EA’s ‘Ready’ For 3D ‘When the Market’s There,’ COO Schappert Says

Electronic Arts has 3D content and “when the market’s there” for it, “we're ready,” EA Chief Operating Officer John Schappert said in a Tuesday earnings call. But he said, “We think it’s still kind of early,” predicting it will be “a little bit more interesting next year.” CEO John Riccitiello said he saw more “potential” for EA in Internet Protocol TV than 3D. EA is “watching that very carefully,” he said, calling IPTV “a priority that’s high for us."

Some consumers are buying 3D TVs this holiday season and EA thinks “it’s something that will continue to grow and mature,” Schappert said. The Nintendo 3DS handheld system that will ship in North America in March is “very interesting,” he said, and it has “3D built into it.” The 3DS achieves stereoscopic 3D effects without the need for special glasses. “What’s nice for us is our content is all 3D-ready” now, Schappert said. “So, it’s relatively easy for us to flip that 3D switch on and make our content 3D as opposed to having to remaster it or reshoot all of the content to make it 3D,” he said.

There is, meanwhile, “absolutely no question that Internet TV is here to stay,” Riccitiello said. “I think the long-term opportunity there is significant,” and it’s “likely to promote more direct-to-consumer digital models,” he said.

EA also announced a new cost reduction plan. It will “restructure key licensing and developer agreements to improve the long-term profitability of its packaged goods portfolio,” it said. EA “expects to incur one-time GAAP restructuring charges of up to” about $180 million for the plan in the second half of fiscal 2011 ending March 31, it said. Benefits from the restructuring “are expected starting in fiscal 2012,” it said. It’s “not a major personnel-related restructuring,” said Chief Financial Officer Eric Brown. “While some employees are impacted by this restructuring, it is a relatively small number,” he said. The plan was “designed to improve the long-term profitability of our business and give us the flexibility to manage our franchises as we see fit under current market conditions,” he said.

EA’s results for Q2 ended Sept. 30 were mixed, but better than it and some analysts had projected. Its loss narrowed to $201 million, 61 cents per share, from $391 million, $1.21, in Q2 last year. GAAP revenue fell to $631 million from $788 million, but EA stressed that non-GAAP revenue came in at $884 million, topping its forecast of $775 million-$825 million, but that was lower than the $1.1 billion for Q2 last year.

The brightest spots in Q2 were digital sales and the latest entry in EA’s FIFA soccer game series. FIFA 11 was the best-selling game in Europe during Q2, it said. FIFA sales grew 20 percent from last year on a comparable basis, with “sell-in approaching 8 million units” to date, said Riccitiello. Digital revenue increased to $161 million from $128 million in Q2 last year. In comparison, GAAP publishing packaged goods and other revenue grew more modestly, to $441 million from $425 million, while GAAP distribution packaged goods revenue tumbled to $29 million from $235 million. Non-GAAP publishing packaged goods and other revenue fell to $689 million from $774 million.

EA was also pleased with the performance of its new release Medal of Honor, Riccitiello said. While it received a few lukewarm reviews from game critics, he said that was to be expected because the title “appeals really well to a mass market, your average gamer,” and some core gamer and magazine reviewers didn’t like it. “So far, the title has outperformed our sales expectations,” and “continues to outperform our expectations through to week three” of its availability, he said. The game “already sold through more than 2 million units” in its first two weeks, said Schappert.

Sales of Madden NFL 11 are “roughly flat with” last year’s entry, said Schappert. EA shipped more than 3 million copies of the game in Q2, said Brown. But Schappert said EA was “seeing great growth in the digital side” for the franchise, while it was “doing well on consoles.” There’s also been a “shift” in the timing of Madden sales, said Riccitiello. “Madden used to do the dominant portion of its business in the month of August and early September,” as soon as it was released, he said. But, he said, “As the franchise grew and went from a couple million units to 4, 5 and 6 million units, one of the things that’s happened is we picked up a more sizable holiday business” with it, he said. Last year, for instance, Madden sold well “through January,” he said. “We're looking forward to a Madden holiday” this year, he said.

EA was the No. 1 publisher on the HD consoles, with 25 percent segment share so far in 2010, “two points higher than the same period a year ago,” it said. In North America and Europe, the HD console software market “is growing strongly with the combined” PS3 and Xbox 360 segments up 23 percent this year, it said. The PS3 software market alone was up 36 percent, it said. EA was the No. 1 PC publisher with 27 percent segment share at retail this year, it said. In Q2, EA had six of the top 20 selling games in western markets: FIFA 11, Madden NFL 11, NCAA Football 11, NHL 11, Battlefield: Bad Company 2 and FIFA 10, it said. EA was also the No. 1 publisher across all platforms on Apple’s App Store in Q2, EA said.

"Other opportunities for growth in mobile include Android and Windows Phone 7,” Schappert said. “Android is growing incredibly fast,” he said. EA also publishes a version of the game Scrabble in partnership with Hasbro that he said “outsold all” Kindle e-books “to secure the No. 1 position in the Kindle” online book store run by Amazon “for almost two straight weeks,” he said. Scrabble “was knocked out of first place by another EA game,” Solitaire, he said.

EA also announced the signing of a five-year deal with Facebook. EA will now “use Facebook credits as the exclusive payment method for our transactions on that platform,” said Schappert. EA is “bullish on this market,” he said, predicting “we'll see more guests turn into purchasers on” the Facebook platform thanks to the “unified currency.” EA will now be sharing revenue with Facebook as it transitions to the Facebook credits system, Schappert said. But he said, “There is a margin share right now with our current payment provider. So, we're going from one vendor to another vendor … We're going to see a lot more of the 250 million gamers actually have Facebook credits in their account” with the new system.

EA was “encouraged by the early data we're seeing” for PlayStation Move sales and pre-launch data on Kinect for Xbox 360, Schappert said. EA will ship two titles for Microsoft’s new motion-sensing control system: EA Sports Active 2 and Harry Potter and the Deathly Hallows Part 1, he said. For Sony’s Move controllers, it has Dead Space Extraction, Tiger Woods PGA Tour 11 and Create, he said. “We believe these innovations will grow the HD console market,” he said.

The publisher expects to report revenue of about $940 million-$1.1 billion and a loss per share of about 70-85 cents for Q3, it said. For Q4, it expects to report revenue of about $960 million-$1.1 billion and earnings per share of about 30-45 cents. For fiscal 2011, it expects to report revenue of about $3.35 billion-$3.6 billion and a loss per share of about 55-85 cents. EA expects packaged software sales for PC and the HD consoles to grow “in the mid-teens in the current calendar year, whereas standard-definition software for the Wii and dedicated handhelds are expected to be down sharply,” said Riccitiello.