookings were up 12% year on year to $504 million led by apex legends ever sales for.
FIFA Ultimate team was up 11% year on year at a constant currency or 5% at actual exchange rates.
Diving into the details season to launch for apex legit.
The bidding beginning of Q2 and were pleased with its performance with regard to both sales and engagement. We will continue to add content during the quarter with a major event in mid August and seasonal.
FIFA online three to FIFA online for.
Meanwhile, FIFA online three outperformed our expectations in China, and we are positioned well for switching over to FIFA online for.
Finally, as Andrew mentioned, the Sims four based game promotion delivered nearly 7 million new installs and we remain on track to have the fifth consecutive year of growth in the Sims four following its launch in 2014.
Mobile delivered net bookings of $122 million down 17% year on year driven by aging titles.
Although down year on year Star Wars Galaxy of heroes outperformed our expectation and maintains a highly engaged user base, leading us to be optimistic about performance and a huge year for the star Wars franchise with new TV shows movie and theme Park launches.
Full game PC and console downloads generated net bookings of $75 million down 22% year on year due to last year's launch of a way out and FIFA 18 World Cup promotions in the quarter, 47% of our unit sales are now digital rather than physical measured on X. box, one and Playstation four over the last 12 months. Although this is up seven percentage points year on year. We continue to model an annual shift of five percentage points, given how strongly digital anthem strongly the digital side of anthem was during the launch last quarter.
Before getting discussing guidance I'd like to highlight that there were three income tax events in the quarter that impacted our GAAP Q1 results and our full year GAAP guidance.
Please refer to our press release for those deep for details on those tax events. As a result, we expect to recognize a 1.7 billion dollar benefit in the fiscal year, which is 200 million better than we included in our guidance last quarter, although the phasing of the benefit between Q1 and Q2 has changed since we gave that guidance.
$1.08 billion of this amount was recognized in the first quarter and the remaining $620 million, we will be recognized when the Swiss tax rates change, which we expect to occur in the second quarter, we do not expect the above events to impact our F Y 20, operating cash flow or our management tax rate for fiscal 2020.
Now turning to guidance, except for the increase in our tax benefit of $200 million or 66 cents a share on GAAP EPS, we are reiterating our guidance for the full year. We continue to expect the Sims four and apex legends to each deliver net bookings in the $300 million to $400 million range. We are holding our operating cash flow guidance at approximately $1.575 billion with capex still expected to be $125 million and free cash flow of a burn of around 1.45 billion.
For the second quarter, we continue to expect net revenue of $1.315 billion cost of revenue to be 407 million and operating expenses of $679 million.
This result in earnings per share of $2.60 for the second quarter.
We anticipate net bookings for the quarter to be $1.23 billion were very excited about the Madden NFL launch and the upcoming apex legend event and the launch of FIFA 20, with Volta football at the end of the quarter.
We over delivered this quarter as a result of the performance of our core franchises. These evergreen lives services provided tremendously solid base for our business and enable us to invest in new opportunities to innovate and to take risks where unique among our peers in this and it is no consequence that we are a leader in cloud gaming subscriptions and in the strength of our player networks.
People will only engaged with our games if they have fun playing them and we continue to invest in keeping them fund whether it's in the.
In major innovations such as both the football and FIFA or new modes events and legends in apex legends or even adding laundry to the Sims four we aim to give players content. They want to place. If we're successful in that were successful of the business.
The combination of core plus innovation, plus fun will drive our success through the year coming up in August we have more live services for our newest franchise apex legends and the latest installment in one of our most storied Madden NFL FIFA 20 launches right at the end of the quarter. The following quarter, we have new IP Star Wars jet I follow on order simultaneously, we continue invest in more new IP, new technologies and new business models. We believe we have the right ingredients in place to deliver fund for our players and success for our business and I look forward to reporting on our progress to you next quarter now I'll turn the call back to Andrew Thanks like.
The world loves to play games as the global gaming audience continues to grow and spend more time with the games. They love Interactive Entertainment is an increasingly important part of our daily lives.
At the heart of the social connection the unique ability to games have to connect and spot play to be part of a shade experience new platforms, new technologies and new ways to engage will continue to fuel growth for the industry and through these opportunities we are positioning EA to lead.
It begins with great games that can fulfill the motivations of a diverse global player base, we continue to invest across our portfolio to deliver the depth breadth and quality of experiences that players seek out top titles across sports simulation shoes and racing connect hundreds of millions of players on console PC and mobile.
We create experiences in some of the most popular owned IP in the industry, including the Sims battlefield need for speed and plans versus on bees, we've introduced powerful new IP like apex, Legendz and wed building new licensed experiences lifestyle was Jeff Foland rolled up our pipeline is full of innovative new projects for our current franchises, new IP and plans to revisit some of that fan favorite brands as we continually work to bring more high quality games to applies across a growing number of platforms and devices.
Live services enable us to build powerful communities with plays come together and continue to share in the experiences. They love. We've had great success building deeply engaged long term communities in ultimate team. The Sims battlefield Star Wars in mobile and now will add to that with our massive player base in apex legends each live services different design uniquely for the community. It since they also enable us to continually learn from our plants the feedback and the motivations. So we can drive more innovation and creative exploration in the future.
Interactive entertainment today transcend the active playing again new ways to engage like E. Sports are becoming just as important we see from mountain, we had the largest esports ecosystem in sports games and apex legends is going to be a major New addition to the global competitive gaming scene Nyishia.
We believe that our games can make competition accessible to everyone. We see opportunities to bring competitive play to more of our franchises and we look forward to delivering for multiplies viewers sponsors and broadcasters around the world.
With gains becoming an increasingly important part of our lives subscriptions offer compelling new value proposition for clients.
All the industries have demonstrated how subscriptions fundamentally shift consumer behavior.
We can see more television content in different ways because of video subscriptions, we consume more music in different ways because of music subscription services. We believe the same is happening with games with subscriptions can offer access to great content at great value with tremendously low friction when combined with cloud streaming that varies a load even further the Nike even more compelling to jump into new games and connect with new communities the subscription opportunities Pal from blood plasma and gain creators and we're continuing to invest in our leading services on console and PC.
In addition to more great games passionate local communities and new ways to engage there will be more transformative shifts on the horizon.
The content push of progress and innovation is what sets. This industry apart from every other form of entertainment without teams with incredibly talented developers artists and engineers, we're looking to drive creativity quality and fund through every aspect of the player experience now and in the future. We look forward to sharing more updates in the months to come.
Now Blake and I have few questions.
Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.
Pause for just a moment to compile the Q and a lot.
And your first question comes from the line of Steven Ju from Credit Suisse. Your line is open.
Okay. Thank you very much so Andrew flick.
Seems like FIFA online is on a recovery path right now but.
This game is to distribute only in Korea, China, and Southeast Asia, and I think we've talked about this many times before the opportunity should be global.
So can you tell us where you stand between either FIFA mobile or other things you may be doing in the background because it seems like the demand for this game should be multiples of the audience that youre, reaching right now thanks.
So again I think we think about fee for is a platform that brings together a soccer fans of football fans, depending on which country you're from.
Together.
To share in that passion for the game.
In any given market that might mean going to them in different ways with different games on different platforms and different business models right now we entertain fully a couple of hundred million people, we see an opportunity to growth. This certainly, but when you think about the offering that we have across console PC and mobile.
Through premium through live services like ultimate team through access to the game in subscription and free to play on mobile and PC in Asia, We feel like that we are we feel like we have really strong offerings for global player base, you should imagine that we're always thinking about how we can attract more users.
To the platform.
That's why we are working on Volte and for this year, we think that thats going to bring in a whole new range applies who loves the game, but want to different type of play than the original 11 11.
And as we think about.
Mobile focus going to mobile over time, we also expect that will continue to grow that business.
Thank you.
Next question.
The next question comes from the line of Mike <unk> from Goldman Sachs. Your line is open.
Thank you so much for the question and all the color I'd like to better understand how you're tracking against your $300 million to $400 million bookings guidance for apex legends in the sense.
How much do you realize in the quarter are you about 25% of the way there and how should we think about the phasing throughout the rest of the year. Thank you very much.
Well the.
I think as we said last quarter, you should expect that the first quarter was smaller than the remaining three quarters Q2 through Q4.
Because we were still want to experimenting and two we didnt have as much contact clearly quarter too.
He has more content and as we talked today about major event that is coming in a few weeks in August that will clearly continue to drive engagement and content, which tends to drive monetization and you should assume Andrew mentioned that Q3 will have even more than Q2. So we're going to continue to build that.
I would assume that the back three quarters of the year, probably all about the same size based on what we know today and larger than the first quarter. That's all I can really tell you is it early days and we're only one month into or less than one month into season to right now, but everything is tracking.
To to plan or better for us and so we're very confident on the 300 to 400 million on apex.
Obviously.
Synos and we've called out that it's in the same range of 300 to 400, we didnt do that before but we want to remind people that our business is not based on FX lessons, along it's very important to us, but it's still a relatively small part of our overall business and franchises like assumes have been continually producing that range of revenues because we run them as a live service and we want to make sure people understand we have confidence in building a live service around FX and that will continue to grow over time.
And we'll continue to update you as we learn more but we know we've got amazing engagement, we have eight to 10 million people on a weekly basis, playing a game that's huge for us on almost any game that we see and we'll continue to take advantage of that.
Keep them engaged.
Playing every day.
Thank you very much thats very helpful.
Thanks.
Next question.
Okay.
Christine next question.
<unk>.
Your next question comes from the line of Colin Sebastian from Baird. Your line is open.
Well for me as well for first on apex I was wondering more specifically what are you seeing in reengagement with some of the early players.
In terms of what is drawn them back into the game and then and then secondly, certainly made some comments today on third party software sales, reducing their outlook a little bit was just hoping for any color from your end in terms of the preorder environment for for some of the titles or the retail environment overall. Thanks.
Yes, we'll all have to effect and what type of apex.
Yeah, I would just come back to the comments that Blake to share and we have between 10 million people engaging in this game on a week by week basis that is large by any measure it makes it one of the probably the most engaging games.
We have continued to see a great fan sentiment inside that game and we expect to continue to grow that audience over time again, when we think about Ipic legend, we you know we set out to build something with longevity and at the very core it is a great gameplay experience and we know that long term engagement.
Involves the ongoing release of new content and the ongoing running of events both of which the team at respawn are doing with great success, but the very core of that is a great gameplay experience and we're building. This in a way that we expect to continue to grow up to be a meaningful part of our business for a long time to come and the signs of engagement of seed today lead us to believe that's possible and we think about this is almost like an annual title. We will continue to innovate that game and evolve that game overtime and hopefully I believe that we have 10 year run ahead of us or thought more theres, so much potential and ways to.
Change that game overtime and add to the game, we think that there's just huge potential of that and that's how we're managing it.
We are in terms of the news around Sony I have not seen the Sony News. So I don't know exactly what they said, we're not seeing any softness in our demand metrics around our titles and thus the reason that we reconfirmed our guidance for the full year.
Okay. Thanks, guys.
Thank you.
Your next question comes from the line of Matthew Larson from Suntrust. Your line is open.
Hey, good afternoon. Thanks for taking the question guys Blake, maybe maybe one for you and then and then one for Andrew if I could quickly up bleaches in terms of the other guide post for the year you talked about apacs, you talked about Cpms.
I think last quarter, you gave us a couple of more guidepost around mobile down 10% to 15%. So some of the front line a unit assumptions as well just curious if there's any changes in in those kind of assumptions versus three months ago.
And then Andrew maybe if you just talked it's just really quickly about the voltage mode within fee, if and how you're thinking about that impacting.
Engagement, but all but also monetization how we should kind of think think through that any color. There would be helpful. Thanks guys.
So no changes on guidance, so were pretty consistent with all the numbers that we provided at the start of the year.
And all the metrics that we've seen are leading towards that and we're feeling confident about it.
And on Volte again, I go back to some earlier comments.
As we do see people like a platform and we do see our opportunity to bring together hundreds of millions of football fans around the world to experience football in a way that that is meaningful to them.
We do that across platforms, you that through business models, we do that through different access models and different play models and what we recognized with the platform. At this juncture was that there was a lot of really hard for full in that and we expect that will continue to be the most meaningful Pos for much of the FIFA applying community, but there was also a whole group of football fans, but one of the more casual style of play and we built that mode to attract new fans and what we have seen over time.
As we put new modes in the game and I'll use the journey Estore device more than we did a few years ago now when we started that mode.
Isn't it brings in a whole new set of players that come into full feel different motivations in the game and ultimately to become part of the community in a richness of that community and typically move into the more competitive modes in the game like FIFA ultimate team and the competitive.
E sports margins out of ultimate team and so we think about volte to that why so expectation is not there will be an impact on monetization of the long term, but rather we are growing the aggregate size of the FIFA community and typically what happens as we grow that community is those players become part of it becoming rich bought and they move more deeply into other modes in the game like ultimate team and how competitive these boltzmann's.
Your next question comes from the line of Mike Hickey from Benchmark. Your line is open.
Hey, Andrew My congrats on a strong first quarter guys great.
Yes on eight packs and a ton of questions and turn a limited capital, but I was hopeful.
You mean, but given the sort of profile that gain a competitive aspects of it.
What sort of a no brainer great you guys.
So to move forward to your first I guess big event in September , but maybe some more color in terms of.
How big these words could be in terms of driving engagement month range.
The overall player for.
And then I guess.
Just another AD on mobile in China. This skill.
Possibilities.
20 years or is this more of a fiscal 21 of that now in terms of size.
Ancillary opportunities.
Yes, let me go over one real quick and I'll, let Andrew talk about sports.
We did not put anything at our annual guidance for either mobile globally or.
Capex in China, and that's because we are still.
Obviously working with a partner that we don't have timing, but I would assume it's a 21 event in both cases, we'll give you more dollars or more input as the quarters go on this year as to how that timing will evolve, but right now I would as I would assume nothing in 20.
On a sports again, what we see around the east fourth community more broadly is the most successful part of those have very very large global player bases, where social interaction competition are at the very core of the experience.
And then I go back to apex legends is built as a really really unbelievable phenomenal gained in the first person shooter category.
Which has a co motivation both competition and social interaction and of course, it has a million strong global audience. So we feel very good.
About its appeal in its application to an east for we've also had a series of events enough and we will have our first competition featuring 80 teens later in the year and as we think about engagement again as we've talked about with fee for Madden.
Engagement at all.
Competitive gaming plays is typically four to seven times higher than non competitive applies so expectation is that not only will the E sports component helped fuel.
The existing community.
And drive higher engagement that that it will ultimately attract new plays a new views, a new spectators and drive higher engage them as well. So we feel like it's going to be a very important part of the global community over the long term.
All right. Thanks, guys.
Thank you next question comes from the line pipe Gerrick Johnson from BMO capital. Your line is open.
Hi, Good afternoon, I guess the obvious questions asked yet the bookings should be by 50 million EPS by 30 cents gross margin by 240 basis points to why no increase in full year guidance. Thanks.
Yeah, you know I mean, it's a good question.
I think we've only raise guidance and coming out of the first quarter, probably once in my tenure here.
And it's rare because it's such a small part of the overall year.
I would if you look at the phasing.
That we do on our guidance.
We basically just dump it into the fourth quarter not for any real reason other than that supportive. It's no. It's almost all catalog.
Yeah, we just don't know, but it's still small enough that we wanted to at least remain conservative in how we forecast on.
Based on what transpires in Q2 will then decide if we should trend guidance or not but that wasn't much more complicated than that.
Okay can I add just dig into the gross margin for a second that outperformed by 240 basis points. So what drove that.
So we've done we've done a faster and better job than we expected on controlling the online cost of revenue, particularly with apex, but continue across all of our platforms. When we first started effects remember you have millions of people playing so they can be expensive games to operate and we called that out in our Q4 earnings call Conference call.
The team led by our CTO, Ken losses worked hard to try to continue to bring down those costs are really different partners or simply how we're operating the game and I think we've done better than we thought and we had bigger digital quarter than we actually expected. We've tracked we tend to plan around.
5% growth of full game downloads for example, and it was higher this year or this quarter and.
Our digital business was stronger than we had expected so that really drove an across the board.
Great. Thank you Mike.
Yes, you bet. Thanks.
Your next question comes from the line of re stuff too from consumer Edge Research. Your line is open.
Great. Thanks, so much for taking my question not just about eightx, but across all of your content that you're that you're building. How are you thinking about the cadence of updates do you think players. These days have expectations for a faster content drops cadence than prior and do you think those expectations are too high now and and what changes do you need to make to hit or come close to those elevated expectations. Thanks.
Oh I think it's a really good question and certainly one that we see and hear a lot. The reality is as we build gains for a lot of different communities and every single community is different some communities at close like a FIFO of FIFA community, how the natural tied into the events that occur in the real world that we tie things too and that makes sense for that community a community like the Sims has has a longer cadence flow again, we were set to have the biggest year in terms of content release this year.
And we'll continue to grow that franchise since launch, but it is not typically a weekly cadence of content because it doesn't make sense to that community.
If we think of a game like apex.
Again it is at its core.
Great game, and so a lot of the ongoing engagement exists because it's built as a great competitive game and so when we think about that.
We we thing about seasons, not as a onetime event, but seasons is kind of the kick off as a as a series of events that happened kind of overall weeks and months of time, we feel really good about where we're at with season two on apex.
We think that we're learning as we go again this is going to FIFA ultimate team we started this.
What is now over 10 years ago.
It started very small we've got much better at.
Engaging with the community over that period of time and now ultimate team has this tremendous business for us.
The same is true for the seams, which launched in 2014, we get smarter and better in terms of understanding how to fulfill the motivation and the design that applies.
And we expect it will continue to learn and get better with apex as well one thing that we do try to avoid is that we end up purely as a content furnace without games, we try and make games that have great gameplay that engage at the very core and then we're able to build on engagement and fulfill motivations with additional content additional events.
What we try to avoid wherever possible finding ourselves in a position where content is the only means of driving engagement because we just feel it's harder to build longevity with that type of model over time, and we've learnt that.
Through over.
10 to 15 years of lots of his experience.
Great. Thanks again.
Your next question comes from the line of Jeff Cohen from Stephens. Your line is open.
Hey, guys. Thanks for the incremental color on Sim.
It feels like that franchise to be one that would do really well and the Nintendo switch. So I'm curious, how you guys determine which platforms to bring the game to games too and is there any reason why you wouldn't want to bring that one.
On there.
Anytime were evaluating platform conversations we're really looking at a couple of things one.
Does the game really fit the profile of that platform in terms all the control of the community ecosystem.
To do we think the community playing on that platform would appreciate the game to go there or would they prefer to play it somewhere else. We have a lot of data that would suggest.
A great. Many switch owners also own a playstation four or an x. box, one or a PC and very often choose to play the games that we make on those platforms, even though they have a switch and I enjoy a lot of great content on the switch and so there is always an evaluation process that goes on a case by case basis, and I wouldn't say that the Sims would never go to the switch.
But I think we're doing really really well attracting seems flies as we said we did the promotion.
In the in the last couple of months and brought in 7 million New Sims players that we expect will engage in that pop in that community on a platform that is really Thailand.
To user generated content creativity and customization.
Thanks, and congrats on the start of the year.
Thank you.
The next question. Your next question comes from the line of Todd Stender from Stanford Bernstein. Your line is open.
Oh, Thanks appreciate taking the question.
Can I do that just a little bit at respond just the resource question, it's something we get from investors a fair amount and so.
Obviously that studios being taxed with some really important stuff. So I guess I would love to hear.
Your thoughts on how how resource.
The apex legend effort is either in terms of bodies or dollars or whatever you can say and where did that come from and if any of that get pulled from the star wars effort and just to reassure us that you've got enough on all of that and when I leave it at that it's pretty broad question. Thanks.
Okay. Good question I would offer to few piece of feedback that I think will make you feel better about loss.
The first is that there are multiple teams at respawn very different teams as well.
Again apex legends is a fast paced multi play a first person shooter and has a bespoke team specific to that type of game. This is a team that.
And worked on pull of Judy many years ago had launched titanfall and now apex legend. So this is very much their particular skill set.
The style was useful in audit team is a completely different topic team led by Stig who had been a game director on Dawn of war and it's all about the single play a journey fantasy of being generally and so those are the two discrete teams, there's actually a third team at respond as well working on some some new things.
In addition to that and this is where scale matters in this industry in electronic Arts, we have a very large central group.
That can provide a lot engineering.
And design help is needed across the company.
And we have a number of live services teams also across the company that.
Well suited for the creation of new content and so the combination of individual teams inside respond that individually stuff with their specific games in mind and the global scale of E Bay and the central resources that we have to help across off and engineering.
We feel very very good about our ability.
So we have a large dicey minella for example.
We have a large life services team in Vancouver, and what we've tried to do is perfect our organization to be able to work long distance as well as.
In the middle of a studio and so we've given them the opportunity to pull on any resources, they want and they're very very conscious about how to make sure. They build the best game and they use the resources very effectively to do that but they there is no shortage of resources relative to to what they need.
Your next question comes from the line of Eric Sheridan from you Brian .
Your line is open.
Thank you very much maybe another big picture question, you know as you think medium to long term on the shift you try and execute on towards more subscription services and cloud based distribution models. How do you also think about allocating resources against that longer term goal versus maybe the shorter to medium term transition where the industry could go through another console cycle next year, and how you think about aligning resources and assets inside the company against both those transitions. Thanks guys.
Another good question.
And so I would start with it doesn't matter what the platform older distribution model all the business model.
What matters is that we build great games and.
We are doubling down and working with great diligence across as Jude organization to ensure our teams have everything they need to build great games and that will continue to be our focus needs and medium term and long term.
In addition to that again, given the scale of this company and the leadership of our CTO, Ken Moss in what we've talked about with project Atlas.
Some months ago is we're also investing for the future to ensure we don't find ourselves at a position.
As a company we started to invest in our digital platform over five years ago.
I think we're still the only develop a publisher with a unique I'd system. It carries with it applies regardless of game or platform. They apply on we have a single data scheme or in data platform across the company and single infrastructure and security and transaction engine. In these types of things. So we've been working on this model for some number of years to ensure that we are ready for the future now as we think about cloud and subscription again, we went out we bought a small company out of Israel that really gave us a head start in how we think about cloud fabric, we've been working on learning and organizational structure and subscription and so we feel really good about our future there.
But at the end of the day, we continue to be focused on making great games, we had seen the value of great games and games like FIFA, and Madden and the sins and apex legends and we expect that we will continue to deliver great games and ensure that we have the technology backbone there when the industry's rate, yes, I think.
We've obviously been doing testing learning along the way so we started.
With our subscription on you access on Microsoft we've learned a lot from that obviously rolled out on origin.
And then as Andrew mentioned earlier, we've just rolled out on Sony and.
Each of those rollout has gotten easier and easier because we understand the technology better and more importantly, what the consumer wants.
And so it becomes more of a muscle memory of the company versus having to start a new initiative from source from scratch, we're working hard on moving building games for next year on Gen. Five I think thats obvious I think everybody in the industry is doing that.
As has happened in the past all games come out on Gen. Five immediately obviously games like Madden you probably bring the Gen. Five came out when the Gen. Five comfortable ships Donlin Madden itself ships, but we'll be ready on Gen. Five we're very excited about it and we've been working on it for some time.
Your next question comes from the line of.
Gammel from Jefferies. Your line is open.
Thanks for taking the question I was just curious if we can get your updated thoughts on the overall mobile strategy looks like mobile bookings were down another 17% year over year I know a lot of that's due to the aging of some legacy titles. So maybe just provide some color on what you're seeing there and then with all the smaller mobile developers out there is this a sector where M&A might make sense. Thanks.
Yes, good question and we've not had a material shift from our stated strategy of last couple of quarters. I think we continue to see the mobile industry grow its a very meaningful pot.
Of the revenue profile, the global industry, but it's also.
Extraordinarily competitive and is very tough and we've seen a lot of large scale mobile games and mobile company in pretty serious decline over the last six to 12 months.
We have a mobile business that still has an operating contribution of 40%. So it's very very profitable as a mobile business and we've held on to that and we feel very good about that.
But if we think about our strategy I would.
I would talk about it in three core categories. One is that we have some tremendous gains in live service mode and what we're seeing is the average age of the top titles on mobile is actually getting older. Those games gallon, it's harder and harder to break in so when you look at games that we have lifestyle as galaxy of heroes or Madden mobile and FIFA globally, we feel very good about our ability to to grow those live services over time and really worked hard to ensure that we're feeling fulfilling the community.
The second element of that is is that we are in a world where acquisition of new players is really really tough and it's really hard to break into the mobile shots.
We're really focusing on our IP that we believe has real resident inside the community in a game like plants versus zombies, which has been downloaded over 1 billion times is absolutely candidate there and you should expect that we will focus on our IP that we think can breakout in what is otherwise a very costly acquisition market and then third I think you are right. There are there are a number of smaller mobile companies out there, but the capacity to build some great games, but maybe don't have the marketing firepower.
To to actually break into the market or the network of plays that we have that they could access and I think there will be an opportunity for some M&A over time.
I don't think Thats, an easy path.
But we're certainly out there and talking to a number of different implies about how we might accelerate that otherwise seeing your objectives. If you had to think about it on priorities I mean, clearly as we mentioned we will have new plants versus zombies game high priority for us.
Apex going mobile and that's globally high priority for us and FIFA and Madden remains Super high priorities because they are two of our largest games and as we talked about earlier the global opportunity for FIFA, including China is very large and so we're spending a lot of time, there and we'll continue to do that.
Thank you.
Your next question comes from the line of Clay Christen from Deutsche Bank. Your line is open.
Hey, guys. Thanks for taking the question I just want to follow up on what you talked about in terms of.
Learnings coming out of.
On Microsoft the access and just.
If we can get an update on what you're seeing in terms of user behavior I know, it's early days with Sony but.
What you're seeing there relative willingness to engage in life services.
As platforms any color there would be helpful. Thanks.
Yes, I mean, what was when we first saw is pretty much stayed true across almost all the platforms is that people end up playing twice as many games as they did before they joined the service, which is kind of a no brainer because that's what you would typically see say on netflix or as modify or others. Because you feel you've reduced some of the friction of trial essentially but we also find the people play their games a lot longer meaning they found a game that they really enjoy playing that they didnt know about and so it's the discovery aspects of where.
Service goes which helps a lot and then if it has a live service on it like an ultimate team they start to spend more money than they did before they went into the service.
Part of that may be subscription.
Behavior, where often times people think they are getting things for free and are willing to spend on them and sometimes it just they found something that didnt know that they wanted to play and they get how deep deeply engaged in it and so were trying to reduce the friction of trial.
To see new games and learn about things that they didnt know or didn't want to spend money on getting in by giving them an amazing.
Economic value to start a subscription and that stay true across all the platforms and.
The one other pieces that you were going to wrestle with an annual subscription has how do you manage the churn over time and you've got to cure rate.
Dropping content into the subscriptions.
Fairly soon.
Predictable rate so people will stay in and we've been trying to do that by bringing third party content in that help.
Phil in the places, where we don't have contacted we don't necessarily have content every every quarter.
And we're thinking about have games might even change in terms of how they are developed over time.
To better match subscription so you're more to come.
But we're in a really good position, we have more subscribers than any other service in the <unk> and the industry by a long shot and I think a lot better experience base because of that.
Can you take us one more one more question.
Thank you. Your last question comes from the line of Brian Nowak from Morgan Stanley . Your line is open.
Thanks, Rob.
Thanks, taking my question excuse me.
I have two that the first wanted to touch a little bit about resource allocation to kind of go back to a couple of the earlier questions one from Eric.
Can you talk to us a little bit about what percentage of the overall R&D budget or head count is sort of being attributed toward new potential franchises in new IP just to that Messrs and kind of get an idea for what could be in the pipeline as we head into 2021 and beyond.
And then the second one on M.B.A. live just philosophical thoughts about potentially going free to play on that thanks.
Why don't I start on the first of all let Andrew take the VA question.
You know we would say is rough allocation is probably 20% of our R&D budget. That's always hard because you know do you call Volta New IP, we certainly do internally, but it was part of this the FIFA team that have developed and evolve that product versus say brand new IP from scratch that we may be working on like an anthem. For example, we try to do both where we're evolving games with new IP and new gameplay modes, but we also tried to.
Make sure we are thinking about games for 2000, our fiscal 15 to 25, and 26 and 27 way out where there may be a small group of people starting to ideate and generate the concept, but you don't scale. It up for a couple of years until you really get into a status or a place where you think you are ready to build the game, but we've always had a mix that that that way and it's a balance between inside game teams as I mentioned as well as standalone teams that were developing.
That.
And didn't exist before but we're comfortable with FX.
Yes on India, we've seen some speculation but around free to play that we don't have anything to share at this time.
Our games he has been working hard as a company and as an EA sports brand, we remain committed to basketball and upon as the MB I in the MBS applies association and our game keeps getting better and better every year.
And we'll be excited to bring MB, a lot 20 to markets and.
All right well. Thank you everyone, we'll talk to everyone either during the quarter as we see you around the country I appreciate all your.
Interest and we'll also talk to you next quarter at the earnings call.
Thanks, Thank you.
This concludes today's conference call you may now disconnect.