We liveblogged yesterday's conference call with Electronic Arts about their buyout of BioWare and Pandemic studios, but that was really just about grabbing some of the highlights. Hit the jump if you want to read the entire script of their pitch and delivery which includes confirmation that BioWare, not Microsoft, owns the Mass Effect IP, that Pandemic is working on several unannounced titles and that BioWare's MMO is several years out.
Good afternoon and welcome to our call.
Today on the call we have:
John Riccitiello - Chief Executive Officer
Warren Jenson - Chief Financial and Administrative Officer and
Frank Gibeau - President of EA Games
Before we begin - I'd like to remind you that:
â€¢ You may find copies of our SEC filings, our press release and a replay of the webcast on our web site at http://investor.ea.com. Shortly after the call - we will post a copy of the script on our website.
â€¢ During the course of this call - we may make forward-looking statements regarding future events, the proposed acquisition of VGH by EA, and the future financial performance of the company. We caution you that actual events and results may differ materially. We refer you to EA's most recent Forms 10-K and 10-Q for a discussion of risk factors that could cause actual results to differ materially from those discussed today. We make these statements as of October 11, 2007 and disclaim any duty to update them.
And now - I'd like to turn the call over to Warren.
Good afternoon and thanks for joining us.
We are pleased to announce that we have reached a definitive agreement with Elevation Partners to acquire two major game developers - BioWare based in Edmonton, Canada and Austin, Texas and Pandemic based in Los Angles and Brisbane, Australia
â€¢ BioWare - founded and led by Greg Zeschuk and Ray Muzyka - is the renowned producer of blockbuster franchises such as Baldur's Gate, Knights of the Old Republic and the much anticipated Mass Effect*.
â€¢ Pandemic - led by Josh Resnick, Andrew Goldman and Greg Borrud - is best known for titles like Star Wars Battlefront and Mercenaries.
â€¢ Both studios have strong creative cultures that will be a great fit with EA.
We welcome these teams to our company.
For the next few minutes I'll walk you through our strategic rationale for this acquisition and some of the deal specifics. I'll then turn it over to John to share his thoughts. Following these brief remarks - John, Frank and I will be happy to take your questions.
Why this Deal?
We have looked at a lot of companies - and have had our eye on these studios for several years. Together - these studios represent one of the most prolific and high quality creative organisations in the industry. This is a powerful combination of creative talent and portfolio strength. To sum it up - we have not seen many opportunities that bring so many high potential assets together under one roof.
Let me touch on each of these points in more detail
First - these are premier developers proven by a strong track record.
â€¢ BioWare is clearly one of the foremost RPG developers in the world. Knights of the Old Republic (Lucas), Neverwinter Knights (Wizards), Baldur's Gate (Wizards) and Jade Empire (owned) - all speak for themselves. The average metacritic rating coming out of this studio over the last 12 years is 88. And - Mass Effect is on the way- an owned IP that will be published by Microsoft.
â€¢ Pandemic is best known for creating Action games and developing its own IP. Pandemic worked with Lucas Arts to develop the award winning Star Wars: Battlefront I and II and Clone Wars - each selling more than three million copies. In addition - the studio had great success with two owned and highly rated IPs - Mercenaries and
Full Spectrum Warrior. Pandemic is currently working on several new titles - including Mercenaries 2 (owned) and Saboteur (owned).
Second - this acquisition fills out a gap in our genre line-up. We are currently underrepresented in key genres - RPG, Action and Adventure. In calendar year 2006 - these genres represented 36 per cent of the North America segment and we estimate 29 per cent in Europe.
With Pandemic and BioWare - we now how have the potential to move into a strong competitive position in these genres as we expect to bring 10 franchises to market in the next few years - six of which are wholly owned.
Third - further expansion into the MMO space. BioWare is developing an MMO in their Austin studio. While still a couple of years out - we think there is real potential.
Fourth - we project solid long term financial returns. In fiscal 2009 and 2010 - we expect the BioWare and Pandemic properties to:
â€¢ Deliver revenue (ex deferral) in excess of $US300 million annually - including the EA Partner titles.
â€¢ Generate Non-GAAP gross margins in excess of 65 per cent.
â€¢ Looking at Non-GAAP EPS - we would expect the transaction to be dilutive to EA's fourth quarter results by roughly $0.05. Break even in fiscal 2009 and solidly accretive thereafter. Were it not for our existing EA Partners relationship (Mercenaries 2 and two un-announced EAP titles) - the transaction would have been accretive in fiscal
Finally - these teams are a great cultural fit. We have deep respect for their talent, high quality games and passion for our industry. We know these guys - they know us - it's a natural fit. Further - this is a straight forward integration - a powerful developer with limited overhead.
Now let me share with you some deal specifics and additional financial information. In total we are paying $US860 million in consideration including:
â€¢ $US655 million in cash (including bridge loan) and - up to - an additional $US155 million in equity to employee owners. All of the equity portion has time or performance based vesting triggers.
â€¢ EA will also assume outstanding VG Holding Corp. stock options.
The acquisition is subject to customary closing conditions, including regulatory approvals.
We expect the closing to occur in early January 2008.
â€¢ On a GAAP EPS basis, we expect the acquisition to be dilutive to EA fiscal 2008 results by approximately $0.30 to $0.40, due to non-recurring acquisition-related charges, stock-based compensation and amortisation of intangible assets. In fiscal 2009 - we anticipate the acquisition will continue to be dilutive on a GAAP basis given
revenue deferrals, on-going stock based compensation and intangible asset amortisation.
â€¢ A few things to keep in mind relative to GAAP EPS -
â€¢ Off the $US155 million of equity - roughly $US125 million will be amortised to the P&L as stock based compensation over the next four years.
â€¢ For assumed options and newly granted equity - we estimate an additional $US40 million will be amortised as stock based compensation over the next four years.
â€¢ Our GAAP charges for fiscal 2008 are preliminary as final valuation work has not been completed.
â€¢ As I mentioned earlier - on a Non-GAAP basis, we would expect the transaction to be dilutive to EA's fourth quarter results by roughly $0.05, break even in fiscal 2009 and solidly accretive thereafter. Were it not for our existing EA Partners relationship. (Mercenaries 2 and two unannounced EAP titles) - the transaction would have been accretive in fiscal 2009.
In closing - we are excited about this acquisition and what it brings to EA, and what it brings to our shareholders and our customers. This is an important step for us in driving growth and profitability over the long term.
Now let me turn the call over to John.
This is John.
As many of you know, while I was with Elevation Partners, I brought these studios together and led this business as CEO. I see this transaction as a big plus for EA - this strategic move speaks directly to our initiatives on quality, online, growth and new IP. I'm extremely familiar with the people, the properties and the extraordinary potential of these two studios.
As you probably know, I have a residual financial interest in Elevation Partners. Depending on the overall performance of the fund, this acquisition is likely to result in a personal financial benefit at some point in the future. More information is included in our 8-K. Given this - EA's board of directors instituted a process under which members of the audit committee engaged directly and independently from me with the management team throughout the decision making process. This was done in order to ensure deal independence.
Let me close by saying that I couldn't be happier to bring these studios to EA.
Now we would be happy to take your questions.