Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I'll turn the meeting over to your host, Mr. Chris Evendin. Sir, you may begin.
Thank you, Kai. Welcome to EA's fiscal 2016 Q1 earnings call. With me on the call today are Andrew Wilson, our CEO and Blake Jorgensen, our CFO. Peter Moore, our COO, will be joining us for the Q and A portion of the call. Please note that our SEC filings and 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 and a transcript. A quick calendar note, our Q2 earnings call is scheduled for Thursday, October 29. 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 ks 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, July 30, 2015, and disclaims any duty to update them. During this call, unless otherwise stated, the financial metrics will be presented on a non GAAP basis. 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, as a substitute 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.
Thanks, Chris. Q1 was a great start to fiscal year 2016, and we continue our journey to put our players first and deliver amazing entertainment experiences for them. We're building deeper connections with players in our games and live services. There is tremendous excitement for our upcoming titles, and we see profound new energy in our industry. Our Q1 results were excellent with revenue, margins and earnings above our guidance.
Our top games and live services including EA Sports FIFA 15, Battlefield: Hardline, The Sims 4 are engaging players around the world with fresh new experiences. We see continued strength in our mobile titles with new games coming later this year. EA is executing well against our plans for FY 'sixteen and with ongoing strength in our digital business and growing anticipation for our upcoming titles, we are raising our full year guidance today to reflect momentum across the portfolio. Our industry is hitting a powerful stride as we advance further into the new global era for games. The Xbox 1 and PlayStation 4 installed base continues to grow and show great strength, driving well beyond adoption rates of previous generation devices.
The opportunities in mobile as well as new service and delivery models are opening up more ways to bring players into our games than ever before. At the E3 conference in June, the appetite for great new games was clear. Players on all platforms are ready for new experiences that capture their imagination with creativity, innovation and breakthrough gameplay. EA is in a strong position to deliver. We had an outstanding E3 this year, showcasing 15 new games to our players, media and partners.
Throughout the event, magnitude and realism of its gameplay. We revealed new expansion a new expansion for Star Wars: The Old Republic and announced a new Star Wars mobile game. We unveiled new experiences for original IP with Mass Effect Andromeda Plants versus Zombies: Garden Warfare 2 and surprised with the unexpected charm of Unravel. We celebrated the return of Need for Speed, captivated players with the authenticity of our upcoming sports games and detailed catalyst. Attendees were able to go hands on with all of this year's titles at our E3 booth.
Most importantly, through content and social conversation, we brought the E3 experience to players around the world. Millions of viewers joined the stream of our live event and our titles were mentioned more than 500 times per minute on social media during the week of E3. Trailers, gameplay and live streams of our games were viewed over 53 1,000,000 views on social platforms, our most popular content ever at E3. It was tremendous to see such positive reaction from players and feel the excitement level for our games continuing to build. We're looking forward to sharing more at Gamescom in just a few days.
In addition to our upcoming games, our live service today are ecosystems of ever changing content for our players. Battlefield 4 and Battlefield Hardline players launched a combined 170,000,000 online gameplay hours in Q1 and we'll be bringing new expansion packs to both experiences in the coming months. The Sims 4 play community continues to grow and engage deeply with the game as we deliver more updates and new content. And we saw gameplay hours in our mobile hit The Sims Free Play increased 85% year over year. In addition, our EA SPORTS Ultimate team modes averaged over 2,000,000 players per day in Q1, up nearly 20% year over year.
Amazing and creative new experiences, dynamic live services and deeply engaged communities built on strong and meaningful relationships with our players. These are the building blocks of our long term strategy for Electronic Arts. Through our key franchises as well as experiences with new and original IP, we have the ability to reach more players than ever. EA Access, Origin and our new Xfinity Games beta are bringing more players in to compete, connect and fuel their passion for games. And with our digital infrastructure, analytics and live services, we are evolving and personalizing experience for each player and exploring how cross game services can create additional value for everyone.
After a strong Q1, the stage is now set for us to deliver a slate of groundbreaking and stunning new games through the remainder of FY 2016. I'll now turn the call over to Blake for a deeper look at our financials.
Thanks, Andrew. PA's non GAAP net revenue was $693,000,000 which was $53,000,000 or more than 8% above our guidance. The quarter's revenue was 11% lower than prior years because we had no console title launch this quarter. And the year ago quarter included the launches of Titanfall for Xbox 360, EA Sports FIFA World Cup 2014 and EA Sports UFC. Our core business was strong and at constant currency this quarter's revenue would have been within 4% of last year's.
As I discuss the results for the quarter, bear in mind that FX changes have had a dramatic impact on year on year comparisons. The euro, for example, fell nearly 20 percent against the dollar from the Q1 last year to this year's Q1. In the Q1, EA Sports FIFA 15, Battlefield Hardline and The Sims 4 drove solid revenue and delivered excellent margins. This demonstrates the power of our deep catalog of popular IP, which delivers a base of stable revenue throughout the year. The revenue and margin beat versus guidance were driven by better than expected performance from FIFA Ultimate Team and The Sims 4.
Our non GAAP digital net revenue for the quarter increased 10% year over year to $532,000,000 77% of this quarter's revenue. The trailing 12 month digital net revenue was up 20% to $2,280,000,000 Breaking down our digital revenue into its key components highlights the performance of each of these businesses this quarter. Extra content and premium contributed $255,000,000 up 21% over the prior year. The principal driver of this growth was FIFA Online 3 in China. Dollars 31,000,000 of the FIFA Online 3 revenue was deferred from previous quarters as noted in our last earnings call.
Total Ultimate Team was down 6% year on year, but up 3% on a constant currency basis, even with the World Cup boosting FIFA Ultimate Team engagement levels last year. Mobile generated $122,000,000 in the quarter. Digital extra content and advertising was up 11% versus the prior year to $115,000,000 while premium mobile full game download revenue was just 7,000,000 percent compared to the prior year. We expect premium full game download revenue to remain at this minimal level for the foreseeable future. Full game PC and console downloads generated $84,000,000 of revenue, up 18% over the prior year.
We continue to see the digital downloads increase as a percentage of full game sales, although this quarter was particularly high since our catalog titles typically skew more towards digital downloads than do newly launched games. Subscriptions, advertising and other digital revenue contributed $71,000,000 down 11% from last year due to the natural decline in Battlefield 4 premium revenue. EA Access is delivering strong sustained growth and we continue to build this value to gamers as we add more games to the Vault. Titanfall is now in the Vault and Dragon Age: Inquisition will join us at the end of the summer, bringing the total titles to 13. Moving on to gross margin.
Our non GAAP gross margin for the quarter was 76 0.8%, an increase from last year's 70.2% and better than our guidance of 74.5%. Growth over the prior year was driven by product mix, the shift to digital and FIFA Online 3 in China. We exceeded guidance largely through better than expected performance from FIFA Ultimate Team and the continued success of The Sims 4, which delivers very high margins by virtue of being a PC title based on wholly owned IP. Non GAAP operating expenses for the quarter were $472,000,000 up $13,000,000 or 3% year on year. The increase over last year was driven by R and D, payroll tax expenses related to stock based compensation, which have risen with the stock price and by the extra week in the quarter.
This was offset by FX and lower marketing costs as a result of no major launch this quarter. The resulting non GAAP EPS was $0.15 a share, which is $0.15 better than guidance due to strong revenue and higher gross margin. As a reminder, this is calculated at our new tax rate of 22%. Our cash and short term investments at the end of the quarter were $2,880,000,000 or approximately 9.2 $3 per share. 64 percent of this cash and short term investment balance is held onshore.
Net cash used by operating activities for the quarter was $71,000,000 On a trailing 12 month basis, operating cash flow was $992,000,000 a record for this period. During Q1, we repurchased 2,200,000 shares at a cost of $132,000,000 Our $1,000,000,000 stock buyback program was initiated partly partway through Q1 in May 2015 and has a 2 year time frame. As of the end of the Q1, there was $925,000,000 left on the $1,000,000,000 plan as some of the stock repurchased during the quarter was bought under the old plan. Due to the strength of our business, we are increasing our full year guidance. For fiscal 2016, our non GAAP guidance for revenue is up by $50,000,000 to $4,450,000,000 and our non GAAP EPS increases $0.10 to $2.85 per share.
This results in an expected operating margin of 27 percent. It's still early in the year and with Q1 representing less than 16% of expected full year revenues, we believe some EPS. Regarding cash flow for the year, we are reiterating our operating cash flow guidance of approximately $1,150,000,000 Our capital expense forecast remains approximately $100,000,000 resulting in a free cash flow forecast of approximately $1,050,000,000 Guidance for our 2nd quarter is for non GAAP net revenue to be $1,075,000,000 12% lower than last year's $1,220,000,000 In this quarter, we're launching Madden NFL, FIFA, Rory McElroy PGA Tour, NHL and NBA Live. While last year's Q2 saw the launches of our major sports titles, it also included The Sims 4. In addition, FX presents a year on year impact of around $100,000,000 to Q2 revenues.
Non GAAP gross margin is forecasted to be 63%. Again, the main difference between this quarter and a year ago quarter is the launch of the Sims 4. We expect our Q2 non GAAP operating expenses to be $510,000,000 up slightly year on year, driven by an increased investment in R and D and offset by FX and savings and marketing. This resulted in non GAAP diluted EPS of $0.40 per share as compared to $0.73 per share last year. Our Q2 GAAP net revenue is expected to be $815,000,000 as compared to $990,000,000 in the prior year.
GAAP loss per share is expected to be $0.58 as compared to $0.01 per share profit in the prior year. We're very pleased with our Q1 results. Our ability to reliably generate earnings even in the absence of major launches is a testament to the value of our broad IT portfolio, our catalog and our robust live services. Digital extra content and mobile continue to provide additional layers of consistent revenue. On top of this, player reaction to our marquee titles at E3 gives us great confidence in our competitive position as we look forward into this year and beyond.
Now I'll turn the call back to Andrew. Thanks, Blake.
We have a great deal ahead of us over the next three quarters as we prepare to deliver a range of new titles from our key franchises and original IP as well as more new content for players in our live services. We will have 4 more EA Sports experiences launching through the summer and fall: Madden NFL 16, NHL 16, FIFA 16 and NBA Live 16, all featuring engaging new modes and groundbreaking gameplay for our players. Need for Speed will arrive in November and fans are loving the authentic car culture and deep customization that we've shown so far. And of course, Star Wars Battlefront will launch on November 17. The excitement for this game continues to build.
It took home 45 awards from E3 including Game of the Show from IGN and Best Online Multiplayer from the E3 game critics. We look forward to unveiling new dimensions of Star Wars Battlefront and letting players go hands on next week at Gamescom. We have more new experiences coming throughout the year. Our live services will continue to evolve with new content. We'll have some great new mobile games and we're excited to have 3 new and original IP titles launching in Q4.
Looking further ahead, we're preparing more new games for our players. The reaction to a first look at Mass Effect Andromeda at E3 was incredibly positive. We have a new Battlefield experience coming in Q3 FY 2017 and another new Star Wars project being led by the dynamic creative team of Jade Raymond and Amy Hennig. These are just a few of the new experiences in development across our studios today. From the creativity of our teams to the technologies we are building to the passion for play that we share with our players, are pushing the boundaries for games in an effort to deliver the next amazing experience.
Through our games and live services, we will immerse players in new worlds, introducing engaging new characters and transport them into adventures that capture the imagination. In a new global age for games where more time is spent playing than ever before, we are also building a future with relationships at the core. Through our network, we are connecting players with each other and delivering experiences that are meaningful every time they play. I look forward to sharing more updates on our progress in the quarters ahead. Now Blake, Peter and I are here for your questions.
Right Kai, we're ready
for questions now. Thank you.
We'll take the first question now, please.
Thank you. We will now begin the question and answer session. Our first
Great. Thanks a lot. So I just had one on gross margin. I think Blake you touched on some of this, but it was a very impressive margin that you posted. Just hoping if you could provide a little bit more detail on what in particular drove that through a combination of, I guess, digital downloads, CIFA Online in China and then whatever else?
And then just secondly, in terms of Ultimate Team, I think you commented that it was up slightly on a constant currency basis, but down on a reported basis. I know last quarter there was a legal coin sale issue and I know you're working to resolve that. So just curious where you stand as it relates to that? And then how we should be thinking about growth for Ultimate Team for the rest of the year in the context of your extra content revenue?
Thanks. Sure. So first on gross margin, the gross margin a couple of things to remember in just year over year comparisons. One last year both Titanfall and UFC are royalty bearing titles. So they may have dampened last year's gross margin a little bit.
But the real driver for us was the strength as you noted FIFA on Line 3, obviously some of that deferred revenue, so coming in at very nice gross margins. But second and probably more importantly, the strength of the Sims 4. And I'd just give people a reminder, last year, the Sims started a little slow relative to our thinking. We talked about that in our Q2 earnings. But the strength of the Sims franchise is the layering in of expansion packs that really fuel not just the expansion pack revenue, but bring people into the core game.
And we were in a situation where many consumers were comparing the original Sims 4 game to the Sims 3 game with a long series of expansion packs. And as we now start to bring out expansion packs, this quarter than we thought, and we think that trend will continue, and we're very excited about it. And 4 this quarter than we thought and we think that trend will continue and we're very excited about it, not just because of the franchise, but because of the power that drives to the gross margin. And then last but not least, as you saw, the digital business as a whole was 77% of our total revenue and that included a large amount of full game downloads, which obviously enhances margin as well as all the other components of the digital business, which enhanced our gross margin. And that really helps the over delivery relative to plan.
Now in terms of FIFA Ultimate Team and I encourage Peter or Andrew to jump in on this if they'd like. First, we saw, as you said, Ultimate Team down slightly, but up on a constant the Q1 last year because of the World Cup and all of the the Q1 last year because of the World Cup and all of the people playing associated with the World Cup and the World Cup modes that we had in the game. We did see better performance of FIFA Ultimate Team than we expected. As you remember in Q1, we or the end of our last call before Q4, excuse me, we gave some warning that because of the illegitimate coin selling, we thought that we would see some slowdown in FIFA Ultimate Team, mainly because the actions we've taken to do price banding. Much of that will be corrected in the new version of FIFA Ultimate Team that comes out with FIFA 16 and we're excited about that and we don't see any change to our outlook for the overall Extra Content and Ultimate Team business in the future.
And as you can see, we were surprised that we did better than expected on Ultimate Team in the quarter, which also helped drive margins. There's a lot of excitement about soccer in the world. The Women's World Cup in Canada really drove a huge amount of excitement in North America. We're seeing a great amount of excitement across Asia. And we think that will continue to help drive both the FIFA product and the Ultimate Team product over time.
Thank you.
Next question?
Next question is coming from Mr. Ryan Geeb of Bank of America.
Hi, guys. This is Ryan calling in for Justin. First question is on OpEx. You've done a good job of managing those expenses the past several years and 2Q guidance shows some sequential growth there. Any color you can give on just where you are in terms of investing for the cycle and OpEx growth going forward?
2nd, Blake, can you just confirm whether or not Unravel was included in your prior outlook and just whether any of the guidance increase this quarter is due to unannounced or new titles or products? Thanks.
Sure. So let me hit OpEx first. OpEx the OpEx that we gave guidance on at the start of the year obviously hasn't changed in terms of the guidance. We have built into that OpEx R and D investment in both console and mobile products and that's why you're seeing a slight uptick. The OpEx this quarter was driven primarily by the options or RSU exercises and the tax expenses associated with those.
We didn't forecast the stock price to be as high as it turned out to be and thus it was a little bit higher than we'd expected. Still obviously within our guidance and we're comfortable with our full year guidance on OpEx. We're continuing to try to be extremely efficient in R and D and continue to try to build benefits in to drive marketing expenses around the great digital connection we have with our users, our gamers and consumers out there. And you'll hopefully see continued benefits of that over time. In terms of the guidance and products, Unraveled was in the original guidance.
I don't think the expectations around the love for Yarni himself was quite built into our guidance. And we were pleasantly surprised at E3 about how popular he was. But it's still a fairly small product and it's built into our guidance. We haven't added any products to our guidance. That was not the reason that we raised the number.
The number was raised primarily to the positive reception we saw across all of our products and the strength of the industry, as Andrew mentioned, the excitement we've seen around console gaming and the continued popularity of both Xbox and PlayStation and the strength of that going forward. So that was really the driver to our raised guidance.
Okay. And then one quick follow-up if I could on digital and the mobile. It's a pretty sharp fall off, but looks like the smartphone portion of that mobile is doing well. Can you help us with the phasing of mobile throughout the year or any products that we should be aware of that are coming out on mobile in the near term? Thanks.
We've talked about a couple of key products that are coming out in the back half of the year. I can't give you exact dates. We test our mobile products extensively. And so it's often hard to be able to guess exactly when the launch date is going to be. Clearly, we have the Minions as a key product.
We have a Star Wars product coming out. We have updates to some of our sports titles, which you'll see, and a lot of exciting expansions or additions to products like The Simpsons or SimCity Build It, which have continued to build off of the strength of our platform there. In terms of the actual phasing, hard to say. I don't think it changes our overall phasing that we put in our new guidance, But we'll update you as that comes along.
Great. Thank you.
Our next question is coming from Mr. Colin Sebastian from Robert Baird. Sir, your line is open.
Thanks. Nice quarter guys. I have a couple of questions. First off, a lot of anticipation around Star Wars obviously and it looked really great at E3. Just considering the release date is fairly fixed, I wonder how comfortable or confident you are, Andrew, around the studio's ability to launch a fully finished product by the time November rolls around?
And then are you sticking with the original $9,000,000 to $10,000,000 unit guidance for the game?
Thanks, Colin, and thanks for the congrats. We're feeling very good about the game right now. Again, as a reminder, this is a tried and true development team building on the Frostbite engine that's now launched a number of products on this platform generation. And we're coming to kind of the 3rd phase of development on this generation of products. So we feel like we have put all of the things in place that we need to deliver a great product.
We had thousands of people play at E3 in one of the more robust setups we've had for a shooter in our E3 booth in recent years. And we're looking at having literally tens or hundreds of thousands of people play it on over 200 units at Gamescom next week. So the code is all very playable, The quality is high and the feedback so far from the player base has been very positive. On the 9% to 10%, I'll let Blake take that one.
Okay. Yes. And just to clarify, no change obviously in ship date on that whatsoever. We're very confident that we should be able to hit that date based on what Andrew just told you. On the guidance, look, we're normally we normally do not raise guidance coming out of the Q1.
I think all of you know we have a fairly conservative mindset around guidance. This is the first time we've raised guidance in probably 10 or 15 years coming out of the Q1 because only 16% of our business is really booked in the Q1. We're really excited about Battlefront, but we're also really excited about all of our products. And that excitement drove us to increase our guidance in the quarter. We haven't yet started to think about or talk about publicly what that means in terms of units, partially because it's still early.
We want to see how the reaction is at Gamescom to all of our products including Battlefront as well as how the fall plays out. So I would assume we'll have that discussion in October before we ship products and more to come on that. But right now, think about the raise in guidance on revenue as strength across all of our products, including strength in the response around Battlefront.
Okay, Blake. Thanks. And just one quick one on the second quarter outlook versus a year ago. You mentioned the FX headwinds and Sims 4, the comp there. But you also have the higher console install base and digital possibility on the strength of the franchises.
But are there any other moving parts I'm missing that might have impacted your initial outlook?
Yes. No. And in fact, it looks like a lot of people on the street got ahead in terms of revenue. And I think that's because maybe people forgot that the Sims was in last year's quarter along with the sports titles. Obviously, no Sims this year.
We're expecting strong revenue out of FIFA, Madden, NHL and NBA, but those are obviously they were there last year as well. I think the biggest and really only headwind comes out of FX. And based on where we are today and FX rates today, we think that's relatively roughly $100,000,000 relative to last year. Okay, great.
Thanks a lot.
Next question is coming from Mr. Steven Zhu from Credit Suisse.
All right. Thanks. So Peter or Andrew, are you able to share some of the underlying user data for FIFA Online 3 in China, monthly active users, paying users, etcetera? If not, at least sort of a directional indicator on how this is ramping? And separately, if you are able to look at your user base for FIFA in the U.
S. And compare that versus Europe or even versus Korea where you think you are? And Blake, I think at U3 you talked about the possibility for an annual release of a Star Wars game as you take advantage of your license here. So where are you in terms of deploying development talent to make that possible? Thanks.
So the first question is, Timur, on Pfeifer on Line 3 as regards to this is, of course, with our partners in Tencent there. So it's a little early. As you recall, we went into soft launch. We're now in full commercial launch. We can probably share a lot more of that data in the next earnings call.
As regards to your question in comparison to the West, obviously, they're very different experiences. This is a free to play game that's built on the ultimate team format, but is not a Twitch type game, which regular FIFA game obviously is. So from that perspective, I think the overriding similarities of soccer fans around the world, and Blake touched on this, we're riding high on soccer currently right now coming off the Women's World Cup and with the new domestic leagues all about to start within the last 2 weeks. So obviously, having that FIFA license for us and been able to deploy it across multiple geographies with multiple partners and in particular in the biggest geography in the world with a very strong partner in Tencent gives us great opportunity. We brought forward the $31,000,000 from the previous quarter into this quarter here.
And as Blake has mentioned on the previous call, we're looking at somewhere in the region of about $10,000,000 to $15,000,000 per quarter as net revenue from
our plan in place, but we do have a long term contract with Disney. And we know Disney has plans for many Star Wars movies I do think what we have said is that our intention is to try over the next couple of years to have a first person shooter as one of the core titles this year. Obviously, Star Wars Battlefront next year another Battlefield title. And as Andrew said, we're working on some other Star Wars titles. Jade Raymond and Amy Hennig are working on a core title right now.
We don't have the timetable yet to announce those, but trust that you will see multiple Star Wars titles both on console and PC as well as on mobile. We have at least one mobile title that's going to come out this year and we have more in the process as well. So lots to come on Star Wars and you'll hear that as we discuss our future guidance. We're very excited about the franchise and about our partnership.
Thank you.
Our next question is coming from Mr. Brian Pitzer from Jefferies. Sir, your line is open.
Thanks for the question. Just a follow-up on Star Wars. Curious what you're seeing out of preorders. I know you've had 20,000,000 views on the trailer and a lot of marketing around it, but any comment on this translating into preorders on the title? And maybe how those preorders could compare to the last Battlefield at this point?
Then separately, an update on your console growth expectations. I know Sony just raised its expectations today for the year. I believe you're around 48000000 to 49000000 next gen boxes by year end. Any changes or updates? Thanks.
So on the preorders, we're seeing extremely strong preorders coming out of E3 as you might imagine. I will remind everybody on the call that more and more as we see digital start to take a hold with our consumers that preorders become less of a key indicator, key indicator as how we predict our business here. But as we came out of E3 and more importantly, as Andrew mentioned, as we come out for what I think will be a pivotal moment for Star Wars next week in Cologne, Germany, when 200 and 65,000 consumers will descend on the Cologne Convention Center on Thursday, all of whom will be trying desperately to get their hands on this title. We expect to see tremendous response from that. I've seen the build and the game looks very, very solid, and we're excited to be able to share that.
As regards to the question regarding installed base, yes, dollars 49,000,000 at the end of the calendar year. Just some data on that, we're now 20 months in and if we go like for like on the previous generation, we're up 44% install base hardware versus where we were with Xbox 360, PS3 et al. And our attach rate for software is slightly ahead as well. When correcting for full game downloads, digital full game downloads and hardware bundles, we're at 6.1% right now versus 5.9% in the same period in the previous generation.
And Brian, we haven't fully digested the Sony announcement other than to say that it's hugely positive. Every time either Sony or Microsoft brings out information, it's been on the positive surprise upside. I think the NPD data showing the success of the Microsoft 1 terabyte console as well as the continued strength in both Sony and Microsoft's product mix have been really strong. And the piece of that puzzle is if you were at E3, you saw the quality of software, not just ours, but the whole industry. And that bodes extremely well for generating interest in if you're sitting on the fence today getting out and buying a new console and we think that's going to do well over the next couple of years.
Great. Thanks guys. Thanks. Next question?
Next one is coming from Drew Crum from Stifel.
Okay, thanks. Good afternoon, everyone. So you guys had a pretty sizable beat on gross margin in the Q1, but it does not seem to be flowing to your fiscal year guidance. And I wonder what the rationale behind that was? And then separately, as it relates to your sports titles, obviously, a lot of moving parts there.
Any updated view in terms of directionally how those businesses or how those franchises will perform aggregate in your fiscal 2016? Thanks.
Yes. Why don't let me take the gross margin question and then let Andrew get the sports question. I think the reality is it's a little bit of a law of math, right? We're able to raise our full year guidance on the bottom line and the top line, but with a slight improvement in gross margin. But remember, 3rd quarter gross margin gets somewhat impacted by the royalty bearing nature of Star Wars Battlefront.
So net net, we're seeing a positive trend in gross margin, but with only 16% of the year gone, math just doesn't drive the gross margin number that much even though we've got a 10% or $0.10 increase in EPS. I think the good news there is a slight improvement in gross margin nowhere near what we saw in the Q1, but just a slight improvement going forward bodes well for the earnings and the cash flow power in the business model. And that's why we're so focused on driving the digital side of our business because it's a huge value creator for us.
As we think about our sports portfolio coming into Q2, again, as we have got more and more data on our player base, one of the greatest things that demonstrates the propensity to upgrade to the next version is continued engagement in the current version. We're seeing very, very strong engagement across the portfolio right now. And that combined with a great feature set across our sports portfolio and the evolution and growing player base as a result of growing console cycle and increased followership of sports like soccer around the world, we are very encouraged and excited by what our sports portfolio can do through this quarter, but not just that, as a result of the live services that we now build around our sports games, what it can do through this fiscal year and beyond.
Got it. Okay. And just one last one. Blake, can you remind us what you're assuming in terms of FX detriment to top line in fiscal 2016?
Yes. So it's a good question. Thanks Drew for asking. As a reminder, we said at the start of last quarter and it pretty much holds that our revenue forecast on a like for like base as last year's FX rates was $4,650,000,000 We thought FX would impact that by $250,000,000 and that led to the $4,400,000,000 revenue guide. So obviously, under the new guidance, we're assuming $4,700,000,000 in revenue, the same FX impact 250 $1,000,000 thus the $4,450,000,000 in adjusted post FX revenue.
And we presented in our investor pack the FX rate. The reality is the euro is right about the same level as it was when we did our original guidance. We saw a little weakening in the dollar during the quarter, up to about $1.13 from $1.09 but that didn't last very long, back down around the $1.09 level. And the Great Britain pound, which is obviously a big driver for things like FIFA, we saw the original guidance was 1 point $6.2 It's currently $1.56 so a little bit difference. But last year's full year average was $1.49 So we're still seeing some movement, but it pencils out to be roughly around that same $250,000,000 headwind.
Okay. Thanks guys. Next question?
Next one is coming from Mr. Ben Schachter from Macquarie.
Hey, guys. First, congratulations on this continued positive momentum. A few questions. One, how should we be thinking about Titanfall free to play in China and throughout Asia? 2, aside from FIFA in China, what are the other key drivers in China?
And then you know I have to ask a question about virtual reality. So I know it's still very, very early for VR and it won't impact the financial model anytime soon, but should we expect you to work with some of the VR platform holders in terms of them helping fund and develop some showcase titles? And when should we expect the 1st VR game from EA? Thanks.
I thought
you're going to ask when should we expect the 1st VR earnings release?
That would be pretty. Hey, Ben, it's Peter. Just on your Titanfall question, as you saw announced a couple of days ago, yes, we've entered into a relationship with our partners at Nexon as well as, of course, the developer Respawn. Think of this as a classic free to play game there, but do not think of this as being particularly material to revenue. It's an interesting experiment in looking at that type of game and whether it plays in a fleet of play environment.
We'll be
interested to see the results. And as it relates to VR, as we've talked about, we're thinking about this on a couple of different levels. We certainly believe that VR represents an opportunity for our industry as you think about our players' motivation to immerse themselves in cool new worlds and explore new characters. It's less for us about any one particular device or piece of technology and more about how we abstract beyond that and ensure our core technology layer, our digital platform and our core engine in Frostbite can facilitate virtual reality experiences irrespective of which device a consumer wants to use. Right now, we have a number of different incubation projects across the company where we're looking at best in class new and innovative and creative ways for players to experience our games in a virtual reality environment.
Still very early days, but we feel we are investing appropriately to prepare for a time where that could provide a new and different and innovative way for our players to experience our games.
Great. And then just anything other than FIFA, what are the other key drivers in China that we should be watching?
So I think FIFA is our biggest single driver. And I think there the biggest driver is continued growth and popularity of soccer. And that's a positive trend going on obviously around the world and particularly in places like China. You'll see additional new products come out that have similar approaches, meaning partner and using known IP that resonates well in the Chinese market. Or to come there.
But I think our real approach is to try to stay very focused and try to build great relationships with partners there to help drive the business. And that's worked for us really well in Korea with our NEXON partnership and we want to try to do the same thing with Tencent in China to really drive that business versus throw a lot of products into the market and hope something works. We're trying to be very, very focused.
Okay. I'm looking forward to the VR game.
Thanks. Next question.
Next one is coming from Mr. Mike Kiki from Benchmark Mark Company. Sir, you may begin.
Hey, guys. Great quarter. Nice to see the guidance going higher too. It's awesome. Thanks for taking my questions.
I think you sort of test on this. I'm going to hit it anyway. Just curious on your hiring of Jade the building of her new motive studio in Montreal, as you said in your prepared remarks, it sounds like her first project is working with Amy at Visceral. And it also sounds like she's overseeing that studio. Wondering if this was an original development direction you were planning?
Or did you feel you needed additional expertise for this game's completion Star Wars that is rumored to be an open world experience? And I also wanted to confirm you touched on it, but confirm that this the new R and D expense related to motive was originally part of the $100,000,000 or so that you announced previous quarter?
And I have a quick follow-up.
So I'll let Blake cover the expense. As it relates to hiring of Jade, I mean, as an organization, as a creative organization, as an organization always looking for really strong creative leaders, we are always hoping to be able to bring in the best and greatest creative leaders. Jade and Amy have had a relationship for a really long time. We've been working with Jade for some time about coming into our organization and doing this project and some other projects quite frankly. And we're very, very excited by what we're going to be able to do on that front, both as it relates to the Star Wars project that you referenced.
I won't make any comments on the rumors in any way whatsoever. But we're excited to have Jade as part of that organization and really looking forward to what she and the team that she's going to be working with both here and in Motive in Montreal are going to be able to do.
And to your comment Mike on operating expenses, yes, it is contemplated in our current guidance. Our assumptions we already have a team of people operating out of the BioWare Studios based in Montreal. It's been a great location for us. And Canada in general obviously has been a great development location for us across Edmonton, Montreal and Vancouver. We would like to continue to build more talent in that marketplace and there are some great people to be hired there and that's always been in our expectations.
The reality is it will take Jade some time to develop the IT ideas and develop the core team. That's not a lot of people upfront. So it won't impact this year's guidance at all. And next year, we'll start to build that out, but you'll hear more about that in next year's guidance. I don't see it as a major driver of IP expense or EP R and D expense over the near term because we'll simply redial where our balance is around the world of where we're investing.
Okay. That's very helpful. Thanks guys. Last question, the also in your prepared remarks, you added a little bit to it, but the $16,000,000 matches, of FIFA 15 played on average per day in Q1, obviously, astonishing and shows sort of the ongoing engagement for a game that's been in the market now almost a year. So when you think about sort of evolving business models, it would seem that a subscription service for game like FIFA could be a successful future model for you and I guess for the players too given the consistency of their engagement.
And so I was just hopeful you could it's a little fringe of the question. I apologize. But curious if you could provide any insight on the potential for subscription game models on console in the future? And obviously not talking about EA Access.
Great question. I'll see if I can shed some light on how we think about this. There's really 2 core vectors as we think about this. The first is how do we build a live service that engages players day in, day out, week in, week out, month in, month out throughout the year. And how do we build that into a consistent and predictable engagement loop for our players and for our business.
And I think what you're seeing with FIFA and their other properties, including Battlefield and Madden and NHL and others is that we are successfully navigating that shift and really leading from the front in an industry to drive great engagement opportunities for our players. The second vector as we think about that is then what's the appropriate business model for any given player to enjoy that experience. And I think it's insightful that you point out that it does open up subscription opportunity. As it relates to subscription right now, we are very happy with the testing and experimentation and analysis we've got going on with EA Access. And over time, we will evaluate based on this ongoing engagement and relationship and conversation we have with our players as to whether the extension of EA Access as a subscription or some alternate subscription would make sense for that player base.
But right now, our focus is on the continuing and driving of that live service experience.
Thanks, guys. Best of luck.
Next question sir is coming from Mr. Eric Handler from MKM Partners.
Thanks for taking my question. Two things for
you guys.
First, with the news of consoles expanding in China beyond the Shanghai free trade zone, what would it take for consoles do you think to actually gain traction in China changing from a massive PC environment to one that's more accepted with consoles? Secondly, a big change of thought here. The convert that you have comes due in a year. I know you've got a hedge on that convert. But can you talk a little bit about can you use cash rather than delivering shares?
How does the hedge impact the P and L when that convert eventually comes due?
I'll take the China piece and let Blake deal with the convert. China, as we know, is a very interesting, diverse and dynamic marketplace, particularly for Western companies. In order for consoles to be supremely successful there, I think that we would have to account for the cultural sensibilities of the Chinese game playing population. We'd have to think about business model. We'd have to think about appropriate culturalized content and the ability to fulfill the motivations that they have for social connection and competition, which differs from how we play in the West or even in other Asian markets.
I believe that both Sony and Microsoft are committed to driving the business there. I feel that we have content that should we be able to kind of navigate through those key elements has appeal in China. But my sense is that it takes some time as has the overall market in China to really gain the traction and momentum that it has today.
On the convert, Eric, so a couple of things to note. So original value of the convert roughly $633,000,000 That has to be settled in cash. And then the upside component of that obviously settled in stock. Right now at the average stock price for the quarter, which was 61.6 $1 that would equal 6,600,000 shares of stock that would be used to obviously settle to convert. We published a chart on our website, our IR website that shows that at various stock levels.
So I would consult that and note there's a difference between the GAAP share count and the non GAAP share count because GAAP accounting excludes the benefit of the bond hedge. So it shows the full dilution versus what comes in through the bond hedge where the non GAAP share count is unaffected by it. A couple of notes. As many people see with converts, particularly ones that are well in the money like ours, there often is early conversion requests that come in. And people are simply making a calculation as to they take their money now or borrow money to carry it for the rest of the year.
And typically the borrowing cost is offset not fully offset by the coupon. And so you're seeing some early conversions. And we've had over $165,000,000 of early conversions that will get paid out over the next 3 months. There's a time lapse. And so our assumption is we'll continue to see some of that over the next year as people get closer to the conversion date next July.
And our intention is to look through ways to obviously potentially refinance that in the capital structure. We've talked about a potential permanent layer of debt or another convert and or just paying it all off and we're looking through all those options and more to come. But we appreciate the fact that there will be a lot of dilution and we're looking at ways to minimize that dilution going forward. Thank you very much. Very helpful.
Thanks.
Next question is coming from Mr. Roy Angie from Bank of America.
Blake, real quick, one of the comments you made was that the increase in OpEx year over year was due to among other things an extra week in the quarter. Can you just explain that? It seems like it's like for like this year and if that had any impact on revenue not just OpEx?
Obviously, a little bit of impact in revenue because it's particularly the catalog revenue didn't have a big impact just because it wasn't like we were releasing a title in the quarter. But OpEx is obviously very steady where revenue can be up and down day to day or week to week. So I don't have the actual revenue impact, but we simply mention it because it's really our closed our internal accounting calendar had an extra week in the quarter versus last week and that's why we mentioned it because it does drive a week's worth of extra OpEx. That would probably be the smaller portion. The The RSU expense was obviously higher than that as part of
Next one is coming from Mr. Doug Karts from Cowen and Company.
Follow-up on an earlier question. You mentioned that the attach rates for the cycle are slightly up and that obviously that the hardware installed base is growing much faster. Can you comment on how the performance of last gen compares to last cycle and sort of on net between the 2 where you see things?
So Doug, it's Peter. So yes, just let me say again. So when we look at this cycle, let's call this current gen Xbox 1, PS4 at all versus last gen, we're at we will be we believe the installed base of hardware at the end of 2015 will be 49,000,000 dollars On a like for like basis of 20 months from the launch of the Xbox 360 and PS3 to where we are today, we are up 44% in the West on installed base. As regards the attach rate of software to the current installed base, 6.1% right now versus 5.9% of the of the previous generation. And that has been like for like index against the full game downloads that we now enjoy both in the previous generation of the back end as well as the full generation we now have of full game downloads as well as hardware bundles where the software has been inserted into the hardware.
So 6.1 right now versus 5.9 taking into account digital downloads and bundles.
And I guess let me add to that. We saw at the tail end of the gen or the 360 and the PlayStation 3 cycle, full game downloads around 5% level. And that 5% across new and catalog products. We're seeing today, if you look at our last full line or frontline title that came out Battlefield Hardline, both in last quarter and this quarter, we're seeing rates north of 20% full game downloads. And if you look at our catalogs, we're seeing some catalog titles up into the 40s that are older titles in the year versus brand new titles.
All of those trends continue to see positive movements and we've heard similar things from our other members in our industry. And so we're very excited about the potential for continuing to drive that part of the
I guess maybe I didn't ask the question very well. What I was actually trying to get at is what you're seeing in terms of performance of 3 60 and PS3 compared to the original Xbox and PS2 at the end of the last cycle? And sort of the net obviously, we've had faster growth in the new gen, but sense is the old gen is falling off faster as well. And what does it look like on net compared to last cycle?
Yes. So it's how the tail is holding up, Doug, yes? Yes. Yes. I think it's fair to say it's hanging in there.
I think when you look at EA in particular, we keep our sports titles for as long as we possibly can. I'll remind you that it's gosh, only 3 years ago, we were shipping a PS2 title for FIFA. But I think it's fair to say as well, when you look at our most recent big AAA launch, which was Battlefield Hardline, we saw 4 out of every 5 units on current gen. And as a result, you're seeing most of our new launches now being on the Xbox 1 and the PlayStation 4, whilst we'll still give some support in particular sports to Xbox 360 and PS3 and hope that they continue a trend of hanging in there, our dev teams in particular are moving forward with it with next gen.
Okay. Thank you.
Thanks, Doug. So with that, I think we'll call the call to a close. We appreciate everybody's time and continued support and we look forward to talking to you next quarter.
And that concludes today's conference. Thank you all for participating. You may now disconnect.