ELECTRONIC ART: Discussion and analysis of the financial and earnings position by management (Form 10-Q)

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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.


OVERVIEW

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, 2021 as
filed with the SEC on May 26, 2021 and in other documents we have filed with the
SEC.
About Electronic Arts
Electronic Arts is 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.
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Financial Results
Our key financial results for our fiscal quarter ended June 30, 2021 were 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 million with 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 million during 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".
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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 million and $3,238 million
for 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 million and $2,479 million for 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
million and $1,369 million during 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 million and $681 million during fiscal years 2021, 2020 and 2019,
respectively; while our net revenue attributable to packaged goods sales
decreased from $1,112 million in fiscal year 2019 to $1,076 million in fiscal
year 2020 and $695 million in 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, Europe and 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.
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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          $ 1,459
Change in deferred net revenue (online-enabled games)          (215)             (69)
Net bookings                                             $    1,336          $ 1,390


Net bookings were $1,336 million for the three months ended June 30, 2021 driven
by sales related to FIFA 21, Apex Legends, The Sims 4, Mass Effect Trilogy
Remaster, and Star Wars: Galaxy of Heroes. Net bookings decreased $54 million or
4 percent as compared to the three months ended June 30, 2020. Live services and
other net bookings were $1,054 million for the three months ended June 30, 2021,
and decreased $49 million or 4 percent as compared to the three months ended
June 30, 2020. Full game net bookings were $282 million for the three months
ended June 30, 2021, and decreased $5 million or 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, 2020 contained 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 plc for 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 England and Wales for $1.4 billion in 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
Playdemic is part of our mobile growth strategy and the acquisition will add to
our current mobile portfolio. The Playdemic acquisition 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  .

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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).
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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
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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 million in 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 Store and 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
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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. Switzerland has 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.

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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  

to

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,
2022 contains 52 weeks and ends on April 2, 2022. Our results of operations for
the fiscal year ended March 31, 2021 contained 53 weeks and ended on April 3,
2021. Our results of operations for the three months ended June 30, 2021
contained 13 weeks and ended on July 3, 2021. Our results of operations for the
three months ended June 30, 2020 contained 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, 2021 was $1,551 million,
primarily driven by FIFA 21, 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, 2021 increased $92
million as compared to the three months ended June 30, 2020. This increase was
driven by a $309 million increase in net revenue primarily from Apex Legends,
Mass Effect Trilogy Remaster, and the FIFA franchise, partially offset by a $217
million decrease 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 June 30, 2021 and 2020 was as follows (in millions):

                                           Three Months Ended June 30,
                                  2021              2020        $ Change       % Change
Net revenue:
Full game downloads       $       233             $   223      $      10            4  %
Packaged goods                     89                 136            (47)         (35) %
Full game                 $       322             $   359      $     (37)         (10) %

Live services and other   $     1,229             $ 1,100      $     129           12  %
Total net revenue         $     1,551             $ 1,459      $      92            6  %


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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 FIFA 21, Mass Effect Trilogy Remaster, It Takes
Two, Madden NFL 21, and UFC 4. Full game net revenue for the three months ended
June 30, 2021 decreased $37 million, or 10 percent, as compared to the three
months ended June 30, 2020. This decrease was driven by a $47 million decrease
in packaged goods net revenue primarily driven by the FIFA franchise, 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
million increase 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 FIFA franchises.
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 million primarily 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, 2021 increased $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, 2021 and 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
$        315                             20  %       $       288                       20  %                      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.

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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, 2021 and
2020 were as follows (in millions):
                      June 30,       % of Net      June 30,       % of Net
                        2021         Revenue         2020         Revenue       $ Change      % Change
Three months ended   $     515           33  %    $     438           30  %    $     77           18  %


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 million increase
in personnel-related costs primarily resulting from an increase in headcount due
to acquisitions and our continued investment in our studios, a $19 million
increase in stock-based compensation, an $18 million increase in development
advances to third-party developers, and a $12 million increase in facility
related costs. These increases were partially offset by a $15 million benefit 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, 2021 and 2020
were as follows (in millions):
                      June 30,       % of Net      June 30,       % of Net
                        2021         Revenue         2020         Revenue       $ Change      % Change
Three months ended   $     190           12  %    $     121            8  %    $     69           57  %


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, 2021 and
2020 were as follows (in millions):
                      June 30,       % of Net      June 30,       % of Net
                        2021         Revenue         2020         Revenue       $ Change      % Change
Three months ended   $     169           11  %    $     136            9  %    $     33           24  %


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 million increase
in acquisition-related transaction costs related to Glu and our pending
acquisition of Playdemic, an $8 million increase in personnel-related costs
resulting from an increase in headcount primarily due to acquisitions, a $4
million increase in contracted services, a $3 million increase in stock-based
compensation, and a $3 million increase in facility related costs.
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Amortization of Intangibles
Amortization of intangibles for the three months ended June 30, 2021 and 2020
were as follows (in millions):
                      June 30,      % of Net      June 30,       % of Net
                        2021        Revenue         2020         Revenue       $ Change      % Change
Three months ended   $     40            3  %    $       5            -  %  

$ 35 700%


Amortization of intangibles increased by $35 million during 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,
2021 and 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, 2021 is 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, 2021 was 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 million of 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)


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Changes in Cash Flow
Operating Activities. Net cash used in operating activities increased by $521
million during 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
million during the three months ended June 30, 2021, as compared to the three
months ended June 30, 2020, primarily driven by payments of $1,989 million in
connection with acquisitions completed during the three months ended June 30,
2021 and a $187 million decrease in proceeds from maturities and sales of
short-term investments. These increases were offset by a $379 million decrease
in the purchase of short-term investments.
Financing Activities. Net cash used in financing activities increased by $335
million during the three months ended June 30, 2021, as compared to the three
months ended June 30, 2020, primarily driven by a $247 million increase in the
repurchase and retirement of our common stock, a payment of $49 million of cash
dividends during the three months ended June 30, 2021, and a $36 million
increase 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 million aggregate principal amount of the 2031
Notes and $750 million aggregate 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 15 and August 15
of each year.
In February 2016, we issued $400 million aggregate 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 1 and September 1 of 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 million unsecured revolving credit
facility ("Credit Facility") with a syndicate of banks. The Credit Facility
terminates on August 29, 2024 unless 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 million due 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 billion share repurchase
program, quarterly cash dividend, which is currently $0.17 per 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
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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 million to
stockholders through our capital return programs, repurchasing 2.3 million
shares for approximately $325 million and $49 million through 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, 2021 we announced that we
entered into a share purchase agreement to acquire Playdemic for $1.4 billion in
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 billion of 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 States and
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.


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