2023-12-05 07:35:26 ET
Electronic Arts Inc. (EA)
Nasdaq 49th Investor Conference Call
December 5, 2023 4:00 AM ET
Company Participants
Stuart Canfield - Executive VP & CFO
Conference Call Participants
Matt Cost - Morgan Stanley
Presentation
Operator
Matt Cost
Okay, we're on. All right. Good morning, everyone. Thanks so much for being here. My name is Matt Costs from Morgan Stanley, US internet team, thrilled to be joined by Stuart Canfield, the CFO of EA, thank you so much for being here.
Stuart Canfield
Good morning. Thank you for having me.
Question-and-Answer Session
Operator
[Operator Instructions]
Matt Cost
Yes. So this is your first fireside chat. So it's an honor to have you here. So maybe we can start with one on the broader industry just to kick off, obviously, there's some other country, other companies that have a clear interest in expanding into gaming. We've seen some M&A this year, maybe more than some, how are you thinking about the competitive environment today? And what is your outlook for the industry, as we head into the holiday season and into the second half of your fiscal year?
Stuart Canfield
Sure. I think first of all, Interactive Entertainment has an incredible growth opportunity ahead of it. And EA is incredibly well positioned to take advantage of that. Maybe we split into a few pieces. Let's talk a little bit about sort of the market context overall, we'll talk a little bit about the near term macroeconomic considerations, maybe some of the structural shifts and tailwinds that are going on inside the game into space and a little bit about EA, and how we're positioned. We think about the sort of the macro market context first. I think there are three things that continue to emerge for us. One is that the emergent generation of consumers, so Gen Z, and Gen A, continue to push for interactive entertainment as their primary medium of entertainment.
Secondly, the dimensions of gaming, and the ways of interacting of play, continue to engage a broader and more diverse audience from whether it's single player to one on one, multi, we have a myriad of dimensions the way you can interact and consume. And last of all, I think one of the biggest one that's happening in recent time is the media landscape continues to converge. So we're all competing effectively for time and entertainment dollars, across linear streaming interactive. When we think about sort of the macro near term, as you think about the holiday season we're heading into, there's clearly some dimensions that we're watching incredibly closely. One for us as international business, FX volatility remains, consumer sentiment, as we think about inflation and purchase intent will be something we watch very closely coming through the quarter.
As we think about some of the more bigger industries inside of gaming itself, a couple of things are emerging that are really clear. The big titles, Triple-A's getting even bigger. We're seeing more time spent than ever, inside of games. And then what that means for us as EA is that we're by now the largest independent gaming company. We're a scaled player, we have some of the biggest largest Triple-A IP in the industry, leading with titles like FC, Apex, Sims, Battlefield and others. And overall, collectively, there's a huge opportunity for us as we go forward.
Matt Cost
Great. I mean, kind of on the point of the broader media landscape converging, let's talk about FC for a second. It's great to see the game spin off to such a great start. What are the steps that you're taking to ensure that the rebranded franchise now that it's transitioned from FIFA to FC? What are you doing to ensure that it maintains the positive momentum you've seen so far? And then you talked a little bit on the earnings call about the growth rate that you've seen year-on-year since launch? How is -- how has that been trending into quarter?
Stuart Canfield
Yes, I mean first of all, congrats to the whole team on an incredible transition from FIFA to FC. We've had an incredibly successful launch. And it's actually beaten our expectations, which are coming off of a record successive back to back years, in terms of the product itself. With the teams, we're basically seeing that we've continued investor support the game. We continue to layer into make sure the holiday season is successful within nearest cohort. We've continued to see meaningful momentum inside the business we'll talk to the first four weeks, we pulled in almost 14.5 million people inside the first four weeks. We saw high single digit growth inside of our life service business. And we're still predicting this year despite some really difficult comps with World Cup last year that we'll see growth again this year.
Matt Cost
Okay. I guess talking about another major franchise with Apex Legends. During the last earnings call, you mentioned that engagement with most recent season is coming in ahead of your expectations. How should we view the longer-term growth strategy for Apex? Can you speak to the magnitude of investment that's required in that franchise now to hit your desired level of long- term growth?
Stuart Canfield
Yes, I think first of all, I mean, Apex operates in one of the most competitive environments inside of interactive entertainment, is also in one of the largest segments, and genres of gaming. And it's also highly seasonal. We see incredibly competitive ebbs and flows inside of this business, particularly around our fourth quarter, and obviously the holiday season we're about to enter. For us, Apex continues to be an investment choice for us. We've talked to two lenses around investment or the stage, the short term we continue to invest in building out around our current seasons. We talked to the last season being if driven improvement around sort of characters and economy. And despite being down year-on-year, we saw us exceed expectations for season 18, we just brought out our latest season 19 added a new character changed dynamically some of the game and the modes. And we're building towards if you can believe the fifth year, since we launched the game, coming up with season 20.
We have one of the most talented teams in the industry working on the game. And in terms of the longer-term growth factors, we believe the growth opportunities are clear for Apex in the future that built around a few pillars continue to broaden the market and the engagement model we have, continued to build out new business models and ways to interact around the product. And then obviously continue to drive engagement and Medallia as a play inside the franchise. We continue to lean into a series of extending teams, we've added multiple teams around the globe to continue to scale the franchise and have high hopes for the future.
Matt Cost
Yes, I think it's easy to forget exactly how long that game has been around. I mean, kind of came onto the scene with such a bang in 2019. I think it was.
Stuart Canfield
2019, yes.
Matt Cost
In a while is mobile, we think about increasing modalities of play. Is mobile still a big untapped opportunity? Or is it something that is sort of maybe not a near term focus for Apex?
Stuart Canfield
I think longer term, mobile is one of the most important platforms in the industry, and a critical path for us as we think about building and engaging larger audiences and continuing connect and engage a broader audience. We continue to evaluate what that is for Apex in the future. But it's no question that in order to continue to scale and reach in certain geographies, which represent an under penetration for us today. That's a path that will enable us to unlock some of those.
Matt Cost
Got it. So maybe talking about broader growth opportunities. I mean, where are your key priorities when we think about new game development versus live services? Like what is your approach to new releases versus focusing on driving monetization across your existing online communities?
Stuart Canfield
Yes, we have three material strategies that we line up our capital allocation and resource against. One is we're building behind what we call massive online communities. Second, we're investing against sort of blockbuster storytelling. And the last part is we're investing around sort of how do we harness a broader player community. And let's kind of go through some of those a little more. Massive online communities for us as sort of the Triple-A blockbuster titles. They represent the largest growth opportunity for us, and we believe in the industry. And at the same time, they are driven by a few key facets for us. One is they're built around a dynamic, robust base game, there's a high quality and scale wrapped around sort of social and creative expression. They're executed and delivered suitable dynamic ongoing life services. And they continue to operate at scale by creating an enabling sort of self-expression, and user generated content around massive online communities.
The second part is sort of blockbuster storytelling, and how we leverage and partner with many iconic brands. As we think about some of the industry secular tailwinds, that are going on today, we know that the risk reward in this space continues to grow. Expectations from players continue to increase. And the risk reward of that return is deferring today. So we're really focused on making sure we're making appropriate choices that enable us to invest appropriately behind and create a breakout innovation inside of blockbuster storytelling. Star Wars Jedi is probably the obvious products and title that reflects that. And we continue to have long term partnerships both with Marvel and Star Wars into the future.
The last pillar is sort of around harnessing our player community. And what we really mean by that is how do we continue to tap into all the interactive and social experiences that players have with us today? And more importantly, how do we extend that beyond the game? What we really mean by that is how do we continue to advance and scale social connection? Through either platform abilities that continue to integrate different forms of engagement models not necessarily directed to play. So think about that, whether that could be news, it could be fantasy, it could be highlights, short form video and the ability for people to interact and engage beyond the play core component itself. And then the second one is how do we continue to increase in and around the community to drive longer term engagement reward mechanisms? And the last part would be how do we think through, a continued advance how we drive stronger digital DTC currency, beyond the traditional micro transactional full game model that we have today. So think through broader paradigms like advertising, as one example of how we continue to extend the fabric of digital currency in our DTC model.
Matt Cost
How does user generated content fit into that? I think people forget how early The Sims is in the evolution of that type of gaming, but it's become so topical now, I guess, is it an increased focus? How does it fit into that paradigm for you?
Stuart Canfield
I think ultimately, as we think how we continue to engage audiences over time, I think one thing we see today is that games look more and more like the social networks of the future. And what we mean by that is that people continue to engage both socially, both their experiences and their connections. So they put all three together. When we think about the time and retention of players inside of games today, it is natural that people want to personalize how they are inside of that game and how they play. The content they want to create and equally how they're rewarded for that content becomes a key path in terms of how we think about user generated content. And there are many examples today Sims for us, where you can continue to create content for both yourself and for others that both enriches the engagement and a community and by default, creates economic and monetization opportunities for us, by default credit line economy.
Matt Cost
Got it. Let's talk about the business reorganization if that's the right word of organizing into the sports business and the non-sports business. It's been a couple of quarters since you announced that, can you walk through how that process has been going, any of the benefits that you've seen? And as you think about driving further efficiencies in the business, how are you thinking about cost management more broadly?
Stuart Canfield
There's a lot in that.
Matt Cost
Split in half.
Stuart Canfield
Looks like two pieces. I think first of all, the reorganization is ongoing. And still, it's still a journey. The intent was clear, we split the EA organizations into two big verticals, EA Sports, and then EA Entertainment. And then we have sort of two other organizations, one being a meaningful pillar, we're calling it EA Experiences. And the last part we think about as more as the infrastructure and the functions that serve like finance, in terms of delivering both those three. If we focus on those three pillars, EA Sports, EA Entertainment, EA Experiences, we're trying to do is enable greater agility, and greater impairment for those leaders who run those businesses. EA Sports today is predominantly an annual live service, almost an ongoing subscription model that provides a reliable, durable stream of revenue, and drives high touchpoint high frequency and high engagement across that business.
EA Entertainment has a mix of both. It has products like Apex and Sims that are materially large scale life services, while also building out some of the interactive blockbuster storytelling experiences through franchises like Star Wars, and Marvel. EA Experience is organization, however, is aggregating everything together, when we think about go-to-market. It brings together the commercial organizations, the marketing organizations, brand, customer experience, to ensure that we're creating an end to end player experience that is fully connected. So everything from design development of a brand to execution go-to-market to post service. And what we found is that by putting them into verticals, we get greater efficiencies, autonomy, we can move much faster. And we empower those leaders to make financial decisions inside that remit that aren't necessarily part of a collective aggregation at the total EA level.
In terms of your second question, how we think about cost. We have a two pronged approach. One is we continue to make sure that we're carefully watching and learning from some of the secular trends we're seeing today. We're very focused on return on profitability and the core business. But at the same time, making sure that we're investing to drive the growth opportunity for the future. So it's and statement. We continue to make rationalization and realignment as we see pressure and squeeze on some of the mid-tier titles. And we continue to invest further behind our biggest Triple-A Titles further structure. At the same time, we're also building and investing for the future as we think about sort of harnessing the power of our community and really connecting and engaging that ecosystem.
Matt Cost
I want to go back to one thing that you said about the three different segments of the business. Are you budgeting separately for sports and for entertainment? How does the cost and budget approval process go now that they're, you want them to be more agile, but you want to exercise control the same time? How are you striking that balance?
Stuart Canfield
Yes, first of all, we're not calling them segments, we're calling them sort of organization designs because the materiality of the third expense organization is a pretty significant number inside the organization. In terms of how we set frameworks, we're really setting a multiyear goal for both Cam who heads up, Cam Webber, who heads up Sports, and Laura Miele, who heads up Entertainment. I'm really given them in pound to figure out inside of their framework, whether it's top and bottom goals, they have the autonomy to decide on investment capabilities inside of that group resource location. So we try and keep it that they are pretty self-contained. There is overall company mix we work through. But we're largely in tandem to run and decipher how best to invest against certain growth targets, both top and bottom.
Matt Cost
Got it, very helpful. I guess on capital allocation, how should we think about your priorities now? I mean, how are you balancing investment versus shareholder return? And where does M&A fit into that strategy for you now?
Stuart Canfield
Yes, I think it's what the topic of the day. I think we have two words; we try and be balanced and productive. What we mean by that as we want to make sure that we're investing appropriately back into the business, to drive the growth opportunities we see in front of us. We also want to be balanced in that we always want to return cash where it makes sense to investors. And we continue to have a pre-programmatic buyback program that at least always wants to cover dilution, and normally asked you driving accretion for us on the bottom. We also want to make sure that as we scale and drive cash, that we continue to return that back to shareholders. But at the same time making sure that we have the ability to continue to pursue M&A where it makes sense for us. In terms of our sort of M&A strategy. We have a couple of focuses, we're really happy, first of all, with the sort of the IP and breadth and talent we have. But if an opportunity were to surface would obviously want to pursue that, they'd be very specific criteria for us on that IP lens. We're probably more likely focused today on sort of how do we continue accelerate tools and technology inside of our company, versus build organically, and how we think of accelerates into some of the spaces and that third pillar of harnessing our player community and or drives capabilities, thinking around UDC that really can robustly move us and accelerate multiple years ahead. We're also looking at sort of ongoing partnerships in different formats. As we think about how do we continue to engage, reward and recognize sort of player loyalty and engagement, as you'll see us continue to operate through sort of industry wide in terms of IP and opportunities for talent, tech tools and partnership, in terms of accelerating the capabilities we have as we move from service to platform. And the last part is how we think about opening eyes to sort of more broader partnerships as we see this kind of media ecosystem merging over time.
Matt Cost
So would it be fair to summarize that by saying that you're taking a pretty broad view across both potentially tools, and also IP and game studios and things that you're open to considering?
Stuart Canfield
Yes, I think we're taking an incredibly broad view, I think the benefit we have is we have an incredible balance sheet. We have minimal debt. We have increasingly high free cash flow every year. So it gives us the flexibility that makes sure that in the near term, we can be assertive and move quickly if we want to, as we push through those three strategic pillars, massive online communities, ensuring those and making sure we grow blockbuster storytelling, how we think through that IP in the lens of driving characters and story, and how we continue to drive more expansive thoughts around sort of platform, digital currency, and scaled social connection through the power of our community.
Matt Cost
Let's talk about AI, my favorite topic. Obviously, it's still very early days to the technologies proliferation in the game industry. But do you have any updates on your thinking about how AI is going to impact AAA publishers like EA and then in the gaming ecosystem?
Stuart Canfield
Yes, it's definitely topic of the day. I think it's almost every question. I think, first of all, I think maybe people don't appreciate AI is really native for us in gaming, interactive entertainment. We've had AI in Madden, for example, as far back as the early days or sort of late 1980s. So it's been very prevalent for us on the way through, we do have a belief that AI is naturally going to transform and accelerate, not only interactive in turn, but obviously beyond at the same time. We kind of see it down three pillars. One is that naturally AI will accelerate the ability for game content production, it should enable, and ultimately like the efficiencies over time. But in the short term, it's really about how do we accelerate the ability to drive more content. One thing we've seen in the success of FC Mobile for us is the game changing leveling up that product has been about frequency of content and keeping it fresh and relatable and connected to the real world. And we've seen that shift come from once a week to five times a week to three times. And then we scale it almost to daily. So the ability for AI to help through that journey. AI to create more innovative engagement models inside of the game, how we think about building character lines, or story arcs with AI to fundamentally change the game content work.
The second part is we also expect AI will empower through human tools and the human element of a game design, which enables our creative teams to spend more time doing what they do best, create amazing, immersive experiences. And I think the third one for us is that we do believe that AI will fundamentally sort of transform the game development framework over time, that continues to accelerate and only enhance the industry all the way through.
Matt Cost
So you've been getting a lot of questions about it. Are there any things that come up that you think are either wrong that the media or investors or are missing about this topic? And is there anything that you think is underappreciated that you wish would come up more on the topic of how AI could be a positive?
Stuart Canfield
I don't think wrong or underappreciated, per se, I think underappreciated just how much AI has been a part of our journey across interactive entertainment for a long time. I think two, I think the assertion is that there naturally will be efficiencies over time. But the focus right now for us is how do we leverage it to enhance and scale more in the near term versus becoming immediate cost lever in the short term. I think that would be the juxtaposition I'd put.
Matt Cost
Yes, it's funny thinking back to the AI and Madden's from the late 80s. I thought I was great at those games until I played another human being. So hopefully, AI has improved since then.
Stuart Canfield
Listen, I need AI in every shooter game possibly.
Matt Cost
So let's talk about the mobile market for a minute. Obviously, mobile gaming has been slowly recovering, but growth at the market level, frankly, remains somewhat challenged. So what is your view on where the market goes from here? And how are you approaching the strategy around EA’s mobile game footprint in light of that?
Stuart Canfield
Yes, and I think I saw someone yesterday saying that the mobile market might end up being sort of flat this year, or maybe slightly up, versus many players are sort of seeing exponential double digit growth. I think, first of all, I think the mobile market remains a critical preeminent part of the industry, and obviously has the largest install base and will continue to grow through time as we see emerging markets come online, mobile for us will continue to be our preeminent acquisition model. There's an amazing way to bring people into our brands, through a freemium entry price point or a low price point in markets where consoles and infrastructure doesn't enable people to engage their product. How we push and connect people from mobile and up level them like we've done in FC, the power of bringing someone to a mobile product connected to a high definition console product, when we combine both those to the players you play both have an exponentially bigger return for us and monetization capability by virtue of more time spent and the more engagement in the model.
Mobile feels like a platform that's in transition. Post IDFA is a long way in the rearview mirror at this point. Obviously, Android may make changes as well as we go forth. But it feels like there's a fundamental shift going on inside of the market and given where we stand today, maturity, title accessibility coming into the store every day. For us, our strategy shifted the focus on sort of three things. One is the foundation and example of FC, how we continue to accelerate mobile as part of our AAA massive online communities and the part that plays in that journey. And you've seen enormous success for us and FC and the growth and scale we're seeing. And we talked to triple digit growth only a year ago, and sort of triple digit quarters for this title as we move forward. So we're very focus on how does mobile enhance through our biggest properties.
Second part is we continue to evaluate and make decisions around what it looks like for standalone experiences on mobile. They're not necessarily part of a broader ecosystem, but have the ability to standalone as a play component will leverage larger brands, like a game like Pvz, and we have Star Wars Galaxy of Heroes that leverage big iconic brands that can actually enable us to scale. I think the third part is we continue to drive and be really focused on sort of prioritization around resource and how we think about new IP, how we think about partnership models in Asia, but being really focused on profitability, and we've really made that a part of their strategy as we move forward to ensure that across the three, we continue to scale, both from a bottom line perspective and as you build growth back into mobile in the future for us.
Matt Cost
I guess quickly just following up on FC Mobile, what has gone so right in that franchise, or specifically in the mobile offering for FC recently, because it's been a big opportunity for a long time, but it feels like it's really inflicted.
Stuart Canfield
Yes, the teams made some really important shifts in both the platform that the game was founded upon, and how they went about building the game. And we touched a little bit on it earlier. FC, I think, has an enormous opportunity even beyond that even further than it is today. And we've probably been under delivering on that promise over the last few years. It really comes about they've taken an approach; we've positioned a team out in Asia, who have inherent understanding of what likes to run a real time service. They've brought about a very much localized and culturalized approach, where we're investing in territories and geography to ensure that the content is relevant to that territory, versus one global program that one size fits all, the personalization aspect, culturalization, localization continues to drive penetration for us in markets, and will continue to leverage that and be more specific and in tentful around that. I think also, the world of Global Football continues to scale. And obviously, that is the preeminent game, in terms of scale and size. And the reach of Premier League, LaLiga and others, into emerging markets continues to scale and grow. So all of those pieces between global world of football, in tentful change in design and resource allocation for us. And a more sort of cultural, local, relevant scaled life service that operates more than a daily or twice a day processes really accelerated that engagement model for us.
Matt Cost
Got it. Maybe I'll close on kind of a really high level point, when you look out over the next three to five years. What are you the most excited about for the future of EA? What opportunities do you see? And what do you want investors to come away most focused on and excited about?
Stuart Canfield
Yes, and in one minute, I think three things that really excite me. One this industry is completely expanding, is going to continue to grow. And it has a huge opportunity in front of us. We've talked about Gen Z and Gen A, they're going to be the largest generations in history, they are the most socially expressive, they are the most engaged and they take entertainment as their primary form. That's the huge opportunity alone in that subset part one industry expanding. Part two, games are clearly becoming a social network, they are social, expressive, they need people to connect and share experiences. And you only have to think about social media a couple of years ago, or three or four years ago, and how games are slowly navigating to that path. I think the last one is play, watch, create, connect, we talk about that a lot. Right now gaming has been heavily lent through play and you're seeing an incredible opportunity to expand through those other three things. Watch, create, connect. 75% of our audience today engage outside of play. They're either watching, reading, writing, commenting, creating, all that opportunity enables us to continue to open up economic factors for us that build out over time. So expanding industry ongoing. Games are clearly social networks and more immersive and taking people's time. And we have other vectors in play, watch, create, connect beyond play that are incredibly powerful as we move forward.
Matt Cost
Right on the buzzer. Stuart, thank you so much for being here.
Stuart Canfield
Thank you.
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Electronic Arts Inc. (EA) CFO Stuart Canfield presents at Nasdaq 49th Investor Conference Call (Transcript)