Earnings Call Transcript - EA Q4 2022

Operator, Operator

Good afternoon. My name is Charlie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Electronic Arts Fourth Quarter 2022 Earnings Conference Call. Mr. Chris Evenden, Vice President, Investor Relations, you may begin your conference.

Chris Evenden, Vice President, Investor Relations

Thank you, operator. Welcome to EA's fourth quarter fiscal 2022 earnings call. With me today are Andrew Wilson, our CEO; and Chris Suh, our CFO. Please note that our SEC filings and our earnings release are available at ir.ea.com. In addition, we have posted earnings slides to accompany our prepared remarks. Lastly, after the call, we will post our prepared remarks, an audio replay of this call, our financial model and a transcript. With regards to our calendar, our Q1 fiscal 2023 earnings call is scheduled for Tuesday, August 2. As a reminder, we post the schedule of our entire year of upcoming earnings calls on our IR website. This presentation and our comments include forward-looking statements regarding future events and the future financial performance of the Company. Actual events and results may differ materially from our expectations. We refer you to our most recent Form 10-Q for a discussion of risks that could cause actual results to differ materially from those discussed today. Electronic Arts makes these statements as of today, May 10, 2022, and disclaims any duty to update them. During this call, the financial metrics, with the exception of free cash flow, will be presented on a GAAP basis. All comparisons made in the course of this call are against the same period in the prior year unless otherwise stated. Now, I'll turn the call over to Andrew.

Andrew Wilson, CEO

Thanks Chris. I hope all of you are well. I want to start by thanking our incredible teams at Electronic Arts. We have the most talented people in the industry who, every day, demonstrate passion, creativity, and determination. I'd also like to extend a warm welcome to Chris Suh. Chris joined us in March as our new Chief Financial Officer. He is an exceptionally qualified leader, and I am looking forward to our partnership as we drive our next phase of growth. EA delivered profitable growth in FY '22, a record year in every important measure of our business. Total players, engagement in our games and live services, net bookings, and underlying profit. We grew our global network of players to more than 580 million unique active accounts, fueled by new players joining titles including EA SPORTS FIFA, Apex Legends, and The Sims, as well as new players that we welcomed from our acquisitions. The strength of our broad IP portfolio, our creative talent, together with highly recurring revenue streams, continues to supercharge growth in our business. We delivered $7.515 billion in net bookings, and underlying profit grew more than 20%. It was a record year, and our talented teams rose to the challenge in a big way, inspiring and entertaining hundreds of millions of engaged players worldwide. Games are now central to people's lives, and younger audiences have more power as consumers. Gen Alpha, Gen Z, and Millennials are digital natives, and they are gaming-first generations. They see gaming as their number one choice for entertainment. The consumption of entertainment and sport is deeply social, with players across our network using games to stay connected to friends and to express themselves. The future of entertainment is interactive, and we derive strength from three structural advantages: our IP; our incredible talent; and our growing network of players deeply engaged in our live services. First, our IP. Everything begins with amazing games, and we continue to invest in one of the most powerful IP portfolios in all of entertainment. Apex Legends will expand in every dimension, going from strength to strength. New gameplay is coming to the console and PC live service; our new mobile service launches globally this month; and the grand finale of the 2022 Apex Legends Global Series for esports is in July. EA SPORTS & Racing is set to grow significantly in FY '23. We have six new EA SPORTS titles this year, with more in development. Our pipeline for this year and future years features big, beloved IP that we cannot wait for players to experience, including Need for Speed, Dead Space, Star Wars, The Sims, Skate, our Bioware franchises, and Lord of the Rings. Our two new studios in Seattle are working on new projects, our Motive studio has an unannounced title in development, and we have more underway across our global studio teams. Next, we have the best talent in the world. Making amazing games starts with incredible game makers. Innovating across our business, our people make Electronic Arts a great place to work, from delivering safe and secure platforms to telling exciting stories and developing our next generation of creators. We are a collective team of leaders who together deliver one of the broadest portfolios in the industry every year, while continuing to pioneer new experiences. We are proud of our distinctive talent from across the many parts of EA for continuing to deliver more exceptional games and content at scale. Finally, we have a large growing network of players deeply engaged in live services. To provide a sense of scale, we had more daily, weekly, and monthly active players across our entire portfolio. FIFA Mobile recorded its biggest quarter ever, with unique new players surging nearly 80% year-over-year, and Apex Legends is amongst the top live service games in the industry. As we look ahead, we are investing in ways for fans to have amazing shared experiences together, whether that’s by playing, watching, or creating. Through our console, PC, and mobile live services; through esports; through other original content; and with tools that unleash the creativity of our players, we will grow what are already some of the world's largest and most engaged entertainment communities. Earlier today, we announced that starting next fiscal year, our football experiences will move under a new EA SPORTS FC brand. This is such an exciting moment for us and our fans. We've just had our biggest year ever for EA SPORTS FIFA games, building on nearly 30 years of connected experiences for players across more than 150 million unique accounts. With more than 300 license partners, 30 leagues and federations, 700 teams, and 19,000 athletes, the future of global football is huge. We're excited to grow EA SPORTS FC. It will be the only place that fans can play in the UEFA Champions League, CONMEBOL Libertadores, the Premier League, Bundesliga, Serie A, LaLiga, MLS, and many others. Our global football franchise has long been at the forefront of innovation. From the first isometric playing angles to online play, Ultimate Team, and Women's Teams, the first narrative story mode with The Journey, to VOLTA, to Hypermotion, we have repeatedly delivered new ways to play the game. We're thankful for many great years of partnership with FIFA, and we are looking forward to delivering another full EA SPORTS FIFA game later this year, filled with great features and World Cup content. Then, the new era begins next year with EA SPORTS FC. With a total addressable market of more than 3.5 billion football and soccer fans worldwide, EA SPORTS FC will be the authentic, inclusive, and immersive global entertainment property at the epicenter of football fandom. We have amazing games, we've built around powerful IP, made by incredibly talented teams. We have a network of more than half a billion player accounts. We have outstanding engagement in our games and live services, fueled by social connection and shared experiences. With these strengths at our core, FY '23 is set to be a year of innovation, growth, and leadership for Electronic Arts. Now I'll hand the call over to Chris.

Chris Suh, CFO

Thanks, Andrew and good afternoon everyone. As Andrew said, FY '22 was a record year, with net bookings that exceeded $7.5 billion. This is more than $200 million ahead of original guidance, driven by growing player engagement across our broad portfolio of live services and games. We grew both net bookings and underlying profit by over 20% for the full year. Operating cash flow for the year was $1.9 billion, nearly $150 million above our original guidance, and we returned almost $1.5 billion to shareholders. These results speak to the power of our diverse portfolio, and to the durability and consistency of a live services business founded on deep player engagement. For the fourth quarter, net bookings were $1.75 billion, up 18% from the prior year, and reaching a new Q4 high, even with the actions we took to cease sales in Russia and Belarus during the quarter. Live services net bookings grew 14% year-over-year. We delivered Q4 net revenue of over $1.8 billion, ahead of our expectations and up 36% year-over-year. Underlying profit was well above our expectations. Q4 operating expenses came in lower than our expectations, driven by the timing of some marketing and sales activities. We are continuing to prioritize our investments in our best long-term growth opportunities, while also remaining agile to realize cost savings and implement efficiencies where appropriate. We generated $444 million in operating cash flow during the quarter, and returned a further $373 million to shareholders through dividends and our ongoing share repurchase program. Now, let me talk about our full year performance. Live services net bookings grew 17% year-over-year to nearly $5.4 billion, and made up over 71% of our total business. Full game sales were up 34% to $2.1 billion. Our healthy live services growth was driven by strength across our broad-based portfolio, most notably by Apex Legends and FIFA. Apex Legends is up over 40% for the year, taking it past the $2 billion milestone in lifetime net bookings. Season 12 finished yesterday, and was the most successful ever. And, of course, Apex Legends Mobile is performing well in tests and is close to launch. FIFA 22 is the most successful FIFA ever, launch to date, with net bookings up double digits. Full game sales growth was similarly diverse, with Battlefield, FIFA 22, Madden NFL, It Takes Two, F1, and Mass Effect Legendary Edition all important contributors. On console, digital represented 65% of full game units sold through, up three percentage points from last year. In Mobile, we passed the billion-dollar milestone this year, with nearly $1.2 billion in net bookings. As a result of great work by our teams, our return on advertising spend is now roughly back where it was before the IDFA changes, and now we're looking to maintain that ROAS level as we scale spend back to the level it was before, and as we continue to learn and adapt to market changes. Across our full portfolio, 12 titles contributed $100 million or more to net bookings in FY '22. Now, let me turn to FY '23. As Andrew laid out, we're entering the year from a position of strength. We're experiencing strong engagement across our live services, have great early indicators for our mobile launches, see continued momentum in our annual sports titles, and have a strong slate of console titles scheduled for the second half. We expect fiscal '23 net bookings to be $7.9 billion to $8.1 billion, up 5% to 8% versus FY '22, driven by growth in live services, particularly in mobile, and supported by the strong launch slate in the second half. Three key drivers of mobile growth in FY '23 are: the launch of Apex Legends Mobile; growth in FIFA Mobile; and the launch of Lord of the Rings: Heroes of Middle-earth later in the year. FX is a headwind of nearly three points, net of hedges, relative to last year, for both net bookings and underlying profit, which puts our net bookings guidance in constant currency at 8% to 10%. Additionally, the impact of the stoppage of Russia sales is one percentage point to net bookings and two points to underlying profits. Adjusted for these factors, we continue to see healthy underlying performance, which illustrates the durability of our portfolio of live services. We expect cost of revenue to be $2.020 to $2.065 billion, in part reflecting the anticipated strong growth of our mobile business. We expect operating expenses to be $4.200 to $4.315 billion. This is driven by investment in user acquisition for our two major mobile launches, and adding talent to our development teams to deliver the live services and title slates we have in development for FY '24, FY '25, and beyond. Also note that we've increased the management tax rate used by our long-term model from 18% to 19%, primarily due to U.S. tax rules published in January. We expect operating cash flow of $1.6 billion to $1.65 billion and capital expenditures of around $200 million, which would deliver free cash flow of about $1.4 billion to $1.45 billion. The business continues to be a strong generator of cash, although the year-on-year number is down slightly, primarily due to timing, as our biggest non-sports launch is coming in Q4, with collections in FY '24, and also because our tax rate has increased. We continue to be committed to growing our cash return program, and announced today that we are increasing our dividend by 12%, from $0.17 to $0.19 per share, payable each quarter. We expect to continue to repurchase stock under our current authorization, and we will revisit it closer to the expiration in November 2022. We expect fiscal '23 GAAP revenue to be $7.6 billion to $7.8 billion and earnings per share of $2.79 to $2.87. We anticipate net bookings for the first quarter to be $1.20 billion to $1.25 billion. As a reminder, in the prior year, we had a number of new game launches in Q1, whereas this Q1 is primarily live services, with only F1 22 launching on console and PC later this quarter. In contrast, this coming Q2 has a profile very similar to last year's Q2, with the launches of Madden and FIFA, plus some live services growth offset by some Ultimate Team net bookings phasing into Q3. For the first quarter, we expect GAAP net revenue of $1.675 billion to $1.725 billion, cost of revenue to be $309 million to $321 million, and operating expenses of approximately $1.013 billion. This results in earnings per share of $0.76 to $0.85 for the first quarter. To conclude, EA delivered another record year, well ahead of our original guidance, driven by strong player engagement across our diverse portfolio of titles. Looking forward, we are capitalizing on this strength to invest in our future. We expect to outgrow the market and show resilience through uncertain times, building on the foundation of live services and our broad portfolio to deliver growth over the long term.

Andrew Wilson, CEO

Thanks, Chris. As we kick off FY '23, we are investing for growth from a position of strength. With a portfolio of amazing IP, the best talent, and a growing network of highly engaged players, we are scaling to deliver new experiences on more platforms across more geographies. Our total addressable market is expanding, and secular trends are driving more consumption of interactive entertainment. Our games are deeply social, and we will continue to build on our strengths as we invest to grow our biggest franchises to connect with more players in the future. We have a clear vision, a clear strategy, and we have a spectacular team ready to deliver in FY '23 for hundreds of millions of players, viewers, and creators around the world. Now Chris and I are here for your questions.

Operator, Operator

Your first question comes from Omar Dessouky with Bank of America. Please go ahead.

Omar Dessouky, Analyst

Hi, thank you for taking my question. It looks like excluding the FX, you have increased your guidance versus the mid- to high single digits, excluding the FX in Russia, which was communicated on the third quarter call. First of all, is that the case? And second, has it become clearer since the third quarter call that the churn among gamers who joined during COVID lockdowns has run its course and that average revenue per paying user will remain near the highs seen during the pandemic as 2022 unfolds?

Chris Suh, CFO

Great. Thank you for the question. I'll start with the first part first, and then I'll turn it over to Andrew, and he can comment as well on the second part of your question. So from a guidance perspective, your math is correct. Normalizing for the impact of the strengthening U.S. dollar, which we articulated was three points on net bookings, as well as the impact of the decision taken in Russia, that effectively puts the equivalent guide more in the high single digits equivalency, which is slightly above the signal that we gave in the last earnings call. So it is indicative of how we finished the quarter with strong player engagement, and we feel good about the outlook.

Andrew Wilson, CEO

And as it relates to player engagement and the value that we see from that over the course of time, I think what you've heard from us throughout COVID is that players sought out our games in the beginning for entertainment reasons, but they stay deeply engaged in them beyond just entertainment. They really saw games as a means of deep social connection with their friends. This is not just four or five friends that you spend a great deal of your social time with. What we have seen even as we are moving past COVID and that people are returning to work and returning to live and returning to school is that our engagement has continued to be very, very strong, and in many cases, across some of our franchises at record levels. Given the level of entertainment that we're developing and delivering, and the value of social interaction as part of those experiences, we think this will continue to be a significant driver for growth for us.

Omar Dessouky, Analyst

Thank you very much.

Operator, Operator

Thank you. Your next question comes from the line of David Karnovsky with JPMorgan. Please go ahead.

David Karnovsky, Analyst

Hi, thank you. Andrew, just on the FIFA license. I was wondering if you could discuss a little bit more the decision to forego that and how are you thinking about potential risks given the brand shift, but also the upside in terms of how ending the license kind of frees you up for certain revenue opportunities that in the past would have been restricted?

Andrew Wilson, CEO

Yes. Great question. As you will have seen from our press release today and certainly FIFA affirms some things on their own website, we've been working through this. We're very excited about the future of football. We have, as you heard in the prepared remarks, over 300 licenses that deliver the content and form the experiences that we deliver to players, which are most meaningful for them. We've got over 150 million players across unique accounts. When we think about the future of football right now, we've really made this decision on the basis of being able to deliver experiences that our players have wanted. They told us they wanted more modalities of play. They wanted to see more commercial partners in the game that are representative and authentic to the broad global world of football. They told us they wanted to move beyond just the core experience and really build out this digital football experience. They want to move really, really fast. As we move through this, we are deeply grateful for our relationship with FIFA for nearly 30 years and deeply respectful of the partnership. We've worked closely together as two organizations to ensure that we can deliver the biggest FIFA this year that we've ever delivered, featuring World Cup content from both the Men's World Cup and the Women's World Cup for the first time ever. We work to do that because we believe that's important for our fans. We are excited to work with our 300-plus partners and all the new partners that we're going to have the opportunity to work with to deliver what we believe will be the greatest digital football experience available and sit at the very epicenter of football fandom globally.

David Karnovsky, Analyst

Okay. Maybe just a follow-up, and I touched on it a little bit, but how do you think specifically about marketing the EA SPORTS FC brand? And would there be an initial bump in advertising costs? Or could you just mostly take advantage of that lack of a license fee? Thank you.

Andrew Wilson, CEO

Yes. I think it's a little early to tell yet. We're certainly being very thoughtful and deliberate about that. The important thing to understand though is that as you travel around the world and you meet with players who are deeply engaged with our game, for a player in the U.K., the most important thing to them is the Premier League. For a player in Germany, the most important thing to them is the Bundesliga league. And Spain is La Liga, and so on and so forth as you go around the world. What we're focused on right now is building very unique experiences for each of those fans in each of those markets. Many of our partners have come out in support of our ability to do this for our fans. Any time you change the name of a product, you must be very thoughtful, and we'll have to think about that marketing front. But what gives us confidence as we move into this next phase of growth is that we are working with the partners and the content that our fans love and relate to most directly in the markets in which they do it.

David Karnovsky, Analyst

Great, thanks.

Operator, Operator

Your next question comes from the line of Benjamin Soff with Deutsche Bank. Please go ahead.

Benjamin Soff, Analyst

Hi, thanks for the question, guys. I wanted to dig into the mobile business a bit. You've got Apex on Mobile coming out soon. The FIFA Mobile rebound seems to be doing really well. You announced the new Lord of the Rings game and doing some other stuff on the sports side. So really, the question is how are you guys thinking about the mobile growth opportunity in general? And how has your outlook changed, if at all, since giving that longer-term growth target for the business last year? Thanks.

Andrew Wilson, CEO

Yes, great question. I mean we remain very excited about the opportunity in mobile. It continues to be the single biggest gaming platform in the world with a TAM of 3.5 billion players. Having that kind of TAM access is just extraordinary for us as game makers and delivering live services to that audience. We're seeing really good metrics around Apex Legends right now in testing, and that will launch later this year. FIFA had its biggest quarter ever, and they had a surge of 80% in users. Lord of the Rings is coming from what has been our strongest mobile studio, Capital Games, who build these types of games and have done so well for us and have such an avid fan following. As we think about moving forward in mobile, we believe that the brands we have and the expertise we've built organically internally, and acquired through recent mobile acquisitions represents a really strong opportunity for us over the long term. Remember, when you launch these games, they last for more than five years as live services. This year, we have three big launches in addition to our already strong portfolio, and we're going to invest behind that for the long term.

Benjamin Soff, Analyst

Got it. And then maybe just a quick follow-up on F1. I believe this upcoming title is the first game in the series that you guys have really been able to put your fingerprints on since the acquisition. Can you talk a little bit more about your plans for the franchise and the types of innovation you're bringing to the game? Thanks.

Andrew Wilson, CEO

Yes. And that team is an extraordinary team that has always built an incredibly high-quality game, and that was really the impetus for the acquisition, to bring that into the EA SPORTS brand portfolio. F1, as you may have seen if you follow the sport, is at an all-time high in fandom. We had an extraordinary season last year between Hamilton and Verstappen. We're seeing an incredible season this year with Ferrari leading in the Constructor's Championship and Leclerc and others really competing with Verstappen. In our world, if you reach a place where sports fandom is high in engagement and the core sport is high, and then you couple that with an extraordinary development team who has a history of building high-quality products, and you layer in EA SPORTS marketing power and global reach, we believe there's incredible opportunity there, and we think that business is going to go from strength to strength.

Operator, Operator

Thank you. Your next question comes from the line of Eric Handler with MKM Partners. Please go ahead.

Eric Handler, Analyst

Good evening, and thanks for the question. I'm curious to think about the marketing investment that you're going to be spending on Apex Legends for mobile and then you have Lord of the Rings, and you're still in the relatively early stages with FIFA for mobile. Should we be thinking about the investment sort of negating a lot of the revenue that comes in from these titles and really, you look to grow the player base in fiscal '23 and then you think about margin expansion in fiscal '24?

Andrew Wilson, CEO

I think that's a good way to think about it. The reality is any time we develop and launch a game, there is a combination of development cost and marketing cost to reach launch and get that critical mass of players. The sequencing is very different in mobile than it is in traditional console experiences. In traditional console experience, of course, you can spend three to five years developing the game with a much lower proportion of marketing spend. In mobile, the development costs are lower to get to launch, while the acquisition spending early on to supercharge a new launch is higher. But remember, these are live services. We're driving a golden cohort at the start of the launch, and that cohort will continue to deliver a return for us over time over the next five plus years. So early on, you see margin compression in the context of mobile. Over time, you see margin accretion and expansion as these live services become global communities of players that continue to play for five plus years and in some cases, up to a decade.

Chris Suh, CFO

Maybe I could just add on to that, Eric. As you go through your model and the guidance that we provided, you'll see that it is implied in the guidance and the cost structure. To reiterate the points Andrew made, we're excited about our opportunity in mobile. It represents an enormous TAM opportunity. We're excited about what we have in store for this year. It has a different margin profile, especially in the short term. But as Andrew pointed out, once we get to scale, we see great revenue and profit potential, and we're really looking forward to it.

Eric Handler, Analyst

Great. And then just as a follow-up, I believe you said, Andrew, six new sports titles this year. I wonder if you could give a little color on that. Are these mobile titles? Are these new PC console games? What can you tell us there?

Andrew Wilson, CEO

So it's the characters you would expect from us, plus F1. We will expand our FIFA product lineup, including NHL, Madden NFL, and F1. We have a new golf game as well. I'm trying to think of everything; you've caught me off guard and Super Mega Baseball, which was an acquired property. Yes, that's across console, PC, and in some cases, mobile.

Eric Handler, Analyst

Great. Thank you very much.

Operator, Operator

Thank you. Your next question comes from the line of Drew Crum with Stifel. Please go ahead.

Drew Crum, Analyst

Hi guys. Good afternoon. I want to drill down a little bit more on Apex Legends. You're lapping a 40%-plus comp but also launching on mobile. What are your expectations for franchise net bookings in fiscal '23? And will you make any changes to the cadence of live services or content drops across the franchise now that it will be on mobile? Thanks.

Chris Suh, CFO

Yes. No, it's a great question. Thank you for it. As you rightly pointed out, Apex Legends had a terrific year in FY '22 across both financial metrics and player engagement data that Andrew spoke to. We're really excited about how we finished the year, coming out of that with a lot of momentum. We do have profitable growth planned again in FY '23. It's a large franchise for us. It's a big business. We expect continued growth on that on the console and on the HD side. With the Apex mobile launch, we are anticipating this to be one of the most exciting launches that we've ever had on mobile. The combination of that indicates a lot of optimism and strength for the Apex mobile or Apex Legends business.

Andrew Wilson, CEO

In terms of the cadence of content drops and experience updates and events, again, the Respawn team and the Apex team have demonstrated over the last two years an extraordinary connection with their community. They’ve been able to figure out exactly when and how to make drops and things that the community wants and needs. There is no hard and fast rule regarding which drops will happen when. We allow the team to work deep with the community. As the franchise continues to grow, and as we move on mobile, launch and grow on a global basis, it’s reasonable to believe that over time there will be more content launched into the world. A new season starting today, which follows a record season 12, is expected to perform well.

Drew Crum, Analyst

Thank you, guys.

Chris Suh, CFO

Thank you.

Operator, Operator

Thank you. Your next question comes from the line of Colin Sebastian with Baird. Please go ahead.

Colin Sebastian, Analyst

Thanks everyone. Good afternoon. Welcome, Chris. Maybe just a quick follow-up to the last question. I guess there may be some changes to the release of Legends going forward on Apex. Curious how you think that might impact engagement or each of the contributions from stories going forward. Despite these results, I wonder, Andrew, what you think the impact has been on growth from the persistent short supplies of consoles and GPU chips, etc.? What's also factored in the outlook from that perspective?

Andrew Wilson, CEO

Yes. Let me touch on the first part first and then I'll let Chris take the outlook piece. Again, I think that with each time the team releases new content, new events, we see growing engagement and have demonstrated an extraordinary ability to understand the things that will drive ongoing engagement for our community. I wouldn't expect any decline in engagement with more content; quite the opposite. As we grow and expand into more platforms, I believe we will see a growing audience and greater engagement. That has been our experience thus far. Regarding supply chain shortages, we've just come off a record year. We exceeded almost every measure despite the supply chain shortages around consoles and graphics cards. It's challenging to predict how much larger our performance could have been; however, we're pleased with what we accomplished. As supply chain issues ease up, more consoles and graphics cards will be available, and we expect an increase in engagement. Historically, at each platform transition and technological evolution, the gaming TAM and community have expanded. I view this as upside for us.

Chris Suh, CFO

I'll just add on to Andrew's good summation. From a market standpoint and the composition of our business, this illustrates the resilience of the live services business model. Over 71% of our business in FY '22 is designated for live services, which will grow next year, especially with mobile launches. We feel good about that, and that's embedded in the guide you heard us talk about at length. Specific to the console market, we anticipate Gen 5 console units to be up year-over-year, which will serve as an additional tailwind to the business.

Colin Sebastian, Analyst

Thank you.

Operator, Operator

Thank you. Your next question comes from the line of Andrew Uerkwitz with Jefferies. Please go ahead.

Andrew Wilson, CEO

Charlie, I think he dropped off the line. So we can move to the next one.

Operator, Operator

Sure. No problem, sir. Your next question comes from the line of Matthew Thornton with Truist Securities. Please go ahead.

Matthew Thornton, Analyst

Hi, good afternoon, Andrew and Chris. A couple of interrelated ones if I could. I'm going to ask a question that was asked earlier but in a different way. Since you spoke about mid- to high single-digit bookings growth last quarter, as you mentioned, there are a lot of incremental headwinds. Is anything changed in the fleet as you consider fiscal '23 versus what you were thinking three months ago? Question one. Question two, the slate discussed a major IP in the fourth quarter. I'm curious if there's a reason why that would fit better in fiscal Q4 as opposed to the traditional holiday quarter in Q3 where you typically might put a significant piece of IP. Any thoughts there? Finally, could you talk about the work-from-home transition back to the office, how that's impacting productivity and how that provides you with the confidence that you could release these titles? You have quite a few in the second half of the year, including in Q4. I'm curious about your level of comfort based on what you're seeing in productivity trends.

Andrew Wilson, CEO

There was a lot in there. I think the first was whether we anticipate slight changes as an additional element as we got from third to fourth quarter. No, we believe our slate is strong. I think the second question revolved around the major IP being in Q4 and not in the holiday quarter. Our commitment to quality drives the decision for the length of time we give our teams to build games and deliver those to a global audience. Our business nature is also changing. As Chris pointed out, 71% of our business comes from live services. These traditional launch windows aren't as relevant now in a world where players engage with our games daily. The combination of changing engagement consumption of our games and our desire to give teams all the time they need is why we see the Q4 launch. The third part related to work-from-home and how that's looking is still evolving. We're seeing an increasing number of people return to the office. The good news is that while there are still waves of COVID, the severity of infection is much lower than before. We have strong confidence in our ability to launch our full slate of high-quality titles this year. Our ability to deliver games continues to thrive over two years. We've launched more content than any other developer and publisher during this time, demonstrating tenacity and ingenuity.

Chris Suh, CFO

I think you got them.

Operator, Operator

Thank you. Your next question comes from the line of Mike Hickey with Benchmark Company. Please go ahead.

Mike Hickey, Analyst

Hi, guys. Andrew, Chris, great results. Thanks for taking my question. First question, just on the economy here. It's been a while since the business has sort of been captured with our recession. Whether or not we are going into a recession, who knows? How do you think about player spending potentially closing up? Would you imagine a shift towards free-to-play if we see pullback in discretionary spending? Just sort of gives the puts and takes on your clarity and then how you factor that into your guidance? I have a follow-up. Thank you.

Andrew Wilson, CEO

Yes. There was a little jumble; I'm sorry. But I think that the essence of the question was with the macroeconomic climate, and I think you mentioned the notion of recession, how do we think about planning and costs. There are people smarter than us predicting the macroeconomic outcomes, but we see we are coming off a record performance last year. Our network and engagement continue to grow. Our games are not just entertainment, but also for social interaction. That gives us confidence in the fundamentals of our business. Looking back at periods of challenged consumer spending, the gaming industry has actually performed very well for two reasons: one, entertainment is a fundamental human need; two, the value we provide to consumers is extraordinary, giving thousands of hours of engagement in our games. Even in a challenging environment, we believe our industry will continue to thrive. Companies that invest from strong positions during downturns typically benefit disproportionately in recovery. Our growing network and engagement make us well-positioned as we could invest in new titles this year. We have built flexibility into our plan, and we remain disciplined around costs.

Chris Suh, CFO

Well, I think everything Andrew said was good.

Mike Hickey, Analyst

Whole day, okay. Sounds good. Second question, Microsoft and Sony have been flirting with the idea of adding advertisements into free-to-play game experiences as a way to help developers monetize their community. You go way back to Burnout Paradise and the impetus for trying the idea of billboards. This idea has created a debate within the player community. I’m curious your thoughts on whether ad monetization could be meaningful and how you balance that with the player experience. Thanks.

Andrew Wilson, CEO

Yes. For us, we start with the player experience. We want to ensure that we provide the best possible experience for players. That’s why we've tested various models over time; some continue while others we've discontinued to maintain that quality. Generally, we see a place for advertising when done right; part of the community will engage with advertising where it enhances gameplay. We’ve learned from Glu as we've brought them on board and observed these trends in the industry. You can expect that we will continue to test different models ensuring we uphold a positive player experience while offering options for engaging with advertising.

Mike Hickey, Analyst

Thank you.

Operator, Operator

Thank you. The next question comes from the line of Mario Lu with Barclays. Please go ahead.

Mario Lu, Analyst

Great. Thanks for taking the question. The first one is on the FIFA title this year. I believe you guys are already testing cross-play support for FIFA 22. So I presume that next year the '23 title will also have it. What is the impact of profit actually of player engagement? Similarly, can you remind us of the magnitude of uplift from the inclusion of a World Cup mode within FIFA?

Andrew Wilson, CEO

Let me start on the World Cup mode with FIFA. In the context of live services, we’re always balancing investment of time and money from the community. Depending on what's happening in the game and the community, we leverage new content/events to drive greater engagement or may monetize. You might recall the last World Cup, which yielded extraordinary engagement. If I recall correctly, we brought 12 million or 13 million people back into the game during the World Cup, significantly boosting engagement then. We will think about it this year similarly, balancing player time and investment to provide a positive, immersive experience. Regarding cross-play, I don’t think we have specifics on that yet for FIFA, but historically, greater liquidity in a franchise brings benefits, especially allowing friends to play together across devices. In FIFA, which has over 30 million players on console and PC, we already have a highly liquid community sufficient to sustain ongoing player experiences. As we consider the future of all our franchises, we aim to ensure the entire community can play together, which will be key as we move forward.

Mario Lu, Analyst

Great. Thanks, Andrew. Just one more on Battlefield. I’m curious if there are any updates on that franchise. I know you previously mentioned an increased investment into the franchise over the long-term. Has that mindset changed in recent weeks given the lack of resurgence from the latest update?

Andrew Wilson, CEO

No. We take a long view here. This is one of the great franchises in our industry, built by one of the great teams. Our expectation is that we will continue to grow and remain an essential part of our portfolio for many years to come. We have fantastic leadership overseeing that team now, rethinking the development process from the ground up, applying the Vince Zampella/Respawn model of getting to the fun as quickly as possible. We've made thousands of updates for the community, focusing on quality of life improvements to enhance the core experience. We still have more work to do, and the team is dedicated to executing this for the community. Once we ensure we’re where we want to be with the core experience, you can expect us to invest and develop beyond where the game stands today.

Operator, Operator

Thank you. Your next question comes from the line of Doug Creutz with Cowen. Please go ahead.

Doug Creutz, Analyst

Hi, thanks. I think on the last call, you'd indicated that the Battlefield mobile game was close to going into Closed Beta. At one point, it seemed like it might have a fiscal '23 launch. Can you provide an update on that? How did the Closed Beta go? What’s your current timing for the title?

Andrew Wilson, CEO

Yes. Right now, we’re looking at going into further testing at the end of May. Based on metrics and the engagement data, we might aim for a global launch by the end of this year or the beginning of next year. In mobile, the timing relies heavily on the tuning and balancing post-Closed Beta. Currently, we do not have any fiscal '23 revenue planned from that title. Should it launch in the year, it would present an upside potential. We want to ensure the game gets all necessary tuning and balancing during its Closed Beta phase. Having played the game, I can say we are excited for its potential.

Operator, Operator

Thank you. Your next question comes from the line of Jamie Bass with Berenberg. Please go ahead.

Jamie Bass, Analyst

Hello guys, and thanks for taking my questions. I've got a couple, if that's okay. Firstly, you talked about the positive metrics within mobile returning to pre-IDFA levels. Two things on that: Firstly, could you provide expectations for key core franchises, meaning not including Apex Mobile that you’ve already had in the mobile business? Secondly, on the developer cost inflation, wage inflation. Do you have an outlook for what you expect this year regarding new hires and how much you might need to pay to bring in new developers?

Andrew Wilson, CEO

Maybe I'll start with the second question. The competition for talent in our industry has always been exceptionally high and remains so. When we recruit new talent, candidates typically weigh their decisions based on four key factors: the work involved, who they'll work with, the conversations they'll have, and opportunities for growth. We're committed to ensuring our culture makes this a desirable place to create games. Despite challenges in the marketplace, we hired a record number of people in FY '22. We've received accolades as an extraordinary workplace and have prioritized our culture to attract amazing new creators and employees across our business.

Chris Suh, CFO

As I commented in my prepared remarks regarding IDFA changes, we are still working through the impacts. Positive movement has occurred toward pre-IDFA levels, and we feel optimistic about the outlook moving forward.

Chris Evenden, Vice President, Investor Relations

And that brings us to the end of the call today.

Andrew Wilson, CEO

Thanks, everyone, for your time, and we look forward to speaking to you in the next quarter.

Chris Suh, CFO

Thank you so much.

Chris Evenden, Vice President, Investor Relations

Thank you, all.

Operator, Operator

And this concludes today's conference call. Thank you all for participating. You may now disconnect.