Electronic Arts Inc.

In addition to the ongoing challenges of the pandemic, these last few months have brought forward important cultural conversations around racial and social justice, harassment, and misconduct. We've long held equality, inclusion, and diversity at the center of our beliefs at Electronic Arts, and as a company, we've made our positions clear and demonstrated with our actions that we have a long-term commitment to making a positive impact in our world. As we've shared previously, our business focus continues to be on our key growth drivers, delivering amazing games and content, offering live services that extend and enhance the experience, and connecting more players across more platforms and ways to play. In our first quarter of FY21, engagement was exceptionally strong across our portfolio. We launched new games, delivered incredible growth in our live services, and welcomed tens of millions of new players into the EA network since the beginning of May. It's the biggest first quarter in EA history, with net bookings and operating cash flow both setting new records. As a result, we are raising our full-year FY21 net revenue and net bookings guidance today. We've seen tremendous growth over the last four months in our business and across the industry. As EA, we sit at the intersection of two fundamental secular trends that have become increasingly clear. First, social interactions in our world are moving from physical to digital. And second, the consumption of sports and entertainment is moving from linear to interactive. We've seen both of these trends accelerate during the COVID-19 period. Tens of millions of new players have come into our games, and we also have many players returning to our franchises after some time away. In addition to higher engagement from our existing players, these new and returning players are now deeply engaged in our live services, establishing new play patterns and building new friendships through our games. So while there are noble aspects to this period of time we are in, and it may be difficult to predict the patterns of new and returning players, we expect these trends to continue during and after the pandemic. We remain committed to continuing to innovate in this space, keeping EA at the forefront of providing social interaction and interactive entertainment to a wide global audience. I'll share a few highlights here that capture what our team's delivered for players in Q1. We launched two new games to players during the quarter, Command & Conquer Remastered, which was incredibly well received by fans and critics and became a top-selling title on Origin and Steam, as well as Burnout Paradise Remastered on the Nintendo Switch. Our teams also delivered over 30 new content updates for our console and PC titles, including two major game expansions, as well as more than 50 updates for our mobile games. All of this and the continued development of our upcoming titles for FY21 and beyond was completed with our teams working from home. Apex Legends continues its momentum as an exceptional live service, building on strong performance through the last several quarters and bringing even more players together in the game. Q1 saw the most game sessions played and highest revenue total since the launch quarter for Apex. And engagement in Season 5 reached the highest level since our first new season of content. Creative in-game events continue to be a huge draw for our Apex community, and the most recent event, Lost Treasures, had more than 96 million hours played in the first two weeks. We're bringing Apex to players on the Switch and Steam, and we're excited to introduce cross-play later this year so more players can engage and play together with their friends. The world has an insatiable appetite for sports and for the experiences that EA Sports delivers in our games. With real-world sports disrupted, EA Sports has become the center of the emotional connection to sports, and we've brought millions of new, returning, and existing players into their own personal sports stories through our games. Player acquisition of new and returning players in FIFA grew more than 100% year-over-year in Q1, with more than 7 million joining during the quarter. These are now among our most engaged groups of players, demonstrating commitment and longevity in our FIFA Live service. FIFA in Asia grew significantly year-over-year in Q1 as well, with FIFA Online 4 now engaging nearly 30 million players to date. Madden NFL 20 also had an incredible Q1, building on what is already the biggest year ever for our Madden franchise. Player acquisition in Madden NFL grew nearly 140% year-over-year in Q1, and virtually every measure of Madden Ultimate team engagement is up more than double over last year. The Sims continues to resonate with more players around the world. The Sims 4 now has more than 30 million players live to date across all platforms, and daily, weekly, and monthly active player totals in the game all reach record highs for a first quarter. Our Sims mobile games had an excellent Q1 as well. The creative and inclusive nature of the Sims experience on any device is truly unique in all of gaming, and we're especially proud of the way it helps players find community, and express themselves during culturally challenging times. During Q1, we also launched nearly 30 titles on the Steam platform. Bringing our games to Steam enables us to substantially grow our PC audience. Our Origin business grew 75% year-over-year as well, and by opening up the ability for Steam and Origin players to play together, we're now positioned to harness the full power of the PC community. Bringing titles to Steam is also foundational to our EA subscription service that will go live on the platform later this summer. In addition, the total number of players in our subscriptions on Origin, Xbox One, and PS4 grew quarter over quarter with new players coming into our services to experience more great games. It was an unprecedented quarter of growth. Looking forward, we've also seen strong engagement in Q2. Although it is difficult to predict ongoing levels of growth in this environment, We have grown our player base during this period and added value to our network. Our EA Sports Live services are acting as social networks for sports fans around the world, and the strength of those connections will grow as real sports seasons return. Players in our communities for The Sims, Apex, Star Wars, and more are building relationships through our games, and we expect them to be with us for a long time to come. Building on this strength, we have exciting new titles and content coming in Q2 and beyond. including Rocket Arena, which just launched with Final Strike games. We showcased many of these new experiences in our EA Play live broadcast in June, where our audience grew significantly year over year, and the trailers and videos that we debuted have been watched more than 31 million times. We'll begin launching our new EA Sports games starting in August. Nowhere else in the world can sports fans find the breadth and depth of interactive experiences like the ones in our EA Sports portfolio this year. With UFC 4 launching on August 14, we've got something for every fight fan. An amazing roster of fighters, tremendous customization, brand new environments, and more fluid gameplay. All making this the most authentic MMA game we've ever created. Madden NFL 21 is then set to launch on August 28th. On top of major gameplay innovation, a new campaign mode, and more of the superstar X-Factor abilities that fans love, we're bringing creative and innovative new ways to play Madden that build on the strength of our NFL partnership. We have more people than ever before playing and connecting through FIFA. And when FIFA 21 launches on October 9, the world's leading football experience will expand with more ways to play with friends. Vault of Squads and FUT Co-op will bring new social dimensions to the game, and we're also delivering the most comprehensive update to career mode that we've ever released. NHL 21 launches October 16, and we're excited about the great work from our NHL team this year, and we'll share more about that soon. Then, in the holiday season, EA Sports will also lead the way on the new PlayStation 5 and Xbox Series X. Next generation versions of FIFA 21 and Madden 21 will bring the next level of innovation and interactive sports experiences to fans with the launch of the new consoles. This will be a great year of new games and content for sports fans around the world. With our cloud-based broadcasting platform for esports operating at global scale, we delivered 85% more esports broadcast content in the last four months than we did in all of of calendar year 2019. Demand for our FIFA, Apex Legends, and Madden Esports content across major networks is unprecedented. And the great entertainment we are providing is bringing more players and viewers into new experiences with our games. We're now significantly expanding and diversifying our content for the rest of this year. Our plans are to deliver three times as many broadcast events in FY21 over last year spanning linear and digital broadcasts with more athletes, celebrity, and fan competitions. In addition to global esports ecosystems for Apex Legends, FIFA, and Madden. We also just launched The Sims Spark on TBS and BuzzFeed, our first ever reality competition TV show. Seemingly integrating entertaining player stories and gameplay alongside weekly challenges for The Sims 4 players, it's an entirely new and unique way to create competition. It shows the innovation we can bring to the esports space with our franchises, and we're excited by the fan reaction to date. We're also very pleased with the response to our new Star Wars Squadrons game from Motive Studios, set to launch on October 2nd. This is going to be the game for anyone that's ever had the fantasy of piloting a Star Wars starfighter, with a deep level of immersion built by our teams in collaboration with Disney and Lucasfilms. We're excited to add another all-new experience to the portfolio of amazing Star Wars titles we've delivered to fans, especially one that opens up new dimensions like full VR support and cross-play. Our business is strong, and it's been an amazing start to the year. These are challenging times in this pandemic, and we're deeply appreciative of all that our teams are doing to continually innovate and deliver for our players and push the boundaries of interactive entertainment at every step of the way, even while working from home. We also have to thank all of our players for their support. We're humbled to see so many using our games and our network as a way to connect with their friends and families during this time. There is much more to come from us electronic arts in FY21. Now I'll hand the call over to Blake.

Thanks, Andrew. We saw extraordinary levels of player engagement through the first quarter, far higher than we even ever expected or had forecasted in May. And it proved more resilient than we had expected. Engagement was broad-based with net bookings for live services at extraordinary levels for FIFA, Madden, Apex Legends, The Sims, and our mobile titles. And with increased sales of our games across the breadth of our entire catalog, we connected with more people to the games they want and to each other. All of this was reflected in our results with record Q1 highs in net revenue, net bookings, live services, and cash flow. I'll report the specifics of our results on a GAAP basis, then use our operational measures of net bookings to discuss the dynamics of our business. Before I get to the numbers, let me remind everyone of the three reporting changes we implemented this quarter and discussed in our last quarter call. First, we now represent gap net revenues in the income statement as one item rather than as product and service. Second, we report mobile bookings gross of platform fees instead of net. And finally, we updated the presentation of our net bookings by composition to focus on full game and live service sales. Our historical results have been recast for comparability. EA's net revenue was $1.46 billion compared to $1.21 billion a year ago and above our guidance by $239 million. Operating expenses were $700 million compared to $607 million a year ago. This was above our expectations, driven by variable compensation due to our strong performance in the quarter, as well as COVID-related costs and lower attrition. Operating income was $471 million compared to $415 million a year ago and above our expectations. Diluted earnings per share was $1.25 as well above our expectations of 93 cents driven by the top line beat. Operating cash flow for the quarter was $378 million, up $220 million from last year. Capital expenditures for the quarter were $38 million, resulting in a free cash flow of $340 million. Operating cash flow for the last 12 months was $2.02 billion, a new record. Here are earnings slides for further cash flow information. Our cash and short-term investments at the end of the quarter were $5.96 billion, up 15% year-on-year. Now I'd like to turn to the key drivers of our business this quarter. Net bookings for the quarter were $1.39 billion, up $608 million from the prior year and $390 million above our guidance, driven by strength across the board with strong performance from our core franchises and live services. Currency headwind net of hedges was $42 million year-on-year. Live service and other net bookings were $1.103 billion, up $416 million from the prior year. This extraordinary result is a consequence of the years of work we've invested in building teams, processes, and content for our titles, which delivered strength across our portfolio. FIFA, Madden, Apex Legends, and The Sims all grew very strongly. Ultimate Team was up 70% on a like-for-like basis, adjusting for the timing of Ultimate Team events for the extra week and a quarter and for currency. With Lost Treasures, Apex Legends presented its most engaging event ever and delivered its biggest season since launch. And as Andrew mentioned, The Sims 4 exceeded 30 million users' lives to date, and Q1 net bookings was more than double year-on-year. Mobile was up 32%, a success across our portfolio led by Star Wars Galaxy of Hero, which had the best quarter since 2018. The game has now generated over $1 billion in lifetime bookings. FIFA Mobile, SimCity, The Sims FreePlay, and more showed growth of a similar magnitude. Full-game bookings were $287 million, up $192 million from the prior year. 52% of our unit sales are now digital rather than physical, measured on Xbox One and PlayStation 4 over the last 12 months. Net bookings for the packaged goods and for the full-game digital downloads almost. This was primarily driven by our deep catalog. A brief note on financial reporting before we go on to guidance. People are playing our games for longer as a result of the amazing content provided on our live service teams and the social connections they make within our games. So for gap reporting, we're increasing the period of time over which we recognize the portion of net revenue. This begins in our second quarter, only affects gap revenue, and only affects the timing of recognition, not total net revenue. We estimate that it will move the recognition of approximately $300 million in capped net revenue from fiscal 2021 into fiscal 2022. It does not affect net bookings or operating cash flow. Now turning to guidance. Due to the significant outperformance during the quarter, we're increasing both our net revenue and net bookings guidance for the full year. In doing so, we had to balance the significant boost we saw in Q1 and the confidence we have in our games and life services against the unknowable macroeconomic environment for the rest of the fiscal year. We're taking a cautious view that assumes that we will continue to see a modest tailwind to engagement, driven in part by continued shelter-in-place orders. This is offset by a weaker economy or could be weaker economies around the world and the slightly later sports launches. There are reasons for optimism. For example, we've added tens of millions of players to the EA player network since the beginning of April. As Andrew mentioned, FIFA alone attracted 7 million new players on console in the last quarter, and more people are playing FIFA now at this time than any previous cycle. This is significant in that people who have played the game recently are more likely to buy the new one. New players are building networks of friends in our games as they play. Engagement in FIFA and Madden continue to be massively above where we would normally expect them to be. Nevertheless, we haven't launched a major tile since the pandemic struck, so it's too early to draw general conclusions. Our business is strong. Our games are on track. Hopefully, our base case around the uncertain economic will prove to be too cautious. Thus, our expectations for full-year gap revenue are now 5.625 billion, cost of revenue to be 1.483 billion, and earnings per share of $2.97. We're raising our operating cash flow guidance by $275 million to 1.85 billion. We continue to anticipate capital expenditures of around 125 million, which would deliver free cash flow of 1.725. A note on OPEX before moving into the business drivers. The increase in our prior guidance is mainly driven by variable compensation plus higher than expected headcount due to lower turnover during this difficult period. In particular, we're increasing the number of mobile tiles we have in development. We now expect net bookings for the year to be $5.95 billion, $400 million above our prior guidance. Versus last year, this factors in an FX headwind of about $100 million. And as you build your models, note that we are also forecasting a fall in interest rates of about $80 million compared to last year, as we mentioned in our last quarterly earnings call. For the second quarter, we now expect gap net revenue of $1.125 billion, cost of revenue to be $280 million, and operating expenses of $755 million. This results in earnings per share of 21 cents for the second quarter. We anticipate net bookings for the second quarter to be $875 million. Significant year-on-year variance is driven by the move of FIFA 21 from Q2 to Q3 and by the later launch of Madden NFL in Q2, which we have previously announced. The change in mix for Q2 weighs on gross margin for the quarter. Madden stays in Q2 but has less live service opportunity than in prior years by virtue of starting later, and FIFA moves to the beginning of Q3. With regard to live services, remember we are focused on engagement ahead of product launches, so expect lower bookings at that point of the cycle. See the phasing that we provided in our quarterly presentations on our IR website. You'll see that the smaller Q2 is more than offset by a much larger Q3 and a slightly larger Q4. As we approach six months working from home, we're finding ways to continue to deliver great games and services. We're excited to showcase the incredible efforts our Madden, FIFA, NHL, and UFC teams have done as they lead into the upcoming launches and by the work of all of our live service teams. The shelter-in-place orders have so far been a strong tailwind for our business as players look for safe, and social entertainment in these difficult times. A macroeconomic headwind in the second half seems very likely. Nevertheless, our ability to deliver high-quality AAA and indie titles for our players, combined with the incredible success of our ongoing live services and increased reach across platforms and geographies, enable us to continue to deliver for players and investors. Now I'll turn the call back to Andrew.

Thanks, Blake. These past few months have been unlike anything we've ever experienced. It was an extraordinary quarter for games and for electronic arts. Our business is strong. We've just had the largest first quarter in the history of the company with tremendous engagement from existing, new, and returning players. We are well positioned to build on that strength. We'll continue to deliver more amazing games and content, including new EA Sports titles, more groundbreaking, fun, esports content, Star Wars Squadrons launching in October, and more. We'll continue to extend and enhance the experiences in our live services on all platforms, from console to PC to mobile. And our focus on connecting more players across more platforms will continue as we bring our subscription to Steam, integrate our games with Stadia, expand support for cross-play, and reach more platforms with our games, including the next-gen consoles coming later this year. It's also increasingly apparent that COVID-19 could be with us for some time. Keeping all of our teams safe is our first priority. They are the true strength of Electronic Arts and their commitment and courage during the challenges of recent months has been deeply inspiring. Not only have they continued to develop and launch games from home, our employees have supported nearly 1,000 different charities in the last three months, including tens of thousands of hours of volunteer time. Their contributions to COVID relief efforts and racial justice organizations, along with matching funds and additional contributions from EA, have totaled more than $3 million to date. In this environment, supporting our teams, building our culture, and striving to amplify the positive impacts of play in our communities around the world has never been more important. We look forward to sharing more updates with you in the quarters ahead. Be well and stay healthy. Now, Blake and I are here for your questions.