Electronic Arts Inc.
Q1 2020 Earnings Call Transcript

Published: 30 Jul 2019

[Operator:]

Good afternoon. My name is Christine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Electronic Arts Q1 2020 Earnings Conference Call. Mr. Chris Evenden, VP of Investor Relations, you may begin your conference.

[Chris Evenden:]

Thanks, Christine. Welcome to EA's First Quarter Fiscal 2020 Earnings Call. With me on the call today are Andrew Wilson, our CEO; and Blake Jorgensen, our CFO and COO. Please note that our SEC filings and our earnings release are available at ir.ea.com. In addition, we posted earnings slides to accompany our prepared remarks. Lastly, after this call, we will post our prepared remarks, an audio replay of this call, a financial model, a transcript and an update to the accounting FAQ.

[Andrew Wilson:]

Thanks, Chris. We delivered a strong start to FY '20. Players were deeply engaged in our top franchises with growing communities reaching new peaks of engagement fueled by content and in-game events in our live services. As a result, our operating results significantly exceeded our expectations for the first quarter. We're thrilled by the great experiences that players are having in our games, and we're looking forward to delivering a lot more throughout the fiscal year. Interactive entertainment continues to grow and expanding global player base and tailwinds for the industry. With this backdrop, the core drivers of growth for EA are the depth and breadth of our portfolio and IP, our expertise in live services, our leadership in subscriptions and competitive gaming that expands our reach and drives deeper engagement. We're also continually strengthening our foundation of great talent and technology. I'll touch on some of these drivers with a few highlights here. Let's start with Apex Legends. We have a massive global audience continuing to engage in this high-quality free-to-play experience. Apex has tremendous gameplay at its core and we've built it to have longevity as a live service that will continue to drive engagement over time. In our live service, we're delivering seasons of new content, a collection of new content and updates that begin to roll out at the start of each season and continue throughout the course of several weeks and months. We launched Season 2 in early July, including a robust Battle Pass offering, a new character and additions to the environment. And to date, it had outperformed our expectations with significant growth in daily and weekly active players. In each season, there are in-game events that are additional drivers of engagement such as the event coming in the next few weeks that will bring new content and deliver one of the most fan-requested features since the launch of Apex. There will be more updates and in-game experiences in the weeks to come for Season 2 and Season 3 is shaping up to be even bigger. All of these elements, the fantastic core gameplay, seasons of new content and additional in-game events are designed to continually excite and engage the Apex community over the long term.

[Blake Jorgensen:]

Thanks, Andrew. We delivered operating results significantly above our expectations this quarter. And at high level, those results were driven by broad strength across our core franchises. Apex Legends continues to delight players and we are pleased with the impact of Season 2 since its launch on July 2. This quarter's result demonstrates how the power of our portfolio strategy, combined with extra content, deliver strong results even in relatively quiet quarters. I'll report the specifics of our results on a GAAP basis, then use our operational measure of net bookings to discuss the dynamics of our business. To compare this quarter's results to historically reported non-GAAP measures, please refer to the relevant tabs in our downloadable financial model. EA's net revenue was $1.21 billion compared to $1.14 billion a year ago and above our guidance by $79 million. Operating expenses were $607 million compared to $622 million a year ago, primarily driven by lower sales and marketing, partially offset by continued investment in new IP. This was significantly below our forecast, driven by timing of advertising spend. Operating income was $415 million compared to $300 million a year ago and above our expectations. Diluted earnings per share was $4.75, up over 400% year-on-year. Underlying EPS was well above our expectations, driven by net bookings, gross profit and operating expenses. Operating cash flow for the quarter was $158 million, up $38 million from last year. Capital expenditures for the quarter were $45 million, resulting in a free cash flow of $113 million. Operating cash flow for the last 12 months was $1.59 billion. See our earnings slides for further cash flow information. During the quarter, we also repurchased 3.2 million shares at a cost of $305 million, leaving $979 million available in our buyback program. Our cash and short-term investments at the end of the quarter were $5.19 billion, up 4% year-on-year. Now, I'd like to turn to the key drivers of our business this quarter. Net bookings for the quarter were $743 million, approximately flat year-on-year. It was $53 million above our guidance, driven by strength across the board with strong performance from our core franchises and live services. Digital net bookings were $701 million, up $8 million on a year-ago period. On a trailing 12-month basis, digital net bookings now represent 76% of our business compared to 69% a year ago. Looking at each of the components of this quarter's digital bookings in turn. First, live service net bookings were up 12% year-on-year to $504 million, led by Apex Legends and The Sims 4. FIFA Ultimate Team was up 11% year-on-year at a constant currency or 5% at actual exchange rates. Diving into the detail, Season 2 launched for Apex Legends at the beginning of Q2 and we're pleased with its performance with regard to both sales and engagement. We will continue to add content during the quarter with a major event in mid-August, and Season 3 will begin next quarter. We are also increasing investments in content development and marketing to continue to drive growth in Apex Legends.

[Andrew Wilson:]

Thanks, Blake. The world loves to play games. As the global gaming audience continues to grow and spend more time with the games they love, interactive entertainment is an increasingly important part of our daily life. At the heart of this is social connection, the unique ability that games have to connect and inspire players to be part of a shared experience. New platforms, new technologies and new ways to engage will continue to fuel growth for the industry. And through these opportunities, we are positioning EA to lead. It begins with great games that can fulfill the motivations of a diverse global player base. We continue to invest across our portfolio to deliver the depth, breadth and quality of experiences that players seek. Our top titles across sports, simulation, shooters and racing connect hundreds of millions of players on console, PC and mobile. We create experiences in some of the most popular owned IP in the industry, including The Sims, Battlefield, Need for Speed and Plants vs. Zombies. We've introduced powerful new IP like Apex Legends and we are building new licensed experiences like Star Wars Jedi

[Operator:]

. And your first question comes from the line of Stephen Ju from Credit Suisse.

[Stephen Ju:]

So Andrew, Blake, it seems like FIFA Online is on a recovery path right now, but this game is still distributed only in Korea, China and Southeast Asia. And I think we have talked about this many times before, the opportunity should be global. So can you tell us where you stand between either FIFA Mobile or other things you may be doing in the background? Because it seems like the demand for this game should be multiples of the audience that you are reaching right now.

[Andrew Wilson:]

So again, I think we think about FIFA as a platform that brings together soccer fans or football fans depending on which country you're from together to share in their passion for the game. In any given market, that might mean going to them in different ways with different games on different platforms or different business models. Right now, we entertain probably a couple hundred million people. We see an opportunity for growth there certainly, but when you think about the offering that we have across console, PC and mobile through premium, through live services like Ultimate Team, through access to the game in subscription and free-to-play on mobile and PC in Asia, we feel like that we -- we feel like we have really strong offerings for a global player base. You should imagine that we're always thinking about how we can attract more users to the platform. That's why we are working on VOLTA for this year. We think that that's going to bring in a whole new range of players who love the game but want a different type of play than the traditional 11-on-11. And as we think about more focus going to mobile over time, we also expect that we'll continue to grow that business.

[Operator:]

The next question comes from the line of Mike Ng from Goldman Sachs.

[Michael Ng:]

I'd like to better understand how you're tracking against your $300 million to $400 million bookings guidance for Apex Legends and The Sims. How much did you realize in the quarter? Are you about 25% of the way there? And how should we think about the phasing throughout the rest of the year?

[Blake Jorgensen:]

Well, I think as we said last quarter, you should expect that the first quarter was smaller remaining three quarters, Q2 through Q4, because we were still, one, experimenting; and two, we didn't have as much content. Clearly, quarter two has more content in it. We talked today about a major event that's coming in a few weeks in August that will clearly continue to drive the engagement and content, which tends to drive monetization. And you should assume -- Andrew mentioned that Q3 will have even more than Q2, so we're going to continue to build that. I would assume that the back three quarters of the year are probably all about the same size based on what we know today and larger than the first quarter. That's all I can really tell you because it's just early days and we're only one month into -- or less than 1 month into Season 2 right now. But everything's tracking to plan or better for us, and so we're very confident on the $300 million to $400 million on Apex. Obviously, Sims, we've called out that it's in the same range of $300 million to $400 million. We didn't do that before, but we wanted to remind people that our business is not based on Apex Legends alone. It's very important to us, but it's still a relatively small part of our overall business. And franchises like The Sims have been continually producing that range of revenues because we run them as a live service. And we want to make sure people understand, we have confidence in building a live service around Apex and that will continue to grow over time and we'll continue to update you as we learn more. But we know we've got amazing engagement. We have 8 million to 10 million people on a weekly basis playing the game. That's huge for us on almost any game that we see. And we'll continue to take advantage of that, keep them engaged and playing everyday.

[Operator:]

Your next question comes from the line of Colin Sebastian from Baird.

[Colin Sebastian:]

For me as well. First, on Apex, I was wondering more specifically what you see in reengagement with some of the early players in terms of what has drawn them back into the game? And then secondly, Sony made some comments today on third-party software sales, reducing their outlook a little bit. Was just hoping for any color from your end in terms of the preorder environment for some of the titles or the retail environment overall.

[Blake Jorgensen:]

Yes. I'll hit the second piece. Andrew wants to talk about the Apex engagement, if you want.

[Andrew Wilson:]

Yes. I would just come back to the comments that Blake just shared. And we have between 8 million to 10 million people engaging in this game on a week-by-week basis. That is large by any measure. It makes it one of the -- probably the most engaging games. We have continued to see great fan sentiment inside that game. And we expect to continue to grow that audience over time. Again, when we think about Apex Legends, we set out to build something with longevity. And at the very core is a great gameplay experience. And we know that long-term engagement involves the ongoing release of new content and the ongoing running of events, both of which the team at Respawn are doing with great success, but the very core of that is a great gameplay experience. And we're building this in a way that we expect to continue to grow and continue to be a meaningful part of our business for a long time to come. And the sign of engagement that we see today lead us to believe that's possible.

[Blake Jorgensen:]

Yes. We think about this as almost like an annual title. We will continue to innovate that game and evolve that game over time and hope to believe -- I believe that we have a 10 year run ahead of us or if not more. There's so much potential and ways to change that game over time and add to that game. We think that there's just huge potential in that and that's how we're managing it. In terms of the news around Sony, I have not seen the Sony news so I don't know exactly what they said. We're not seeing any softness in our demand metrics around our titles. And thus, the reason that we reconfirmed our guidance for the full year.

[Operator:]

Your next question comes from the line of Matthew Thornton from SunTrust.

[Matthew Thornton:]

Blake, maybe one for you and then one for Andrew, if I could quickly. Blake, just in terms of the other guidepost for the year, you talked about Apex, you talked about Sims. I think last quarter you gave us a couple more guidepost around mobile down 10% to 15%, some of the frontline unit assumptions as well. Just curious if there's any changes in those kind of assumptions versus three months ago. And then, Andrew, maybe if you could just talk just really quickly about the VOLTA mode within FIFA and how you're thinking about that impacting engagement? But also monetization, how we should kind of think through that? Any color there would be helpful.

[Blake Jorgensen:]

So no changes on guidance. We're pretty consistent with all of the numbers that we provided at the start of the year. And all the metrics that we've seen are leading towards that and we're feeling confident about it.

[Andrew Wilson:]

And on VOLTA, again, I go back to some earlier comments, is we do see FIFA like a platform and we do see our opportunity to bring together hundreds of millions of football fans around the world to experience football in a way that is meaningful to them. We do that across platforms. We do that through business models. We do that through different access models and different play models. And what we recognized with the platform at this juncture was that there was a lot of really hard-core football in there. And we expect that, that will continue to be the most meaningful part for much of the FIFA playing community. But there was also a whole group of football fans that wanted a more casual style of play. And we built that model to attract new fans. And what we have seen over time, as we have put new modes in the game, and I will use The Journey, our story-based mode that we did a few years ago now, when we started that mode, is that it brings in a whole new set of players that come in to fulfill different motivations in the game. And ultimately, they become part of the community and the richness of that community and typically move into the more competitive modes in the game like FIFA Ultimate Team and the competitive esports modes inside of Ultimate Team. And so we think about VOLTA that way. So our expectation is not that there will be an impact on monetization over the long term, but rather we are growing the aggregate size of the FIFA community. And that typically, what happens as we grow that community is those players become part of it, become enriched by it and then move more deeper into other modes in the game like Ultimate Team and our competitive esports modes.

[Operator:]

Your next question comes from the line of Mike Hickey from Benchmark.

[Michael Hickey:]

I guess on Apex, I've got a ton of questions. I'll try to limit it to a couple. But I was hopeful -- I mean, given the sort of profile of the game, the competitive aspects of it, esports is sort of a no-brainer. It's great to see you guys start to move forward to your first, I guess, state of mind in September, but maybe some more color in terms of how big esports could be in terms of driving engagement, monetization and maybe overall player feel for Apex. And then, I guess, just another add-on, mobile in China, is this still a possibility in '20? Or is this more of a fiscal '21 event now in terms of expanding insulated opportunities ?

[Blake Jorgensen:]

Yes. Let me hit the mobile one real quick and I'll let talk Andrew talk about esports. We did not put anything in our annual guidance for either mobile globally for Apex in China and that's because we are still obviously working with a partner but we don't have timing set up, but I would assume it's a '21 event in both cases. We'll give you more knowledge or more input as the quarters go on this year as to how that timing will evolve, but right now, I would assume nothing in '20.

[Andrew Wilson:]

On esports, again, what we see around the esports community more broadly is the most successful titles are those that have very, very large global player bases where social interaction and competition are at the very core of the experience. And again, I go back to Apex Legends is built as a really, really unbelievable phenomenal game in the first-person shooter category, which has, as its core motivation, both competition and social interaction. And of course, it has a million-strong global audience. So we feel very good about its appeal and its application to an esport. We've also had a series of events and our -- and we'll have our first competition featuring 80 teams later in the year. And as we think about engagement, again, as we've talked about with FIFA and Madden, engagement of competitive gaming players is typically 4x to 7x higher than noncompetitive players. So our expectation is that not only will the esports component help fuel the existing community and drive higher engagement there, but it will ultimately attract new players and new viewers and new spectators and drive higher engagement there as well. So we feel like it's going to be a very important part of the global community over the long term.

[Operator:]

Your next question comes from the line of Gerrick Johnson from BMO Capital.

[Gerrick Johnson:]

I guess the obvious question no one's asked yet, bookings should be by $50 million, EPS by $0.30, gross margin by 240 basis points, so why no increase in full year guidance?

[Blake Jorgensen:]

Yes. I mean it's a good question. I think we've only raised guidance coming out of the first quarter probably once in my tenure here. And it's rare because it's such a small part of the overall year. I would -- if you look at the phasing that we do in our guidance, we basically just dumped it into the fourth quarter, not for any real reason other than that's supportive. It's no -- it's almost all catalog and we just don't know, but it's still small enough that we wanted to at least remain conservative in how we forecast. And based on what transpires in Q2, we'll then decide if we should change guidance or not, but that -- it wasn't much more complicated than that.

[Gerrick Johnson:]

Okay. Can I just dig into the gross margin for a second? That outperformed by 240 basis points, so what drove that?

[Blake Jorgensen:]

So we have done a faster and better job than we expected on controlling the online cost of revenue, particularly with Apex, but continue across all of our platforms. When we first started Apex, remember that you have millions of people playing, so they can be expensive games to operate, and we called that out in our Q4 earnings conference call. The team led by our CTO, Ken Moss, has worked hard to try to continue to bring down those costs through either different partners or simply how we're operating the game, and I think we've done better than we thought. And we had a bigger digital quarter than we actually expected. We tend to play in around 5% growth of full game downloads, for example, and it was higher this year -- or this quarter. And our digital business was stronger than we had expected, so that really drove it across the board.

[Operator:]

Your next question comes from the line of Ray Stochel from Consumer Edge Research.

[Raymond Stochel:]

Not just about Apex, but across all of your content that you're building, how are you thinking about the cadence of updates? Do you think players these days have expectations for a faster content drop cadence than prior? And do you think those expectations are too high now? And what changes do you need to make to hit or come close to those elevated expectations?

[Andrew Wilson:]

I think it's a really good question, certainly one that we see and hear a lot. The reality is we build games for a lot of different communities, and every single community is different. Some communities, of course, like a FIFA community, have a natural cadence of events that occur in the real world that we tie things to, and that makes sense for that community. A community like The Sims has a longer cadence flow. Again, we're set to have the biggest year in terms of content release this year, and we've continued to grow that franchise since launch, but it is not typically a weekly cadence of content because it doesn't make sense for that community. If we think of a game like Apex, again, it is, at its core, a great game, and so a lot of the ongoing engagement exist because it's built as a great competitive game. And so when we think about that, we think about seasons not as a onetime event, but seasons as kind of a kick-off -- as a series of events that happen kind of over weeks and months of time. We feel really good about where we're at with Season 2 on Apex. We think that we're learning as we go. Again, this is -- remember, FIFA Ultimate Team, we started this what is now over 10 years ago. It started very small. We've got much better at engaging with the community over that period of time. And now, Ultimate Team is this tremendous business for us. The same is true for The Sims, which launched in 2014. We get smarter and better in terms of understanding how to fulfill the motivations and the desires of our players. And we expect that we'll continue to learn and get better with Apex as well. One thing that we do try and avoid is that we end up purely as a content furnace with our games. We try and make games that have great gameplay that engage at their very core, and then we're able to build on engagement and fulfill motivations with additional content and additional events. But we try and avoid wherever possible finding ourselves in a position where content is the only means of driving engagement because we just feel it's harder to build longevity with that type of model over time. And we've learned that through over 10 to 15 years of live service experience.

[Operator:]

Your next question comes from the line of Jeff Cohen from Stephens.

[Jeffrey Cohen:]

Thanks for the incremental color on The Sims. It feels like that franchise would be one that would do really well on the Nintendo Switch. So I'm curious how you guys determine which platforms you'd bring the game to or games to? And is there any reason why you wouldn't want to bring that one on there?

[Andrew Wilson:]

Any time we're evaluating platform conversations, we are really looking at a couple of things. One, does the game really fit the profile of that platform in terms of the control or the community ecosystem? Two, do we think the community playing on that platform would appreciate the game to go there? Or would they prefer to play it somewhere else? We have a lot of data that would suggest a great many Switch owners also own a PlayStation 4 or an Xbox One or a PC and very often choose to play the games that we make on those platforms even though they have a Switch and they enjoy a lot of great content on the Switch. And so there's always an evaluation process that goes on a case-by-case basis. And I wouldn't say that The Sims would never go to the Switch, but I think we're doing really, really well attracting Sims players. As we said, we did the promotion in the last couple of months and brought in 7 million new Sims players that we expect will engage in that community on a platform that is really tailored to user-generated content, creativity and customization.

[Operator:]

Your next question comes from the line of Todd Juenger from Sanford Bernstein.

[Todd Juenger:]

Can I visit just a little bit at Respawn, just the resource question? It's something we get from investors a fair amount. And so obviously that studio is being taxed with some really important stuff. So I guess would love to hear your thoughts on how resourced the Apex Legends effort is, either in terms of bodies or dollars or whatever you can say? And where did that come from? And did any of that get pulled from the Star Wars effort? And just to reassure us that you've got enough on all of that. And why don't I leave at that? It's a pretty broad question.

[Andrew Wilson:]

Okay. Good question. I would offer a few pieces of feedback that I think will make you feel better about life. The first is that there are multiple teams at Respawn, very different teams as well. Again, Apex Legends is a fast-paced multiplayer first-person shooter and has a bespoke team specific to that type of game. This is the team that had worked on Call of Duty many years ago, had launched Titanfall, and now Apex Legends. So this is very much their particular skill set. The Star Wars Jedi

[Blake Jorgensen:]

We've also pulled teams from outside of Respawn to provide them resources on development if they wish to do so -- as Respawn wishes to do so. We have a large DICE team in LA, for example. We have a large live services team in Vancouver. And what we've tried to do is perfect our organization to be able to work long distance as well as in the middle of a studio. And so we've given them the opportunity to pull on any resources they want. And they're very, very conscious about how to make sure they've built the best game and they use the resources very effectively to do that, but they -- there's no shortage of resources relative to what they need.

[Operator:]

Your next question comes from the line of Eric Sheridan from UBS.

[Eric Sheridan:]

Maybe another big picture question. As you think medium to long term on the shift you're trying to execute on towards more subscription services and cloud-based distribution models, how do you also think about allocating resources against that longer-term goal versus maybe the shorter to medium-term transition where the industry could go through another console cycle next year and how you think about aligning resources and assets inside the company against both those transitions?

[Andrew Wilson:]

Another good question. And so I would start with it doesn't matter what the platform or the distribution model or the business model. What matters is that we build great games. And we are doubling down and working with great diligence across our studio organization to ensure our teams have everything they need to build great games. And that will continue to be our focus near-term, medium-term and long-term. In addition to that, again, given the scale of this company and the leadership of our CTO, Ken Moss, and what we've talked about with Project Atlas some months ago, is we're also investing for the future to ensure we don't find ourselves out of position. As a company, we started to invest in our digital platform over five years ago. I think we're still the only developer publisher with a unique ID system that carries with our players regardless of game or platform they play on. We have a single data scheme and data platform across the company and single infrastructure in security and transaction engine and these types of things. So we've been working on this model for some number of years to ensure that we are ready for the future. Now, as we think about cloud and subscription, again, we went out -- we bought a small company out of Israel that really gave us a head start in how we think about cloud fabric. We've been working on learning an organizational structure around subscription. And so we feel really good about our future there. But at the end of the day, we continue to be focused on making great games. We have seen the value of great games in games like FIFA and Madden and The Sims and Apex Legends, and we expect that we will continue deliver great games and -- but ensure that we have the technology backbone there to when the industry is ready.

[Blake Jorgensen:]

Yes. I think we've obviously been doing tests and learning along the way. So we started with our subscription on EA Access on Microsoft. We've learned a lot from that. Obviously, rolled out on Origin. And then, as Andrew mentioned earlier, we just rolled out on Sony. And each of those rollouts have gotten easier and easier because we understand the technology better, but more importantly, what the consumer wants. And so it becomes more of the muscle memory of the company versus having to start a new initiative from scratch. We're working hard on moving -- building games for next year on Gen 5. I think it's obvious. I think everybody in the industry is doing that. As has happened in the past, not all games come out on Gen 5 immediately. And obviously, with games like Madden, you'd probably bring the Gen 5 game out when the Gen 5 console ships, not when Madden itself ships, but we'll be ready on Gen 5. We're very excited about it and we've been working on it for some time.

[Operator:]

Your next question comes from the line of Alex Giaimo from Jefferies.

[Alexander Giaimo:]

I was just curious if we can get your updated thoughts on the overall mobile strategy. It looks like mobile bookings were down another 17% year-over-year. I know a lot of that is due to the aging of some legacy titles. So maybe just provide some color on what you're seeing there. And then with all of the smaller mobile developers out there, is this a sector where M&A might make sense?

[Andrew Wilson:]

Yes. A good question and either -- we've not had a material shift from our stated strategy over the last couple of quarters. I think we continue to see the mobile industry grow. It's a very meaningful part of the revenue profile, of the contribution, but it's also extraordinarily competitive and it's very tough and we've seen a lot of large-scale mobile games and mobile companies in pretty serious decline over the last 6 to 12 months. We have a mobile business that still has an operating contribution of 40%. So it's very, very profitable as a mobile business. And we've held on to that and we feel very good about that. But if we think about our strategy, I would talk about it in three core categories. One is that we have some tremendous games in live service mode, and what we're seeing is the average age of the top titles on mobile is actually getting older as those games scale and it's harder and harder to break in. So when you look at games that we have like Star Wars

[Blake Jorgensen:]

Yes. If you had to think about it on priorities, I mean clearly, as we mentioned, we'll have a new Plants vs. Zombies game, a high priority for us; Apex going mobile, and that's globally a high priority for us. And FIFA and Madden remain super high priorities because they're two of our largest games. And as we talked about earlier, the global opportunity for FIFA, including China, is very large. And so we're spending a lot of time there and we'll continue to do that.

[Operator:]

Your next question comes from the line of Clay Griffin from Deutsche Bank.

[Clayton Griffin:]

Blake, I just want to follow-up on what you talked about in terms of learnings coming out of -- on Microsoft EA Access and just if we can get an update on what you're seeing in terms of user behavior. I know it's early days with Sony, but what you're seeing there, relative willingness to engage with live services on those platforms. Any color there would be helpful.

[Blake Jorgensen:]

Yes. I mean what we first saw and has pretty much stayed true across almost all of the platforms is that people ended up playing twice as many games as they did before they joined the service, which is kind of a no-brainer because that's what you would typically see, say, on a Netflix or a Spotify or others because you've reduced some of the friction of trial essentially. But we also find that people played their games a lot longer, meaning they found a game that they really enjoy playing that they didn't know about. And so it's the discovery aspects of where a service goes which helps a lot. And then if it has a live service on it like in Ultimate Team, they start to spend more money than they did before they went into the service. And part of that might be subscription behavior where oftentimes people think they're getting things for free and are willing to spend on them, and sometimes they just -- they found something they didn't know that they wanted to play and they get deeply engaged in it. And so we're trying to reduce the friction of trial to see new games and to learn about things that they didn't know or didn't want to spend money on getting in by giving them an amazing economic value to start a subscription, and that's stayed true across all of the platforms. And the one other piece is that you were going to wrestle within any subscription is how do you manage the churn over time and you've got to curate dropping content into the subscriptions at a fairly predictable rate so people will stay in. And we've been trying to do that by bringing third-party content in to help fill in the places where we don't have content because we don't necessarily have content every quarter. And we're thinking about how games might even change in terms of how they're developed over time to better match subscriptions. So you have more to come, but we're in a really good position. We have more subscribers than any other service in the industry by a long shot and I think a lot better experience base because of that.

[Operator:]

Your last question comes from the line of Brian Nowak from Morgan Stanley.

[Brian Nowak:]

I have two. The first one is you talked a little bit about resource allocation, kind of going back to a couple of the earlier questions, the one from Eric. Can you talk to us a little bit about what percentage of the overall R&D budget or headcount is sort of being attributed toward new potential franchises and new IP just so that investors would kind of get an idea for what could be in the pipeline as we head into 2021 and beyond? And then the second one, on NBA Live, just philosophical thoughts about potentially going free-to-play on that.

[Blake Jorgensen:]

Why don't I start with the first one? I'll let Andrew take the NBA question. We would say, as a rough allocation, it's probably 20% of our R&D budget. That's always hard because do you call VOLTA new IP? We certainly do internally, but it was part of this -- the FIFA team that have developed and evolved that product versus a brand-new IP from scratch that we may be working on, like an Anthem, for example. We try to do both where we're evolving games with new IP and new gameplay modes, but we also try to make sure when we're thinking about games for 2000 -- our fiscal '25 and '26 and '27, way out, where there may be a small group of people starting to ideate and generate the concepts, but you don't scale it up for a couple of years until you really get it to a status or a place where you think you are ready to build the game. But we've always kind of mixed it that way. And it's a balance between inside game teams, as I mentioned, as well as stand-alone teams that we're developing that didn't exist before. But we're comfortable with that mix.

[Andrew Wilson:]

Yes. On NBA, we've seen some speculation but -- around free-to-play, but we don't have anything to share at this time. Our game team has been working hard. As a company and as an EA SPORTS brand, we remain committed to basketball and our partners, the NBA and the NBA Players Association. And our game keeps getting better and better every year, and we'll be excited to bring NBA Live 20 to market soon.

[Blake Jorgensen:]

All right. Well, thank you, everyone. We'll talk to everyone either during the quarter as we see you around the country. Appreciate all your interest. And we'll also talk to you next quarter at the earnings call. Thanks.

[Andrew Wilson:]

Thank you.

[Operator:]

This concludes today's conference call. You may now disconnect.