CAUTION ON FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. We use words such as "anticipate," "believe," "expect," "intend," "estimate", "plan", "predict", "seek", "goal", "will", "may", "likely", "should", "could" (and the negative of any of these terms), "future" and similar expressions to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our business, projections of markets relevant to our business, uncertain events and assumptions and other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements consist of, among other things, statements related to the impact of the COVID-19 pandemic to our business, operations and financial results, industry prospects, our future financial performance, and our business plans and objectives, and may include certain assumptions that underlie the forward-looking statements. These forward-looking statements are not guarantees of future performance and reflect management's current expectations. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that might cause or contribute to such differences include those discussed in Part II, Item 1A of this Quarterly Report under the heading "Risk Factors" in, as well as in other documents we have filed with the
Securities and Exchange Commission("SEC"), including our Annual Report on Form 10-K for the fiscal year ended March 31, 2021. We assume no obligation to revise or update any forward-looking statement for any reason, except as required by law.
The following overview is a high-level discussion of our operating results, as well as some of the trends and drivers that affect our business. Management believes that an understanding of these trends and drivers provides important context for our results for the three months ended
June 30, 2021, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Form 10-Q, including in the remainder of "Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")," "Risk Factors," and the Condensed Consolidated Financial Statements and related Notes. Additional information can be found in the "Business" section of our Annual Report on Form 10-K for the fiscal year ended March 31, 2021as filed with the SECon May 26, 2021and in other documents we have filed with the SEC. About Electronic Arts Electronic Artsis a global leader in digital interactive entertainment. We develop, market, publish and deliver games, content and services that can be played and watched on game consoles, PCs, mobile phones and tablets. We believe that the breadth and depth of our portfolio, live services offerings, and our use of multiple business models and distribution channels provide us with strategic advantages. Our foundation is a collection of intellectual property from which we create innovative games and content that enables us to build on-going and meaningful relationships with a community of players, creators and viewers. Our portfolio includes brands that we either wholly own (such as Battlefield, The Sims, Apex Legends, Need for Speed and Plants vs. Zombies) or license from others (such as FIFA, Madden NFL, UFC, NHL, Formula 1 and Star Wars). Through our live services offerings, we offer our players high-quality experiences designed to provide value to players and extend and enhance gameplay. These live services include extra content, subscription offerings and other revenue generated outside of the sale of our base games. In addition, we are focused on reaching more players whenever and wherever they want to play. We believe that we can add value to our network by making it easier for players to connect to a world of play by offering choice of business model, distribution channel and device. 29 -------------------------------------------------------------------------------- Table of Contents Financial Results Our key financial results for our fiscal quarter ended June 30, 2021were as follows: •Total net revenue was $1,551 million, up 6 percent year-over-year. On a constant currency basis, we estimate total net revenue would have been $1,528 million, up 5 percent year-over-year. •Live services and other net revenue was $1,229 million, up 12 percent year-over-year. •Gross margin was 79.7 percent, down 1 percentage point year-over-year. •Operating expenses were $914 million, up 31 percent year-over-year. On a constant currency basis, we estimate that operating expenses would have been $895 million, up 28 percent year-over-year. •Operating income was $322 million, down 32 percent year-over-year. •Net income was $204 millionwith diluted earnings per share of $0.71. •Operating cash flow was negative $143 million, down 138 percent year-over-year. •Total cash, cash equivalents and short-term investments were $3,719 million. •We repurchased 2.3 million shares of our common stock for $325 million. •We paid cash dividends of $49 millionduring the quarter ended June 30, 2021. From time to time, we make comparisons of current periods to prior periods with reference to constant currency. Constant currency comparisons are based on translating local currency amounts in the current period at actual foreign exchange rates from the prior comparable period. We evaluate our financial performance on a constant currency basis in order to facilitate period-to-period comparisons without regard to the impact of changing foreign currency exchange rates. Trends in Our Business COVID-19 Impact. We are closely monitoring the impact of the COVID-19 pandemic to our people and our business. Since the outbreak of COVID-19, we have focused on actions to support our people, our players, and communities around the world that have been affected by the COVID-19 pandemic. Our People: The well-being of our people is our top priority, and to keep everyone as safe as possible, the vast majority of our workforce is expected to work from home at least through January 2022. We are offering support to our people to assist with work from home and care needs, a pandemic care leave program, and additional services for mental and physical health. We have developed a detailed protocol for how we evaluate the readiness to return to work for each of our offices around the world, accounting for guidance from health authorities and government, vaccine availability and effectiveness, the comfort level of our employees, and preparation of our facilities for continued physical distancing. Our Business: In fiscal year 2021, execution against our strategic pillars and increased engagement with our products and services led to growth in our business, aided by consumers spending more time at home because of social restrictions and local government mandates related to the COVID-19 pandemic. In addition, longer-term trends that benefit our business accelerated. Live services and other net revenue for fiscal year 2021 increased more than 10 percent year-over-year. We have also experienced a significant increase in the percentage of our games purchased digitally. Future Outlook: The full extent of the impact of the COVID-19 pandemic to our business, operations and financial results will depend on numerous evolving factors that cannot be accurately predicted at this time, such as the duration and spread of the pandemic, the extent, speed and effectiveness of worldwide containment and vaccination efforts and the impact of these and other factors on our employees, customers, partners and vendors. Trends from fiscal year 2021 that benefited our industry and business may not be indicative of results for future periods, particularly as factors related to the COVID-19 pandemic lessen and consumers can engage with other forms of entertainment, if the trend towards digital adoption decelerates, or if global macroeconomic effects of the COVID-19 pandemic persist even after the pandemic has subsided. Additional factors that could impact our business include: our ability to timely deliver high quality and technically stable games and services while our teams, including our development teams, work in a distributed environment, our ability to safely reintroduce our employees to our offices when it is appropriate to do so, and other factors included in Part II, Item 1A of this Quarterly Report under the heading "Risk Factors". 30 -------------------------------------------------------------------------------- Table of Contents Live Services Business. We offer our players high-quality experiences designed to provide value to players and to extend and enhance gameplay. These live services include extra content, subscription offerings and other revenue generated outside of the sale of our base games. Our net revenue attributable to live services and other was $4,145 million, $3,803 millionand $3,238 millionfor the trailing twelve months ended June 30, 2021, 2020 and 2019, respectively, and we expect that live services net revenue will continue to be material to our business. Within live services and other, net revenue attributable to extra content was $3,149 million, $2,980 millionand $2,479 millionfor the trailing twelve months ended June 30, 2021, 2020 and 2019, respectively. Extra content net revenue has increased as players engage with our games and services over longer periods of time, and purchase additional content designed to provide value to players and extend and enhance gameplay. Our most popular live service is the extra content purchased for the Ultimate Team mode associated with our sports franchises. Ultimate Team allows players to collect current and former professional players in order to build and compete as a personalized team. Net revenue from extra content sales for Ultimate Team was $1,623 million, $1,491 millionand $1,369 millionduring fiscal years 2021, 2020 and 2019, respectively, a substantial portion of which was derived from FIFA Ultimate Team. Digital Delivery of Games. In our industry, players increasingly purchase games digitally as opposed to purchasing physical discs. While this trend, as applied to our business, may not be linear because of product mix during a fiscal year, consumer buying patterns and other factors, over time we expect players to purchase an increasingly higher proportion of our games digitally; therefore we expect net revenue attributable to digital full game downloads to increase over time and net revenue attributable to sales of packaged goods to decrease. Our net revenue attributable to digital full game downloads was $918 million, $811 millionand $681 millionduring fiscal years 2021, 2020 and 2019, respectively; while our net revenue attributable to packaged goods sales decreased from $1,112 millionin fiscal year 2019 to $1,076 millionin fiscal year 2020 and $695 millionin fiscal year 2021. In addition, as measured based on total units sold on Microsoft's Xbox One and Xbox Series X and Sony's PlayStation 4 and 5 rather than by net revenue, we estimate that 62 percent, 49 percent, and 49 percent of our total units sold during fiscal years 2021, 2020 and 2019 were sold digitally. Digital full game units are based on sales information provided by Microsoft and Sony; packaged goods units sold through are estimated by obtaining data from significant retail partners in North America, Europeand Asia, and applying internal sales estimates with respect to retail partners from which we do not obtain data. We believe that these percentages are reasonable estimates of the proportion of our games that are digitally downloaded in relation to our total number of units sold for the applicable period of measurement. During fiscal year 2021, the percentage of our full games purchased digitally accelerated, likely aided by factors associated with the COVID-19 pandemic, including store closures of our key retail partners for a portion of fiscal year 2021. While digital adoption may decelerate in fiscal year 2022, as factors related to the COVID-19 pandemic lessen or if global macroeconomic effects of the COVID-19 pandemic persist even after the pandemic has subsided, we believe that the significant increase in digital adoption we experienced in fiscal year 2021 is likely a permanent structural change. Increases in consumer adoption of digital purchase of games combined with increases in our live services revenue generally results in expansion of our gross margin, as costs associated with selling a game digitally is generally less than selling the same game through traditional retail and distribution channels. Free-to-Play Games. The global adoption of mobile devices and a business model for those devices that allows consumers to try new games with no up-front cost, and that are monetized through a live service associated with the game, particularly extra content sales, has led to significant sales growth in the mobile gaming industry. Similarly, sales of extra content are the primary driver of our mobile business. We are investing resources in our mobile business, seeking to maximize our mobile live services, innovate on mobile with our franchises, and have added additional growth opportunities through mergers and acquisitions activity. Likewise, the consumer acceptance of free-to-play, live service-based, online PC games has broadened our consumer base and has begun to expand into the console market. For example, within our business, we offer Apex Legends as a free-to-play, live service-based PC and console game. We expect extra content revenue generated from mobile, PC and console free-to-play games to continue to be an important part of our business. Concentration of Sales Among the Most Popular Games. In all major segments of our industry, we see a large portion of games sales concentrated on the most popular titles. Similarly, a significant portion of our revenue historically has been derived from games based on a few popular franchises, several of which we have released on an annual or bi-annual basis. In particular, we have historically derived a significant portion of our net revenue from our largest and most popular game, FIFA, the annualized version of which is consistently one of the best-selling games in the marketplace. 31 -------------------------------------------------------------------------------- Table of Contents Recurring Revenue Sources. Our business model includes revenue that we deem recurring in nature, such as revenue from our annualized sports franchises (e.g., FIFA, Madden NFL), our console, PC and mobile catalog titles (i.e., titles that did not launch in the current fiscal year), and our live services. We have been able to forecast revenue from these areas of our business with greater relative confidence than for new games, services and business models. As we continue to incorporate new business models and modalities of play into our games, our goal is to continue to look for opportunities to expand the recurring portion of our business. Net Bookings. In order to improve transparency into our business, we disclose an operating performance metric, net bookings. Net bookings is defined as the net amount of products and services sold digitally or sold-in physically in the period. Net bookings is calculated by adding total net revenue to the change in deferred net revenue for online-enabled games. The following is a calculation of our total net bookings for the periods presented: Three Months Ended June 30, (In millions) 2021 2020 Total net revenue $ 1,551 $ 1,459Change in deferred net revenue (online-enabled games) (215) (69) Net bookings $ 1,336 $ 1,390Net bookings were $1,336 millionfor the three months ended June 30, 2021driven by sales related to FIFA21, Apex Legends, The Sims 4, Mass Effect Trilogy Remaster, and Star Wars: Galaxy of Heroes. Net bookings decreased $54 millionor 4 percent as compared to the three months ended June 30, 2020. Live services and other net bookings were $1,054 millionfor the three months ended June 30, 2021, and decreased $49 millionor 4 percent as compared to the three months ended June 30, 2020. Full game net bookings were $282 millionfor the three months ended June 30, 2021, and decreased $5 millionor 2 percent as compared to the three months ended June 30, 2020. During the three months ended June 30, 2020, we saw extraordinary levels of engagement with our products and services as players spent more time at home as a result of the COVID-19 pandemic leading to slight year-over-year declines in total net bookings, live services and other net bookings and full game net bookings as players engaged with other forms of entertainment during the three months ended June 30, 2021. In addition, net bookings for the three months ended June 30, 2020contained 14 weeks of performance in comparison to 13 weeks for three months ended June 30, 2021. These decreases were partially offset by the performance of recent releases of Mass Effect Trilogy Remaster and It Takes Two. Mergers and Acquisitions Acquisition of Codemasters. On February 18, 2021, we completed the acquisition of Codemasters Group Holdings plcfor total cash consideration of $1.2 billion, net of cash acquired. Codemasters is a UK-based game developer and publisher of high-quality racing games across console, PC and mobile. We expect the Codemasters acquisition to grow our presence in racing, creating a global leader in racing entertainment. Codemasters was integrated into the Company for financial reporting purposes during the fourth quarter of fiscal year 2021. Acquisition of Glu Mobile. On April 29, 2021, we completed the acquisition of 100% of the equity interests of Glu Mobile Inc., a leading global developer and publisher of mobile games for a total purchase price of $2.0 billion, net of cash acquired of $332 million. The acquisition of Glu is expected to accelerate our mobile growth by creating a combined organization with ongoing live services across multiple games and genres. We also believe that the acquisition will create value by adding Glu's expertise in casual sports and lifestyle genres to new titles based on our intellectual property. Glu was integrated into the Company for financial reporting purposes during the first fiscal quarter of fiscal year 2022. Pending Acquisition of Playdemic. On June 23, 2021, we announced that we entered into a share purchase agreement to acquire Playdemic Limited, a private limited company incorporated in Englandand Walesfor $1.4 billionin cash, subject to customary purchase price adjustments. Under the terms of the agreement, the completion of the acquisition is subject to a customary closing condition regarding the receipt of applicable regulatory clearances. The acquisition of Playdemicis part of our mobile growth strategy and the acquisition will add to our current mobile portfolio. The Playdemicacquisition is expected to close in fiscal year 2022. We intend to fund this acquisition with existing cash on hand and any financing we may do from time to time. For more information about our acquisitions, see Part I, Item 1 of this Form 10-Q in the Notes to the Condensed Consolidated Financial Statements in Note 6 - Business Combinations . 32
-------------------------------------------------------------------------------- Table of Contents CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in
the United States(" U.S.GAAP"). The preparation of these Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, and revenue and expenses during the reporting periods. The policies discussed below are considered by management to be critical because they are not only important to the portrayal of our financial condition and results of operations, but also because application and interpretation of these policies requires both management judgment and estimates of matters that are inherently uncertain and unknown, including uncertainty in the current economic environment due to the COVID-19 pandemic. As a result, actual results may differ materially from our estimates. Revenue Recognition We derive revenue principally from sales of our games, and related extra content and services that can be played on game consoles, PCs, mobile phones and tablets. Our product and service offerings include, but are not limited to, the following: •full games with both online and offline functionality ("Games with Services"), which generally includes (1) the initial game delivered digitally or via physical disc at the time of sale and typically provide access to offline core game content ("software license"); (2) updates on a when-and-if-available basis, such as software patches or updates, and/or additional free content to be delivered in the future ("future update rights"); and (3) a hosted connection for online playability ("online hosting"); •full games with online-only functionality which require an Internet connection to access all gameplay and functionality ("Online-Hosted Service Games"); •extra content related to Games with Services and Online-Hosted Service Games which provides access to additional in-game content; •subscriptions, such as EA Play and EA Play Pro, that generally offers access to a selection of full games, in-game content, online services and other benefits typically for a recurring monthly or annual fee; and •licensing to third parties to distribute and host our games and content. We evaluate and recognize revenue by: •identifying the contract(s) with the customer; •identifying the performance obligations in the contract; •determining the transaction price; •allocating the transaction price to performance obligations in the contract; and •recognizing revenue as each performance obligation is satisfied through the transfer of a promised good or service to a customer (i.e., "transfer of control"). Certain of our full game and/or extra content are sold to resellers with a contingency that the full game and/or extra content cannot be resold prior to a specific date ("Street Date Contingency"). We recognize revenue for transactions that have a Street Date Contingency when the Street Date Contingency is removed and the full game and/or extra content can be resold by the reseller. For digital full game and/or extra content downloads sold to customers, we recognize revenue when the full game and/or extra content is made available for download to the customer. Online-Enabled Games Games with Services. Our sales of Games with Services are evaluated to determine whether the software license, future update rights and the online hosting are distinct and separable. Sales of Games with Services are generally determined to have three distinct performance obligations: software license, future update rights, and the online hosting. Since we do not sell the performance obligations on a stand-alone basis, we consider market conditions and other observable inputs to estimate the stand-alone selling price for each performance obligation. For Games with Services, generally 75 percent of the sales price is allocated to the software license performance obligation and recognized at a point in time when control of the license has been transferred to the customer (which is usually at or near the same time as the booking of the transaction). The remaining 25 percent is allocated to the future update rights and the online hosting performance obligations and recognized ratably as the service is provided (over the Estimated Offering Period). 33 -------------------------------------------------------------------------------- Table of Contents Online-Hosted Service Games. Sales of our Online-Hosted Service Games are determined to have one distinct performance obligation: the online hosting. We recognize revenue from these arrangements as the service is provided. Extra Content. Revenue received from sales of downloadable content are derived primarily from the sale of virtual currencies and digital in-game content that are designed to extend and enhance players' game experience. Sales of extra content are accounted for in a manner consistent with the treatment for our Games with Services and Online-Hosted Service Games as discussed above, depending upon whether or not the extra content has offline functionality. That is, if the extra content has offline functionality, then the extra content is accounted for similarly to Games with Services (generally determined to have three distinct performance obligations: software license, future update rights, and the online hosting). If the extra content does not have offline functionality, then the extra content is determined to have one distinct performance obligation: the online-hosted service offering. Subscriptions Sales of our subscriptions are deemed to be one performance obligation and we recognize revenue from these arrangements ratably over the subscription term as the performance obligation is satisfied. Licensing Revenue In certain countries, we utilize third-party licensees to distribute and host our games and content in accordance with license agreements, for which the licensees typically pay us a fixed minimum guarantee and/or sales-based royalties. These arrangements typically include multiple performance obligations, such as a time-based license of software and future update rights. We recognize as revenue a portion of the minimum guarantee when we transfer control of the license of software (generally upon commercial launch) and the remaining portion ratably over the contractual term in which we provide the licensee with future update rights. Any sales-based royalties are generally recognized as the related sales occur by the licensee. Significant Judgments around Revenue Arrangements Identifying performance obligations. Performance obligations promised in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct, (i.e., the customer can benefit from the goods or services either on its own or together with other resources that are readily available), and are distinct in the context of the contract (i.e., it is separately identifiable from other goods or services in the contract). To the extent a contract includes multiple promises, we must apply judgment to determine whether those promises are separate and distinct performance obligations. If these criteria are not met, the promises are accounted for as a combined performance obligation. Determining the transaction price. The transaction price is determined based on the consideration that we will be entitled to receive in exchange for transferring our goods and services to the customer. Determining the transaction price often requires judgment, based on an assessment of contractual terms and business practices. It further includes review of variable consideration such as discounts, sales returns, price protection, and rebates, which is estimated at the time of the transaction. In addition, the transaction price does not include an estimate of the variable consideration related to sales-based royalties. Sales-based royalties are recognized as the sales occur. Allocating the transaction price. Allocating the transaction price requires that we determine an estimate of the relative stand-alone selling price for each distinct performance obligation. Determining the relative stand-alone selling price is inherently subjective, especially in situations where we do not sell the performance obligation on a stand-alone basis (which occurs in the majority of our transactions). In those situations, we determine the relative stand-alone selling price based on various observable inputs using all information that is reasonably available. Examples of observable inputs and information include: historical internal pricing data, cost plus margin analyses, third-party external pricing of similar or same products and services such as software licenses and maintenance support within the enterprise software industry. The results of our analysis resulted in a specific percentage of the transaction price being allocated to each performance obligation. Determining the Estimated Offering Period. The offering period is the period in which we offer to provide the future update rights and/or online hosting for the game and related extra content sold. Because the offering period is not an explicitly defined period, we must make an estimate of the offering period for the service-related performance obligations (i.e., future update rights and online hosting). Determining the Estimated Offering Period is inherently subjective and is subject to regular revision. Generally, we consider the average period of time customers are online when estimating the offering period. We also consider the estimated period of time between the date a game unit is sold to a reseller and the date the reseller sells the game unit to the customer (i.e., time in channel). Based on these two factors, we then consider the method of distribution. For example, games 34 -------------------------------------------------------------------------------- Table of Contents and extra content sold at retail would have a composite offering period equal to the online gameplay period plus time in channel as opposed to digitally-distributed games and extra content which are delivered immediately via digital download and therefore, the offering period is estimated to be only the online gameplay period. Additionally, we consider results from prior analyses, known and expected online gameplay trends, as well as disclosed service periods for competitors' games in determining the Estimated Offering Period for future sales. We believe this provides a reasonable depiction of the transfer of future update rights and online hosting to our customers, as it is the best representation of the time period during which our games and extra content are played. We recognize revenue for future update rights and online hosting performance obligations ratably on a straight-line basis over this period as there is a consistent pattern of delivery for these performance obligations. Revenue for service related performance obligations for games and extra content sold through retail are generally recognized over an estimated ten-month period beginning in the month of sale, and revenue for service related performance obligations for digitally-distributed games and extra content are generally recognized over an estimated eight-month period beginning in the month of sale. We recently completed our annual evaluation of the Estimated Offering Period. We have noted consumers are playing certain of our Online Hosted Service Games, such as PC and Console Free-to-Play games, for longer periods of time than in prior years as players engage with services we provide that are designed to enhance and extend gameplay, and as such, have concluded that the Estimated Offering Period for such games should be lengthened. As a result, for all new sales beginning in the second quarter of fiscal year 2022, the revenue that we recognize for service-related performance obligation related to our PC and Console Free-to-Play games will be recognized generally over a twelve-month period. We do not expect this change in Estimated Offering Period to impact the amount of net bookings or the operating cash flows that we report. We expect that this change will move the recognition of approximately $100 millionin net revenue from fiscal year 2022 into fiscal year 2023. Principal Agent Considerations We evaluate sales to end customers of our full games and related content via third-party storefronts, including digital storefronts such as Microsoft's Xbox Store, Sony's PlayStation Store, Apple App Store, and Google Play Store, in order to determine whether or not we are acting as the principal in the sale to the end customer, which we consider in determining if revenue should be reported gross or net of fees retained by the third-party storefront. An entity is the principal if it controls a good or service before it is transferred to the end customer. Key indicators that we evaluate in determining gross versus net treatment include but are not limited to the following: •the underlying contract terms and conditions between the various parties to the transaction; •which party is primarily responsible for fulfilling the promise to provide the specified good or service to the end customer; •which party has inventory risk before the specified good or service has been transferred to the end customer; and •which party has discretion in establishing the price for the specified good or service. Based on an evaluation of the above indicators, except as discussed below, we have determined that generally the third party is considered the principal to end customers for the sale of our full games and related content. We therefore report revenue related to these arrangements net of the fees retained by the storefront. However, for sales arrangements via Apple App Storeand Google Play Store, EA is considered the principal to the end customer and thus, we report revenue on a gross basis and mobile platform fees are reported within cost of revenue. Fair Value Estimates Business Combinations. We must estimate the fair value of assets acquired, liabilities assumed, and acquired in-process technology in a business combination. Our assessment of the estimated fair value of each of these can have a material effect on our reported results as intangible assets are amortized over various estimated useful lives. Furthermore, the estimated fair value assigned to an acquired asset or liability has a direct impact on the amount we recognize as goodwill, which is an asset that is not amortized. Determining the fair value of assets acquired requires an assessment of the highest and best use of the asset or group of assets that maximizes the value from a market participant perspective or the expected price to sell the asset and the related expected future cash flows. Determining the fair value of acquired in-process technology also requires an assessment of 35 -------------------------------------------------------------------------------- Table of Contents our expectations related to the use of that technology. Such estimates are inherently difficult and subjective and can have a material impact on our Consolidated Financial Statements. Income Taxes We recognize deferred tax assets and liabilities for both (1) the expected impact of differences between the financial statement amount and the tax basis of assets and liabilities and (2) the expected future tax benefit to be derived from tax losses and tax credit carryforwards. We do not recognize any deferred taxes related to the U.S.taxes on foreign earnings as we recognize these taxes as a period cost. We record a valuation allowance against deferred tax assets when it is considered more likely than not that all or a portion of our deferred tax assets will not be realized. In making this determination, we are required to give significant weight to evidence that can be objectively verified. It is generally difficult to conclude that a valuation allowance is not needed when there is significant negative evidence, such as cumulative losses in recent years. Forecasts of future taxable income are considered to be less objective than past results. Therefore, cumulative losses weigh heavily in the overall assessment. In addition to considering forecasts of future taxable income, we are also required to evaluate and quantify other possible sources of taxable income in order to assess the realization of our deferred tax assets, namely the reversal of existing deferred tax liabilities, the carryback of losses and credits as allowed under current tax law, and the implementation of tax planning strategies. Evaluating and quantifying these amounts involves significant judgments. Each source of income must be evaluated based on all positive and negative evidence and this evaluation may involve assumptions about future activity. Certain taxable temporary differences that are not expected to reverse during the carry forward periods permitted by tax law cannot be considered as a source of future taxable income that may be available to realize the benefit of deferred tax assets. Each quarter, we perform a realizability analysis to evaluate whether it is more likely than not that all or a portion of our deferred tax assets will not be realized. In particular, our Swiss deferred tax asset realizability analysis relies upon future Swiss taxable income as the primary source of taxable income but considers all available sources of Swiss income based on the positive and negative evidence. We give more weight to evidence that can be objectively verified. However, there is significant judgment involved in estimating future Swiss taxable income, specifically related to assumptions about expected growth rates of future Swiss taxable income, which are based primarily on third party market and industry growth data. Actual results that differ materially from those estimates could have a material impact on our valuation allowance assessment. Although objectively verifiable, Swiss interest rates have an impact on the valuation allowance and are based on published Swiss guidance. Any significant changes to such interest rates could result in a material impact to the valuation allowance. Switzerlandhas a seven-year carryforward period and does not permit the carry back of losses. Changes in Estimated Offering Period and actions we take in connection with acquisitions could also impact the utilization of our Swiss deferred tax asset. As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each jurisdiction in which we operate prior to the completion and filing of tax returns for such periods. This process requires estimating both our geographic mix of income and our uncertain tax positions in each jurisdiction where we operate. These estimates involve complex issues and require us to make judgments about the likely application of the tax law to our situation, as well as with respect to other matters, such as anticipating the positions that we will take on tax returns prior to our preparing the returns and the outcomes of disputes with tax authorities. The ultimate resolution of these issues may take extended periods of time due to examinations by tax authorities and statutes of limitations. In addition, changes in our business, including acquisitions and the alignment of them with our global operating structure, changes in our international corporate structure, changes in the geographic location of business functions or assets, changes in the geographic mix and amount of income, as well as changes in our agreements with tax authorities, valuation allowances, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in the estimated and actual level of annual pre-tax income can affect the overall effective tax rate. 36 -------------------------------------------------------------------------------- Table of Contents IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS The information under the subheading "Other Recently Issued Accounting Standards" in Note 1 - Description of Business and Basis of Presentation
the condensed consolidated financial statements on this Form 10-Q are incorporated into this Item 2 by reference.
RESULTS OF OPERATIONS Our fiscal year is reported on a 52- or 53-week period that ends on the Saturday nearest
March 31. Our results of operations for the fiscal year ending March 31, 2022contains 52 weeks and ends on April 2, 2022. Our results of operations for the fiscal year ended March 31, 2021contained 53 weeks and ended on April 3, 2021. Our results of operations for the three months ended June 30, 2021contained 13 weeks and ended on July 3, 2021. Our results of operations for the three months ended June 30, 2020contained 14 weeks and ended on July 4, 2020. For simplicity of disclosure, all fiscal periods are referred to as ending on a calendar month end. Net Revenue Net revenue consists of sales generated from (1) full games sold as digital downloads or as packaged goods and designed for play on game consoles, PCs and mobile phones and tablets (2) live services associated with these games, such as extra-content, (3) subscriptions that generally offer access to a selection of full games, in-game content, online services and other benefits, and (4) licensing our games to third parties to distribute and host our games. Net Revenue Quarterly Analysis Net Revenue Net revenue for the three months ended June 30, 2021was $1,551 million, primarily driven by FIFA21, Apex Legends, Madden NFL 21, The Sims 4, Mass Effect Trilogy Remaster, Star Wars: Galaxy of Heroes, FIFA Online 4, and It Takes Two. Net revenue for the three months ended June 30, 2021increased $92 millionas compared to the three months ended June 30, 2020. This increase was driven by a $309 millionincrease in net revenue primarily from Apex Legends, Mass Effect Trilogy Remaster, and the FIFAfranchise, partially offset by a $217 milliondecrease in net revenue primarily from The Sims, Star Wars, and Need for Speed franchises. Net Revenue by Composition
Our breakdown of net sales for the past three months
Three Months Ended June 30, 2021 2020 $ Change % Change Net revenue: Full game downloads
$ 233 $ 223 $ 104 % Packaged goods 89 136 (47) (35) % Full game $ 322 $ 359 $ (37)(10) % Live services and other $ 1,229 $ 1,100 $ 12912 % Total net revenue $ 1,551 $ 1,459 $ 926 % 37
-------------------------------------------------------------------------------- Table of Contents Full Game Net Revenue Full game net revenue includes full game downloads and packaged goods. Full game downloads includes revenue from digital sales of full games on console, PC, and mobile phones and tablets. Packaged goods includes revenue from software that is sold physically. This includes (1) net revenue from game software sold physically through traditional channels such as brick and mortar retailers, and (2) software licensing revenue from third parties (for example, makers of console platforms, personal computers or computer accessories) who include certain of our full games for sale with their products (for example, OEM bundles). For the three months ended
June 30, 2021, full game net revenue was $322 million, primarily driven by FIFA21, Mass Effect Trilogy Remaster, It Takes Two, Madden NFL 21, and UFC 4. Full game net revenue for the three months ended June 30, 2021decreased $37 million, or 10 percent, as compared to the three months ended June 30, 2020. This decrease was driven by a $47 milliondecrease in packaged goods net revenue primarily driven by the FIFAfranchise, Star Wars Jedi: Fallen Order, the Madden, and Need for Speed franchises, and partially offset by Mass Effect Trilogy Remaster. This decrease was offset by a $10 millionincrease in full game downloads net revenue primarily from Mass Effect Trilogy Remaster and It Takes Two, and partially offset by the Star Wars, Need for Speed, The Sims, and FIFAfranchises. Live Services and Other Net Revenue Live services and other net revenue includes revenue from sales of extra content for console, PC and mobile games, licensing revenue from third-party publishing partners who distribute our games digitally, subscriptions, advertising, and non-software licensing. For the three months ended June 30, 2021, live services and other net revenue was $1,229 millionprimarily driven by sales of extra content for FIFA Ultimate Team, Apex Legends, Madden Ultimate Team, and The Sims 4. Live services and other net revenue for the three months ended June 30, 2021increased $129 million, or 12 percent, as compared to the three months ended June 30, 2020. This increase was primarily driven by sales of extra content for Apex Legends and FIFA Ultimate Team, and partially offset by The Sims 4. Cost of Revenue Quarterly Analysis Cost of revenue consists of (1) manufacturing royalties, net of volume discounts and other vendor reimbursements, (2) certain royalty expenses for celebrities, professional sports leagues, movie studios and other organizations, and independent software developers, (3) data center, bandwidth and server costs associated with hosting our online games and websites, (4) inventory costs, (5) payment processing fees, (6) mobile platform fees associated with our mobile revenue (for transactions in which we are acting as the principal in the sale to the end customer), (7) expenses for defective products, (8) write-offs of post launch prepaid royalty costs and losses on previously unrecognized licensed intellectual property commitments, (9) amortization of certain intangible assets, (10) personnel-related costs, and (11) warehousing and distribution costs. We generally recognize volume discounts when they are earned from the manufacturer (typically in connection with the achievement of unit-based milestones); whereas other vendor reimbursements are generally recognized as the related revenue is recognized. Cost of revenue for the three months ended June 30, 2021and 2020 was as follows (in millions): June 30, June 30, Change as a % of 2021 % of Net Revenue 2020 % of Net Revenue % Change Net Revenue $ 31520 % $ 28820 % 9 % - % Cost of Revenue Cost of revenue increased by $27 million, or 9 percent during the three months ended June 30, 2021, as compared to the three months ended June 30, 2020. This increase was primarily due to an increase in intangible amortization due to acquisition-related intangible assets and an increase in platform and hosting fees due to higher engagement with our mobile games and Apex Legends. These increases were partially offset by a decrease in royalty costs primarily driven by lower sales associated with the Madden, FIFA, and Star Wars franchises. 38 -------------------------------------------------------------------------------- Table of Contents Research and Development Research and development expenses consist of expenses incurred by our production studios for personnel-related costs, related overhead costs, external third-party development costs, contracted services, depreciation and any impairment of prepaid royalties for pre-launch products. Research and development expenses for our online products include expenses incurred by our studios consisting of direct development and related overhead costs in connection with the development and production of our online games. Research and development expenses also include expenses associated with our digital platform, software licenses and maintenance, and management overhead. Research and development expenses for the three months ended June 30, 2021and 2020 were as follows (in millions): June 30, % of Net June 30, % of Net 2021 Revenue 2020 Revenue $ Change % Change Three months ended $ 51533 % $ 43830 % $ 7718 % Research and development expenses increased by $77 million, or 18 percent, during the three months ended June 30, 2021, as compared to the three months ended June 30, 2020. This increase was primarily due to a $45 millionincrease in personnel-related costs primarily resulting from an increase in headcount due to acquisitions and our continued investment in our studios, a $19 millionincrease in stock-based compensation, an $18 millionincrease in development advances to third-party developers, and a $12 millionincrease in facility related costs. These increases were partially offset by a $15 millionbenefit in cash flow hedging activities. Marketing and Sales Marketing and sales expenses consist of personnel-related costs, related overhead costs, advertising, marketing and promotional expenses, net of qualified advertising cost reimbursements from third parties. Marketing and sales expenses for the three months ended June 30, 2021and 2020 were as follows (in millions): June 30, % of Net June 30, % of Net 2021 Revenue 2020 Revenue $ Change % Change Three months ended $ 19012 % $ 1218 % $ 6957 % Marketing and sales expenses increased by $69 million, or 57 percent during the three months ended June 30, 2021, as compared to the three months ended June 30, 2020. This increase was primarily due to an increase in advertising and promotional spending primarily on our mobile titles and the upcoming release of Battlefield 2042. General and Administrative General and administrative expenses consist of personnel and related expenses of executive and administrative staff, corporate functions such as finance, legal, human resources, and information technology, related overhead costs, fees for professional services such as legal and accounting, and allowances for doubtful accounts. General and administrative expenses for the three months ended June 30, 2021and 2020 were as follows (in millions): June 30, % of Net June 30, % of Net 2021 Revenue 2020 Revenue $ Change % Change Three months ended $ 16911 % $ 1369 % $ 3324 % General and administrative expenses increased by $33 million, or 24 percent, during the three months ended June 30, 2021, as compared to the three months ended June 30, 2020. This increase was primarily due to a $14 millionincrease in acquisition-related transaction costs related to Glu and our pending acquisition of Playdemic, an $8 millionincrease in personnel-related costs resulting from an increase in headcount primarily due to acquisitions, a $4 millionincrease in contracted services, a $3 millionincrease in stock-based compensation, and a $3 millionincrease in facility related costs. 39 -------------------------------------------------------------------------------- Table of Contents Amortization of Intangibles Amortization of intangibles for the three months ended June 30, 2021and 2020 were as follows (in millions): June 30, % of Net June 30, % of Net 2021 Revenue 2020 Revenue $ Change % Change Three months ended $ 403 % $ 5- %
Amortization of intangibles increased by
$35 millionduring the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, due to an increase in acquired intangible assets from recent acquisitions. Income Taxes Provision for (benefit from) income taxes for the three months ended June 30, 2021and 2020 were as follows (in millions): June 30, 2021 Effective Tax Rate June 30, 2020 Effective Tax Rate Three months ended $ 104 34 % $ 103 22 % The provision for income taxes for the three months ended June 30, 2021is based on our projected annual effective tax rate for fiscal year 2022, adjusted for specific items that are required to be recognized in the period in which they are incurred. Our effective tax rate for the three months ended June 30, 2021was 34 percent, as compared to 22 percent for the same period in fiscal year 2021 and the 21 percent U.S.federal statutory rate. The higher effective tax rate was primarily due to our decision to capitalize for income tax purposes certain foreign expenses which increased the taxable income in our foreign entities that is subject to U.S.tax. In accordance with our existing accounting policy, we do not establish deferred tax assets to offset this charge, but we expect future deductions of the capitalized amounts. Each quarter, we perform a realizability analysis to evaluate whether it is more likely than not that all or a portion of our deferred tax assets will not be realized. During the three months ended June 30, 2021, we recognized an additional $13 millionof valuation allowance against our deferred tax assets primarily due to the expected alignment of the recently acquired businesses with our global operating structure.
LIQUIDITY AND CAPITAL RESOURCES
As of As of (In millions) June 30, 2021 March 31, 2021 Increase/(Decrease) Cash and cash equivalents
$ 2,838 $ 5,260$ (2,422) Short-term investments 881 1,106 (225) Total $ 3,719 $ 6,366$ (2,647) Percentage of total assets 29 % 48 % Three Months Ended June 30, (In millions) 2021 2020 Change Net cash provided by (used in) operating activities $ (143) $ 378 $ (521)Net cash used in investing activities (1,811) (8) (1,803) Net cash used in financing activities (479) (144) (335) Effect of foreign exchange on cash and cash equivalents 11 19 (8) Net increase (decrease) in cash and cash equivalents $ (2,422) $ 245 $ (2,667)40
-------------------------------------------------------------------------------- Table of Contents Changes in Cash Flow Operating Activities. Net cash used in operating activities increased by
$521 millionduring the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, primarily driven by higher cash payments for income taxes and royalties, higher variable compensation payments related to fiscal year 2021 performance, higher personnel-related payments primarily from an increase in headcount, higher acquisition transaction costs, and higher marketing and advertising payments. Investing Activities. Net cash used in investing activities increased by $1,803 millionduring the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, primarily driven by payments of $1,989 millionin connection with acquisitions completed during the three months ended June 30, 2021and a $187 milliondecrease in proceeds from maturities and sales of short-term investments. These increases were offset by a $379 milliondecrease in the purchase of short-term investments. Financing Activities. Net cash used in financing activities increased by $335 millionduring the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, primarily driven by a $247 millionincrease in the repurchase and retirement of our common stock, a payment of $49 millionof cash dividends during the three months ended June 30, 2021, and a $36 millionincrease in cash paid to taxing authorities in connection with withholding taxes for stock-based compensation. Short-term Investments Due to our mix of fixed and variable rate securities, our short-term investment portfolio is susceptible to changes in short-term interest rates. As of June 30, 2021, our short-term investments had gross unrealized gains of $1 million, or less than 1 percent of the total in short-term investments. From time to time, we may liquidate some or all of our short-term investments to fund operational needs or other activities, such as capital expenditures, business acquisitions or stock repurchase programs. Senior Notes In February 2021, we issued $750 millionaggregate principal amount of the 2031 Notes and $750 millionaggregate principal amount of the 2051 Notes. The effective interest rate is 1.98% for the 2031 Notes and 3.04% for the 2051 Notes. Interest is payable semiannually in arrears, on February 15and August 15of each year. In February 2016, we issued $400 millionaggregate principal amount of the 2026 Notes. The effective interest rate is 4.97% for the 2026 Notes. Interest is payable semiannually in arrears, on March 1and September 1of each year. See Note 11 - Financing Arrangements to the Condensed Consolidated Financial Statements in this Form 10-Q as it relates to our Senior Notes, which is incorporated by reference into this Item 2. Credit Facility On August 29, 2019, we entered into a $500 millionunsecured revolving credit facility ("Credit Facility") with a syndicate of banks. The Credit Facility terminates on August 29, 2024unless the maturity is extended in accordance with its terms. As of June 30, 2021, no amounts were outstanding under the Credit Facility. See Note 11 - Financing Arrangements to the Condensed Consolidated Financial Statements in this Form 10-Q as it relates to our Credit Facility, which is incorporated by reference into this Item 2. Financial Condition Our material cash requirements as of June 30, 2021 are set forth in our Note 12 - Commitments and Contingencies to the Condensed Consolidated Financial Statements in this Form 10-Q, which is incorporated by reference into this Item 2. We expect capital expenditures to more than double in fiscal year 2022 to approximately $250 milliondue to facility buildouts. We believe that our cash, cash equivalents, short-term investments, cash generated from operations and available financing facilities will be sufficient to meet these material cash requirements, which include debt repayment obligations of $1.9 billion, and fund our operating requirements for the next 12 months and beyond, including working capital requirements, capital expenditures, our $2.6 billionshare repurchase program, quarterly cash dividend, which is currently $0.17per share, subject to declaration by our Board of Directors or a designated Committee of the Board of Directors, and potentially, future acquisitions or strategic investments. We may choose at any time to raise additional capital to repay debt, strengthen our financial position, facilitate expansion, repurchase our stock, pursue strategic acquisitions and investments, and/or to take advantage of business 41 -------------------------------------------------------------------------------- Table of Contents opportunities as they arise. There can be no assurance, however, that such additional capital will be available to us on favorable terms, if at all, or that it will not result in substantial dilution to our existing stockholders. During the three months ended June 30, 2021, we returned $374 millionto stockholders through our capital return programs, repurchasing 2.3 million shares for approximately $325 millionand $49 millionthrough our quarterly cash dividend program which was initiated in November 2020. During the three months ended June 30, 2021, we also completed mergers and acquisitions activity, including the acquisition of 100% of the equity interests of Glu for cash consideration of $2.0 billion, net of cash acquired, and one other immaterial acquisition. In addition, on June 23, 2021we announced that we entered into a share purchase agreement to acquire Playdemicfor $1.4 billionin cash, subject to a customary closing condition regarding the receipt of applicable regulatory clearances. We intend to fund this acquisition with existing cash on hand. Our foreign subsidiaries are generally subject to U.S.tax, and to the extent earnings from these subsidiaries can be repatriated without a material tax cost, such earnings will not be indefinitely reinvested. As of June 30, 2021, approximately $1.1 billionof our cash, cash equivalents, and short-term investments were domiciled in foreign tax jurisdictions. All of our foreign cash is available for repatriation without a material tax cost. We have a "shelf" registration statement on Form S-3 on file with the SEC. This shelf registration statement, which includes a base prospectus, allows us at any time to offer any combination of securities described in the prospectus in one or more offerings. Unless otherwise specified in a prospectus supplement accompanying the base prospectus, we would use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes, which may include funding for working capital, financing capital expenditures, research and development, marketing and distribution efforts, and if opportunities arise, for acquisitions or strategic alliances. Pending such uses, we may invest the net proceeds in interest-bearing securities. In addition, we may conduct concurrent or other financings at any time. Our ability to maintain sufficient liquidity could be affected by various risks and uncertainties including, but not limited to, customer demand and acceptance of our products, our ability to collect our accounts receivable as they become due, successfully achieving our product release schedules and attaining our forecasted sales objectives, economic conditions in the United Statesand abroad, the impact of acquisitions and other strategic transactions in which we may engage, the impact of competition, the seasonal and cyclical nature of our business and operating results, and the other risks described in the " Risk Factors " section, included in Part II, Item 1A of this report. As of June 30, 2021, we did not have any off-balance sheet arrangements. 42
Table of Contents
© Edgar Online, source