Electronic Arts Inc.
Q1 2017 Earnings Call Transcript

Published: 3 Aug 2016

[Operator:]

And good afternoon. My name is Jennifer and I will be the conference operator today. At this time, I would like to welcome everyone to the Electronic Arts First Quarter 2017 Earnings Call. All lines been placed on the to prevent background noise. After the speaker's remarks there will be a question-and-answer session. Thank you. And now I would like to turn the call over to Chris Evenden, Vice President of Investor Relations. Sir, you may begin.

[Chris Evenden:]

Thank you, Jennifer. Welcome to EA's fiscal 2017 first quarter earnings call. With me on the call today are Andrew Wilson, our CEO; Blake Jorgensen, our CFO; and Ken Barker, our Chief Accounting Officer. Please note that our SEC filings and our earnings release are available at, ir.ea.com. In addition, we have posted earnings sides to accompany our prepared remarks. Lastly, after the call we will post our prepared remarks, an audio replay of the call and a transcript. One quick note on upcoming events. Our Q2 earnings call is scheduled for Tuesday, November 1. This presentation does contain 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-K 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, August 2, 2016, and disclaims any duty to update them. We will present both GAAP and non-GAAP financial metrics during this call. However, as discussed on our July 19 conference call, in light of the new interpretations issued by the SEC on May 17, this will be the last call in which we disclose any non-GAAP measures that adjust for deferred revenue. Our earnings release and the earnings slides provide a reconciliation of our GAAP to non-GAAP measures. These non-GAAP measures are not intended to be considered in isolation from or as a substitution for or superior to our GAAP results. We encourage investors to consider all measures before making an investment decision. 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 P. Wilson:]

Thanks, Chris. Our first quarter was an excellent start for fiscal year 2017, demonstrating that our digital transformation continues to strengthen and drive growth for Electronic Arts. Revenue and earnings exceeded our guidance as players engaged deeply with their favorite games and connected with each other across a global network of live services. On HD platforms, we have thriving communities in our major franchises, and these will continue to grow as we introduce great new experiences this year. More than 11.5 million people played our Battlefield titles during Q1 and more than 6.6 million played Star Wars Battlefront, two examples that illustrate how great games continue to engage players over time. Looking ahead, there is tremendous excitement for both Battlefield 1 and Titanfall 2, a combination that we believe will bring vitality and innovation to the huge first-person shooter audience. The community has been electrified by Battlefield 1's modern take on World War I, delivering strategy, team play and epic scale in a completely new setting. Titanfall 2 is bringing the game's signature Pilot and Titan combat to a new single-player campaign, and its fast and fluid multiplayer led it to win the Best Online Multiplayer award from the E3 Game Critics. These two titles are driving the variety, progression and fresh new experiences that players want, and we believe they will be an unstoppable pairing during the holiday quarter. Our EA SPORTS titles on console are also seeing massive engagement and players will be thrilled with new ways to play in this year's games. Unique players in Madden NFL grew 20% in Q1 over last year's game. And current and new fans alike will love Madden NFL 17's redesigned Franchise Mode and new competitive tournament, the Madden NFL 17 Championship Series. In our FIFA franchise, millions of soccer fans continue to engage daily with FIFA Ultimate Team, and this year we'll deliver our first-ever Story Mode in FIFA 17. Powered by our Frostbite engine, Story Mode adds an entirely new dimension to the FIFA experience that has fans incredibly excited. And perennial fan-favorite NHL 17 will let hockey fans show their national pride through the all-new World Cup of Hockey Mode. In our mobile business, we are seeing growth across multiple genres. Star Wars

[Blake J. Jorgensen:]

Thanks, Andrew. As we discussed on our July 19 call, the SEC has issued new interpretations that no longer permit the use of non-GAAP measures that adjust for revenue deferrals into and out of the quarter. As well as revenue, we've historically adjusted many non-GAAP financial measures for the effect of revenue deferrals, including gross margin and EPS. This is the last call in which we'll report these non-GAAP measures. However, since our board and management team will continue to use these measures internally to manage the business, we will continue to provide the financial data that will allow you to compare our results to our historically reported non-GAAP financials. For more information on this, please see the documents we posted on our Investor Relations website following our July 19 call. Now on to the quarter. Q1 beat our expectations, driven by outperformance from Ultimate Team and our mobile game, Star Wars

[Andrew P. Wilson:]

Thanks, Blake. Our industry has never been more vibrant and full of opportunity. Games are a global phenomenon. Digital is unlocking more growth and reducing barriers for the next billion players who experience games through new platforms, new ways to play and new business models. In this world, discovery and connection are critical. We are building our EA Player Network to connect more players through games and deliver fresh, engaging experiences every time they play. From single cross-platform identity profiles to more intuitive user interfaces and recommendation engines that help you find friends and get into the action faster, the Player Network will enable new ways to engage in-game and beyond. In our crowd, competitive and multiplatform world, EA is working to connect more players with each other through the games they want to play. Games should be extraordinary. With each game we make, we work to push the boundaries with creativity, technology and new ways to play. Our Frostbite engine is powering more of our biggest games and becoming a true differentiator, scaling across FIFA, Battlefield, Mass Effect and more to deliver stunning gameplay, incredible depth and entirely new modes. And mobile games from EA SPORTS to The Sims to Star Wars are tapping into the passion of our players and offering captivating ways to engage no matter where you are. Across our studios and labs teams, we're developing new types of games and breakthrough capabilities. From immersive and authentic VR experiences to new technologies that transform how we connect, we are constantly in pursuit of the next amazing thing for our players. Games also bring us together. Each day, millions of players connect through our live services, and this year, we'll bring even more ways to engage, including competitions accessible to all our players. In two weeks, tens of thousands of players will join us again to come to play our upcoming titles like Battlefield 1, Titanfall 2, and FIFA 17. Many more will watch the content streamed online from Cologne, joining the excitement and conversation about the games they love that are launching in the weeks and months ahead. With every game session, every social conversation and every connection between our players, we are building a powerful global community. We have outstanding new titles to launch in Q2 and much more to come through the rest of the year. Now Blake, Ken and I are here for your questions.

[Operator:]

And our first question comes from Stephen Ju with Credit Suisse.

[Stephen Ju:]

Okay. Thanks. Just wondering if you can share anything about NBA this year and what will change versus years past and whether you think launching off-calendar will meaningfully impact its prospects? And secondarily, is the Q4 launch of NBA, is that going to be the rule of thumb on a go-forward basis, or will you look to get this back on the calendar? Thanks.

[Andrew P. Wilson:]

So first off, as we think about NBA and we think about captivating a global fan base with NBA, we're very, very excited about what we just launched with NBA Live on mobile. As we said in the prepared remarks, it quickly went to number one in the free downloads and it's been performing extremely well. Engagement is high and better in terms of metrics across the board than we could've expected and better in terms of metrics than many of our other sports games so far. So that leads us to believe that we have an exciting opportunity with NBA and an exciting opportunity with sports on mobile all together. The broader NBA plans, we don't have anything more to announce right now other than the team continues to work diligently on ensuring that we are delivering great NBA experiences on any and all devices that fans want to play on. And we believe that, as we are able to announce more around our plans, that it will be very exciting for fans across all devices.

[Stephen Ju:]

Thank you.

[Blake J. Jorgensen:]

Next question?

[Operator:]

And our next question is from Justin Post with Merrill Lynch.

[Justin Post:]

Thank you. Can you help us at all with your Battlefield expectations in your guidance and whether you've changed those at all post E3? And then you are buying back quite a bit of stock, but you have a lot of SBC. Now that you're going to GAAP, do you think you can lower SBC? And as you do buybacks, do you think you can really lower that share count over time? Thank you.

[Blake J. Jorgensen:]

Yeah, let me hit both of those, Justin. First, we were very pleased at the reaction of players at our EA Play. I think you got a chance to play it yourself. It's been very, very popular, and the feedback has been extremely strong. We tend not to try to raise guidance too early in the year. We would like to see a little more demand metrics on all of our products, particularly Battlefield and Titanfall, before we make that decision. Gamescom is a very important beat that's coming up in a couple of weeks in Europe, and then obviously the potential for betas around those products will help us derive better demand metrics. Last year, if you remember, we did raise guidance coming out of the first quarter because our initial forecast on Battlefront, the Star Wars title, was relatively low, and we moved that up. We've got a fairly normal forecast for Battlefield and Titanfall, so we're not moving those yet, but we're still super optimistic about the titles. I'm very excited. So, more to come in the future. But we felt it was just too early in the year to try to move guidance on any of the titles going forward. On the share count piece, we have been over time bringing down stock-based compensation. With an important part of the overall compensation, we feel it's important as part of our employees and executives to bear some of the risks of the stockholders. And having your compensation as part of that is critical. But we also recognize that we need to bring all compensation down over time to continue to be profitable as a company. We balance that with the requirements of attracting the greatest people that we can in the industry, and we feel like that mix is a pretty good mix today. But we will obviously be trying to drive down the share count between a combination of managing aggressive buybacks as well as prudent management of our overall compensation pool.

[Justin Post:]

Okay. Thank you.

[Operator:]

Your next question is from Colin Sebastian with Robert W. Baird.

[Colin A. Sebastian:]

Great. Thank you. I wonder if you could describe overall trends with (28

[Blake J. Jorgensen:]

Okay, Colin?

[Colin A. Sebastian:]

Yeah?

[Blake J. Jorgensen:]

Colin, we're having a hard time hearing you.

[Colin A. Sebastian:]

Can you hear me now?

[Blake J. Jorgensen:]

Yeah.

[Colin A. Sebastian:]

The first question was describing trends you're seeing in attach rates for catalog titles, and that's just as a measure of the progress of comps in the cycle. And then secondly, I was hoping for just a clarification or update on the multi-year framework for revenue growth that you laid out at the Analyst Day. I believe you initially indicated an incremental $1 billion in revenue over two to three years. I wonder if you look through the pipeline and the progress you're making, how much of that potential there could be to that framework. Thank you.

[Blake J. Jorgensen:]

Sure. So on attach rates, we're continuing to be excited about the growth of the overall console business. And I think the plans that were announced at E3 around both Xbox and PlayStation were viewed in the industry as very positive. I think moving beyond the notion of – or jumping into the compatibility issue head-on and trying to stop the notion of having consoles that are not compatible will help the software side of the equation dramatically over time, and I think that's a big plus. We continue to believe that we'll see upside in the number of consoles sold this year. And the software attach rates stayed pretty consistent with what we've seen up through the cycle so far. And so all of that I think bodes well for the overall cycle and should continue to help us drive upside. Now on the revenue growth, the numbers I laid out at the Analyst Day were basically, if you take our year-end fiscal 2016 results and you look out over the 2020 to 2022 timeframe, we believe that we could add another $1.5 billion of revenue from areas such as genre growth, moving into the action genre, continuing to grow our mobile business, continuing to grow our business in Asia and other parts of the emerging markets around the world. And we believe that could then continue to drive free cash flow growth and earnings growth. And $1.5 billion of additional revenue should be able to drive $1 billion in operating income and just under $1 billion in free cash flow growth during that time. Obviously those are all non-GAAP numbers, so. And we feel confident about the progress that we're making there.

[Colin A. Sebastian:]

Great. Thank you.

[Operator:]

Your next question is from Drew Crum with Stifel.

[Drew Crum:]

Okay. Thanks. Good afternoon, everyone. I wonder if you guys could comment on the timing of FIFA Mobile, what your expectations are. And I believe your guidance for mobile for the year was 15%. I know that's on a non-GAAP basis, but it looks like you're off to a very good start for fiscal 2017. Any update on expectations for mobile as a whole? Thanks.

[Andrew P. Wilson:]

So I'll take that. Thanks, Drew. So a couple of things. One is, mobile is going strong for us. We're seeing growth in the mobile market that is outpacing some of our early expectations for the broader industry. Star Wars

[Drew Crum:]

Okay. Thanks, guys.

[Operator:]

Your next question is from Brian Pitz with Jefferies.

[Brian J. Pitz:]

Thanks for the questions. On Madden, with unique players up 20% and mobile players up 25%, can you discuss what is driving this user growth and what role Ultimate Team is actually playing here? And then on mobile, with Star Wars

[Andrew P. Wilson:]

I'll grab the first half and I'll let Blake take the second half. As it relates to our broader Madden community, again, the fan base of the NFL continues to grow. It's a great league. It's a sport that's very, very important to the population of North America and even growing internationally right now in Europe and Mexico and other parts of the world. Our Madden development teams have been very, very focused on a couple of vectors over the last couple of years. And you've seen this kind of manifest in both console and mobile as we've come forward. The first is about how do we bring on new players and then how do we keep players engaged over time. And, of course, quality is at the very core of that, but on-boarding, user interface, tutorials, training, things that really ignite the passion for new players and get them into the Madden community and playing and competing for the love of the sport as well as providing ongoing innovation and live services and ongoing community-based events that keeps our long-term fans and our long-time fans more deeply engaged. You're going to continue to see this across both Madden and our sports games and our broader portfolio. The global player community continues to grow. Mobile brings players in. Many of those players choose other modalities of play, like console. We see it as our objective to continue to deliver great experiences to new fans as well as meaningful and long-term engagement in live services to our long-time fans.

[Blake J. Jorgensen:]

I think on Galaxy of Heroes, what makes a great game is a deep engagement model, some reason for people to come back to enjoy something each day or each week. And we've cracked that code, we believe, inside of the console base. Ultimate Team, as you are all well aware of, it's a deeply engaging way to enjoy the sports you love as well as the video game you love. That same mechanic can work well inside of a mobile game, not just in sports, but also in games that we're proving with Star Wars

[Brian J. Pitz:]

Great. Thanks.

[Operator:]

Your next question comes from Chris Merwin with Barclays.

[Christopher David Merwin:]

All right. Great. Thank you. I just had a couple, and apologies if this was covered. Just in terms of the Player Network, I was just trying to get a sense of where you are in rolling that out, and to what extent we actually saw the benefit of that in the Ultimate Team result that you delivered this quarter? And then should we see maybe even more of an impact later in the year as it relates to your marketing costs as you roll out the big first-person shooters? And then just a second question on the mobile business; just wondering if there's any impact that you saw from Pokémon GO in the quarter. Augmented reality turned out to be this huge mass market feature that people really like. So do you have any plans to integrate augmented reality into your mobile games? Thanks.

[Andrew P. Wilson:]

Okay. So on the Player Network, you're going to hear a lot more about this from us. As we look to the future, as we think about where games are going, we see some fundamental problems arising if you are a gamer. So in a world where gamers are playing more games across more devices through more business models in more geographies than ever before, the concept as a player of always being able to stay connected to your friends and always being able to stay connected to the games you love, irrespective of what device you play on, is going to be an important problem to solve. We believe that the investment that we've been making, our core digital platform, with an ID that travels with you across devices with a single data infrastructure that allows us to always understand the full 360-degree view of you as a player and all of the services that are built on top of that, that allow you to connect with your friends across devices, is going to be an imperative part of our future. What you're starting to see now is this lineup inside of – across our console games, across our mobile games. We're making tremendous headway. That means no matter where you play, you can remain connected to your friends. If you move from iOS to Android and you are using our ID system, you do not lose your game progress. As you start to think about the communities that we build and connecting with those communities, particularly in things like Ultimate Team, we're seeing tremendous engagement where we are able to deliver you, by virtue of this Player Network, experiences that are personal, contextual and meaningful to you and your friends. We're seeing that the engagement improve dramatically and we're that seeing that players are opting into more and more of our games because we are finding a way to present them with opportunities that are meaningful and personal for them. You're going to see more and more of this in the future. We expect that it will continue to become a powerful tool in how we engage with players, but as importantly, how players engage with each other. And in the broader network world that we now live in, the power of our network will be directly proportional to the number of players inside the network and the strength of connections between the players inside that network. And a lot of what we are doing as it relates our core digital platform development, our single engine development and our broader portfolio of game development is all in service of manifesting the strength in that network. As it relates to Pokémon GO, great question. First, as a comment, I think that what that team has done is very, very strong. It's a great blend of an IP that we have known and loved for the best part of 20 years and a new technology that introduces that to a new audience through mobile devices. What you've heard from us is that we have been working on both VR and AR for some time. We have made some announcements around VR in mobile and on console with PlayStation VR, and we're going to continue to invest there. As you can imagine, we are energized by the success of Pokémon GO. We have tremendously strong brands that are unbelievably social in nature, where we believe that the participation at a community level through AR will just heighten that experience. And we have been working on some things for some time and we'll continue to work on those, and we'll be ready to launch them at a time where we think we can better engage communities through AR.

[Blake J. Jorgensen:]

And, Chris, Pokémon really came out after our quarter ended and, in a broader sense, in global rollout. But if we look at the daily revenue trends even after it's come out, we haven't seen much impact. I think it's brought in a lot of new game players and a lot of people have been involved with it, but it hasn't really detracted from any revenue that we're seeing in our regular mobile games.

[Christopher David Merwin:]

All right. Great. Thank you.

[Blake J. Jorgensen:]

Next question?

[Operator:]

Your next question comes from Eric Sheridan with UBS.

[Eric J. Sheridan:]

Thanks for taking the questions. Maybe one big picture and one on the Star Wars franchise. Big picture question, Andrew. Would love your thoughts on how we should be thinking about the publisher community and how it's going to approach the console upgrade or mid-cycle console upgrade cycle, however you'd like to frame it, that we're going to see from Sony and Microsoft and Nintendo over the next 12 months, plus or minus, how you're preparing for that, what that might mean in terms of going to market, making consumers aware of your titles and managing through that transition. And then on Star Wars, we saw the announcement at Star Wars Celebration. It looked as if the expansion pack this year is going to be more tightly intertwined with the actual movie content that comes out in December. What might that mean for the breadth of the platform going forward as well as maybe even marketing efficiencies, since the content could be so tied closely with the movie? Thanks, guys.

[Andrew P. Wilson:]

So on the first question, at a macro level, we're excited about what Sony and Microsoft have announced. The reality for us is, again, in a networked world, liquidity of players is really, really important. And what we've seen over the last decade or more with respect to PC gamers is that community has continued to grow and it has grown a world where the hardware refresh cycle has been disconnected from the software refresh cycle. And what that's meant is that irrespective of what kind of device you have within kind of a seven to 10-year timeframe, you're able to play with a much, much bigger global community. What we see now with the things that have been talked about with the mid-cycle refresh is that only going to enhance the size and engagement levels inside the communities. For us as a publisher, we're in a very strong place. We've been building across platform and across console and for scalable architectures like PC for some time. So the notion that we would build once an experience that can scale up and down across an entire spectrum of consoles, whether the first phase, the second phase or the third phase over time is not something that's foreign to us and something that we're very energized about because, again, I think we have strength in a networked world and we have strength where there is a requirement to build these scaled experiences that keep players connected. So on balance, we think this is great for the industry. It will almost certainly extend the console cycle almost to an infinite level if we get to a point where there's just constant hardware upgrades and constant software upgrades but we are able through the scaling of our games to keep the community always together. More broadly thinking about the Star Wars franchise, again, this is a long-term play for us. We're very excited. We were overjoyed with the performance of Star Wars Battlefront. We're overjoyed with the 6.6 million players that played the game through Q1. We're continuing to support that. As each movie comes out over the time of our relationship, we expect that the Star Wars community will continue to grow and we will be doing our best to align, in some cases, the content and experiences and, in some cases, just the passion for Star Wars. But certainly aligning what we're doing around the Star Wars universe with what's more broadly happening with Star Wars pop culture. And we think that's a win as we continue to live up to the fans long term.

[Chris Evenden:]

Next question?

[Operator:]

Your next question comes from Mike Olson with Piper Jaffray.

[Mike J. Olson:]

Hey, everybody. I had two question. You mentioned earlier that you haven't changed your assumptions that are built into guidance for Battlefield 1 and Titanfall 2. I don't recall if you provided what kind of unit expectations you have for those titles. Is that something that you would be willing to share or share again if you have already talked about it? And then secondly, do you anticipate any Olympics-related distraction that could impact player engagement over the next month or so? Have you ever seen anything from Olympics in the past? Thanks.

[Blake J. Jorgensen:]

So on the guidance, we've talked rough numbers with people. We've told people that typically a Battlefield title does about 15 million in a year. Our guidance is slightly under that. And we hope that that excitement builds and it will clearly go through that number. But for right now, it's slightly under that number. And Titanfall did a little more than 7 million units last time. It was early in the cycle and one of the few titles out there. We think it'll do more than that, but it's probably closer to 10 million than it is to 15 million as built into our guidance. So closer to 9 million to 10 million on Titanfall and just under 15 million on Battlefield 1. In terms of the Olympics, Andrew can probably jump in here. But I think oftentimes, if there are sports going on that we have games associated with, there's a lot of positive. As you see with the FIFA Ultimate Team, numbers relative to the Euro and the Copa America. We didn't have programs directly linked to those, but people engage in those because their favorite players are playing on new teams or in new tournaments and that drives them in. So I think in general, athletics bring people back to athletics. If they're watching on TV, they're oftentimes going to try to imitate that somewhere else and that may benefit some of our games.

[Mike J. Olson:]

Thank you.

[Operator:]

Your next question comes from Eric Handler with MKM Partners.

[Eric O. Handler:]

Thanks a lot for taking my question. Just looking at your extra content free-to-play line in digital, obviously your biggest segment within digital, growth in 1Q was just a little more than 1%. That's your slowest growth quarter I think ever since you started putting out those metrics. Was there anything specific that – was it timing of just the releases that drove that number so below average? Or was there something unique there? And how do you see that playing out over the rest of the year?

[Blake J. Jorgensen:]

Yeah, so you're referring to growth in extra content? Is that what you're saying?

[Eric O. Handler:]

Yes, Blake.

[Blake J. Jorgensen:]

Yeah, so growth in extra content is really masked by the fact that we last year in the quarter had a $30 million deferral of...

[Eric O. Handler:]

Oh, that's right.

[Blake J. Jorgensen:]

FIFA Online 3 revenue that popped all in Q3. So if you take that out, you saw strong growth in extra content. Clearly, if you look at the underlying growth of Ultimate Team, you're continuing to see extremely strong growth in Ultimate Team led by FIFA across the full Ultimate Team spectrum. And so we are pretty confident that our guidance for the full year of 10% growth of extra content will be on track and we should easily be able to see that over time. Similar dynamic and full game downloads, it was flat year-over-year. But almost all of that flat was driven by the fact that in Q1 last year, we had a huge amount of sales on Battlefield Hardline, a very large title. We didn't have a similar large title. Obviously we had one title in the quarter, Mirror's Edge, but a much smaller title than the comparison as Battlefield Hardline last year. So we're very confident that the digital growth is continuing and just cautioning people to always make sure they look at drivers of the underlying – understand the underlying component.

[Eric O. Handler:]

Much appreciated, Blake. Thanks.

[Blake J. Jorgensen:]

Thanks.

[Operator:]

Your next question comes from Ben Schachter with Macquarie. Benjamin Schachter - Macquarie Capital (USA), Inc. Hey, guys. A few questions. First, just broadly on retail. As you move to more digital full game downloads, can you just broadly discuss how it's impacting relationships with the key retailers, how that will evolve over time? And then secondly, PlayStation VR likely to first (49

[Blake J. Jorgensen:]

So why don't I just hit the piece on the U.K. real quick. So we're hedged through – out 18 months. Those hedges are not 100% each quarter, as they decline over time, but we're well hedged for the rest of this year, so we don't see more FX headwind that would impact the sales of FIFA or Battlefield or Titanfall. We also don't see any changes in the Brexit driving changing in people's desire to play video games. So we don't see an impact there. Do you want to touch on the VR piece?

[Andrew P. Wilson:]

Yeah, so on PlayStation VR, again, we're very excited about this. I think to your point, given its price point and modality of play, it's one of the more accessible forms of virtual reality play right now. We've got a great experience coming later in the year that I've played and it's super fun and super exciting. I think that part of the reason people play games is to kind of immerse themselves in a fantasy and escape and fulfill these fantasies with their friends. Particularly when we design games, we design them on a big screen TV and we have to overcome, as designers, this spatial disconnect between us and the television. Of course virtual reality, we don't have to overcome that spatial disconnect. So the more that we can introduce people to low barrier to entry virtual reality, I think the faster it's going to take off as an industry. And so us as a company, we're looking at how we can invest across all elements of the spectrum from the mobile elements right up to the high-end elements. And PlayStation VR I think is going to be a great step in the evolution of our industry and the evolution of how people play games and we're going to continue to invest there.

[Blake J. Jorgensen:]

And then on the retail question, we have, we believe, strong relationships with a whole set of global retailers around the world, some large, some small. We try to maintain those and we try to build a dual strategy where we're pushing digital but we're also using the retailers for what the retailers are really good about, which is marketing and really pushing out the information about the games and the excitement around the games. We're always going to have that as a dual strategy. We believe the retailers will be around for a long period of time and are important in our system and we try to have a fine balance there. We try to help the retailers be involved in some of the digital business where they can, and just maintain a strong business for them as well as continuing to grow our business, both digitally and physically. Next question?

[Operator:]

And your next question comes from Mike Hickey with The Benchmark Company.

[Michael Hickey:]

Hey, Andrew and Blake. Great quarter, guys. Thanks for squeezing me in the question-and-answer here. I'm curious – two questions, one on FIFA 17 on the Story Mode, who the incremental player is there that you think will show up and if you fear at all there could be any sort of pressure on Ultimate Team and I guess Story Mode cannibalizing Ultimate Team to some level? And second question, any visibility on fiscal 2018? At least on the surface – obviously we're Q1 2017, so it's quite a ways away, but on the surface it looks like the environment could be a bit challenging at least in driving sales growth and how you think about maybe M&A as a potential driver for fiscal 2018 growth? Thanks, guys.

[Andrew P. Wilson:]

Let me touch on the FIFA piece, and then I'll let Blake take on FY 2018. As we think about our global community of gamers, again, FIFA is one of the biggest games on the planet. It attracts a very diverse playing population

[Blake J. Jorgensen:]

Yeah, remember still just a little bit more than 50% of all people who buy FIFA actually engage in Ultimate Team. We see that as a huge opportunity to bring more people into Ultimate Team. And there are many people that don't understand how the soccer system might work or works around players and development of players, which is critical to the foundation of Ultimate Team. And so we believe this is a way to continue to bring people into that. On the fiscal 2018, we're obviously not prepared to give guidance yet on 2018 anything more than we've already said in the past. We're excited and hard at work at the next Star Wars Battlefront title. We've got a couple of great new opportunities coming that we haven't yet announced that we'll give you more insight on. We've got some great things going on in mobile. We're excited about the continued growth of the FIFA franchise and Madden franchise, NHL, NBA franchise, and leveraging mobile in all of those cases. And I think the one thing to remind people of that oftentimes gets forgotten, is to the extent that we have a very successful Battlefield 1 and Titanfall 2 launch, those will be a big benefit to next year's plan. Just as you're seeing now, we still have 11 million people engaging in Battlefield 4. And so that Battlefield world is incredibly important; the Star Wars world, the same way. We'll continue to leverage that as we drive through 2017 and into 2018 and 2019.

[Michael Hickey:]

Thanks, guys.

[Operator:]

Your next question comes from Neil Doshi with Mizuho.

[Neil A. Doshi:]

Great. Thanks, guys. Given the increasing engagement on the mobile side as well as on the console side, have you guys thought about getting more aggressive in terms of advertising as a way to get players to pay more as well as to play more? And then on the international side, it looks like international as a percent of revenue jumped to about 59%. It's been higher than it has been in the past couple of quarters. Any color in terms of titles and/or regions that drove that growth? Thanks.

[Blake J. Jorgensen:]

So on mobile advertising, we do a little under $100 million in mobile advertising. We try to steer – we try to do a couple things. We try to keep people in our networks, so steer them to other games in our network, which is powerful. That doesn't make us money, it just keeps people in the network. And, two, the next piece is we might tend to show people advertising if they're not monetizing in other ways. What I will tell you is because most of mobile game use is anonymous, it's hard to collect data on your mobile users. That means the value of that advertising or the CPMs are fairly low and thus the reason it's less than $100 million for us even though we have a large mobile network. We'll continue to experiment with that and we'll continue to look at it, but we don't see that as a giant revenue growth opportunity for us at this point in time. On the international piece, I think some of it's simply driven by the strength of FIFA and FIFA Ultimate Team. Much of FIFA's marketplace is international, particularly Europe. And as that business continues to get stronger, you're going to see that skewing, particularly in a quarter where FIFA Team is so important where there's not as many new releases that'll skew the revenue to the international. One last question?

[Operator:]

And our final question is from Doug Creutz with Cowen.

[Doug Creutz:]

Hey, thanks. I'm going to get way down in the weeds here. There was a story towards the end of the quarter that your in-form players weren't interacting correctly with the chemistry mechanic in FIFA Ultimate Team. It's one of those things you see on Reddit. Has that had any impact on Ultimate Team monetization as you got into the September quarter? And do you feel like you have your arms around getting the mechanics fixed and making sure the player base is happy with the outcome?

[Andrew P. Wilson:]

Yes, so that is getting in the weeds a little bit, but I'm happy to have a conversation about it. So as with any live service, there are times where we find bugs in the software. We stayed very, very close to the community, again, engagement of our community. Ensuring our community has the utmost and highest experience when playing our games is very, very important to us. And so what I'm happy to say is the team was very close, they heard that feedback from the community. They rallied very quickly, the found the bug. They fixed the bug and deployed a fix very, very quickly and were very transparent and open with the community throughout every step of the way. As a result of that, we didn't see any impact to the engagement or the broader interaction with the mode, and quite the opposite. I think what we found was the community deeply appreciated that we were connected with them, that we were listening to them, that we acted quickly, transparently and openly and we solved the problem going forward. As we think about our live services future, this is really how we need to operate as a business. We won't always get the code exactly right, but it's as much about how we operate when we don't quite get it right as it is about when we do. And the commitment we make to gamers is to be very open and transparent with them, to listen to them and always working diligently to deliver the best experience possible.

[Doug Creutz:]

Great. Thanks, Andrew.

[Blake J. Jorgensen:]

With that, I think we'll end the call. I do appreciate everyone's patience around the GAAP to non-GAAP transition that we're making. I encourage everyone to dig in to make sure that you and the rest of your investors understand what the real numbers are because we have already started to see some disconnects between people who don't understand it. So appreciate everyone here on the call communicating the right numbers to people and helping us make this transition. So we'll talk to everyone next quarter.

[Operator:]

Thank you for your participation. This does conclude today's conference call, and you may now disconnect.