Name Begin: 4:00 January 1, 0000 4:29 AM ET
Digital Arts Inc. (NASDAQ:EA)
Nasdaq forty ninth Investor Convention Name
December 5, 2023 4:00 AM ET
Firm Individuals
Stuart Canfield – Government VP & CFO
Convention Name Individuals
Matt Value – Morgan Stanley
Matt Value
Okay, we’re on. All proper. Good morning, everybody. Thanks a lot for being right here. My title is Matt Prices from Morgan Stanley, US web crew, thrilled to be joined by Stuart Canfield, the CFO of EA, thanks a lot for being right here.
Stuart Canfield
Good morning. Thanks for having me.
Query-and-Reply Session
Operator
[Operator Instructions]
Matt Value
Sure. So that is your first fireplace chat. So it is an honor to have you ever right here. So possibly we will begin with one on the broader business simply to kick off, clearly, there’s another nation, different corporations which have a transparent curiosity in increasing into gaming. We have seen some M&A this yr, possibly greater than some, how are you fascinated by the aggressive surroundings at present? And what’s your outlook for the business, as we head into the vacation season and into the second half of your fiscal yr?
Stuart Canfield
Positive. I believe to begin with, Interactive Leisure has an unimaginable progress alternative forward of it. And EA is extremely effectively positioned to benefit from that. Perhaps we cut up into a number of items. Let’s discuss a bit bit about type of the market context general, we’ll discuss a bit bit in regards to the close to time period macroeconomic issues, possibly a few of the structural shifts and tailwinds which might be occurring inside the sport into house and a bit bit about EA, and the way we’re positioned. We take into consideration the type of the macro market context first. I believe there are three issues that proceed to emerge for us. One is that the emergent technology of customers, so Gen Z, and Gen A, proceed to push for interactive leisure as their main medium of leisure.
Secondly, the scale of gaming, and the methods of interacting of play, proceed to interact a broader and extra various viewers from whether or not it is single participant to at least one on one, multi, now we have a myriad of dimensions the best way you possibly can work together and devour. And final of all, I believe one of many largest one which’s taking place in latest time is the media panorama continues to converge. So we’re all competing successfully for time and leisure {dollars}, throughout linear streaming interactive. Once we take into consideration type of the macro close to time period, as you concentrate on the vacation season we’re heading into, there’s clearly some dimensions that we’re watching extremely intently. One for us as worldwide enterprise, FX volatility stays, client sentiment, as we take into consideration inflation and buy intent can be one thing we watch very intently coming by the quarter.
As we take into consideration a few of the extra larger industries within gaming itself, a few issues are rising which might be actually clear. The massive titles, Triple-A’s getting even larger. We’re seeing extra time spent than ever, within video games. After which what meaning for us as EA is that we’re by now the most important unbiased gaming firm. We’re a scaled participant, now we have a few of the largest largest Triple-A IP within the business, main with titles like FC, Apex, Sims, Battlefield and others. And general, collectively, there’s an enormous alternative for us as we go ahead.
Matt Value
Nice. I imply, type of on the purpose of the broader media panorama converging, let’s discuss FC for a second. It is nice to see the sport spin off to such a terrific begin. What are the steps that you are taking to make sure that the rebranded franchise now that it is transitioned from FIFA to FC? What are you doing to make sure that it maintains the constructive momentum you have seen thus far? And then you definately talked a bit bit on the earnings name in regards to the progress price that you’ve got seen year-on-year since launch? How is — how has that been trending into quarter?
Stuart Canfield
Sure, I imply to begin with, congrats to the entire crew on an unimaginable transition from FIFA to FC. We have had an extremely profitable launch. And it is truly crushed our expectations, that are coming off of a file successive again to again years, by way of the product itself. With the groups, we’re principally seeing that we have continued investor assist the sport. We proceed to layer into make sure that the vacation season is profitable inside nearest cohort. We have continued to see significant momentum contained in the enterprise we’ll discuss to the primary 4 weeks, we pulled in virtually 14.5 million folks inside the primary 4 weeks. We noticed excessive single digit progress within our life service enterprise. And we’re nonetheless predicting this yr regardless of some actually troublesome comps with World Cup final yr that we’ll see progress once more this yr.
Matt Value
Okay. I assume speaking about one other main franchise with Apex Legends. Over the last earnings name, you talked about that engagement with most up-to-date season is coming in forward of your expectations. How ought to we view the longer-term progress technique for Apex? Are you able to communicate to the magnitude of funding that is required in that franchise now to hit your required degree of long- time period progress?
Stuart Canfield
Sure, I believe to begin with, I imply, Apex operates in probably the most aggressive environments within interactive leisure, can be in one of many largest segments, and genres of gaming. And it is also extremely seasonal. We see extremely aggressive ebbs and flows within this enterprise, notably round our fourth quarter, and clearly the vacation season we’re about to enter. For us, Apex continues to be an funding selection for us. We have talked to 2 lenses round funding or the stage, the quick time period we proceed to put money into constructing out round our present seasons. We talked to the final season being if pushed enchancment round type of characters and financial system. And regardless of being down year-on-year, we noticed us exceed expectations for season 18, we simply introduced out our newest season 19 added a brand new character modified dynamically a few of the recreation and the modes. And we’re constructing in direction of should you can consider the fifth yr, since we launched the sport, developing with season 20.
We’ve probably the most proficient groups within the business engaged on the sport. And by way of the longer-term progress elements, we consider the expansion alternatives are clear for Apex sooner or later that constructed round a number of pillars proceed to broaden the market and the engagement mannequin now we have, continued to construct out new enterprise fashions and methods to work together across the product. After which clearly proceed to drive engagement and Medallia as a play contained in the franchise. We proceed to lean right into a sequence of extending groups, we have added a number of groups across the globe to proceed to scale the franchise and have excessive hopes for the longer term.
Matt Value
Sure, I believe it is easy to overlook precisely how lengthy that recreation has been round. I imply, type of got here onto the scene with such a bang in 2019. I believe it was.
Stuart Canfield
2019, sure.
Matt Value
Shortly is cellular, we take into consideration growing modalities of play. Is cellular nonetheless an enormous untapped alternative? Or is it one thing that’s type of possibly not a close to time period focus for Apex?
Stuart Canfield
I believe long run, cellular is among the most essential platforms within the business, and a essential path for us as we take into consideration constructing and interesting bigger audiences and persevering with join and interact a broader viewers. We proceed to judge what that’s for Apex sooner or later. However it’s no query that with a view to proceed to scale and attain in sure geographies, which symbolize an underneath penetration for us at present. That is a path that may allow us to unlock a few of these.
Matt Value
Acquired it. So possibly speaking about broader progress alternatives. I imply, the place are your key priorities once we take into consideration new recreation improvement versus dwell providers? Like what’s your method to new releases versus specializing in driving monetization throughout your current on-line communities?
Stuart Canfield
Sure, now we have three materials methods that we line up our capital allocation and useful resource towards. One is we’re constructing behind what we name large on-line communities. Second, we’re investing towards type of blockbuster storytelling. And the final half is we’re investing round type of how can we harness a broader participant neighborhood. And let’s type of undergo a few of these a bit extra. Huge on-line communities for us as type of the Triple-A blockbuster titles. They symbolize the most important progress alternative for us, and we consider within the business. And on the identical time, they’re pushed by a number of key sides for us. One is that they’re constructed round a dynamic, sturdy base recreation, there’s a top quality and scale wrapped round type of social and inventive expression. They’re executed and delivered appropriate dynamic ongoing life providers. And so they proceed to function at scale by creating an enabling type of self-expression, and person generated content material round large on-line communities.
The second half is type of blockbuster storytelling, and the way we leverage and associate with many iconic manufacturers. As we take into consideration a few of the business secular tailwinds, which might be occurring at present, we all know that the danger reward on this house continues to develop. Expectations from gamers proceed to extend. And the danger reward of that return is deferring at present. So we’re actually centered on ensuring we’re making acceptable selections that allow us to take a position appropriately behind and create a breakout innovation within blockbuster storytelling. Star Wars Jedi might be the plain merchandise and title that displays that. And we proceed to have long run partnerships each with Marvel and Star Wars into the longer term.
The final pillar is type of round harnessing our participant neighborhood. And what we actually imply by that’s how can we proceed to faucet into all of the interactive and social experiences that gamers have with us at present? And extra importantly, how can we prolong that past the sport? What we actually imply by that’s how can we proceed to advance and scale social connection? Via both platform skills that proceed to combine completely different types of engagement fashions not essentially directed to play. So take into consideration that, whether or not that could possibly be information, it could possibly be fantasy, it could possibly be highlights, quick kind video and the power for folks to work together and interact past the play core element itself. After which the second is how can we proceed to extend in and across the neighborhood to drive long run engagement reward mechanisms? And the final half can be how do we expect by, a continued advance how we drive stronger digital DTC forex, past the normal micro transactional full recreation mannequin that now we have at present. So assume by broader paradigms like promoting, as one instance of how we proceed to increase the material of digital forex in our DTC mannequin.
Matt Value
How does person generated content material match into that? I believe folks overlook how early The Sims is within the evolution of that kind of gaming, nevertheless it’s develop into so topical now, I assume, is it an elevated focus? How does it match into that paradigm for you?
Stuart Canfield
I believe finally, as we expect how we proceed to interact audiences over time, I believe one factor we see at present is that video games look increasingly just like the social networks of the longer term. And what we imply by that’s that individuals proceed to interact each socially, each their experiences and their connections. So that they put all three collectively. Once we take into consideration the time and retention of gamers within video games at present, it’s pure that individuals need to personalize how they’re within that recreation and the way they play. The content material they need to create and equally how they’re rewarded for that content material turns into a key path by way of how we take into consideration person generated content material. And there are lots of examples at present Sims for us, the place you possibly can proceed to create content material for each your self and for others that each enriches the engagement and a neighborhood and by default, creates financial and monetization alternatives for us, by default credit score line financial system.
Matt Value
Acquired it. Let’s discuss in regards to the enterprise reorganization if that is the proper phrase of organizing into the sports activities enterprise and the non-sports enterprise. It has been a few quarters because you introduced that, are you able to stroll by how that course of has been going, any of the advantages that you’ve got seen? And as you concentrate on driving additional efficiencies within the enterprise, how are you fascinated by value administration extra broadly?
Stuart Canfield
There’s rather a lot in that.
Matt Value
Break up in half.
Stuart Canfield
Appears like two items. I believe to begin with, the reorganization is ongoing. And nonetheless, it is nonetheless a journey. The intent was clear, we cut up the EA organizations into two large verticals, EA Sports activities, after which EA Leisure. After which now we have type of two different organizations, one being a significant pillar, we’re calling it EA Experiences. And the final half we take into consideration as extra because the infrastructure and the features that serve like finance, by way of delivering each these three. If we concentrate on these three pillars, EA Sports activities, EA Leisure, EA Experiences, we’re making an attempt to do is allow larger agility, and larger impairment for these leaders who run these companies. EA Sports activities at present is predominantly an annual dwell service, virtually an ongoing subscription mannequin that gives a dependable, sturdy stream of income, and drives excessive touchpoint excessive frequency and excessive engagement throughout that enterprise.
EA Leisure has a mixture of each. It has merchandise like Apex and Sims which might be materially massive scale life providers, whereas additionally constructing out a few of the interactive blockbuster storytelling experiences by franchises like Star Wars, and Marvel. EA Expertise is group, nonetheless, is aggregating every part collectively, once we take into consideration go-to-market. It brings collectively the industrial organizations, the advertising organizations, model, buyer expertise, to make sure that we’re creating an finish to finish participant expertise that’s absolutely related. So every part from design improvement of a model to execution go-to-market to publish service. And what we discovered is that by placing them into verticals, we get larger efficiencies, autonomy, we will transfer a lot quicker. And we empower these leaders to make monetary selections inside that remit that are not essentially a part of a collective aggregation on the complete EA degree.
When it comes to your second query, how we take into consideration value. We’ve a two pronged method. One is we proceed to make it possible for we’re rigorously watching and studying from a few of the secular traits we’re seeing at present. We’re very centered on return on profitability and the core enterprise. However on the identical time, ensuring that we’re investing to drive the expansion alternative for the longer term. So it is and assertion. We proceed to make rationalization and realignment as we see stress and squeeze on a few of the mid-tier titles. And we proceed to take a position additional behind our largest Triple-A Titles additional construction. On the identical time, we’re additionally constructing and investing for the longer term as we take into consideration type of harnessing the facility of our neighborhood and actually connecting and interesting that ecosystem.
Matt Value
I need to return to at least one factor that you simply mentioned in regards to the three completely different segments of the enterprise. Are you budgeting individually for sports activities and for leisure? How does the price and finances approval course of go now that they are, you need them to be extra agile, however you need to train management the identical time? How are you hanging that steadiness?
Stuart Canfield
Sure, to begin with, we’re not calling them segments, we’re calling them type of group designs as a result of the materiality of the third expense group is a fairly important quantity contained in the group. When it comes to how we set frameworks, we’re actually setting a multiyear purpose for each Cam who heads up, Cam Webber, who heads up Sports activities, and Laura Miele, who heads up Leisure. I am actually given them in pound to determine within their framework, whether or not it is prime and backside objectives, they’ve the autonomy to determine on funding capabilities within that group useful resource location. So we attempt to preserve it that they’re fairly self-contained. There’s general firm combine we work by. However we’re largely in tandem to run and decipher how finest to take a position towards sure progress targets, each prime and backside.
Matt Value
Acquired it, very useful. I assume on capital allocation, how ought to we take into consideration your priorities now? I imply, how are you balancing funding versus shareholder return? And the place does M&A match into that technique for you now?
Stuart Canfield
Sure, I believe it is what the subject of the day. I believe now we have two phrases; we attempt to be balanced and productive. What we imply by that as we need to make it possible for we’re investing appropriately again into the enterprise, to drive the expansion alternatives we see in entrance of us. We additionally need to be balanced in that we at all times need to return money the place it is smart to buyers. And we proceed to have a pre-programmatic buyback program that a minimum of at all times needs to cowl dilution, and usually requested you driving accretion for us on the underside. We additionally need to make it possible for as we scale and drive money, that we proceed to return that again to shareholders. However on the identical time ensuring that now we have the power to proceed to pursue M&A the place it is smart for us. When it comes to our type of M&A technique. We’ve a few focuses, we’re actually joyful, to begin with, with the type of the IP and breadth and expertise now we have. But when a chance had been to floor would clearly need to pursue that, they’d be very particular standards for us on that IP lens. We’re in all probability extra seemingly centered at present on type of how can we proceed speed up instruments and know-how within our firm, versus construct organically, and the way we consider accelerates into a few of the areas and that third pillar of harnessing our participant neighborhood and or drives capabilities, pondering round UDC that basically can robustly transfer us and speed up a number of years forward. We’re additionally taking a look at type of ongoing partnerships in several codecs. As we take into consideration how can we proceed to interact, reward and acknowledge type of participant loyalty and engagement, as you will see us proceed to function by type of business broad by way of IP and alternatives for expertise, tech instruments and partnership, by way of accelerating the capabilities now we have as we transfer from service to platform. And the final half is how we take into consideration opening eyes to type of extra broader partnerships as we see this type of media ecosystem merging over time.
Matt Value
So wouldn’t it be truthful to summarize that by saying that you are taking a fairly broad view throughout each probably instruments, and in addition IP and recreation studios and issues that you simply’re open to contemplating?
Stuart Canfield
Sure, I believe we’re taking an extremely broad view, I believe the profit now we have is now we have an unimaginable steadiness sheet. We’ve minimal debt. We’ve more and more excessive free money stream yearly. So it provides us the flexibleness that makes positive that within the close to time period, we may be assertive and transfer rapidly if we need to, as we push by these three strategic pillars, large on-line communities, making certain these and ensuring we develop blockbuster storytelling, how we expect by that IP within the lens of driving characters and story, and the way we proceed to drive extra expansive ideas round type of platform, digital forex, and scaled social connection by the facility of our neighborhood.
Matt Value
Let’s discuss AI, my favourite subject. Clearly, it is nonetheless very early days to the applied sciences proliferation within the recreation business. However do you might have any updates in your fascinated by how AI goes to impression AAA publishers like EA after which within the gaming ecosystem?
Stuart Canfield
Sure, it is undoubtedly subject of the day. I believe it is virtually each query. I believe, to begin with, I believe possibly folks do not respect AI is de facto native for us in gaming, interactive leisure. We have had AI in Madden, for instance, way back to the early days or type of late Nineteen Eighties. So it has been very prevalent for us on the best way by, we do have a perception that AI is of course going to remodel and speed up, not solely interactive in flip, however clearly past on the identical time. We type of see it down three pillars. One is that naturally AI will speed up the power for recreation content material manufacturing, it ought to allow, and finally just like the efficiencies over time. However within the quick time period, it is actually about how can we speed up the power to drive extra content material. One factor we have seen within the success of FC Cellular for us is the sport altering leveling up that product has been about frequency of content material and conserving it contemporary and relatable and related to the true world. And we have seen that shift come from as soon as every week to 5 occasions every week to a few occasions. After which we scale it virtually to each day. So the power for AI to assist by that journey. AI to create extra revolutionary engagement fashions within the sport, how we take into consideration constructing character strains, or story arcs with AI to essentially change the sport content material work.
The second half is we additionally count on AI will empower by human instruments and the human component of a recreation design, which allows our artistic groups to spend extra time doing what they do finest, create wonderful, immersive experiences. And I believe the third one for us is that we do consider that AI will essentially type of remodel the sport improvement framework over time, that continues to speed up and solely improve the business right through.
Matt Value
So you have been getting quite a lot of questions on it. Are there any issues that come up that you simply assume are both unsuitable that the media or buyers or are lacking about this subject? And is there something that you simply assume is underappreciated that you simply want would come up extra on the subject of how AI could possibly be a constructive?
Stuart Canfield
I do not assume unsuitable or underappreciated, per se, I believe underappreciated simply how a lot AI has been part of our journey throughout interactive leisure for a very long time. I believe two, I believe the assertion is that there naturally can be efficiencies over time. However the focus proper now for us is how can we leverage it to boost and scale extra within the close to time period versus changing into rapid value lever within the quick time period. I believe that might be the juxtaposition I would put.
Matt Value
Sure, it is humorous pondering again to the AI and Madden’s from the late 80s. I assumed I used to be nice at these video games till I performed one other human being. So hopefully, AI has improved since then.
Stuart Canfield
Hear, I would like AI in each shooter recreation presumably.
Matt Value
So let’s discuss in regards to the cellular marketplace for a minute. Clearly, cellular gaming has been slowly recovering, however progress on the market degree, frankly, stays considerably challenged. So what’s your view on the place the market goes from right here? And the way are you approaching the technique round EA’s cellular recreation footprint in gentle of that?
Stuart Canfield
Sure, and I believe I noticed somebody yesterday saying that the cellular market may find yourself being type of flat this yr, or possibly barely up, versus many gamers are type of seeing exponential double digit progress. I believe, to begin with, I believe the cellular market stays a essential preeminent a part of the business, and clearly has the most important set up base and can proceed to develop by time as we see rising markets come on-line, cellular for us will proceed to be our preeminent acquisition mannequin. There’s an incredible solution to convey folks into our manufacturers, by a freemium entry value level or a low value level in markets the place consoles and infrastructure would not allow folks to interact their product. How we push and join folks from cellular and up degree them like we have executed in FC, the facility of bringing somebody to a cellular product related to a excessive definition console product, once we mix each these to the gamers you play each have an exponentially larger return for us and monetization functionality by advantage of extra time spent and the extra engagement within the mannequin.
Cellular seems like a platform that is in transition. Publish IDFA is a good distance within the rearview mirror at this level. Clearly, Android might make adjustments in addition to we go forth. However it seems like there is a elementary shift occurring within the market and given the place we stand at present, maturity, title accessibility coming into the shop on daily basis. For us, our technique shifted the concentrate on type of three issues. One is the inspiration and instance of FC, how we proceed to speed up cellular as a part of our AAA large on-line communities and the half that performs in that journey. And you’ve got seen huge success for us and FC and the expansion and scale we’re seeing. And we talked to triple digit progress solely a yr in the past, and type of triple digit quarters for this title as we transfer ahead. So we’re very concentrate on how does cellular improve by our largest properties.
Second half is we proceed to judge and make selections round what it appears like for standalone experiences on cellular. They don’t seem to be essentially a part of a broader ecosystem, however have the power to standalone as a play element will leverage bigger manufacturers, like a recreation like Pvz, and now we have Star Wars Galaxy of Heroes that leverage large iconic manufacturers that may truly allow us to scale. I believe the third half is we proceed to drive and be actually centered on type of prioritization round useful resource and the way we take into consideration new IP, how we take into consideration partnership fashions in Asia, however being actually centered on profitability, and we have actually made that part of their technique as we transfer ahead to make sure that throughout the three, we proceed to scale, each from a backside line perspective and as you construct progress again into cellular sooner or later for us.
Matt Value
I assume rapidly simply following up on FC Cellular, what has gone so proper in that franchise, or particularly within the cellular providing for FC not too long ago, as a result of it has been an enormous alternative for a very long time, nevertheless it feels prefer it’s actually inflicted.
Stuart Canfield
Sure, the groups made some actually essential shifts in each the platform that the sport was based upon, and the way they went about constructing the sport. And we touched a bit bit on it earlier. FC, I believe, has an infinite alternative even past that even additional than it’s at present. And we have in all probability been underneath delivering on that promise over the previous few years. It actually comes about they’ve taken an method; we have positioned a crew out in Asia, who’ve inherent understanding of what likes to run an actual time service. They’ve led to a really a lot localized and culturalized method, the place we’re investing in territories and geography to make sure that the content material is related to that territory, versus one international program that one dimension matches all, the personalization side, culturalization, localization continues to drive penetration for us in markets, and can proceed to leverage that and be extra particular and in tentful round that. I believe additionally, the world of World Soccer continues to scale. And clearly, that’s the preeminent recreation, by way of scale and dimension. And the attain of Premier League, LaLiga and others, into rising markets continues to scale and develop. So all of these items between international world of soccer, in tentful change in design and useful resource allocation for us. And a extra type of cultural, native, related scaled life service that operates greater than a each day or twice a day processes actually accelerated that engagement mannequin for us.
Matt Value
Acquired it. Perhaps I will shut on type of a extremely excessive degree level, once you look out over the subsequent three to 5 years. What are you probably the most enthusiastic about for the way forward for EA? What alternatives do you see? And what would you like buyers to come back away most centered on and enthusiastic about?
Stuart Canfield
Sure, and in a single minute, I believe three issues that basically excite me. One this business is totally increasing, goes to proceed to develop. And it has an enormous alternative in entrance of us. We have talked about Gen Z and Gen A, they’ll be the most important generations in historical past, they’re probably the most socially expressive, they’re probably the most engaged they usually take leisure as their main kind. That is the large alternative alone in that subset half one business increasing. Half two, video games are clearly changing into a social community, they’re social, expressive, they want folks to attach and share experiences. And also you solely have to consider social media a few years in the past, or three or 4 years in the past, and the way video games are slowly navigating to that path. I believe the final one is play, watch, create, join, we discuss that rather a lot. Proper now gaming has been closely lent by play and also you’re seeing an unimaginable alternative to develop by these different three issues. Watch, create, join. 75% of our viewers at present have interaction outdoors of play. They’re both watching, studying, writing, commenting, creating, all that chance allows us to proceed to open up financial elements for us that construct out over time. So increasing business ongoing. Video games are clearly social networks and extra immersive and taking folks’s time. And now we have different vectors in play, watch, create, join past play which might be extremely highly effective as we transfer ahead.
Matt Value
Proper on the buzzer. Stuart, thanks a lot for being right here.
Stuart Canfield
Thanks.
