. Tricia Gugler, Electronic Arts, VP of IR . John Riccitiello, Electronic Arts, CEO . Eric Brown, Electronic Arts, EVP & CFO . John Taylor, Arcadia Investment Corporation, Analyst . Justin Post, Merrill Lynch, Analyst . Brent Thill, Citigroup, Analyst . Ben Schachter, UBS, Analyst . Doug Creutz, Cowen and Company, Analyst . Mark Wienkes, Goldman Sachs, Analyst . Sean McGowan, Needham & Company, Analyst . Mike Hickey, Janco Partners, Analyst . Jeetil Patel, Deutsche Bank, Analyst
ERTS updated its FY09 outlook. It reported that it's clear that it will be coming in with revenue significantly below internal plan for the qtr., and as a result, will not be able to achieve previously issued financial guidance for FY09.
S1. Opening Comments (J.R.) 1. Update: 1. Co. is almost 11 weeks into 3Q09. 1. Clear that Co. will be coming in with revenue significantly below internal plan for the qtr. 2. As a result, Co. will not be able to achieve previously issued financial guidance for FY09. 2. Observations on Projected Shortfall: 1. While Co. saw significant improvement in overall quality of key products this year that quality has not yet translated into enough sales. 1. So far in calendar 2008, has shipped 17 titles with meta-critic scores of 80 or above vs. 7 this time last year. 2. Quality is a pre-requisite for a great selling game, but it is not the entire equation. 2. Today, consumers are particularly selective in how they spend their discretionary dollars. 3. Co. is seeing a stronger polarization among Top 10 selling titles. 4. Key catalog titles continue to under-perform. 5. Unique to this year, some major retailers are reducing their year-end inventories, and in particular, those inventories for titles not in the [Top five sales group] for Nov. and Dec. 1. This may not impact publishers or titles in the Top Five, however Co. expects this will sharply reduce Dec. revenue vs. prior expectations. 2. Given these observations, Co. is going to do three things differently: 1. Reduce titles and SKUs and invest more particularly marketing, on the titles with the greatest hit potential. 2. Will focus on games with strong online features and on-going new content, this will prolong catalog sales by preferred products. 3. Will reduce expenses beyond cutting the number of titles and SKUs. 3. Reduction of Titles & SKUs: 1. On last conference call, Co. announced a personnel reduction and a plan to reduce titles and SKUs in FY10. 2. Intent is to reduce FY10 expenses below FY09 levels excluding impact of bonus, which varies depending upon performance. 3. Co. is cutting SKUs at bottom of the profitability range, and plans to push top titles more aggressively. 4. Goal is to deliver higher profits and margins, even if total revenue may be slightly lower than might otherwise be the case. 5. Cutting cost will not impact Co.'s commitment to game quality, investing in new properties, and direct-to-consumer initiatives. 6. Will be launching several new titles and online games in FY10. 1. Believes these steps will yield a stronger, more profitable Co., and one that will better weather any economic environment.
S2. Performance Review (E.B.) 1. Performance: 1. Oct. and Nov. [sell-in] numbers were close to expectations. 2. On a sell-through basis, a few key titles including FIFA continue to perform well. 3. Majority of Co.'s portfolios under-performing, are sell-through projections. 1. This fact, combined with the observation that some retailers are planning to end calendar year with fewer weeks of inventory on hand, indicates that Co. will not have sufficient re-order activity in Dec. to meet 3Q09 expectations. 4. With two of the most important weeks of 3Q09 and all of 4Q09 still ahead of Co., and the greater uncertainty in the retail channel, ERTS does not have enough information on 12/09/08 to provide updated FY09 guidance. 5. Plans to update guidance in early February. 2. Focus: 1. Co. is in the process of scaling back FY10 SKU plan significantly with a goal of reducing R&D YoverY. 1. Expects to have fewer SKUs next year vs. FY09. 2. Reducing variable and fixed spend in multiple areas including contracted services and [T&E], and Co. plans to consolidate its facilities. 3. Will budget …