UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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| þ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 20172020
OR
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| ¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 000-17948
ELECTRONIC ARTS INC.
(Exact name of registrant as specified in its charter)
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| Delaware | | | | 94-2838567 |
(State or other jurisdiction of
incorporation or organization)
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| | (I.R.S. Employer
Identification No.)
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| 209 Redwood Shores Parkway | | | | 94065 |
Redwood City California | California | | | (Zip Code) |
| (Address of principal executive offices) | | | | |
Registrant’s telephone number, including area code:
(650) 628-1500
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class | | Trading Symbol | | Name of Each Exchange on Which Registered |
| Common Stock, $0.01 par value | | EA | | NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically, and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. |
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Large accelerated filer þ Accelerated Filer | þ | | Accelerated filer¨ | ¨ | | Non-accelerated filer¨ | ¨ | | Smaller reporting company | ¨ |
Emerging growth company¨ | ¨ | (Do not check if a smaller reporting company) | | | | | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No þ
The aggregate market value of the registrant’s common stock, $0.01 par value, held by non-affiliates of the registrant as of September 30, 2016,27, 2019, the last business day of our second fiscal quarter, was $24,908$27,568 million.
As of May 22, 2017,18, 2020, there were 310,028,355288,687,620 shares of the registrant’s common stock, $0.01 par value, outstanding.
Documents Incorporated by Reference
Portions of the registrant’s definitive proxy statement for its 20172020 Annual Meeting of Stockholders (the “2017“2020 Proxy”) are incorporated by reference into Part III hereof. The 20172020 Proxy is expected to be filed not later than 120 days after the registrant’s fiscal year end. Except with respect to information specifically incorporated by reference into this Form 10-K, the 2020 Proxy is not deemed to be filed as part hereof.
ELECTRONIC ARTS INC.
20172020 FORM 10-K ANNUAL REPORT
Table of Contents
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| PART I | Page |
| PART I | |
| Item 1 | | |
| Item 1A | | |
| Item 1B | | |
| Item 2 | | |
| Item 3 | | |
| Item 4 | | |
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| PART II | |
| Item 5 | | |
| Item 6 | | |
| Item 7 | | |
| Item 7A | | |
| Item 8 | | |
| Item 9 | | |
| Item 9A | | |
| Item 9B | | |
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| PART III | |
| Item 10 | | |
| Item 11 | | |
| Item 12 | | |
| Item 13 | | |
| Item 14 | | |
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| PART IV | |
| Item 15 | | |
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CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, made in this Report are forward looking. Examples of forward-looking statements include statements related to industry prospects, our future economic performance including anticipated revenues and expenditures, results of operations or financial position, and other financial items, our business plans and objectives, including our intended product releases, and may include certain assumptions that underlie the 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 help 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 subject to business and economic risknot guarantees of future performance and reflect management’s current expectations, and involve subjects that are inherently uncertain and difficult to predict.expectations. Our actual results could differ materially from those discussed in the forward-looking statements. We will not necessarily update information if any forward-looking statement later turns outFactors that might cause or contribute to be inaccurate. Risks and uncertainties that may affect our future resultssuch differences include but are not limited to, those discussed in Part I, Item 1A of this Annual Report under the heading “Risk Factors,”Factors” beginning on page 9. We assume no obligation to revise or update any forward-looking statement for any reason, except as required by law.
PART I
Item 1: Business
Overview
We areElectronic Arts is a global leader in digital interactive entertainment. We develop, market, publish and distributedeliver games, content and services that can be played by consumersand watched on a variety of platforms, which include game consoles, PCs, mobile phones and tablets.
Our StrategyStrategic Pillars
Our strategy is to create amazing games and content, powered by services, delivered to a large, global audience. We have three core pillars to our strategy:
•Players First
•Commitment to Digital
•One EA
Players First
Players arebelieve that the foundationbreadth and depth of our success,portfolio, live services offerings, and our use of multiple business models and distribution channels provide us with strategic advantages. These advantages include the opportunity to engage an increasing number of players across more distribution channels and geographies, and dependable sources of 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.
Amazing Games and Content, Powered by Services
Our foundation is a portfolio of intellectual property from which we are committed to thinking about players first in everything we do. Our goal iscreate innovative games and content that enables us to build deep, on-going and meaningful relationships with our players. We aim to build these relationships by creating amazing gamescommunities of players, creators and servicesviewers. Our portfolio includes brands that deliver long-lasting funwe either wholly own (such as Battlefield, The Sims, Apex Legends, Need for Speed and enduring value, by connecting with our players across platforms and by delivering flexibility and innovation in our business models.
Our games and services are based on a portfolio of intellectual property that includes established brands suchPlants v. Zombies) or license from others (such as FIFA, Madden NFL and Star Wars, Battlefield, the Sims and Need for Speed. Our goal is toWars).
We develop and publish a broad and deep portfolio of games and services that engages players across geographies, platformsdiverse genres, such as sports, first-person shooter, action, role-playing and business models.simulation. We werehave added to the number one publisher on PlayStation 4 and Xbox One consolesbreadth of our portfolio in recent years by, among other things, launching Star Wars Jedi: Fallen Order, a single-player action-adventure game based in the Western WorldStar Wars universe, and Apex Legends, our first free-to-play console game, as well as by expanding the ways in which players can engage with The Sims 4. The depth of our portfolio is demonstrated by providing players with opportunities for choice within genres and franchises. For example, our sports portfolio includes the FIFA (soccer), Madden NFL (American football), NHL (ice hockey), and UFC (ultimate fighting) franchises, among others. And within our franchises we have innovated by providing multiple modalities of play designed to satisfy the various motivations of our players. For example, within FIFA 20, in addition to the professional soccer simulation base game, players can also engage with FIFA Ultimate Team, designed for players motivated by competition and self-improvement as well as VOLTA FOOTBALL, designed for players that play for social connection and self-expression. FIFA is our largest and most popular game and franchise, and the annualized console and PC game is consistently one of the best-selling games in the marketplace. Net revenue from FIFA 20, FIFA 19,and FIFA 18 represented approximately 12 percent of our total net revenue in fiscal year 2017 based on available sources2020, approximately 14 percent of our total net revenue in fiscal year 2019 and EA estimatesapproximately 11 percent of our total net revenue in fiscal year 2018, respectively.
We seek to add to the breadth and depth of our portfolio by investing in calendar year 2016, FIFA 17 was the best-selling console titledeveloping and establishing new brands as well as investing in the world.our partnerships with external game developers to create games and content that we bring to market.
Commitment to Digital
Players increasingly purchase
In addition, through our games digitally and engage with the 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. Our digital live services net revenue represented 51 percent of our total net revenue during fiscal year 2020. We expect that live services net revenue, particularly extra content net revenue, will continue to be material to our business. Our most popular live service is the extra content purchased within the Ultimate Team mode associated with our portfolio of games. Our live services engagement model includes microtransactions, downloadable content, subscriptions, esports, among others. For example, features suchsports franchises. Ultimate Team allows players to collect current and former professional players in order to build, and compete as, the a personalized team. Net revenue from Ultimate Team moderepresented approximately 27 percent, 28 percent and 23 percent of our total net revenue during fiscal year 2020, 2019 and 2018, respectively, a substantial portion of which was derived from FIFA Ultimate Team. In addition, in our FIFA, Madden NFLfiscal year 2020, we provided players with additional engagement opportunities through new maps, vehicles and NHLmore in Battlefield V, new ways to play across eras in Star Wars Battlefront II, launched four seasons of content for Apex Legends and released five additional content packs for The Sims 4 on PC.
Within our games and live services, for our Star Wars, Battlefield and Sims franchises have extended the life of those games by engaging players over longer periods of time. This digital transformation also is creating opportunities in platforms, content models and modalities of play. For example, we have leveraged franchises historically associated with consoles and traditional PC gaming, such as FIFA, Madden NFL, The Sims, SimCity, and Star Wars, to create mobile and PC free-to-download gamesoffer additional services that are monetized through a business model in which we sell incremental content and/or features in discrete transactions.
We have significantly increased our digital net revenue from $2.199 billion in fiscal year 2015designed to $2.409 billion in fiscal year 2016 and $2.874 billion during fiscal year 2017. We believe that our digital revenue, which generally has a higher gross margin relative to packaged goods revenue, will continue to increase during fiscal year 2018 relative to packaged goods
revenue and in absolute terms as we continue to focus on developing and monetizing products and services that can be delivered digitally.
One EA
The pursuit of our goals requires that we operate as one team that is fast, focused and constantly evolving and we have undertaken a cultural shift across our organization to become more flexible. We are transitioning from developing our console and PC products and services on over twenty game engines to developing on a single game engine. This transition has created operational flexibility as our development teams code in the same language, increases the pace of our development as content can be leveraged across franchises and allows us to transition our products and services to new platforms quickly and cost-effectively.
We are also working to strengthen our player network, connecting ourconnect players to each othertheir friends and to the games they love.love, such as access to online marketplaces and in-game player rewards and achievements, which such services do not directly monetize. We also are investing in a technology foundationnumber of long-term service-based initiatives that we believe will allow us to better serve and deepen our engagement with our players, such as an infrastructure that will enable us to build personalized player relationshipsbetter deliver content that will resonate with players and provide more choice in the way that players connect with their games, with each other, and with new types of content, and our esports initiatives. We believe that the interest and enthusiasm that surrounds esports will drive engagement and monetization in our products and services in addition to providing revenue opportunities through partnerships with sponsors and broadcasters.
Delivered to a Large, Global Audience
We are focused on reaching more players whenever and wherever they want to play. We believe that we can lastadd value to our network by making it easier for years instead of days or weeks by connecting our players to usconnect to a world of play by offering choice of business model, distribution channel and to each other. This connection allows us to market and deliver content and services for popular franchises like FIFA, Battlefield and Star Wars to our players more efficiently. That same foundation also enables new player-centric ways to discover and try new experiences, such as our subscription-based EA Access and Origin Access services.
device. Our Games and Services
We develop games and services for a variety of platforms, includingcan be played and watched on consoles, PCs, mobile phones, tablets, and tablets. We marketreach our players through both digital distribution channels and sellretail channels. Players can access our games and services through digitaltraditional single-game purchase or through our subscription offerings; and certain of our games and services are available through a “free-to-play” model whereby players download the game for free and engage with services provided on an ongoing basis. For example, we develop products and services within the FIFA franchise that allow players to engage with FIFA through multiple business models, distribution channels and devices, including: (1) our annualized console and PC games and associated services, which can be purchased through both digital distribution and retail channels. We believe that flexibility across platforms, distribution channels and business modelsalso is critical to maintainingavailable through our subscription services; (2) FIFA Mobile, a mobile free-to-play offering; and growing our player base, as well as increasing engagement with our games and services. New gaming platforms, engagement models and business models are expected to continue to emerge(3) FIFA Online, a PC free-to-play game available in the future, and we intend to evaluate these opportunities on a case-by-case basis.certain Asian countries.
Digitally, our console games and live services can be purchased through third-party storefronts, such as Sony’s PlayStation Storethe digital stores of our console partners Sony, Microsoft and Microsoft’s Xbox Store.Nintendo. Our direct sales to Sony and Microsoft represented approximately 1932 percent and 17 percent of total net revenue, respectively, in fiscal 2017. Our direct sales to Sony and Microsoft representedyear 2020; approximately 1629 percent and 1416 percent of total net revenue, respectively, in fiscal 2016. Our direct sales to Microsoft representedyear 2019; and approximately 1027 percent and 16 percent of total net revenue, respectively, in fiscal 2015.year 2018. Our mobile and tablet games and services are available through third-party application storefronts such as the Apple App Store and Google Play. Our PC games and services can be downloaded directly through our Origin, platform,EA’s digital storefront, as well as through third-party online download stores.stores, such as Steam. We also partner with third parties to publish our mobile and PC games on their platformsand services in certain Asian territories, such as our partnerships with Tencent Holdings Limited and Nexon Co. Ltd. for FIFA Online 3 in China and Korea, respectively. Players canFrom time to time, third parties will publish mobile and tablet games and services under a license to certain of our intellectual property assets.
We also offer subscription services, such as EA Access on consoles and Origin Access and Origin Access Premier on PC as we look to build deeper relationships with our players and offer increased choice and flexibility for our players to try new games. These subscription services allow players access to a catalogselection of our console and PC games throughand services for a monthly or annual fee. In fiscal year 2020, we expanded our subscription-basedsubscription offerings by bringing our EA Access subscription service to the Sony distribution channel and expect to expand our Origin Access services, respectively.subscription service to more distribution channels in fiscal year 2021.
Our packaged goods games are sold directly to mass market retailers, electronics specialty stores and game software specialty stores or through distribution arrangements. Our direct sales
New distribution methods and business models are expected to GameStop represented approximately 11 percentcontinue to emerge in the future, and we intend to evaluate these opportunities on a case-by-case basis.
In our games, we use established brands that we either wholly own (such as Battlefield, Mass Effect, Need for Speed, The Sims and Plants v. Zombies) or license from others (such as FIFA, Madden NFL and Star Wars). From time to time, we contract with external game developers, such as Respawn Entertainment, to develop our games or to publish and distribute their games. We believe our established brands give us the opportunity to engage an increasing number of players across more platforms, more geographies and through more business models.
In fiscal year 2017, net revenue from our Ultimate Team services and FIFA 17 represented approximately 16 percent and 11 percent, respectively, of our total net revenue. In fiscal year 2016, net revenue from our Ultimate Team services and FIFA 16 represented approximately 15 percent and 11 percent, respectively, of our total net revenue. In fiscal year 2015, net revenue from our Ultimate Team services, Battlefield 4 and FIFA 15 represented approximately 13 percent, 11 percent and 11 percent, respectively, of our total net revenue.
We also are investing in a number of long-term initiatives that we believe will allow us to better serve and deepen our engagement with our players, such as our EA Competitive Gaming Division through which we will focus our efforts in competitive gaming and esports.
Significant Relationships
Sony & Microsoft. Under the terms of agreements we have entered into with Sony Computer Entertainment Inc. and its affiliates and with Microsoft Corporation and its affiliates, we are authorized to develop and distribute disc-based and digitally-delivered software products and services compatible with PlayStation and Xbox consoles, respectively. As of the date of this filing, we have not entered into a licensed publisher agreement with Sony for PlayStation 4, and the parties currently operate under the terms of existing agreements, subject to a new pricing structure with respect to PlayStation 4.
Under thethese agreements with Sony and Microsoft, we are provided withhave the non-exclusive right to use, for a fixed term and in a designated territory, technology that is owned or licensed by them to publish our games on their respective platform.consoles. With respect to our digitally-delivered products and services, the console manufacturers pay us either a wholesale price or a royalty percentage on the revenue they derive from their sales of our products and services. Our transactions for disc-basedpackaged goods products are made pursuant to individual purchase orders, which are accepted on a case-by case basis by Sony or Microsoft (or their designated replicators), as the case may be. For packaged goods products, we pay the console manufacturers a per-unit royalty for each unit manufactured. With respect to digitally-delivered products and services, the console manufacturers pay us either a wholesale price or a percentage royalty on the revenue they derive from their sales of our products and services. Many key commercial terms of our relationships with Sony and Microsoft -— such as manufacturing terms, delivery times, platform policies and approval conditions -— are determined unilaterally, and are subject to change by the console manufacturers.
The platform license agreements also require us to indemnify the console manufacturers for any loss, liability and expense resulting from any claim against the console manufacturer regarding our games and services, including any claims for patent, copyright or trademark infringement brought against the console manufacturer. Each platform license may be terminated by the console manufacturer if a breach or default by us is not cured after we receive written notice from the console manufacturer, or if we become insolvent. The console manufacturers are not obligated to enter into platform license agreements with us for any future consoles, products or services.
Apple, Google and Other App Stores. We have agreements to distribute our mobile applications and additional content through distributors such as Apple and Google. Our applications are downloaded for mobile devices from third party application storefronts. The distributor eithercharges consumers for content purchased within the application or charges consumers a one-time fee to download the application or charges consumers for content purchased within the application after it is downloaded for free.application. Our distribution agreements establish the amounts that are retained by the distributor and the amounts passed through to us. These arrangements are typically terminable on short notice. The agreements generally do not obligate the distributors to market or distribute any of our applications.
Publishing Partners in Asia. We have entered into agreements whereby we partner with certain companies, including Tencent Holdings Limited and Nexon Co., Ltd. or their respective affiliates, pursuant to which these companies publish our mobile and PC free-to-downloadfree-to-play games in certain Asian territories, including China and Korea. Our players access games from the publishers’ platforms,online storefronts and are charged for additional content purchased within our game environment. The agreements generally establish the amounts that are retained by the publisher, and the amounts passed through to us.
Competition
The market for interactive entertainment is intensely competitive and changes rapidly as new products, business models and platformsdistribution channels are introduced. We also face competition for the right to use certain intellectual property included in our products. In order to remain successful, we are required to anticipate, sometimes years in advance, the ways in which our products and services will compete in the market. We face significant competition from companies such as Activision Blizzard, Take-Two Interactive, Ubisoft, Bethesda, Epic Games, NetEase, Tencent, Sony, Microsoft and Microsoft,Nintendo, primarily with respect to developing games and services that operate on consoles, PCs and/or mobile devices. In addition, broader technology companies with significant resources, including Google, Apple and Amazon, are pursuing initiatives in our industry that may compete with us.
More broadly, we compete against providers of different sources of entertainment, such as motion pictures,movies, television, social networking, online casual entertainment and music that our players could enjoy in their free time. Important competitive factors in our industry include the ability to attract creative and technical talent, game quality and ease of use, innovation, compatibility of products with certain platforms,consoles and other distribution channels, brand recognition, reputation, reliability, security, creativity, price, marketing, and quality of customer service.
Intellectual Property and Technology
To establish and protect our intellectual property, we rely on a combination of copyrights, trademarks, patents, patent applications, trade secrets, know-how, license agreements, confidentiality provisions and procedures and other contractual provisions. We actively engage in enforcement and other activities to protect our intellectual property.property, but the laws of some countries in which we operate, particularly in Asia, either do not protect our intellectual property to the same extent as the laws of the United States or are poorly enforced. As our digital business has grown, our games and services increasingly depend on the reliability, availability and security of our technological infrastructure. Our industry is prone to, and our systems and
networks are subject to actions by malfeasant actors, such as cyber-attacks and other information security incidents. While we devote financial and operational resources to implement systems, processes and technologies to guard against cyber events and to help protect our intellectual property, employee and consumer data and information technology systems against intrusions or other security breaches, we have experienced such events in the past and expect future events to occur. In addition, we engage in activities designed to limit the impact of abuse of our digital products and services, including monitoring our games for evidence of exploitation and re-balancing our game environments in the event that such abuse is discovered.
Governmental Regulation
We are a global company subject to a number of foreignvarious and domesticcomplex laws and regulations that affect companies conducting business on the Internet. In addition,domestically and internationally, including laws and regulations that may have an impact on our business relatingrelated to user privacy, data collection and retention, consumer protection, protection of minors, content, advertising, localization, information security, intellectual property, competition and taxation, among others. Many of these laws and regulations are continuously evolving and developing, and the application to, and impact on, us is uncertain. Certain of our business models are subject to new laws or regulations or evolving interpretations and application of existing laws and regulations, including those related to gambling. The growth and development of electronic commerce, virtual items and virtual currency consumer protection, content, advertising, localizationhas prompted calls for new laws and information securityregulations and resulted in the application of existing laws or regulations that have been adoptedlimited or are being considered for adoption by many countries throughoutrestricted the world.sale of our products and services in certain territories.
Seasonality
We have historically experienced the highest percentage of our salesnet bookings in our third fiscal quarter due to seasonal holiday demand and the launch timing of our games; however,games. While we expect this trend to continue in fiscal year 2021, there can beis no assurance that this will continue. In addition, we defer the recognition of a significant amount of net revenue over an extended period of time. As a result, the quarter in which we generate the highest net sales may be different from the quarter in which we recognize the highest amount of net revenue.it will.
Employees
As of March 31, 2017,2020, we had approximately 8,8009,800 regular, full-time employees, over 5,5006,000 of whom were outside the United States. We believe that our ability to attract, train, motivate and retain qualified employees is a critical factor in the successful development of our products and services and that our future success will depend, in large measure, on our ability to continue to attractattracting, training, motivating and retainretaining qualified employees. Approximately 7 percent of our employees, all of whom work for our DICE development studio in Sweden, are represented by a union.
Investor Information
Our website address is www.ea.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act, as amended, are available free of charge on the Investor Relations section of our website at http://ir.ea.com as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). We announce material financial information and business updates through our SEC filings, press releases, public conference calls and webcasts, the Investor Relations section of our website at http://ir.ea.com, our blog at https://www.ea.com/news and through our Twitter account @EA. Except as expressly set forth in this Form 10-K annual report, the contents of our website and/or social media accounts are not incorporated into, or otherwise to be regarded as part of this report.
Company Information
We were incorporated originally in California in 1982. In September 1991, we were reincorporated under the laws of Delaware. Our principal executive offices are located at 209 Redwood Shores Parkway, Redwood City, California 94065 and our telephone number is (650) 628-1500.
Information about Geographic Areas and Research & Development Expense
Information regarding financial data by geographic area is set forth in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 16, “Segment Information”. Information regarding financial data is set forth in Part II, Item 6 of this Form 10-K under the heading “Selected Financial Data,” and information regarding certain risks attendant to our foreign operations is set forth in Part II, Item 7 of this Form 10-K under the heading “Trends inAbout Our Business”. For the fiscal years ended March 31, 2017, 2016 and 2015, research and development expenses were $1,205 million, $1,109 million and $1,094 million, respectively.
Executive Officers
The following table sets forth information regarding our executive officers as of May 24, 2017:20, 2020: |
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| Name | | Age | | Position |
| Andrew Wilson | | 4245 | | Chief Executive Officer |
| Blake Jorgensen | | 5760 | | Executive Vice President,Chief Operating Officer and Chief Financial Officer |
Patrick SöderlundLaura Miele | | 4350 | | Executive Vice President, EA WorldwideChief Studios Officer |
Laura Miele | | 47 | | Executive Vice President, Global Publishing Electronic Arts |
| Kenneth Moss | | 5154 | | Chief Technology Officer |
| Christopher Bruzzo | | 4750 | | Chief Marketing Officer |
| Joel Linzner | | 6568 | | Executive Vice President, Worldwide Business Affairs |
| Mala Singh | | 4649 | | Chief People Officer |
| Matthew Bilbey | | 44 | | Executive Vice President of Strategic Growth |
| Kenneth A. Barker | | 5053 | | Senior Vice President, Chief Accounting Officer |
| Jacob J. Schatz | | 4851 | | SeniorExecutive Vice President, General Counsel and Corporate Secretary |
Mr. Wilson has served as EA’s Chief Executive Officer and as a director of EA since September 2013. Prior to his appointment as our Chief Executive Officer, Mr. Wilson held several positions within the Company since joining EA in May 2000, including Executive Vice President, EA SPORTS from August 2011 to September 2013. Mr. Wilson also serves onas a director of Intel Corporation, is chairman of the board of the privately-held World Surf League and is a member of the Board of DirectorsTrustees of the World Surf League.Paley Center for Media.
Mr. Jorgensen has served as Executive Vice President andEA’s Chief Financial Officer since September 2012.2012 and as EA’s Chief Operating Officer since April 2018. Prior to joining EA, he served as Executive Vice President, and Chief Financial Officer of Levi Strauss & Co. from July 2009 to August 2012. From June 2007 to June 2009, Mr. Jorgensen served as Executive Vice President, and Chief Financial Officer of Yahoo! Inc. Mr. Jorgensen earned his M.B.A. from Harvard Business School and his undergraduate degree from Stanford University.
Mr. SöderlundMs. Miele has served as Executive Vice President, EA WorldwideEA’s Chief Studios since September 2013. Prior to that time, he served as Executive Vice President, EA Games Label from August 2011 to September 2013. Mr. Söderlund joined EA in October 2006 when EA purchased DICE studios where he was the Chief Executive Officer.
Ms. Miele has served as Executive Vice President, Global PublishingOfficer since April 2016.2018. Ms. Miele joined the CompanyEA in March 1996 and has held several positions at the Company, including Executive Vice President, Global Publishing from April 2016 to April 2018, Senior Vice President of Americas Publishing General Manager of the Company’s Star Wars business,from June 2014 to April 2016, and several senior roles in the Company's marketing organization. Ms. Miele serves on the board of Silicon Valley Community Foundation.
Mr. Moss has served as EA’s Chief Technology Officer since July 2014. He served as Vice President of Market Places Technology, Science and Data at eBay Inc. from November 2011 to July 2014. Prior to joining eBay, he co-founded CrowdEye, Inc. and served as its Chief Executive Officer from October 2008 to November 2011. Mr. Moss graduated from Princeton University.
Mr. Bruzzo has served as EA’s Chief Marketing Officer since September 2014. Prior to joining EA, he served as Senior Vice President at Starbucks Corporation from June 2011 to August 2014. Mr. Bruzzo graduated from Whitworth University.
Mr. Linzner has served as EA’s Executive Vice President, Worldwide Business Affairs since April 2016. From March 2005 until April 2016, Mr. Linzner was EA's Executive Vice President, Business and Legal Affairs. Prior to joining EA in July 1999, Mr. Linzner served as outside litigation counsel to EA and several other companies in the video game industry. Mr. Linzner earned his J.D. from Boalt Hall at the University of California, Berkeley, after graduating from Brandeis University.
Ms. Singhhas served as ourEA’s Chief People Officer since October 2016. Ms. Singh was previously employed by EA from 2009 to 2013, serving as Vice President, Human Resources, EA Labels from 2011 to 2013. Prior to rejoining EA, Ms. Singh served as the Chief People Officer of Minted, LLC from January 2014 to October 2016. Ms. Singh earned both her undergraduate and graduate degrees from Rutgers University - New Brunswick.
Mr. BarkerBilbey has served as EA’s Executive Vice President of Strategic Growth since April 2018. Mr. Bilbey joined EA in 1995 and has held several positions within the Company, including Chief Operating Officer, Worldwide Studios from August 2016 to April 2018 and Senior Vice President, Group General Manager from November 2013 to January 2017.
Mr. Barker has served as the Company's Chief Accounting Officer since April 2006.June 2003. From February 2012 to September 2012, he also served as Interim Chief Financial Officer. From June 2003 to April 2006, Mr. Barker held the position of Vice President, Chief Accounting Officer. Prior to joining EA, Mr. Barker was at Sun Microsystems, Inc., as theirits Vice
President and Corporate Controller from October 2002 to June 2003 and Assistant Corporate Controller from April 2000 to September 2002. Prior to that, he was an audit partner at Deloitte & Touche.Touche as an audit partner. Mr. Barker serves on the Board of Directors of Corsair Components,
Inc., the Audit Committee of Gatepath, a non-profit organization, and on the Accounting Advisory Board for the University of Notre Dame. Mr. Barker graduated from the University of Notre Dame.
Mr. Schatzhas served as Senior Vice President,EA’s General Counsel and Corporate Secretary since June 2014. Mr. Schatz joined EA in 1999, and prior to his current role, he served as Deputy General Counsel and as Vice President since 2006.from 2006 to 2014. Mr. Schatz earned his J.D. from Georgetown University Law Center, and received his undergraduate degree from Pomona College. Mr. Schatz is a member of the Bar of the State of California and is admitted to practice in the United States Supreme Court, the Ninth Circuit Court of Appeals and several United States District Courts.
Item 1A: Risk Factors
Our business is subject to many risks and uncertainties, which may affect our future financial performance. In the past, we have experienced certain of the events and circumstances described below, which adversely impacted our business and financial performance. If any of the events or circumstances described below occurs, our business or financial performance could be harmed, our actual results could differ materially from our expectations and the market value of our stock could decline. The risks and uncertainties discussed below are not the only ones we face. There may be additional risks and uncertainties not currently known to us or that we currently do not believe could be material that may harm our business or financial performance.
Our business is intensely competitive and “hit” driven.competitive. We may not deliver “hit”successful and engaging products and services, or consumers may prefer our competitors’ products or services over our own.
Competition in our industrybusiness is intense. Many new products and services are regularly introduced, in each major industry segment (console, mobile and PC free-to-download), but only a relatively small number of “hit” titlesproducts and associated services drive significant engagement and account for a significant portion of total revenue in each segment.revenue. Our competitors range from established interactive entertainment companies and diversified media companies to emerging start-ups, and we expect new competitors to continue to emerge throughout the world. If our competitors develop and market more successful and engaging products or services, offer competitive products or services at lower price points, or if we do not continue to develop consistently high-quality, well-received and engaging products and services, our revenue, margins, and profitability will decline.
We maintain a relatively limited product portfolio in an effortstrive to focus on developingcreate innovative and high-quality products and engaging productsservices that allow us to build on-going and meaningful relationships with the potential to become hits. High-qualityour community. However, innovative and high-quality titles, even if highly-reviewed, may not turn into hit products.meet our expectations. Many hitfinancially successful products and services within our industry are iterations of prior hit productstitles with large established consumer bases and significant brand recognition, which makes competing in certain product categories challenging. In addition, hit products or services of our direct competitors or other entertainment companies may take a larger portion of consumer spending or time than we anticipate, which could cause our products and services to underperform relative to our expectations. Publishing a relatively small number of major titles each year also concentrates risk in those titles and means each major title has greater associated risk. A significant portion of our revenue historically has been derived from gamesproducts and services based on a few popular franchises, and the underperformance of a single major title has had, and could in the future have, a material adverse impact on our financial results. For example, we have historically derived a significant portion of our net revenue from sales related to our largest and most popular game, FIFA, annualized versions of which are consistently one of the best-selling games in the marketplace. Any events or circumstances that negatively impact our FIFA franchise, such as product or service quality, competing products that take a portion of consumer spending and time, the delay or cancellation of a product or service launch, or real or perceived security risks could negatively impact our financial results to a disproportionate extent.
The increased importance of live services, revenueincluding extra content, to our business heightens the risks associated with our limited product portfolio asthe products for which such live services are offered. Live services that are either poorly-received or provided in connection with underperforming games may generate lower than expected sales. Any lapse, delay or failure in our ability to provide high-quality live services content to consumers over an extended period of time could materially and adversely affect our financial results, consumer engagement with our live services, and cause harm to our reputation and brand. Our most popular live service is the extra content available for the Ultimate Team mode associated with our sports franchises. Any events or circumstances that negatively impact our ability to reliably provide content or sustain engagement for Ultimate Team, particularly FIFA Ultimate Team, would negatively impact our financial results to a disproportionate extent.
Our business is dependentsubject to economic, market and geopolitical conditions.
Our business is subject to economic, market, public health and geopolitical conditions, which are beyond our control. The United States and other international economies have experienced cyclical downturns from time to time. Worsening economic conditions that negatively impact discretionary consumer spending and consumer demand, including inflation, slower growth, recession and other macroeconomic conditions, including those resulting from public health outbreaks such as the COVID-19 pandemic and geopolitical issues could have a material adverse impact on our business and operating results. In addition, the successUnited Kingdom’s departure from the European Union has caused economic and legal uncertainty in the region and may result in macroeconomic conditions that adversely affect our business.
We are particularly susceptible to market conditions and risks associated with the entertainment industry, which, in addition to general macroeconomic downturns, also include the popularity, price and timing of our games, changes in consumer demographics, the availability and popularity of platforms developed by third parties, as well asother forms of entertainment, and critical reviews and public tastes and preferences, which may change rapidly and cannot necessarily be predicted.
Catastrophic events may disrupt our business.
Natural disasters, cyber-incidents, weather events, wildfires, power disruptions, telecommunications failures, public health outbreaks, failed upgrades of existing systems or migrations to new systems, acts of terrorism or other events could cause outages, disruptions and/or degradations of our infrastructure, including our or our partners’ information technology and network systems, a failure in our ability to develop commercially successfulconduct normal business operations, or the closure of public spaces in which players engage with our games and services. The health and safety of our employees, players, third-party organizations with whom we partner or regulatory agencies on which we rely could be also affected, which may prevent us from executing against our business strategies or cause a decrease in consumer demand for our products and services. System redundancy may be ineffective and our disaster recovery and business continuity planning may not be sufficient for all eventualities. Such failures, disruptions, closures, or inability to conduct normal business operations could also prevent access to our products, services for these platforms.
The success of our business is driven in part by the commercial success and adequate supply of third party platforms for which we developor online stores selling our products and services, cause delay or through whichinterruption in our product or live services offerings, allow breaches of data security or result in the loss of critical data. Several of our key locations are closed as a result of the COVID-19 pandemic, including our global headquarters in Redwood Shores, California and key studios across North America, Europe and Asia, and the distribution of our workforce could disrupt out ability to conduct normal business operations. Our corporate headquarters and several of our key studios also are located in seismically active regions. An event that results in the disruption or degradation of any of our critical business functions or information technology systems, harms our ability to conduct normal business operations or causes a decreased in consumer demand for our products and services could materially impact our reputation and brand, financial condition and operating results.
We may not meet our product and live service development schedules and key events, sports seasons and/or movies that are distributed. tied to our product and live service release schedule may be delayed, cancelled or poorly received.
Our success also depends on our ability to accurately predict which platforms will be successful inmeet product and live service development schedules is affected by a number of factors both within and outside our control, including feedback from our players, the marketplace,creative processes involved, the coordination of large and sometimes geographically dispersed development teams, the complexity of our ability to develop commercially successful products and services for these platforms and our ability to effectively manage the transition from one generation of platforms to the next. We must make product development decisions and commit significant resources well in advance of anticipated platform release dates and may incur significant expense to adjust our product portfolio and development efforts in response to changing consumer platform preferences. Additionally, we may enter into certain exclusive licensing arrangements that affect our ability to deliver or market products or services on certain platforms. A platform for which we are developing products and services may not succeed as expected or new platforms may take market share and interactive entertainment consumers away from platforms for which we have devoted significant resources. If consumer demand for the platforms for which they are developed, the need to fine-tune our products prior to their release and, in certain cases, approvals from third parties. During the worldwide COVID-19 pandemic, our ability to meet product and live service development schedules will be challenged as we are developinghave closed key studios across North America, Europe and Asia and moved to a distributed workforce for certain of our development teams. We have experienced development delays for our products in the past, which caused us to delay or cancel release dates. Any failure to meet anticipated production or release schedules likely would result in a delay of revenue and/or possibly a significant shortfall in our revenue, increase our development and/or marketing expenses, harm our profitability, and cause our operating results to be materially different than anticipated. If we miss key selling periods for products or services, particularly the fiscal quarter ending in December, for any reason, including product delays or product cancellations our sales likely will suffer significantly.
We also seek to release certain products and extra content for our live services is lower than- such as our expectations, we may be unable to fully recoversports franchises and the investments we have madeassociated Ultimate Team live service - in developingconjunction with key events, such as the beginning of a sports season, events associated with the sports calendar, or the release of a related movie. If such seasons or events were delayed, cancelled or poorly received, our productssales could suffer materially. For example, the worldwide COVID-19 pandemic has resulted in the disruption, postponement and services,cancellation of sports seasons and our financial performance will be harmed. Alternatively, a platform forsporting events. Continued disruption, postponement and cancellation of sports seasons and sporting events around which we seek to launch our games and provide live services could have not devoted significant resources could be more successful than we initially anticipated, causing us to not be able to take advantage of meaningful revenue opportunities.
Technology changes rapidly ina material adverse impact on our business and ifoperating results.
Our industry changes rapidly and we may fail to anticipate orsuccessfully implement new or evolving technologies, or adopt newsuccessful business strategies, technologiesdistribution methods or methods, the quality, timeliness and competitiveness of our products and services may suffer.services.
Rapid technology changes in our industry require us to anticipate, sometimes years in advance, which technologies we must develop, implement and take advantage ofthe ways in order to makewhich our products and services will be competitive in the market. We have invested, and in the future may invest, in new business strategies, technologies, distribution methods, products, and services. There can be no assurance that these strategic investments will achieve expected returns. For example, we are investing in the technological infrastructure for our EA Player Network whichthat we expect will allowenable us to market and deliver content that will resonate with players and services for our franchisesprovide more efficiently as well as enablechoice in the way that players connect with their games, with each other, and with new player-centric ways to discover and try new experiences.types of content. Such endeavors may
involve significant risks and uncertainties, and nouncertainties. No assurance can be given that the technology we choose to implement, the business strategies we choose to adopt and the products and services that we pursue will achieve financial results that meet or exceed our expectations. Our reputation and brand could also be successful. If we do not successfully implement these new technologies, our reputation may be materially adversely affected and our financial condition and operating results may be impacted.affected. We also may miss opportunities or fail to respond quickly enough to adopt technology or distribution methods or develop products, and services or new ways to engage with our games that become popular with consumers, which could adversely affect our financial results. It may take significant time and resources to shift our focus to such technologies, putting us at a competitive disadvantage.
Our development process usually starts with particular platforms and distribution methods in mind, and a range of technical development, feature and featureongoing goals that we hope to be able to achieve. We may not be able to achieve these goals, or our competition may be able to achieve them more quickly and effectively than we can.in a way that better engages consumers. In either case, our products and services may be technologically inferior to those of our competitors, less appealing to consumers, or both. If we cannot achieve our technology goals within the original development schedule for our products and services, then we may delay their release until these goals can be achieved, which may delay or reduce revenue and increase our development expenses. Alternatively, we may increase the resources employed in research and development in an attempt to accelerate our development of new technologies, either to preserve our product or service launch schedule or to keep up with our competition, which would increase our development expenses.
We may experience security breaches and cyber threats.
We continually face cyber risksThe integrity of our and threatsour partners’ information technology networks and systems is critical to our ongoing operations, products, and services. Our industry is prone to, and our systems and networks are subject to actions by malfeasant actors, such as cyber-attacks and other information security incidents that seek to exploit, disable, damage, and/or disrupt our networks, business operations, products and services and supporting technological infrastructure, or gain access to our networks, our productsconsumer and services, supporting infrastructure,employee personal information, our intellectual property and other assets. In addition, weour systems and networks could be harmed or improperly accessed due to error by employees or third parties that are authorized to access to these networks and systems. We also rely on technological infrastructure provided by third partythird-party business partners to support the online functionality of our products and services. These business partners, as well as our channel partners,services, who are also are subject to these same cyber risks and threats. Such cyber risks and threats may be difficult to detect.risks. Both our partners and we have implemented certain systemsexpended, and processesexpect to continue to expend, financial and operational resources to guard against cyber risks and to help protect our data and systems. However, the techniques that may be used by malfeasant actors changes frequently, continue to obtain unauthorized access or disable, degrade, exploit or sabotage our products, servicesevolve in sophistication and systems change frequentlyvolume, and often are not detected. Ourdetected for long periods of time. As a result of the COVID-19 pandemic, remote access to our networks and systems has increased substantially. While we have taken steps to secure our networks and processes,systems, we may be more vulnerable to a successful cyber-attack or information security incident while our workforce remains distributed. The costs to respond to, mitigate, and/or notify affected parties of cyber-attacks and other security vulnerabilities are significant. In addition, such events could compromise the confidentiality, integrity, or accessibility of these networks and systems or result in the compromise or loss of the data, including personal data, processed by these systems. Consequences of such events have included, and processescould in the future include, the loss of proprietary and personal data and interruptions or delays in our business partners, may not be adequate. Any failure to prevent or mitigate security breaches or cyber risks, or respond adequately to a security breach or cyber risk, could result in interruptions to our products and services, degrade the user experience, cause consumers to lose confidence in our products,operations, as well as significantloss of player confidence and damage to our brand and reputation. In addition, such events could cause us to be non-compliant with applicable regulations, subject us to legal claims or penalties under laws protecting the privacy or security of personal information or proprietary material information. We have experienced such events in the past and financial exposure. This could harm our business and reputation, disrupt our relationships with partners and diminish our competitive position.expect future events to occur.
Successful exploitation of our systems can have other negative effects upon the products, services and user experience we offer. In particular,addition, the virtual economies that we have established in many of our games are subject to abuse, exploitation and other forms of fraudulent activity that can negatively impact our business. Virtual economies involve the use of virtual currency and/or virtual assets that can be used or redeemed by a player within a particular game or service. The abuse or exploitation of our virtual economies includehave included the illegitimate generation and sale of virtual items, including in black markets. Our online services have been impacted by in-game exploits and the use of automated or other fraudulent processes to generate virtual item or currency illegitimately, and such activity may continue. These kinds of activitiesabuses and exploits, and the steps that we take to address these issuesabuses and exploits may result in a loss of anticipated revenue, increased costs to protect against or remediate these issues, interfere with players’ enjoyment of a balanced game environment and cause reputational harm.harm to our reputation and brand.
Our business is subject to complex and prescriptive regulations regarding consumer protection and data privacy practices, and could be adversely affected if our consumer protection, data privacy and security practices are not adequate, or perceived as being inadequate.
We are subject to preventglobal data breaches, or byprivacy, data protection, localization, security and consumer-protection laws and regulations worldwide. These laws and regulations are emerging and evolving and the interpretation and application of these laws and regulations often are uncertain, contradictory and changing. The failure to maintain data practices that are compliant with applicable laws and regulations, or evolving interpretations of applicable laws and regulations, could result in inquiries from enforcement agencies or direct consumer protectioncomplaints, resulting in civil or criminal penalties, and could adversely impact our reputation and brand. In addition, the operational costs of compliance with these regulations is high and will likely continue to increase.
Even if we remain in strict compliance with applicable laws and regulations, consumer sensitivity to the collection and processing of their personal information continues to increase. Any real or perceived failures in maintaining acceptable data privacy and security laws generally.
In the course of our business, we collect, process, store and use consumer and other information,practices, including personal information, passwords and credit card information. Although we take measures to protect this information from unauthorized access, acquisition, disclosure and misuse, our security controls, policies and practices may not be able to prevent theallowing improper or unauthorized access, acquisition or misuse and/or uninformed disclosure of such information. For example, third parties may fraudulently induce employees or customers into disclosing identification or
consumer, employee and other sensitive information which may, in turn, be used to access our information technology systems. The unauthorized access, acquisition or disclosure of this information, or a perception that we do not adequately secure consumerthis information or provide consumers with adequate notice about the information that they authorize us to collect and other informationdisclose could result in legal liability,brand, reputational, or other harms to the business, result in costly remedial measures, governmentaldeter current and regulatory investigations, harmpotential customers from using our profitabilityproducts and reputationservices and cause our financial results to be materially affected. In addition, third
Third party vendors and business partners receive access to certain information that we collect. These vendors and business partners may not prevent data security breaches with respect to the information we provide them or fully enforce our policies, contractual obligations and disclosures regarding the collection, use, storage, transfer and retention of personal data. A data security breach of one of our vendors or business partners could cause reputational and financial harm to them and/orand us, negatively impact our ability to offer our products and services.services, and could result in legal liability, costly remedial measures, governmental and regulatory investigations, harm our profitability, reputation and brand, and cause our financial results to be materially affected.
We also are subject to payment card association rules and obligations pursuant to contracts with payment card processors. Under these rules and obligations, if information is compromised, we could be liable to payment card issuers for the cost of associated expenses and penalties. In addition, if we fail to follow payment card industry security standards, even if no consumer information is compromised, we could incur significant fines or experience a significant increase in payment card transaction costs.
Data privacy, data protection, localization, security and consumer-protection laws are evolving, and the interpretation and application of these laws in the United States, Europe and elsewhere often are uncertain, contradictory and changing. It is possible that these laws may be interpreted or applied in a manner that is adverse to us or otherwise inconsistent with our practices, which could result in litigation, regulatory investigations and potential legal liability or require us to change our practices in a manner adverse to our business. As a result, our reputation and brand may be harmed, we could incur substantial costs, and we could lose both consumers and revenue.
We may experience outages, and disruptions or degradations in our services, products and/or technological infrastructure.
The reliable performance of our online services.
We are investingproducts and expect to continue to invest in technology, hardwareservices depends on the continuing operation and software to support the online functionalityavailability of our portfolioinformation technology systems and those of products andour external service providers, including third-party “cloud” computing services. In addition, we rely on technological infrastructure provided by third party business partners. Launching and operatingOur games and services with online features, developing related technologiesare complex software products and implementing online business initiativesmaintaining the sophisticated internal and external technological infrastructure required to reliably deliver these games and services is expensive and complex. Implementation of these technologiesThe reliable delivery and execution of these initiatives could result in operational failures and other issues impacting the technical stability of our products and services. In addition, having access toservices has been, and could in the necessary infrastructure to support the online functionality of our products and services is vital to our growth and success. Our products and services couldfuture be, adversely impacted by outages, disruptions, and failures or degradations in our network and related infrastructure, as well as in the online platforms or services of key business partners whothat offer, support or supporthost our products and services.
We may not consistently meet our product development schedules or key events, sports seasons or movies that we tie our product release schedules to may be delayed, cancelled or poorly received.
Our ability to meet product development schedules is affected by a number of factors both within The reliability and outside our control, including feedback from our players, the creative processes involved, the coordination of large and sometimes geographically dispersed development teams, the complexity of our products and the platforms for which they are developed, the need to fine-tune our products prior to their release and, in certain cases, approvals from third parties. We have experienced development delays for our products in the past, which caused us to delay or cancel release dates. We also seek to release certain products in conjunction with key events, such as the beginning of a sports season, major sporting event, or the release of a related movie. If such a key event were delayed, cancelled or poorly received, our sales likely would suffer materially. Any failure to meet anticipated production or release schedules likely would result in a delay of revenue and/or possibly a significant shortfall in our revenue, increase our development and/or marketing expenses, harm our profitability, and cause our operating results to be materially different than anticipated.
Our business is highly seasonal with the highest percentage of our sales occurring in the quarter ending in December. While our sales generally follow this seasonal trend, there can be no assurance that this trend will continue. If we miss key selling periods for products, for any reason, including product delays, product cancellations, or delayed introduction of a new platform for which we have developed products and services or through which we distribute our products and services, our sales likely will suffer significantly. Additionally, macroeconomic conditions or the occurrence of unforeseen events that negatively impact retailer or consumer buying patterns, particularly during the quarter ending in December, likely will harm our financial performance disproportionately.
Our financial results are subject to currency fluctuations.
International sales are a fundamental part of our business. For our fiscal year ended March 31, 2017, international net revenue comprised 56 percent of our total net revenue, and we expect our international business to continue to account for a significant portion of our total net revenue. As a result of our international sales, and also the denomination of our foreign investments and our cash and cash equivalents in foreign currencies, we are exposed to the effects of fluctuations in foreign currency exchange rates. Strengthening of the U.S. dollar, particularly relative to the Euro, British pound sterling, Australian dollar, Chinese yuan and South Korean won, has a negative impact on our reported international net revenue but a positive impact on our reported international operating expenses (particularly when the U.S. dollar strengthens against the Swedish krona and the Canadian dollar) because these amounts are translated at lower rates. We use foreign currency hedging contracts to mitigate some foreign currency risk. However, these activities are limited in the protection they provide us from foreign currency fluctuations and can themselves result in losses.
We may not attract and retain key personnel.
The market for technical, creative, marketing and other personnel essential to the development, marketing and supportstability of our products and services and managementhas been affected by events outside of our businesses is extremely competitive. Our leading position within the interactive entertainment industry makes us a prime target for recruiting our executives,control as well as key creative and technical talent. If we cannot successfully recruit and retain qualified employees, or replace key employees following their departure,by events within our ability to develop and manage our business will be impaired.
We may experience declines or fluctuations in the recurring portion of our business.
Our business model includes revenue that we deem recurring in nature,control, such as revenue fromthe migration of data among data centers and to third-party hosted environments, the performance of upgrades and maintenance on our annualized titles (e.g., FIFAsystems, and Madden NFL), and associated services, and ongoing mobile businesses. While we have been able to forecast the revenue from these areas ofonline demand for our business with greater certainty than for new offerings, we cannot provide assurances that consumers will purchase these games and services on a consistent basis. Furthermore, we may cease to offer gamesproducts and services that exceeds the capabilities of our technological infrastructure.
If we previously had deemedor our external business partners were to experience an event that caused a significant system outage, disruption or degradation or if a transition among data centers or service providers or an upgrade or maintenance session encountered unexpected interruptions, unforeseen complexity or unplanned disruptions, our products and services may not be recurringavailable to consumers or may not be delivered reliably and stably. As a result, our reputation and brand may be harmed, consumer engagement with our products and services may be reduced, and our revenue and profitability could be negatively impacted. We do not have redundancy for all our systems, many of our critical applications reside in nature. Consumer purchasesonly one of our data centers, and our disaster recovery planning may not account for all eventualities.
As our digital business grows, we will require an increasing amount of internal and external technical infrastructure, including network capacity and computing power to continue to satisfy the needs of our players. We are investing, and expect to continue to invest, in our own technology, hardware and software and the technology, hardware and software of external service providers to support our business. It is possible that we may fail to scale effectively and grow this technical infrastructure to accommodate increased demands, which may adversely affect the reliable and stable performance of our games and services, may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our gamestherefore negatively impacting engagement, reputation, brand and services, our abilityrevenue growth.
Government regulations applicable to improve and innovate our annualized titles, our ability to adapt our games and services to new platforms, outages and disruptions of online services, the games and services offered by our competitors, our marketing and advertising efforts or declines in consumer activity generally as a result of economic downturns, among others. The reception to our licensed sports games may be adversely impacted by circumstances outside our control impacting the sports leagues and organizations. Any decline or fluctuation in the recurring portion of our business may have a negative impact on our financial and operating results.
We could fail to successfully adopt new business models.
From time to time we seek to establish and implement new business models. Forecasting the success of any new business model is inherently uncertain and depends on a number of factors both within and outside of our control. Our actual revenue and profit for these businesses may be significantly greater or less than our forecasts. Additionally, these new business models could fail, resulting in the loss of our investment in the development and infrastructure needed to support these new business models, as well as the opportunity cost of diverting management and financial resources away from more successful and established businesses.
We may be unable to maintain or acquire licenses to include intellectual property owned by others in our games, or to maintain or acquire the rights to publish or distribute games developed by others.
Many of our products and services are based on or incorporate intellectual property owned by others. For example, our EA Sports products include rights licensed from major sports leagues and players’ associations and our Star Wars products include rights licensed from Disney. Competition for these licenses and rights is intense. If we are unable to maintain these licenses and rights or obtain additional licenses or rights with significant commercial value, our ability to develop and successful and engaging games and services may be adversely affected and our revenue, profitability and cash flows may decline significantly. Competition for these licenses also may increase the amounts that we must pay to licensors and developers, through higher minimum guarantees or royalty rates, which could significantly increase our costs and reduce our profitability.
External game developers may not meet product development schedules or otherwise honor their obligations.
We may contract with external game developers to develop our games or to publish or distribute their games. While we maintain contractual protections, we have less control over the product development schedules of games developed by external developers, and we depend on their ability to meet product development schedules. In addition, we may have disputes with external developers over game content, launch timing, achievement of certain milestones, the game development timeline, marketing campaigns or other matters. If we have disputes with external developers or they cannot meet product development schedules, acquire certain approvals or are otherwise unable or unwilling to honor their obligations to us we may delay or cancel previously announced games, alter our launch schedule or experience increased costs and expenses, which could result in a delay or significant shortfall in anticipated revenue, harm our profitability and reputation, and cause our financial results to be materially affected.
Negative player perceptions about our brands, products, services and/or business practices may damage our business and the costs incurred in addressing player concerns may increase our operating expenses.
Player expectations regarding the quality, performance and integrity of our products and services are high. Players may be critical of our brands, products, services and/or business practices for a wide variety of reasons. These negative player reactions may not be foreseeable or within our control to manage effectively, including perceptions about gameplay fairness, negative player reactions to game content, components and services, or objections to certain of our business practices. In the past, we have taken actions,
including delaying the release of our games and discontinuing services for our games, after taking into consideration, among other things, feedback from the player community even if those decisions negatively impacted our operating results in the short term. We expect to continue to take actions to address concerns as appropriate, including actions that may result in additional expenditures and the loss of revenue. Negative player sentiment about our business practices also can lead to investigations from regulatory agencies and consumer groups, as well as litigation, which, regardless of their outcome, may be costly, damaging to our reputation and harm our business.
The products or services we release may contain defects.
Our products and services are extremely complex software programs, and are difficult to develop and distribute. We have quality controls in place to detect defects in our products and services before they are released. Nonetheless, these quality controls are subject to human error, overriding, and reasonable resource or technical constraints. Therefore, these quality controls and preventative measures may not be effective in detecting all defects in our products and services before they have been released into the marketplace. In such an event, we could be required to or may find it necessary to, offer a refund for the product or service, suspend the availability or sale of the product or service or expend significant resources to cure the defect, each of which could significantly harm our business and operating results.
Our business is subject to regulation, and changes in applicable regulations may negatively impact our business.
We are a global company subject to a number of foreignvarious and domesticcomplex laws and regulations that affect companies conducting business on the Internet. In addition,domestically and internationally, including laws and regulations relatingrelated to user privacy, data collection, retention, electronic commerce, virtual items and currency, consumer protection, protection of minors, content, advertising, localization, and information security, have been adopted orintellectual property, competition and taxation, among others. Many of these laws and regulations are being considered for adoption by many jurisdictionscontinuously evolving and countries throughoutdeveloping, and the world.application to, and impact on, us is uncertain. For example, the World Health Organization recently included “gaming disorder” in the 11th Revision of the International Classification of Diseases, prompting discussion and consideration of legislation and policies aimed at mitigating the risk of overuse of, and overspending within, video games. These laws could harm our business by limiting the products and services we can offer consumers or the manner in which we offer them. The costs of compliance with these laws may increase in the future as a result of changes in applicable laws or
changes to interpretation. Furthermore, anyAny failure on our part to comply with these laws or the application of these laws in an unanticipated manner may harm our business and result in penalties or significant legal liability.
Certain of our business models are subject to new laws or regulations or evolving interpretations and application of existing laws and regulations, including those related to gambling. The growth and development of electronic commerce, virtual items and virtual currency has prompted calls for new laws and regulations and resulted in the application of existing laws or regulations that have limited or restricted the sale of our products and services in certain territories. For example, governmental organizations have applied existing laws and regulations to certain mechanics commonly included within our games, including the Ultimate Team mode associated with our sports franchises. In addition, we include modes in our games that allow players to compete against each other and manage player competitions that are based on our products and services. Although we structure and operate our skill-based competitions with applicable laws in mind, including those related to gambling, our skill-based competitions in the future could become subject to evolving laws and regulations. New laws related to these business models or the interpretation or application of current laws that impact these business models - each of which could vary significantly across jurisdictions - could subject us to additional regulation and oversight, cause us to further limit or restrict the sale of our products and services or otherwise impact our products and services, lessen the engagement with, and growth of, profitable business models, and expose us to increased compliance costs, significant liability, fines, penalties and harm to our reputation and brand.
We are subject to laws in certain foreign countries, and adhere to industry standards in the United States, that mandate rating requirements or set other restrictions on the advertisement or distribution of interactive entertainment software based on content. In addition, certain foreign countries allow government censorship of interactive entertainment software products. Adoption of ratings systems, censorship or restrictions on distribution of interactive entertainment software based on content could harm our business by limiting the products we are able to offer to our customers.consumers. In addition, compliance with new and possibly inconsistent regulations for different territories could be costly, delay or prevent the release of our products in those territories.
Negative perceptions about our business, products and services and the communities within our products and services may damage our business, and we may incur costs to address concerns.
Expectations regarding the quality, performance and integrity of our products and services are high. Players have sometimes been critical of our brands, products, services, online communities, business models and/or business practices for a wide variety of reasons, including perceptions about gameplay fun, fairness, game content, features or services, or objections to certain of our business practices. These negative responses may not be foreseeable. We also may not effectively manage these responses because of reasons within or outside of our control. For example, we have included in certain games the ability for players to purchase digital items, including in some instances virtual “packs”, “boxes” or “crates” that contain variable digital items. The inclusion of variable digital items in certain games has attracted the attention of our community and if the future implementation of these features creates a negative perception of gameplay fairness or other negative perceptions, our reputation and brand could be harmed and revenue could be negatively impacted. In addition, we have taken actions, including delaying the release of our games and delaying or discontinuing features and services for our games, after taking into consideration, among other things, feedback from our community even if those decisions negatively impacted our operating results in the short term. We expect to continue to take actions to address concerns as appropriate, including actions that may result in additional expenditures and the loss of revenue.
In addition, we aim to offer our players safe, inclusive and fulfilling online communities. We may include modes innot be able to maintain healthy, long-term online communities within our games and services as a result of the use of those communities as forums for harassment or bullying, our inability to successfully discourage overuse of our games and services or overspending within our games and services, or the successful implementation of cheating programs. Although we expend resources, and expect to continue to expend resources, to maintain healthy online communities, our efforts may not be successful due to scale, limitations of existing technologies or other factors.
Negative sentiment about gameplay fairness, our online communities, our business practices, business models or game content also can lead to investigations or increased scrutiny from governmental bodies and consumer groups, as well as litigation, which, regardless of their outcome, may be costly, damaging to our reputation and harm our business.
Our business depends on the success and availability of consoles, systems and devices developed by third parties and our ability to develop commercially successful products and services for those consoles, systems and devices.
The success of our business is driven in part by the commercial success and adequate supply of third-party consoles, systems and devices for which we develop our products and services or through which our products and services are distributed. Our success depends on our ability to reach a large, global audience by accurately predicting which consoles, systems and devices will be successful in the marketplace, our ability to develop commercially successful products and services that allowreach players across multiple channels, our ability to compete against each othersimultaneously manage products and services on multiple consoles, systems and devices and our ability to effectively transition our products and services to new consoles, systems and devices. We must make product development decisions and commit significant resources well in advance of the commercial availability of new consoles, systems and devices, and we may manage player competitions basedincur significant expense to adjust our product portfolio and development efforts in response to changing consumer preferences. Additionally, we may enter into certain exclusive licensing arrangements that affect our ability to deliver or market products or services on certain consoles, systems or devices. A console, system or device for which we are developing products and services may not succeed as expected or new consoles, systems or devices may take market share and interactive entertainment consumers away from those for which we have devoted significant resources. If consumer demand for the consoles, systems or devices for which we are developing products and services is lower than our expectations, we may be unable to fully recover the investments we have made in developing our products and services, and our financial performance will be harmed. Alternatively, a console, system or device for which we have not devoted significant resources could be more successful than we initially anticipated, causing us to not be able to reach our intended audience and take advantage of meaningful revenue opportunities.
External game developers may not meet product development schedules or otherwise honor their obligations.
We contract with external game developers to develop our games or to publish or distribute their games. While we maintain contractual protections, we have less control over the product development schedules of games developed by external developers. We depend on their ability to meet product development schedules which could be negatively affected by, among other things, the shift to a distributed workforce model resulting from the COVID-19 pandemic. In addition, disputes occasionally arise with external developers, including with respect to game content, launch timing, achievement of certain milestones, the game development timeline, marketing campaigns, contractual terms and interpretation. If we have disputes with external developers or they cannot meet product development schedules, acquire certain approvals or are otherwise unable or unwilling to honor their obligations to us, we may delay or cancel previously announced games, alter our launch schedule or experience increased costs and expenses, which could result in a delay or significant shortfall in anticipated revenue, harm our profitability and reputation, and cause our financial results to be materially affected.
We may not attract, train, motivate and retain key personnel.
Our business depends on our ability to attract, train, motivate and retain executive, technical, creative, marketing and other personnel that are essential to the development, marketing and support of our products and services. Although we structureThe market for highly-skilled workers and operate these skill-based competitions with applicable lawsleaders in mind, our skill based competitionsindustry is extremely competitive, particularly in the future could become subjectgeographic locations in which many of our key personnel are located. In addition, our leading position within the interactive entertainment industry makes us a prime target for recruiting our executives, as well as key creative and technical talent. We may experience significant compensation costs to evolving ruleshire and regulationsretain senior executives and expose usother personnel that we deem critical to significant liability, penaltiesour success. If we cannot successfully recruit, train, motivate and reputational harm.retain qualified employees, develop and maintain a diverse and inclusive work environment, or replace key employees following their departure, our ability to develop and manage our business will be impaired.
Our marketing and advertising efforts may fail to resonate with our customers.consumers.
Our products and services are marketed worldwide through a diverse spectrum of advertising and promotional programs such as online and mobile advertising, television advertising, retail merchandising, marketing through websites, event sponsorship and direct communications with our consumers including via email.programs. An increasing portion of our marketing activity is taking place on social media platforms and through streaming networks, influencers and content creators that are outside of our direct control. ChangesOur ability to consumerengage players with our products and services is dependent in part upon the success of these programs, and changes to player preferences, the impact of athletes, celebrities, influencers or content creators, marketing regulations, technology changes or service disruptions may negatively impact our ability to reach and engage our customers. Our ability to sellplayers or otherwise negatively impact our products and services is dependent in part uponmarketing campaigns or the success of these programs. Iffranchises associated with those marketing campaigns. Moreover, if the marketing for our products and services is not innovative or fails to resonate with our customers,players, particularly during the critical holiday season or during other key selling periods, or if advertising rates or other media placement costs increase, our business and operating results could be harmed.
A significantWe may experience declines or fluctuations in the recurring portion of our sales are madebusiness.
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. While we have been able to forecast the revenue from these areas of our business with greater relative confidence than for new games, services and business models, we cannot provide assurances that consumer demand will remain consistent, including in connection with circumstances outside of our control. Furthermore, we may cease to offer games and services that we previously had deemed to be recurring in nature. Consumer demand has declined and fluctuated, and could in the future decline or fluctuate, as a relatively smallresult of a number ofcustomers, factors, including their level of satisfaction with our games and services, our ability to improve and innovate our annualized titles, our ability to adapt our games and services to new distribution channels and business models, outages and disruptions of online services, the games and services offered by our competitors, our marketing and advertising efforts or declines in consumer activity generally as a result of economic downturns, among others. The reception to our sports games also depends, in part, on the popularity, reputation and brand of the leagues, organizations and individual athletes with whom we partner. Events and circumstances outside of our control that have a negative impact on the accessibility, popularity, reputation and brand of these partners has impacted, and could in the future negatively impact, sales related to our annualized sports games. Any decline or fluctuation in the recurring portion of our business may have a negative impact on our financial and operating results.
We could fail to successfully adopt new business models.
From time to time we seek to establish and implement new business models. Forecasting the success of any new business model is inherently uncertain and depends on a number of factors both within and outside of our control. Our actual revenue and profit for these businesses may be disrupted.
We derive a significant percentagesignificantly greater or less than our forecasts. In addition, these new business models could fail, resulting in the loss of our net revenue through salesinvestment in the development and infrastructure needed to support these new business models, as well as the opportunity cost of diverting management and financial resources away from more successful and established businesses. For example, we have devoted financial and operational resources to our top customers. The concentrationsubscription offerings without any assurance that these businesses will be financially successful. While we anticipate growth in this area of our business, consumer demand is difficult to predict as a result of a significant percentagenumber of our sales through a few large customers could lead to a short-term disruption to our business if certain of these customers significantly reduced their purchases or ceased to offerfactors, including satisfaction with our products and services.services, our ability to provide engaging products and services, third parties offering their products and services within our subscription, partners that provide, or don’t provide, access to our subscription, products and services offered by our competitors, reliability of our infrastructure and the infrastructure of our partners, pricing, the actual or perceived security of our and our partners information technology systems and reductions in consumer spending levels. In addition, if our subscription offerings are successful, sales could be diverted from established business models. If we do not select a target price that is optimal for our subscription services, maintain our target pricing structure or correctly project renewal rates, our financial results may be harmed.
Acquisitions, investments, divestitures and other strategic transactions could result inoperating difficulties and other negativeconsequences.
We have made and may continue to make acquisitions or enter into other strategic transactions including (1) acquisitions of companies, businesses, intellectual properties, and other assets, (2) minority investments in strategic partners, and (3) investments in new interactive entertainment businesses as part of our long-term business strategy. These transactions involve significant challenges and risks including that the transaction does not advance our business strategy, that we do not realize a satisfactory return on our investment, that we acquire liabilities, that our due diligence process does not identify significant issues, liabilities or other challenges, diversion of management’s attention from our other businesses, the incurrence of debt, contingent liabilities or amortization expenses, write-offs of goodwill, intangibles, or acquired in-process technology, or other increased cash and non-cash expenses. In addition, we may not integrate these businesses successfully or achieve expected synergies. For example, we may experience difficulties with the integration of business systems and technologies, the integration and retention of new employees, the implementation of our internal control and compliance procedures and/or the remediation of the internal control and compliance environment of the acquired entity, or the maintenance of key business and customer relationships. These events could harm our operating results or financial condition.
We may fund strategic transactions with (1) cash, which would reduce cash available for other corporate purposes, (2) debt, which would increase our interest expense and leverage and/or (3) equity which would dilute current shareholders’ percentage ownership and also dilute our earnings per share. We also may divest or sell assets or a business and we may have difficulty selling such assets or business on acceptable terms in a timely manner. This could result in a delay in the achievement of our strategic objectives, cause us to incur additional expense, or the sale of such assets or business at a price or on terms that are less favorable than we anticipated.
We may be more vulnerableunable to collection risk if onemaintain or more of these large customers experienced a deterioration of their business or declared bankruptcy. Additionally, receivables from our customers generally increaseacquire licenses to include intellectual property owned by others in our December fiscal quarter as salesgames, or to maintain or acquire the rights to publish or distribute games developed by others.
Many of our products and services generallyare based on or incorporate intellectual property owned by others. For example, our EA Sports products include rights licensed from major sports leagues, teams and players’ associations and our Star Wars products include rights licensed from Disney. Competition for these licenses and rights is intense. If we are unable to maintain these licenses and rights or obtain additional licenses or rights with significant commercial value, our ability to develop successful and engaging products and services may be adversely affected and our revenue, profitability and cash flows may decline significantly. Competition for these licenses has increased, and may continue to increase, in anticipation of the holiday season. Having a significant portion ofamounts that we must pay to licensors and developers, through higher minimum guarantees or royalty rates, which could significantly increase our net revenue concentrated in sales through a few customers couldcosts and reduce our negotiating leverage with them. If one or moreprofitability.
We rely on the consoles, systems and devices of our key customers experience deterioration in their business, or become unable to obtain sufficient financing to maintain their operations, our business could be harmed.
Our channel partners who have significant influence over the products and services that we offer on their platforms.in the marketplace.
OurA significant percentage of our digital net revenue is attributable to sales of products and services through our significant partners, including Sony, Microsoft, Apple and Google. The concentration of a material portion of our digital sales in these partners exposes us to risks associated with these businesses. Any deterioration in the businesses of our significant partners could disrupt and harm our business, including by limiting the methods through which our digital products and services are offered and exposing us to collection risks.
In addition, our license agreements with our channeltypically provide these partners typically give themwith significant control over the approval manufacturing and distribution of the products and services that we develop for their platform. In particular, our arrangements with Sonyconsoles, systems and Microsoft could, in certain circumstances, leave us unable to get our products and services approved, manufactured and distributed to customers.devices. For our digital products and services delivered via digital channels, such as Sony’s PlayStation Store, Microsoft’s Xbox Store, Apple’s App Store and Google Play, each respective channel partner has policies and guidelines that control the promotion and distribution of these titles and the features and functionalities that we are permitted to offer through the channel. In addition, we are dependent on our channelthese partners to invest in, and upgrade, digital commercethe capabilities of their systems in a manner than corresponds to the way in which consumers purchase our products and services.preferences of consumers. Failure by our channelsthese partners to keep pace with consumer preferences could have an adverse impact onthe engagement with our products and services and our ability to merchandise and commercialize our products and services which could harm our business and/or financial results.
Moreover, certain of our channelsignificant partners can determine and change unilaterally certain key terms and conditions, including the ability to change their user and developer policies and guidelines. In many cases our channelthese partners also set the rates that we must pay to provide our games and services through their online channels, and retain flexibility to change their fee structures or adopt different fee structures for their online channels, which could adversely impact our costs, profitability and margins. In addition, our channelThese partners also control the information technology systems through which online sales of our products and service channels are captured. If our channel partners establish terms that restrict our offerings, through their channels, significantly impact the financial terms on which these products or services are offered to our customers, or their information technology systems failexperiences outages that impact our players’ ability to access our games or purchase extra content or cause an unanticipated delay in reporting, our business and/or financial results could be materially affected.
Our business is subjectDuring the transition period to risks generally associated with the entertainment industry.
Our business is subject to risks that are generally associated with the entertainment industry, many of which are beyond our control. These risks could negatively impactnew console systems, our operating results may be more volatile.
New console systems historically have been developed and include:released several years apart. In periods of transition, sales of products for legacy generation consoles typically slow or decline in response to the popularity, priceanticipated and timingactual introduction of new consoles, and sales of products for new generation consoles typically stabilize only after new consoles are widely-established with the consumer base. Sony and Microsoft have announced new generation consoles, but such consoles have not yet been released. Consistent with historical transition periods, we expect consumers to purchase fewer products for the Sony PlayStation 4 and Microsoft Xbox One consoles during the upcoming transition period. The console transition may have a comparable impact on our games, economic conditions that adverselylive services business, potentially increasing the impact on our financial results. The transition could accelerate faster than anticipated and may put downward pressure on legacy generation pricing, which could negatively affect discretionaryour operating results. Our revenue from sales for the new generation consoles from Sony and Microsoft may not offset the negative effects of the transition on our operating results. Alternatively, adoption of the new generation consoles in which we have made significant investments may be slower than we anticipate or consumer spending, changes in consumer demographics,availability may be delayed because of, among other things, business disruptions resulting from the availabilityCOVID-19 pandemic. We do not control the release dates or unit volumes of consoles made available for sale, the pricing or appeal of new generation consoles, or the rates at which consumers purchase these consoles. As a result, our operating results during this transition may be more volatile and popularity of other forms of entertainment, and critical reviews and public tastes and preferences, which may change rapidly and cannot necessarily be predicted.difficult to predict.
Our business partners may be unable to honor their obligations to us or their actions may put us at risk.
We rely on various business partners, including third-party service providers, vendors, licensing partners, development partners, and licensees in many areas of our business. Their actions may put our business and our reputation and brand at risk. For
example, we may have disputes with our business partners that may impact our business and/or financial results. In many cases, our business partners may be given access to sensitive and proprietary information in order to provide services and support to our teams, and they may misappropriate our information and engage in unauthorized use of it. In addition, the failure of these third parties to provide adequate services and technologies, or the failure of the third parties to adequately maintain or update their services and technologies, could result in a disruption to our business operations. Further, disruptions in the financial markets, economic downturns including related to the COVID-19 pandemic, poor business decisions, or reputational harm may adversely affect our business partners and they may not be able to continue honoring their obligations to us or we may cease our arrangements with them. Alternative arrangements and services may not be available to us on commercially reasonable terms or we may experience business interruptions upon a transition to an alternative partner or vendor. If we lose one or more significant business partners, our business could be harmed and our financial results could be materially affected.
The products or services we release may contain defects, bugs or errors.
Our products and services are extremely complex software programs and are difficult to develop and distribute. We have quality controls in place to detect defects, bugs or other errors in our products and services before they are released. Nonetheless, these quality controls are subject to human error, overriding, and resource or technical constraints. In addition, the effectiveness of our quality controls and preventative measures may be negatively affected by the distribution of our workforce resulting from the COVID-19 pandemic. As such, these quality controls and preventative measures may not be effective in detecting all defects, bugs or errors in our products and services before they have been released into the marketplace. In such an event, the technological reliability and stability of our products and services could be below our standards and the standards of our players and our reputation, brand and sales could be adversely affected. In addition, we could be required to, or may find it necessary to, offer a refund for the product or service, suspend the availability or sale of the product or service or expend significant resources to cure the defect, bug or error each of which could significantly harm our business and operating results.
We may be subject to claims of infringement of third-party intellectual property rights.
From time to time, third parties may claim that we have infringed their intellectual property rights. For example, patent holding companies may assert patent claims against us in which they seek to monetize patents they have purchased or otherwise obtained. Although we take steps to avoid knowingly violating the intellectual property rights of others, it is possible that third parties still may claim infringement.
Existing or future infringement claims against us whether valid or not, may be expensive to defend and divert the attention of our employees from business operations. Such claims or litigation could require us to pay damages and other costs. We also could be required to stop selling, distributing or supporting products, features or services which incorporate the affected intellectual property rights, redesign products, features or services to avoid infringement, or obtain a license, all of which could be costly and harm our business.
In addition, many patents have been issued that may apply to potential new modes of delivering, playing or monetizing interactive entertainment software products and services such as those that we produce or would like to offer in the future. We may discover that future opportunities to provide new and innovative modes of game play and game delivery to consumers may be precluded by existing patents that we are unable to acquire or license on reasonable terms.
From time to time we may become involved in other legal proceedings.
We are currently, and from time to time in the future may become, subject to legal proceedings, claims, litigation and government investigations or inquiries, which could be expensive, lengthy, disruptive to normal business operations and occupy a significant amount of our employees’ time and attention. In addition, the outcome of any legal proceedings, claims, litigation, investigations or inquiries may be difficult to predict and could have a material adverse effect on our business, reputation, operating results, or financial condition.
Acquisitions, investments, divestitures and other strategic transactions could result inoperating difficulties and other negativeconsequences.
We may make acquisitions or enter into other strategic transactions including (1) acquisitions of companies, businesses, intellectual properties, and other assets, (2) minority investments in strategic partners, and (3) investments in new interactive entertainment businesses as part of our long-term business strategy. These transactions involve significant challenges and risks including that the transaction does not advance our business strategy, that we do not realize a satisfactory return on our investment, that we acquire unknown liabilities, diversion of management’s attention from our other businesses, the incurrence of debt, contingent liabilities or amortization expenses, write-offs of goodwill, intangibles, or acquired in-process technology, or other increased cash and non-cash expenses. In addition, we may not integrate these businesses successfully, including experiencing difficulty in the integration of business systems and technologies, the integration and retention of new employees, or in the maintenance of key business and customer relationships. These events could harm our operating results or financial condition. We also may divest or sell assets or a business and we may have difficulty selling such assets or business on acceptable terms in a timely manner. This could result in a delay in the achievement of our strategic objectives, cause us to incur additional expense, or the sale of such assets or business at a price or on terms that are less favorable than we anticipated.
Our products and brands are subject to the threat of piracy, unauthorized copying and other forms of intellectual property infringement.infringement, including in jurisdictions that do not adequately protect our products and intellectual property rights.
We regard our products, brands and brandsintellectual property as proprietary and take measures to protect our products, brands and other confidential informationassets from infringement. We are aware that some unauthorized copying of our products and brands occurs, and if a significantly greater amount were to occur, it could negatively impact our business.
Piracy Further, our products and other forms of unauthorized copyingservices are available worldwide and use of our content and brands are persistent problems for us, and policing is difficult. Further, the laws of some countries, particularly in which our products are or may be distributedAsia, either do not protect our products, brands and intellectual property rights to the same extent as the laws of the United States or are poorly enforced. Legal protection of our rights may be ineffective in such countries.countries with weaker intellectual property enforcement mechanisms. In addition, althoughcertain third parties have registered our intellectual property rights without authorization in foreign countries. Successfully registering such intellectual property rights could limit or restrict
our ability to offer products and services based on such rights in those countries. Although we take steps to enforce and police our rights, factorsour practices and methodologies may not be effective against all eventualities.
A significant portion of our packaged goods sales are made to a relatively small number ofretail and distribution partners, and these sales may be disrupted.
We derive a significant percentage of our net revenue attributable to sales of our packaged goods products to our top retail and distribution partners. The concentration of a significant percentage of these sales through a few large partners could lead to a short-term disruption to our business if certain of these partners significantly reduced their purchases or ceased to offer our products. The financial position of certain partners has deteriorated and while we maintain protections such as monitoring the proliferationcredit extended to these partners, we could be vulnerable to collection risk if one or more of technology designed to circumventthese partners experienced continued deterioration of their business or declared bankruptcy. The COVID-19 pandemic has resulted in closures of the protection measures used byretail stores of certain partners, which could negatively impact the sales of our businesspackaged goods products and accelerate deterioration of the financial position of such partners. Additionally, receivables from these partners or by us, the availability of broadband access to the Internet, the refusal of Internet service providers or platform holders to remove infringing contentgenerally increase in certain instances, and the proliferation of online channels through which infringing product is distributed all have contributed to an expansion in unauthorized copyingour December fiscal quarter as sales of our products and brands.
We may experience outages and disruptionsgenerally increase in anticipation of the holiday season which expose us to heightened risk at that time of year. Having a significant portion of our infrastructure.packaged goods sales concentrated in a few partners could reduce our negotiating leverage with them. If one or more of these partners experience deterioration in their business or become unable to obtain sufficient financing to maintain their operations, our business could be harmed.
We may experience outrages or disruptionsOur financial results are subject to currency and interest rate fluctuations.
International sales are a fundamental part of our infrastructure, including information technology system failuresbusiness. For our fiscal year ended March 31, 2020, international net revenue comprised 59 percent of our total net revenue, and network disruptions. These may bewe expect our international business to continue to account for a significant portion of our total net revenue. As a result of our international sales, and also the denomination of our foreign investments and our cash and cash equivalents in foreign currencies, we are exposed to the effects of fluctuations in foreign currency exchange rates, and volatility in foreign currency exchange rates has increased in connection with the macroeconomic uncertainty caused by natural disasters, cyber-incidents, weather events, power disruptions, telecommunications failures, actsthe COVID-19 pandemic. Strengthening of terrorism or other events. System redundancy may be ineffective or inadequate,the U.S. dollar, particularly relative to the Euro, British pound sterling, Australian dollar, Chinese yuan, South Korean won and Polish zloty, has a negative impact on our disaster recovery planning may not be sufficient for all eventualities. Such failures or disruptions could prevent accessreported international net revenue but a positive impact on our reported international operating expenses (particularly when the U.S. dollar strengthens against the Swedish krona and the Canadian dollar) because these amounts are translated at lower rates. We use foreign currency hedging contracts to our products, services or online stores selling our products and services. Our corporate headquarters in Redwood City, CA and our studio in Burnaby, British Columbiamitigate some foreign currency risk. However, these activities are located in seismically active regions, and certain of our game development activities and other essential business operations are conducted at these locations. An event that resultslimited in the disruptionprotection they provide us from foreign currency fluctuations and can themselves result in losses. In addition, interest rate volatility, including lower interest rates resulting from actions taken in connection with the COVID-19 pandemic, can decrease the amount of any ofinterest earned on our critical business or information technology systems could harm our ability to conduct normal business operations.cash, cash equivalents and short-term investment portfolio.
We utilize debt financing and such indebtedness could adversely impact our business and financial condition.
We have $1 billion in senior unsecured notes outstanding as well as an unsecured committed $500 million revolving credit facility. While the facility is currently undrawn, we may use the proceeds of any future borrowings for general corporate purposes. We may also enter into other financial instruments in the future.
Our indebtedness could affect our financial condition and future financial results by, among other things:
•Requiring the dedication of a substantial portion of any cash flow from operations to the payment of principal of, and interest on, our indebtedness, thereby reducing the availability of such cash flow to fund our growth strategy, working capital, capital expenditures and other general corporate purposes;purposes
Utilizing funds that are domiciled in foreign tax jurisdictions in order to make the cash payments upon any repayment of our indebtedness. If we were to choose to use such funds, we would be required to accrue any additional taxes on any portion of the repatriation where no United States income tax had been previously provided; and
•Limiting our flexibility in planning for, or reacting to, changes in our business and our industry.industry; and
•Increasing our vulnerability to adverse changes in general economic and industry conditions.
The agreements governing our indebtedness impose restrictions on us and require us to maintain compliance with specified covenants. In particular, the revolving credit facility includesrequires us to maintain compliance with a maximum capitalization ratio and minimum liquidity requirements.debt to EBITDA ratio. Our ability to comply with these covenants may be affected by events beyond our control. If we breach any of these covenants and do not obtain a waiver from the lenders or noteholders, then, subject to applicable cure periods, our outstanding indebtedness may be declared immediately due and payable. In addition, changes by any rating agency to our credit rating may negatively impact the value and liquidity of both our debt and equity securities, as well as the potential costs associated with any potential
refinancing our indebtedness. Downgrades in our credit rating could also restrict our ability to obtain additional financing in the future and could affect the terms of any such financing.
Changes in our tax rates or exposure to additional tax liabilities, and changes to tax laws and interpretations of tax lawscould adversely affect our earnings and financial condition.
We are subject to taxes in the United States and in various foreign jurisdictions. Significant judgment is required in determining our worldwide income tax provision, tax assets, and accruals for other taxes, and there are many transactions and calculations where the ultimate tax determination is uncertain. Our effective income tax rate is based in part on our corporate operating structure and the manner in which we operate our business and develop, value and use our intellectual property. Taxing authorities in jurisdictions in which we operate have, and may continue to, challenge and audit our methodologies for calculating our income taxes, which could be adverselyincrease our effective income tax rate and have an adverse impact on our results of operations and cash flows. In addition, our provision for income taxes is materially affected by our profit levels, changes in our business, reorganization of our business and operating structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the elections we make, changes in the valuation of our deferred tax assets and liabilities, or changes in applicable tax laws or interpretations of existing income and withholding tax laws, or changes in the valuation allowance for deferred tax assets, as well as other factors. For example, the outcome of future guidance related to the U.S. Tax Act could cause us to change our analysis and materially impact our previous estimates and consolidated financial statements.
In addition, changes to U.S. federal, state or international tax laws or their applicability to corporate multinationals in the countries in which we do business, particularly in Switzerland, where our international business is headquartered, and actions we have taken in our business with respect to such laws, have affected our effective tax rates and cash taxes, cause us to change the way in which we structure our business and resulted in other costs. Our effective tax rate also could be adversely affected by changes in our valuation allowances for deferred tax assets. In particular, the partial valuation allowance against our Swiss deferred tax assets could be affected by changes in future Swiss taxable income, expected growth rates of future Swiss taxable income, which are based primarily on third party market and industry growth data, and changes in Swiss interest rates. The partial valuation allowance is due to the limited seven-year carry forward period and our scheduling of future Swiss taxable income. Significant judgment is involved in determining the amount of the partial valuation allowance, particularly in estimating future Swiss taxable income over the period in which the Swiss deferred tax assets will reverse and assumptions related to expected growth rates. Actual financial results also may differ materially from our current estimates and could have a material impact on our assessment of the valuation allowance.
We are also required to pay taxes other than income taxes, such as payroll, sales, use, value-added, net worth, property, transfer, and goods and services taxes, in both the United States and foreign jurisdictions. Furthermore, we are regularly subjectSeveral foreign jurisdictions have introduced new digital services taxes on revenue of companies that provide certain digital services or expanded their interpretation of existing tax laws with regard to audit by tax authorities with respect to both income and such other non-income taxes. Adverse changesThere is limited guidance about the applicability of these new taxes or changing interpretations to our business and significant uncertainty as to what will be deemed in our effective income tax rate, unfavorable audit results or tax rulings, or other changes resulting in significant additional tax liabilitiesscope. If these foreign taxes are applied to the Company, it could have an adverse and material adverse effects uponimpact on our earnings, cash flows,business and financial condition. In addition, the United States and other countries in which we do business are considering changes to tax laws applicable to corporate multinationals, which could adversely affect our effective tax rates, cause us to change the way in which we structure our business or result in other costs to us.performance.
Our reported financial results could be adversely affected by changes infinancial accounting standards.
Our reported financial results are impacted by the accounting standards promulgated by the SEC and national accounting standards bodies and the methods, estimates, and judgments that we use in applying our accounting policies. These methods, estimates, and judgments are subject to risks, uncertainties, assumptions and changes that could adversely affect our reported financial position
and financial results. In addition, changes to applicable financial accounting standards could
adversely affectimpact our reported financial position and financial results. For
example,more information on recently adopted accounting standards and recently issued accounting standards
are expectedapplicable to
materially change the way in which we recognize revenue and account for leases upon adoption. For more information,us, see Part II, Item 8 of this Form 10-K in the Notes to
the Consolidated Financial Statements in
Note 1 -— Description of Business and SummaryBasis of Significant Accounting Policies to the Consolidated Financial StatementsPresentation under the subheading “Impact ofsubheadings “Recently Adopted Accounting Standards” and “Other Recently Issued Accounting Standards”Standards”.
As we enhance, expand and diversify our business and product offerings, the application of existing or future financial accounting standards, particularly those relating to the way we account for revenue, costs and taxes, could have an adverse effect on our reported results although not necessarily on our cash flows.
Our stock price has been volatile and may continue to fluctuate significantly.
The market price of our common stock historically has been, and we expect will continue to be, subject to significant fluctuations. These fluctuations may be due to our operating results or factors specific to usour operating results (including those discussed in the risk factors above, as well as others not currently known to us or that we currently do not believe are material), to
changes in securities analysts’ earnings estimates of our future financial performance, ratings or ratings, torecommendations, our results or future financial guidance falling below our expectations and analysts’ and investors’ expectations, to factors affecting the entertainment, computer, software, Internet, media or electronics industries, to our ability to successfully integrateannouncement and integration of any acquisitions we may make, departure of key personnel, cyberattacks, or tofactors largely outside of our control including, those affecting interactive gaming, entertainment, and/or technology companies generally, national or international economic conditions.conditions, investor sentiment or other factors related or unrelated to our operating performance. In particular, economic downturns may contribute to the public stock markets experiencing extreme price and trading volume volatility. These broad market fluctuations could adversely affect the market price of our common stock.
Item 1B: Unresolved Staff Comments
None.
Item 2: Properties
We own our 660,000-square-foot Redwood Shores headquarters facilities located in Redwood City, California, which includes a product development studio and administrative and sales functions. We also own a 418,000-square-foot product development studio facility in Burnaby, Canada. In addition to the properties we own, we lease approximately 1.1 million square feet in North America and 890,000 square feet in Europe and Asia at various research and development, sales and administration and distribution facilities, including leases for our development studios in Orlando, Florida, Stockholm, Sweden and Austin, Texas.Not applicable.
While we continually evaluate our facility requirements, we believe that suitable additional or substitute space will be available as needed to accommodate our future needs. For information regarding our lease commitments, see Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 11, “Commitments and Contingencies”.
Item 3: Legal Proceedings
On July 29, 2010, Michael Davis, a former NFL running back, filed a putative class action in the United States District Court for the Northern District of California against the Company, alleging that certain past versions of Madden NFL included the images of certain retired NFL players without their permission. In March 2012, the trial court denied the Company’s request to dismiss the complaint on First Amendment grounds. In January 2015, that trial court decision was affirmed by the Ninth Circuit Court of Appeals and the case was remanded back to the United States District Court for the Northern District of California. On February 2, 2017, the United States District Court for the Northern District of California denied the plaintiffs’ motion for class certification.
We are also subject to claims and litigation arising in the ordinary course of business. We do not believe that any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on our Consolidated Financial Statements.
Item 4: Mine Safety Disclosures
Not applicable.
PART II
| |
Item 5: | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Item 5: Market Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol “EA”. The following table sets forth the quarterly highfor Registrant’s Common Equity, Related Stockholder Matters and low closing sales price per shareIssuer Purchases of our common stock from April 1, 2015 through March 31, 2017. |
| | | | | | | |
| | Prices |
| | High | | Low |
| Fiscal Year Ended March 31, 2016: | | | |
| First Quarter | $ | 68.00 |
| | $ | 56.03 |
|
| Second Quarter | 75.16 |
| | 63.43 |
|
| Third Quarter | 76.77 |
| | 65.04 |
|
| Fourth Quarter | 70.83 |
| | 55.50 |
|
| Fiscal Year Ended March 31, 2017: | | | |
| First Quarter | 77.25 |
| | 61.85 |
|
| Second Quarter | 85.40 |
| | 75.38 |
|
| Third Quarter | 85.56 |
| | 75.58 |
|
| Fourth Quarter | 91.51 |
| | 78.64 |
|
Holders
There were approximately 1,230784 holders of record of our common stock as of May 22, 2017, and the closing price of our common stock was $108.39 per share as reported by the NASDAQ Global Select Market.18, 2020. In addition, a significant number of beneficial owners of our common stock hold their shares in street name. Our common stock is traded on the NASDAQ Global Select Market under the symbol “EA”.
Dividends
We have not paid any cash dividends and do not anticipate paying cash dividends in the foreseeable future.
Issuer Purchases of Equity Securities
In May 2015, our Board of Directors authorized a program to repurchase up to $1 billion of our common stock. This stock repurchase program expires on May 31, 2017. We repurchased approximately 6.5 million and 6.9 million shares for approximately $508 million and $461 million under this program, respectively, during the fiscal years ended March 31, 2017 and 2016. We completed repurchases under the May 2015 program in April 2017.
In May 2017,2018, a Special Committee of our Board of Directors, on behalf of the full Board of Directors, authorized a new program to repurchase up to $1.2$2.4 billion of our common stock. This stock repurchaseWe repurchased approximately 12.3 million and 10.4 million shares for approximately $1,207 million and $1,116 million under this program, expiresrespectively, during the fiscal years ended March 31, 2020 and 2019. The May 2018 program was scheduled to expire on May 31, 2019. Under this2020, however we completed repurchases under the May 2018 program we may purchase stock in the open market or through privately-negotiated transactions in accordance with applicable securities laws, including pursuant to pre-arranged stock trading plans. The timing and actual amount of the stock repurchases will depend on several factors including price, capital availability, regulatory requirements, alternative investment opportunities and other market conditions. We are not obligated to repurchase a specific number of shares under this program and it may be modified, suspended or discontinued at any time. We are actively repurchasing shares under this program.April 2020.
The following table summarizes the number of shares repurchased in the fourth quarter of the fiscal year ended March 31, 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Month | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as part of Publicly Announced Programs | | Maximum Dollar Value that May Still Be Purchased Under the Programs (in millions) |
| December 29, 2019 - January 25, 2020 | | 797,785 | | | $ | 109.32 | | | 797,785 | | | $ | 282 | |
| January 26, 2020 - February 22, 2020 | | 750,646 | | | $ | 109.73 | | | 750,646 | | | $ | 199 | |
| February 23, 2020 - March 28, 2020 | | 1,209,537 | | | $ | 100.15 | | | 1,209,537 | | | $ | 78 | |
| | 2,757,968 | | | $ | 105.41 | | | 2,757,968 | | | |
|
| | | | | | | | | | | | | | |
| Fiscal Month | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as part of Publicly Announced Programs | | Maximum Dollar Value that May Still Be Purchased Under the Programs (in millions) |
| January 1 - January 28, 2017 | | 456,406 |
| | $ | 79.67 |
| | 456,406 |
| | $ | 120 |
|
| January 29 - February 25, 2017 | | 457,171 |
| | $ | 83.96 |
| | 457,171 |
| | $ | 81 |
|
| February 26 - April 1, 2017 | | 570,644 |
| | $ | 88.49 |
| | 570,644 |
| | $ | 31 |
|
| | | 1,484,221 |
| | $ | 84.38 |
| | 1,484,221 |
| |
|
Stock Performance Graph
The following information shall not be deemed to be “filed” with the SEC nor shall this information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Exchange Act, as amended, except to the extent that we specifically incorporate it by reference into a filing.
The following graph shows a five-year comparison of cumulative total returns during the period from March 31, 20122015 through March 31, 2017,2020, for our common stock, the S&P 500 Index (to which EA was added in July 2002), the NASDAQ Composite Index, and the RDG Technology Composite Index, each of which assumes an initial value of $100. Each measurement point is as of the end of each fiscal year. The performance of our stock depicted in the following graph is not necessarily indicative of the future performance of our stock.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Electronic Arts Inc., the S&P 500 Index, the NASDAQ Composite Index,
and the RDG Technology Composite Index
|
| | | | |
| * | Based on $100 invested on March 31, 20122015 in stock or index, including reinvestment of dividends. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, | | | | | | | | | | |
| | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
| Electronic Arts Inc. | $ | 100 | | | $ | 112 | | | $ | 152 | | | $ | 206 | | | $ | 173 | | | $ | 170 | |
| S&P 500 Index | 100 | | | 102 | | | 119 | | | 136 | | | 149 | | | 138 | |
| NASDAQ Composite Index | 100 | | | 101 | | | 124 | | | 149 | | | 165 | | | 166 | |
| RDG Technology Composite Index | 100 | | | 100 | | | 127 | | | 163 | | | 192 | | | 204 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, |
| | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| Electronic Arts Inc. | $ | 100 |
| | $ | 107 |
| | $ | 176 |
| | $ | 357 |
| | $ | 401 |
| | $ | 543 |
|
| S&P 500 Index | 100 |
| | 114 |
| | 139 |
| | 157 |
| | 159 |
| | 187 |
|
| NASDAQ Composite Index | 100 |
| | 107 |
| | 141 |
| | 166 |
| | 166 |
| | 203 |
|
| RDG Technology Composite Index | 100 |
| | 100 |
| | 129 |
| | 151 |
| | 155 |
| | 190 |
|
Item 6: Selected Financial Data
ELECTRONIC ARTS INC. AND SUBSIDIARIES
SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA
(In millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, | | | | | | | | | |
| STATEMENTS OF OPERATIONS DATA | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | |
Net revenue (a) | $ | 5,537 | | | $ | 4,950 | | | $ | 5,150 | | | $ | 4,845 | | | $ | 4,396 | | |
| Cost of revenue | 1,369 | | | 1,322 | | | 1,277 | | | 1,298 | | | 1,354 | | |
| Gross profit | 4,168 | | | 3,628 | | | 3,873 | | | 3,547 | | | 3,042 | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total operating expenses | 2,723 | | | 2,632 | | | 2,439 | | | 2,323 | | | 2,144 | | |
| Operating income | 1,445 | | | 996 | | | 1,434 | | | 1,224 | | | 898 | | |
| | | | | | | | | | |
| Interest and other income (expense), net | 63 | | | 83 | | | 15 | | | (14) | | | (21) | | |
| Income before provision for (benefit from) income taxes | 1,508 | | | 1,079 | | | 1,449 | | | 1,210 | | | 877 | | |
| Provision for (benefit from) income taxes | (1,531) | | (b) | 60 | | | 406 | | (c) | 243 | | | (279) | | (d) |
| Net income | $ | 3,039 | | | $ | 1,019 | | | $ | 1,043 | | | $ | 967 | | | $ | 1,156 | | |
| Earnings per share: | | | | | | | | | | |
| Basic | $ | 10.37 | | | $ | 3.36 | | | $ | 3.39 | | | $ | 3.19 | | | $ | 3.73 | | |
| Diluted | $ | 10.30 | | | $ | 3.33 | | | $ | 3.34 | | | $ | 3.08 | | | $ | 3.50 | | |
| Number of shares used in computation: | | | | | | | | | | |
| Basic | 293 | | | 303 | | | 308 | | | 303 | | | 310 | | |
| Diluted | 295 | | | 306 | | | 312 | | | 314 | | | 330 | | |
| | As of March 31, | | | | | | | | | |
| BALANCE SHEETS DATA | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | |
| Cash and cash equivalents | $ | 3,768 | | | $ | 4,708 | | | $ | 4,258 | | | $ | 2,565 | | | $ | 2,493 | | |
| Short-term investments | 1,967 | | | 737 | | | 1,073 | | | 1,967 | | | 1,341 | | |
| | | | | | | | | | |
| Working capital | 3,853 | | (e) | 4,116 | | | 3,513 | | | 2,784 | | | 1,936 | | (e) |
| Total assets | 11,112 | | | 8,957 | | | 8,584 | | | 7,718 | | | 7,050 | | |
| | | | | | | | | | |
| Senior notes, net | 397 | | | 994 | | | 992 | | | 990 | | | 989 | | |
| Other long-term liabilities | 590 | | | 367 | | | 506 | | | 253 | | | 245 | | |
| Total liabilities | 3,651 | | | 3,626 | | | 3,989 | | | 3,658 | | | 3,652 | | |
| Total stockholders’ equity | 7,461 | | | 5,331 | | | 4,595 | | | 4,060 | | | 3,396 | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
(a)On April 1, 2018, at the beginning of fiscal year 2019, we adopted the New Revenue Standard, which significantly changed how we recognize and report net revenue. Financial data for periods prior to April 1, 2018 has not been restated. For more information on the impact of adoption of the New Revenue Standard, please see Part II, Item 8, Notes to Consolidated Financial Statements in Note 1 under the heading “Recently Adopted Accounting Standards” included in our Annual Report on Form 10-K for our fiscal year ended March 31, 2019.
(b)During the fiscal year ended March 31, 2020, we recognized total one-time tax benefits of $1.760 billion related to the $1.840 billion Swiss Deferred Tax Asset, partially offset by the $80 million one-time Altera opinion charge. Please see Part II, Item 8 of this Form 10-K in the Notes to the Consolidated Financial Statements in Note 2 — Summary of Significant Accounting Policies - Income Taxes, for more information.
(c)For the fiscal year ended March 31, 2018, we recognized a tax expense of $235 million due to the application of the U.S. Tax Act, enacted on December 22, 2017.
(d)For the fiscal year ended March 31, 2016, we recognized a tax benefit of $453 million for the reversal of a significant portion of our deferred tax valuation allowance.
(e)Working capital for the fiscal year ended March 31, 2020 includes the current portion of the 3.70% Senior Notes due March 1, 2021. Working capital for the fiscal year ended March 31, 2016 includes the current portion of 0.75% convertible senior notes due 2016.
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| STATEMENTS OF OPERATIONS DATA | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Net revenue | $ | 4,845 |
| | $ | 4,396 |
| | $ | 4,515 |
| | $ | 3,575 |
| | $ | 3,797 |
|
| Cost of revenue | 1,298 |
| | 1,354 |
| | 1,429 |
| | 1,347 |
| | 1,388 |
|
| Gross profit | 3,547 |
| | 3,042 |
| | 3,086 |
| | 2,228 |
| | 2,409 |
|
| Total operating expenses | 2,323 |
| | 2,144 |
| | 2,138 |
| | 2,195 |
| | 2,288 |
|
| Operating income | 1,224 |
| | 898 |
| | 948 |
| | 33 |
| | 121 |
|
| Gains on strategic investments, net | — |
| | — |
| | — |
| | — |
| | 39 |
|
| Interest and other income (expense), net | (14 | ) | | (21 | ) | | (23 | ) | | (26 | ) | | (21 | ) |
| Income before provision for (benefit from) income taxes | 1,210 |
| | 877 |
| | 925 |
| | 7 |
| | 139 |
|
| Provision for (benefit from) income taxes | 243 |
| | (279 | ) | | 50 |
| | (1 | ) | | 41 |
|
| Net income | $ | 967 |
| | $ | 1,156 |
| | $ | 875 |
| | $ | 8 |
| | $ | 98 |
|
| Earnings per share: | | | | | | | | | |
| Basic | $ | 3.19 |
| | $ | 3.73 |
| | $ | 2.81 |
| | $ | 0.03 |
| | $ | 0.32 |
|
| Diluted | $ | 3.08 |
| | $ | 3.50 |
| | $ | 2.69 |
| | $ | 0.03 |
| | $ | 0.31 |
|
| Number of shares used in computation: | | | | | | | | | |
| Basic | 303 |
| | 310 |
| | 311 |
| | 308 |
| | 310 |
|
| Diluted | 314 |
| | 330 |
| | 325 |
| | 316 |
| | 313 |
|
| | As of March 31, |
| BALANCE SHEETS DATA | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Cash and cash equivalents | $ | 2,565 |
| | $ | 2,493 |
| | $ | 2,068 |
| | $ | 1,782 |
| | $ | 1,292 |
|
| Short-term investments | 1,967 |
| | 1,341 |
| | 953 |
| | 583 |
| | 388 |
|
| Working capital | 2,784 |
| | 1,936 |
| | 973 |
| | 748 |
| | 408 |
|
| Total assets | 7,718 |
| | 7,050 |
| | 6,147 |
| | 5,716 |
| | 5,070 |
|
| 0.75% convertible senior notes due 2016, net | — |
| | 163 |
| | 633 |
| | 580 |
| | 559 |
|
| Senior notes, net | 990 |
| | 989 |
| | — |
| | — |
| | — |
|
| Other long-term liabilities | 253 |
| | 245 |
| | 333 |
| | 324 |
| | 327 |
|
| Total liabilities | 3,658 |
| | 3,652 |
| | 3,080 |
| | 3,294 |
| | 2,803 |
|
| Total stockholders’ equity | 4,060 |
| | 3,396 |
| | 3,036 |
| | 2,422 |
| | 2,267 |
|
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 fiscal year ended March 31, 2017,2020, 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-K, including in the “Business” section and the “Risk Factors” above, the remainder of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)”, and or the Consolidated Financial Statements and related Notes.
About Electronic Arts
We areElectronic Arts is a global leader in digital interactive entertainment. We develop, market, publish and distributedeliver games, content and services that can be played by consumersand watched on a variety of platforms, which include game consoles, PCs, mobile phones and tablets. InWe 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 we use establishedand 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, Mass Effect,The Sims, Apex Legends, Need for Speed The Sims and Plants v. Zombies), or license from others (such as FIFA, Madden NFL and Star Wars). We also publishoffer our players high-quality experiences designed to provide value to players and distribute games developedextend and enhance gameplay. Our live services experiences 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 third parties (e.g., Titanfall).making it easier for players to connect to a world of play by offering choice of business model, distribution channel and device.
Financial Results
Our key financial results for our fiscal year ended March 31, 20172020 were as follows:
•Total net revenue was $4,845$5,537 million, up 1012 percent year-over-year. On a constant currency basis, we estimate
total net revenue would have been $5,610 million, up 13 percent year-over-year.
•Digital net revenue was $4,314 million, up 16 percent year-over-year.
•Gross margin was 75.3 percent, up 2 percentage points year-over-year.
•Operating expenses were $2,723 million, up 3 percent year-over-year. On a constant currency basis, we estimate that total net revenue would have been $4,992 million, up 14 percent year over year.
Digital revenue was $2,874 million, up 19 percent year-over-year. Digital revenue comprised 59 percent of total net revenue.
International net revenue was $2,726 million, up 10 percent year-over-year. On a constant currency basis, we estimate that international net revenue would have been $2,876 million, up 16 percent year over year.
Gross margin was 73.2 percent, up 4.0 percentage points year-over-year.
Operating expenses were $2,323 million, up 8 percent year-over-year. On a constant currency basis, we estimate that
total operating expenses would have been $2,349$2,754 million, up 105 percent year over year.year-over-year.
•Operating income was $1,224$1,445 million, up 3645 percent year-over-year.
•Net income was $967$3,039 million, down 16 percent year-over-year. The decrease was primarily attributable to the $453 million incomeincluding a one-time net tax benefit in fiscal year 2016 related toof $1,760 million. Excluding the reversal of a significant portion of our deferredone-time tax valuation allowance.benefit, net income would have been $1,279 million, up 26 percent year-over-year.
•Diluted earnings per share was $3.08, down 12$10.30, including a one-time net tax benefit of $5.97. Excluding the one-time tax benefit, diluted earnings per share would have been $4.33, up 30 percent year-over-year.
•Operating cash flow was $1,383$1,797 million, up 1316 percent year-over-year.
•Total cash, cash equivalents and short-term investments were $4,532$5,735 million.
•We repurchased 12.3 million shares of our common stock for $1,207 million.
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. For additional information on the one-time net tax benefit excluded above from net income and diluted earnings per share, please see Part II, Item 8 of this Form 10-K in the Notes to the Consolidated Financial Statements in Note 2 — Summary of Significant Accounting Policies - Income Taxes.
Trends in Our Business
DigitalCOVID-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: First, we have focused on the health and wellbeing of our people and their families. During the fiscal quarter ending March 31, 2020, we shifted nearly all of our global workforce to work from home in response to the growing threat of the pandemic. Our IT, security and digital platform teams mobilized to add capacity to our remote working systems to scale to a distributed workforce and support business continuity. To date, substantially all of our people outside of Shanghai are continuing to work from home. We have developed a detailed protocol for how we will evaluate the readiness to return to work for each of our offices around the world, accounting for guidance from health authorities and government, the comfort level of our employees, and preparation of our facilities for continued physical distancing.
Our Business: Throughout this time, we have also focused on what we can do for our players. We launched our “Stay Home, Play Together” initiative to bring our players together when physical distancing is keeping us apart, and dozens of Stay & Play programs have been delivered to date. With more people staying at home we have experienced, and are continuing to experience, heightened levels of engagement and live services net bookings growth during the three months ended March 31, 2020 and during the current fiscal quarter to date.
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 we may not be able to predict. For example, we do not know when stay-at-home orders will be eased and lifted, and how our products and services will be impacted when that occurs. Engagement and net bookings could subside. Additional factors that could impact our business – particularly if stay-at-home orders remain in place for the longer term or a second wave of stay-at-home orders is necessary – include: our ability to deliver new games and services in a distributed work environment, macroeconomic challenges that impact consumer demand, the status of sports seasons on which our products and live services are based, impacts to our key business partners, foreign exchange rate fluctuations, and other factors included in Part I, Item 1A of this Annual Report under the heading “Risk Factors”. Players increasingly purchase
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 digital live services for console and PC was $2,813 million, $2,216 million and $2,083 million during fiscal years 2020, 2019 and 2018, respectively, and we expect that live services net revenue will continue to be material to our business. Net revenue attributable to extra content, which includes extra content within digital live services for console and PC as well as extra content within our mobile business was $2,763 million, $2,309 million and $2,033 million during fiscal years 2020, 2019 and 2018, respectively. Extra content net revenue has increased as players engage with our games digitally and engage withservices 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 live services associated with our portfolio of games. For example,extra content purchased for the Ultimate Team mode incorporated into iterationsassociated 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 $1,491 million, $1,369 million and $1,180 million during fiscal years 2020, 2019 and 2018, 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 FIFA, Madden NFL and NHL franchises and live services available digitally for our Star Wars, Battlefield and Sims franchises have extended the life of those games by engaging players for longer periods of time. Our digital transformation is also creating opportunities in platforms, content models and modalities of play. For example,digitally; therefore we have leveraged franchises typically associated with consoles and traditional PC gaming, such as FIFA, Madden NFL, The Sims, SimCity and Star Wars, to create mobile and PC free-to-download games that are monetized through a business model in which we sell incremental content and/or features in discrete transactions. We also provide our EA Access service on Xbox One and Origin Access service on PC which offer players access to a selection of EA games and other benefits for a monthly or annual fee.
Our digital transformation also gives us the opportunity to strengthen our player network. We are investing in a technology foundation to enable us to build personalized player relationships that can last for years instead of days or weeks by connecting our players to us and to each other. This connection allows us to market and deliver content and services for popular franchises like FIFA, Battlefield and Star Wars to our players more efficiently. That same foundation also enables new player-centric ways to discover and try new experiences, such as our subscription-based EA Access and Origin Access services.
We significantly increased our digitalexpect 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 $809 million, $680 million and $707 million during fiscal years 2020, 2019 and 2018, respectively; while our net revenue attributable to packaged goods sales decreased from $2,199$1,700 million in fiscal year 20152018 to $2,409$1,240 million in fiscal year 20162019 and $2,874$1,223 million in fiscal year 2020. In addition, as measured based on total units sold on Microsoft’s Xbox One and Sony’s PlayStation 4 rather than by net revenue, we estimate that 49 percent, 49 percent, and 39 percent of our total units sold during fiscal year 2017.years 2020, 2019 and 2018 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. We expect this portionthe long-term trends in revenue and in the percentage of games digitally downloaded to continue. Increases in consumer adoption of digital purchase of games combined with increases in our live services revenue generally results in expansion of our business to continue to growgross margin, as costs associated with selling a game digitally is generally less than selling the same game through fiscal year 2018traditional retail and beyond as we continue to focus on developing and monetizing products and services that can be delivered digitally.distribution channels.
Foreign Currency Exchange Rates. International sales are a fundamental part of our business, and the strengthening of the U.S. dollar (particularly relative to the Euro, British pound sterling, Australian dollar, Chinese yuan and South Korean won) has a negative impact on our reported international net revenue, but a positive impact on our reported international operating expenses (particularly the Swedish krona and Canadian dollar) because these amounts are translated at lower rates as compared to periods in which the U.S. dollar is weaker. Volatility in exchange rates remains elevated as compared to historical standards, and macroeconomic factors such as events related to the United Kingdom’s vote to leave the European Union inject uncertainty. While we use foreign currency hedging contracts to mitigate some foreign currency exchange risk, these activities are limited in the protection that they provide us and can themselves result in losses.
Mobile and PC Free-to-Download Games.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 pay for additionalthat are monetized through a live service associated with the game, particularly extra content or in-game items,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 expect this growththe mobile gaming industry to continue to grow during our 20182021 fiscal year. Likewise,
the wide consumer acceptance of free-to-download, microtransaction-basedfree-to-play, live service-based, online PC games played over the Internet has broadened our consumer base.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 PC free-to-downloadconsole free-to-play games to remain 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. The increased importance of live services revenue to our business has accelerated this trend. Live services revenue includes digital extra content, subscriptions, advertising and other digital revenues. For example,In particular, we derivehave historically derived a materialsignificant portion of our net revenue from our largest and most popular game, FIFA, the Ultimate Team game mode includedannualized version of which is consistently one of the best-selling games in our annualized FIFA, Madden NFL and NHL games.the marketplace.
Recurring Revenue Sources. Our business model includes revenue that we deem recurring in nature, such as revenue from our annualized titles (such assports franchises (e.g., FIFA, and Madden NFL), our console, PC and associated services,mobile catalog titles (i.e., titles that did not launch in the current fiscal year), and our ongoing mobile business and subscription programs.live services. We have been able to forecast revenue from these areas of our business with greater relative confidence than for new offerings.games, services and business models. As we continue to leverage the digital transformation in our industry and incorporate new contentbusiness 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 SalesBookings. In order to improve transparency into our business, we disclose an operating performance metric, net sales.bookings. Net salesbookings 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 and platform fees.
Net sales were $4.9 billion
The following is a calculation of our total net bookings for the periods presented:
| | | | | | | | | | | | | | | |
| Year Ended March 31, | | | | | | |
| (In millions) | 2020 | | 2019 | | | | |
| Total net revenue | $ | 5,537 | | | $ | 4,950 | | | | | |
| Change in deferred net revenue (online-enabled games) | (165) | | | 182 | | | | | |
| Platform fees | (161) | | | (188) | | | | | |
| Net bookings | $ | 5,211 | | | $ | 4,944 | | | | | |
Net bookings were $5,211 million for fiscal year ended March 31, 2017,2020 driven by sales of related to FIFA 1720, Madden NFL 20 and Battlefield 1 during the fiscal year.Star Wars Jedi: Fallen Order. Net salesbookings increased $376$267 million or 8%5 percent as compared to the fiscal year ended March 31, 20162019 due primarily to stronger sales associated with our FIFA franchise Star Wars Jedi: Fallen Order, Apex Legends and first-person shooter titles on a year-over-year basis. Need for Speed Heat,partially offset by Battlefield V and Anthem. Digital net salesbookings were $3.0 billion$4,052 million for the fiscal year ended March 31, 2017,2020, an increase of $503$330 million or 20%9 percent as compared to the fiscal year ended March 31, 2016.2019. The increase in digital net salesbookings was primarily driven by the ongoing digital transformation, as players increasingly purchase our games digitally and engage with our live services. Specifically,services which grew $372 million or 15 percent year-over-year, primarily due to sales of extra content for Apex Legends, FIFA Ultimate Team and Madden Ultimate Team; and full game downloads net saleswhich grew $222$18 million or 44% year-over-year primarily from a higher percentage of full game downloads of Battlefield 1 in fiscal year 2017, as compared2 percent due to fiscal year 2016’s first-person shooter title, net bookings associated with Star Wars BattlefrontJedi: Fallen Order and Need for Speed Heat, partially offset by Battlefield V. In addition, extra content grew $177These increases were partially offset by a decrease of $60 million or 16% year-over-year driven by increased net sales associated with Ultimate Team services.10 percent in our mobile business due to declines from aging titles.
Recent Developments
Stock Repurchase Program. In May 2017, a Special Committee of our Board of Directors, on behalf of the full Board of Directors, authorized a new program to repurchase up to $1.2 billion of our common stock. This stock repurchase program expires on May 31, 2019. Under this program, we may purchase stock in the open market or through privately-negotiated transactions in accordance with applicable securities laws, including pursuant to pre-arranged stock trading plans. The timing
and actual amount of the stock repurchases will depend on several factors including price, capital availability, regulatory requirements, alternative investment opportunities and other market conditions. We are not obligated to repurchase a specific number of shares under this program and it may be modified, suspended or discontinued at any time. We are actively repurchasing shares under this program.
In April 2017, we completed the stock repurchase authorization approved by our Board of Directors in May 2015. During fiscal year 2017, we repurchased approximately 6.5 million shares for approximately $508 million pursuant to the May 2015 repurchase program.
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.unknown, including uncertainty in the current economic environment due to the recent outbreak of COVID-19. As a result, actual results may differ materially from our estimates.
Results of Operations” under the subheading Critical Accounting Policies and Estimates included in our Annual Report on Form 10-K for our fiscal year ended March 31, 2018, filed with the SEC on May 23, 2018. With respect to revenue transactions occurring on April 1, 2018 and onward, our revenue recognition accounting policy is set forth below and follows ASC 606, Revenue from Contracts with Customers (the “New Revenue Standard” or “ASC 606”). Revenue Recognition
We derive revenue principally from sales of interactive softwareour games, and related extra content and services that can be played on game consoles, PCs, mobile phones and tablets. We evaluate revenue recognition based on the criteria set forth in FASB Accounting Standards Codification (“ASC”) 605, Revenue Recognition and ASC 985-605, Software: Revenue Recognition. We classify our revenue as either product revenue or service and other revenue.
Product revenue.Our product revenue includes revenue associated with the sale of software games or related product content or updates, whether delivered digitally (e.g., full-game downloads, extra-content) or via a physical disc (e.g., packaged goods), and licensing of game software to third-parties. Product revenue also includes revenue from mobile full game downloads that do not require our hosting support (e.g., premium mobile games) in order to utilize the game or related content (i.e. can be played with or without an Internet connection), and sales of tangible products such as hardware, peripherals, or collectors’ items.
Service and other revenue. Our service revenue includes revenue recognized from time-based subscriptions, games, content or updates that requires our hosting support in order to utilize the game or related content (i.e., can only be played with an Internet connection). This includes (1) entitlements to content that are accessed through hosting services (e.g., microtransactions for Internet-based, social network and free-to-download mobile games), (2) massively multi-player online (“MMO”) games (both software game and subscription sales), (3) subscriptions for our Battlefield Premium, EA and Origin Access, and Pogo-branded online game services, and (4) allocated service revenue from sales of software games with a service of online activities (e.g., online playability). Our other revenue includes advertising and non-software licensing revenue.
With respect to the allocated service revenue from sales of software games with a service of online activities (“online services”) mentioned above, our allocation of proceeds between product and service revenue for presentation purposes is based on management’s best estimate of the selling price of the online services with the residual value allocated to product revenue. Our estimate of the selling price of the online servicesofferings include, but are comprised of several factors including, but not limited to, prior selling pricesthe 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 theonline 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 Origin Access, Origin Access Premier and EA Access, that generally offers access to a selection of full games, in-game content, online services prices charged separately byand other third-party vendorsbenefits typically for similar service offerings,a recurring monthly or annual fee; and a cost-plus-margin approach. We review the estimated selling price of the online services on a regular basis
•licensing to third parties to distribute and use this methodology consistently to allocate revenue between producthost our games and service for software game sales with online services.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 all fourthe 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 following criteriasales 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).
Online-Hosted Service Games. Sales of our Online-Hosted Service Games are met:determined to have one distinct performance obligation: the online hosting. We recognize revenue from these arrangements as the service is provided.
EvidenceExtra Content.Revenue received from sales of an arrangement. Evidencedownloadable content are derived primarily from the sale of an agreementvirtual currencies and digital in-game content that enhance players’ game experience. Sales of extra content are accounted for in a manner consistent with the customer that reflectstreatment for our Games with Services and Online-Hosted Service Games as discussed above, depending upon whether or not the termsextra 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 conditionsthe online hosting). If the extra content does not have offline functionality, then the extra content is determined to deliverhave one distinct performance obligation: the related products 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 services must be present.
Fixed or determinable fee. Ifsales-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 arrangement fee is not fixed or determinable,minimum guarantee when we recognize revenuetransfer 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 amount becomes fixed or determinable.
related sales occur by the licensee.
Significant Judgments around Revenue Arrangements
Collection is deemed probable. Collection is deemed probable if we expectIdentifying performance obligations. Performance obligations promised in a contract are identified based on the customer togoods and services that will be able to pay amounts under the arrangement as those amounts become due. If we determine that collection is not probable as the amounts become due, we generally conclude that collection becomes probable upon cash collection.
Delivery. For packaged goods, delivery is considered to occur when a product is shipped and the risk of loss and rewards of ownership have transferred to the customer. For digital downloads, delivery is considered to occur when the software is made available tocustomer 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 download. For services and other, delivery is generally considered to occur as a combined performance obligation.
Determining the service is delivered, whichtransaction price.The transaction price is determined based on the underlying serviceconsideration 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. If thereDetermining the relative stand-alone selling price is significant uncertainty of acceptance, revenue is recognized once acceptance is reasonably assured.
Online-Enabled Games
Theinherently 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 gameslicenses 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 have online connectivity whereby a consumer may be able to download unspecified content or updates on a when-and-if-available basis (“unspecified updates”) for use with the original game software. In addition, we may also offer a service of online activities (e.g., online playability) without a separate fee. U.S. GAAP requires us to account for the consumer’s right to receive unspecified updates or the service of online activities for no additional fee as a “bundled” sale, or multiple-element arrangement.
We have an established historical pattern of providing unspecified updates (e.g., player roster updates to Madden NFL 17) to online-enabled games and related content at no additional charge to the consumer. Because we do not have vendor-specific objective evidence of fair value (“VSOE”) for these unspecified updates, we are required by current U.S. GAAP to recognize as revenue the entire sales price of these online-enabled games and related content over the period we expect to offer the unspecified updates to the consumer (“estimated offering period”).
Estimated Offering Period
sold. Because the offering period is not an explicitly defined period, we must make an estimate of the offering period.period for the service related performance obligations (i.e., future update rights and online hosting). Determining the estimated offering periodEstimated Offering Period is inherently subjective and is subject to regular revision based on historical online usage. For example, in determining the estimated offering period for unspecified updates associated with our online-enabled games,revision. Generally, we consider the average period of time consumerscustomers are online as online connectivity is required. On an annual basis, we review consumers’ online gameplay of all online-enabled games that have been released 12 to 24 months prior towhen estimating the evaluation date. For example, if our evaluation date is April 1, 2016, we evaluate all online-enabled games released between April 1, 2014 and March 31, 2015. Based on this population of games, for all players that register the game online within the first six months of release of the game to the general public, we compute the weighted-average number of days for each online-enabled game, based on when a player initially registers the game online to when that player last plays the game online.offering period. We then compute the weighted-average number of days for all online-enabled games by multiplying the weighted-average number of days for each online-enabled game by its relative percentage of total units sold from these online-enabled games (i.e., a game with more units sold will have a higher weighting to the overall computation than a game with fewer units sold). Under a similar computation, 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 an end consumer (i.e.the customer (i.e., time in channel). Based on these two calculationsfactors, we then consider the method of distribution. For example,, physical software games
sold at retail would have a composite offering period equal to the online gameplay period plus time in channel as opposed to digitally distributeddigitally-distributed software gameslicenses which are delivered immediately via digital download and thus have no concept of channel. 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 periodEstimated Offering Period for future sales.
While we consistently applyWe believe this methodology, inherent assumptions used in this methodology includeprovides 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 online-enabledour games to sample, whether to use only units that have registered online, whether to weight the number of days for each game, whether to weight the days based on the units sold of each game, determining the period of time between the date of sale to reseller and the date of sale to the consumer and assessing online gameplay trends.
are played. We recognize revenue from the sale of online-enabled games for which we do not have VSOE for the unspecified updatesfuture 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. These performance obligations are generally recognized over an estimated nine-month period beginning in the month after shipment for physical gamessoftware licenses sold through retail and an estimated six-month period for digitally-distributed games.
Deferred Net Revenue (online-enabled games)
Because the majority of our sales are subject to a deferral period of generally six to nine months, our deferred net revenue (online-enabled games) balance is material. This balance increases from period to period by the revenue being deferred for current sales and is reduced by the recognition of revenue from prior sales that were deferred (i.e., the “net change”software licenses beginning in the deferred balance). However, given the seasonal sales naturemonth of our business, the net change in the deferred balance may be material from period to period. For example, because our sales have historically been highest in the fiscal third quarter, the deferred net revenue (online-enabled games) balance generally increases significantly in the third fiscal quarter. Similarly, because sales have historically been lowest in the first fiscal quarter, the deferred net revenue (online-enabled games) balance generally decreases significantly in the first fiscal quarter of a fiscal year.sale.
Other Multiple-Element Arrangements
In some of our multiple-element arrangements, we sell non-software products with software and/or software-related offerings. These non-software products are generally music soundtracks, peripherals or ancillary collectors’ items, such as figurines and comic books. Revenue for these arrangements is allocated to each separate unit of accounting for each deliverable using the relative selling prices of each deliverable in the arrangement based on the selling price hierarchy described below. If the arrangement contains more than one software deliverable, the arrangement consideration is allocated to the software deliverables as a group and then allocated to each software deliverable.
We determine the selling price for a non-software product deliverable based on the following selling price hierarchy: VSOE (i.e., the price we charge when the non-software product is sold separately) if available, third-party evidence (“TPE”) of fair value (i.e., the price charged by others for similar non-software products) if VSOE is not available, or our best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. Determining the BESP is a subjective process that is based on multiple factors including, but not limited to, recent selling prices and related discounts, market conditions, customer classes, sales channels and other factors. Provided the other three revenue recognition criteria other than delivery have been met, we recognize revenue upon delivery to the customer as we have no further obligations.
We must make assumptions and judgments in order to (1) determine whether and when each element is delivered, (2) determine whether VSOE exists for each undelivered element, and (3) allocate the total price among the various elements, as applicable. Changes to any of these assumptions and judgments, or changes to the elements in the arrangement, could cause a material increase or decrease in the amount of revenue that we report in a particular period.
Principal Agent Considerations
We evaluate sales to end customers of our interactive softwarefull games extra-content, and services from our subscription offeringsrelated content via third partythird-party storefronts, including digital channel 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 primary obligorprincipal in the sale to the end consumer,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•the underlying contract terms and conditions between the various parties to the transaction;
•which party is primarily responsible for delivery/fulfillment offulfilling the productpromise to provide the specified good or service to the end consumercustomer;
The•which party responsible forhas inventory risk before the billing, collection of fees and refundsspecified good or service has been transferred to the end consumercustomer; and
The storefront and Terms of Sale that govern•which party has discretion in establishing the end consumer’s purchase ofprice for the productspecified good or serviceservice.
The party that sets the pricing with the end consumer and has credit risk
Based on an evaluation of the above indicators, except as discussed below, we have determined that generally the third party is considered the primary obligorprincipal to end consumerscustomers for the sale of our interactive software games.full games and related content. We therefore report revenue related to these arrangements net of the fees retained by the storefront.
Sales Returns However, for sales arrangements via Apple App Store and AllowancesGoogle Play Store, EA is considered the principal to the end customer and Bad Debt Reserves
We reducethus, we report revenue for estimated future returns and price protection which may occur with our distributors and retailers (“channel partners”). Price protection represents our practice to provide our channel partners with a credit allowance to lower their wholesale price on a particular product that they have not resold to end consumers. The amount of the price protection is generally the difference between the old wholesale pricegross basis and the new reduced wholesale price. In certain countries for our PC and console packaged goods software products, we also have a practice of allowing channel partners to return older software products in the channel in exchange for a credit allowance. As a general practice, we do not give cash refunds.
When evaluating the adequacy of sales returns and price protection allowances, we analyze the following: historical credit allowances, current sell-through of our channel partners’ inventory of our software products, current trends in retail and the video game industry, changes in customer demand, acceptance of our software products, and other related factors. In addition, we monitor the volume of sales to our channel partners and their inventories, as substantial overstocking in the distribution channel could result in high returns or higher price protection in subsequent periods.
In the future, actual returns and price protections may materially exceed our estimates as unsold software products in the distribution channelsmobile platform fees are exposed to rapid changes in consumer preferences, market conditions or technological obsolescence due to new platforms, product updates or competing software products. While we believe we can make reliable estimates regarding these matters, these estimates are inherently subjective. Accordingly, if our estimates change, our returns and price protection allowances would change and would impact the total net revenue, accounts receivable and deferred net revenue that we report.
We determine our allowance for doubtful accounts by evaluating the following: customer creditworthiness, current economic trends, historical experience, age of current accounts receivable balances, and changes in financial condition or payment terms of our customers. Significant management judgment is required to estimate our allowance for doubtful accounts in any accounting period. The amount and timing of our bad debt expense and cash collection could change significantly as a result of a change in any of the evaluation factors mentioned above.
Royalties and Licenses
Our royalty expenses consist of payments to (1) content licensors, (2) independent software developers, and (3) co-publishing and distribution affiliates. License royalties consist of payments made to celebrities, professional sports organizations, movie studios and other organizations for our use of their trademarks, copyrights, personal publicity rights, content and/or other intellectual property. Royalty payments to independent software developers are payments for the development of intellectual property related to our games. Co-publishing and distribution royalties are payments made to third parties for the delivery of products.
Royalty-based obligations with content licensors and distribution affiliates are either paid in advance and capitalized as prepaid royalties or are accrued as incurred and subsequently paid. These royalty-based obligations are generally expensed to cost of revenue generally at the greater of the contractual rate or an effective royalty rate based on the total projected net revenue for contracts with guaranteed minimums. Significant judgment is required to estimate the effective royalty rate for a particular contract. Because the computation of effective royalty rates requires us to project future revenue, it is inherently subjective as our future revenue projections must anticipate a number of factors, including (1) the total number of titles subject to the contract, (2) the timing of the release of these titles, (3) the number of software units and amount of extra content that we expect to sell, which can be impacted by a number of variables, including product quality, number of platforms we release on, the timing of the title’s release and competition, and (4) future pricing. Determining the effective royalty rate for our titles is particularly challenging due to the inherent difficulty in predicting the popularity of entertainment products. Furthermore, if we conclude that we are unable to make a reasonably reliable forecast of projected net revenue, we recognize royalty expense at the greater of contract rate or on a straight-line basis over the term of the contract. Accordingly, if our future revenue projections change, our effective royalty rates would change, which could impact the amount and timing of royalty expense we recognize.
Prepayments made to thinly capitalized independent software developers and co-publishing affiliates are generally made in connection with the development of a particular product, and therefore, we are generally subject to development risk prior to the release of the product. Accordingly, payments that are due prior to completion of a product are generally expensed to research and development over the development period as the services are incurred. Payments due after completion of the product (primarily royalty-based in nature) are generally expensed asreported within cost of revenue.
Our contracts with some licensors include minimum guaranteed royalty payments, which are initially recorded as an asset and as a liability at the contractual amount when no performance remains with the licensor. When performance remains with the licensor, we record guarantee payments as an asset when actually paid and as a liability when incurred, rather than recording the asset and liability upon execution of the contract.
Each quarter, we also evaluate the expected future realization of our royalty-based assets, as well as any unrecognized minimum commitments not yet paid to determine amounts we deem unlikely to be realized through product and service sales. Any impairments or losses determined before the launch of a product are generally charged to research and development expense. Impairments or losses determined post-launch are charged to cost of revenue. We evaluate long-lived royalty-based assets for impairment using undiscounted cash flows when impairment indicators exist. If impairment exists, then the assets are
written down to fair value. Unrecognized minimum royalty-based commitments are accounted for as executory contracts, and therefore, any losses on these commitments are recognized when the underlying intellectual property is abandoned (i.e., cease use) or the contractual rights to use the intellectual property are terminated.
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 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;evidence and; this evaluation involvesmay 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.
In the fourth
Every quarter, we perform a realizability analysis to evaluate whether it is more likely than not that all or a portion of fiscal year 2016, we realized significant U.S. pre-tax income for both the fourth quarter and the fiscal year ended March 31, 2016. As a result, we released the valuation allowance against all of the U.S. federalour deferred tax assets andwill not be realized. As of March 31, 2020, we have recognized a portion of the U.S. state deferred tax assets during the fourth quarter of fiscal year 2016. We continue to maintain a$131 million valuation allowance related to specific U.S. stateour Swiss deferred tax assets. 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 over the 20-year period over which the Swiss deferred tax assets will reverse, specifically related to assumptions about expected growth rates of future Swiss taxable income, which are based primarily on
third party market and foreign capital loss carryovers, dueindustry 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 uncertainty about the future realization of these assets.
Priorsuch interest rates could result in a material impact to the fourth quartervaluation allowance. Switzerland has a seven-year carryforward period and does not permit the carry back of fiscal year 2016, we considered all undistributed earnings of our foreign subsidiarieslosses. We do not recognize any deferred taxes related to be indefinitely reinvested outside of the United States and, accordingly, no U.S. taxes had been provided thereon. During the fourth quarter of fiscal year 2016,on foreign earnings as we reevaluated our intent to indefinitely reinvest all earnings of foreign subsidiary companies, and concluded thatrecognize these taxes as a portion of earnings of certain subsidiaries will no longer be considered to be indefinitely reinvested. We currently intend to continue to indefinitely reinvest a substantial majority of the undistributed earnings of our foreign subsidiaries outside of the United States. In the ordinary course of our business, there are many transactions and calculations where the tax law and ultimate tax determination is uncertain. period cost.
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, 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.
Recent proposals
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The information under the subheading “Impact of Recently Issued Accounting Standards” in Note 1 — Description of Business and Basis of Presentationto lower the U.S. corporate income tax rate would require us to reduce our net deferred tax assets uponConsolidated Financial Statements in this Form 10-K is incorporated by reference into this Item 7.
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 yearyears ended March 31, 20172020, 2019 and 20152018 contained 52 weeks each and ended on April 1, 2017March 28, 2020, March 30, 2019 and March 28, 2015,31, 2018, respectively. Our results of operations for the fiscal year ended March 31, 2016 contained 53 weeks and ended on April 2, 2016. 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) videofull games sold as digital downloads or as packaged goods and designed for play on game consoles and PCs, (2) videofull games for mobile phones and tablets, (3) separate software products and extra-content and online gamelive services associated with these products,games, such as extra content, (4) subscriptions that generally offer access to a selection of full games, in-game content, online services and other benefits, and (5) licensing our game softwaregames to third parties (5) allowing other companies to manufacturedistribute and sell our products in conjunction with other products, and (6) advertisements on our online web pages and inhost our games. We recognize revenue from the sale of online-enabled games for which we do not have VSOE for the unspecified updates on a straight-line basis, generally over an estimated six-month period for digitally-delivered games and content and an estimated nine-month period beginning in the month after shipment for physical games sold through retail.
We provide two different measures of our Net Revenue. (1) Net Revenue by Product revenue and Service and other revenue, and (2) Net Revenue by Composition, which is primarily based on method of distribution. Management places a greater emphasis and focus on assessing our business through a review of the Net Revenue by Composition (Digital, and Packaged goods and other) than by Net Revenue by Product revenue and Service and other revenue.
Comparison of Fiscal Year 20172020 to Fiscal Year 20162019
Net Revenue
For
Net revenue for fiscal year 2017, net2020 was $5,537 million, primarily driven by FIFA 20, FIFA 19, The Sims 4, Apex Legends and Madden NFL 20. Net revenue was $4,845for fiscal year 2020 increased $587 million, and increased $449 million, or 10 percent, as compared to fiscal year 2016.2019. This increase was driven by an $809a $924 million increase in revenue primarily from theApex Legends, Star Wars Battlefield,Jedi: Fallen Order and FIFA franchises. This increase was partially offset by a $360 million decrease in revenue primarily from the Dragon Age, The Sims, and NHL franchises, and The Simpsons Tapped Out.
Net Revenue by Product Revenue and Service and Other Revenue
Our Net Revenue by Product revenue and Service and other revenue for fiscal years 2017 and 2016 was as follows (in millions):
|
| | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2017 | | 2016 | | $ Change | | % Change |
| Net revenue: | | | | | | | |
| Product | $ | 2,640 |
| | $ | 2,497 |
| | $ | 143 |
| | 6 | % |
| Service and other | 2,205 |
| | 1,899 |
| | 306 |
| | 16 | % |
| Total net revenue | $ | 4,845 |
| | $ | 4,396 |
| | $ | 449 |
| | 10 | % |
Product Revenue
For fiscal year 2017, Product net revenue was $2,640 million, primarily driven by FIFA 17, Battlefield 1, and Star WarsBattlefront. Product net revenue increased $143 million, or 6 percent, as compared to fiscal year 2016. This increase was driven by a $526 million increase primarily from the Battlefield and Star Wars franchises, and Titanfall 2Anthem. This increase was partially offset by a $383$337 million decrease in revenue primarily from the Dragon Age, FIFA, The Sims, and Need for Speed franchises.Battlefield franchise.
Service and Other Revenue
For fiscal year 2017, Service and other net revenue was $2,205 million, primarily driven by FIFA Ultimate Team, Star Wars: Galaxy of Heroes, and Need for Speed 2015. Service and other net revenue for fiscal year 2017 increased $306 million, or 16 percent, as compared to fiscal year 2016. This increase was driven by a $404 million increase primarily from FIFA Ultimate Team andtheStar Wars and Need for Speed franchises. This increase was partially offset by a $98 million decrease primarily from The Simpsons Tapped Out, Titanfall, The Sims FreePlay, and Battlefield 4 Premium.
Supplemental Net Revenue by Composition
As we continue to evolve our business has evolved and more of our products are delivered to consumers digitally, we placehave placed a greatersignificant emphasis and focus on assessing our business performance through a review of net revenue by composition.composition, which is primarily based on method of distribution.
Our net revenue by composition for fiscal years 20172020 and 20162019 was as follows (in millions): | | | | | | | | | | | | Year Ended March 31, | |
| | Year Ended March 31, | |
| | 2017 | | 2016 | | $ Change | | % Change | | 2020 | | 2019 | | $ Change | | % Change |
| | | | | | | | | |
| Net revenue: | | Net revenue: | | | | | | | |
| Full game downloads | $ | 659 |
| | $ | 465 |
| | $ | 194 |
| | 42 | % | Full game downloads | $ | 809 | | | $ | 680 | | | $ | 129 | | | 19 | % |
| Extra content | 1,204 |
| | 1,062 |
| | 142 |
| | 13 | % | |
| Subscriptions, advertising, and other | 385 |
| | 338 |
| | 47 |
| | 14 | % | |
| Live services | | Live services | 2,813 | | | 2,216 | | | 597 | | | 27 | % |
| Mobile | 626 |
| | 544 |
| | 82 |
| | 15 | % | Mobile | 692 | | | 814 | | | (122) | | | (15) | % |
| Total Digital | $ | 2,874 |
| | $ | 2,409 |
| | $ | 465 |
| | 19 | % | Total Digital | $ | 4,314 | | | $ | 3,710 | | | $ | 604 | | | 16 | % |
| | | | | | | | | | | | | | | | |
| Packaged goods and other | $ | 1,971 |
| | $ | 1,987 |
| | $ | (16 | ) | | (1 | )% | Packaged goods and other | $ | 1,223 | | | $ | 1,240 | | | $ | (17) | | | (1) | % |
| Net revenue | $ | 4,845 |
| | $ | 4,396 |
| | $ | 449 |
| | 10 | % | |
| Total net revenue | | Total net revenue | $ | 5,537 | | | $ | 4,950 | | | $ | 587 | | | 12 | % |
Digital Net Revenue
Digital net revenue includes full game downloads, extra content, subscriptions, advertising and other,live services, and mobile revenue. Digital netFull game downloads includes revenue from digital sales of full games on console and PC. Live services includes revenue from sales of extra content for console, PC, browser games, game software distributed through our direct-to-consumer PC platform Origin, distributed wirelessly through mobile carriers, or licensed to our third-party publishing partners who distribute our games digitally.digitally, subscriptions, and advertising. Mobile primarily includes revenue from the sale of extra content for our mobile games. It also includes revenue
from the sale of full games and advertising on mobile phones and tablets.
For fiscal year 2017, digital net revenue was $2,874 million primarily driven by FIFA Ultimate Team, FIFA Online 3 in Asia, Battlefield 1, and Star Wars: Galaxy of Heroes.
Digital net revenue for fiscal year 20172020 was $4,314 million, primarily driven by extra content sales for FIFA Ultimate Team, Apex Legends and The Sims 4. Digital net revenue for fiscal year 2020 increased $465$604 million, or 19 percent, as compared to fiscal year 2016.2019. This increase iswas due to (1) a $194$597 million or 42 percent increase in full-game download netlive services revenue primarily driven by Battlefield 1sales of extra content for Apex Legends,FIFA Ultimate Team and FIFA 17Madden Ultimate Team, and a $129 million increase in full game downloads revenue primarily driven by Star Wars Jedi: Fallen Order, partially offset by Battlefield Hardline, (2)a $142$122 million or 13 percent increasedecrease in extra content netmobile revenue primarily driven by our Ultimate Team game mode and Star Wars Battlefront, (3) an $82 million or 15 percent increase in mobile net revenue primarily driven by lower extra content sales for Star Wars: Galaxy of Heroesand(4)a $47 million or 14 percent increase in subscriptions, advertising, and other net revenue.Madden Mobile.
Packaged Goods and Other Net Revenue
Packaged goods and other net revenue includes revenue from software that is distributed physically. This includes (1) net revenue from game software distributed physically through traditional channels such as brick and mortar retailers, and (2) our software licensing revenue from third parties (for example, makers of console platforms, personal computers or computer accessories) who include certain of our products for sale with their products (“(for example, OEM bundles”)bundles).
For fiscal year 2017, packaged goods and other Other net revenue was $1,971 million, primarily driven by FIFA 17, FIFA 16, Star Wars Battlefront, and Battlefield 1.includes our non-software licensing revenue.
Packaged goods and other net revenue for fiscal year 2017 decreased $162020 was $1,223 million, or 1 percent,primarily driven by FIFA 20, Star Wars Jedi: Fallen Order, Madden NFL 20, and FIFA 19. Packaged goods and other net revenue remained relatively consistent for fiscal year 2020, as compared to fiscal year 2016.2019.
Cost of Revenue
Cost of revenue for fiscal years 20172020 and 20162019 was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31,
2020 | | | | % of Net Revenue | | March 31,
2019 | | % of Net Revenue | | % Change | | Change as a % of Net Revenue |
| $ | 1,369 | | | | | 25 | % | | $ | 1,322 | | | 27 | % | | 4 | % | | (2) | % |
|
| | | | | | | | | | | | | | | | | | | |
| | March 31,
2017 | | % of Related Net Revenue | | March 31,
2016 | | % of Related Net Revenue | | % Change | | Change as a % of Related Net Revenue |
| Cost of revenue: | | | | | | | | | | | |
| Product | $ | 893 |
| | 33.8 | % | | $ | 938 |
| | 37.6 | % | | (4.8 | )% | | (3.8 | )% |
| Service and other | 405 |
| | 18.4 | % | | 416 |
| | 21.9 | % | | (2.6 | )% | | (3.5 | )% |
| Total cost of revenue | $ | 1,298 |
| | 26.8 | % | | $ | 1,354 |
| | 30.8 | % | | (4.1 | )% | | (4.0 | )% |
Cost of Product Revenue
Cost of product 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, (4)(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, (5)(8) write-offs of post launch prepaid royalty costs and losses on previously unrecognized licensed intellectual property commitments, (6)(9) amortization of certain intangible assets,
(7) (10) personnel-related costs, and (8)(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 productRevenue
Cost of revenue decreasedincreased by $45$47 million, or 4.84 percent in during fiscal year 2017,2020, as compared to fiscal year 2016.2019. This decreaseincrease was driven primarily by a reductiondue to an increase in licensinginventory and royalty costs as a result of a change in mix of our titles (i.e. associated with Star Wars Battlefront was a fiscal 2016 title that had royalties associated with it while Battlefield 1 was a fiscal 2017 title that does not bear royalties). This was partially offset by the recognition of a $15 million impairment charge on an acquisition-related intangible asset, as well Jedi: Fallen Order, an increase in royalty costs driven by higher sales associated with Madden franchise, a higher royalty rate associated with the FIFA 17 franchise, andTitanfall 2.
Cost of Service and Other Revenue
Cost of service and other revenue consists primarily of (1) royalty costs, (2) data center, bandwidth and server usage costs associated with hosting our online games and websites, (3) inventory costs, (4) platform processing fees from operating our website-based games on third party platforms, and (5) credit card fees associated with our service revenue.
Cost of service and other revenue decreasedApex Legends, partially offset by $11 million, or 2.6 percent in fiscal year 2017, as compared to fiscal year 2016. The decrease was primarily due to a decrease in inventory costs due to associated with Battlefield V andthe launch of Need for Speed 2015FIFA franchise,and data center, bandwidth and server usage costs associated with Anthem, which launched as online-only title during fiscal year 2019.
2016 without a comparable service game launch during fiscal year 2017, partially offset by the recognition of a $10 million impairment charge on a royalty-based asset, and an increase in royalty costs associated with FIFA Ultimate Team and Star Wars: Galaxy of Heroes during fiscal year 2017.
Total Cost of Revenue as a Percentage of Total Net Revenue
During fiscal year 2017, total cost of revenue as a percentage of total net revenue decreased by 4.02 percent during fiscal year 2020, as compared to the fiscal year ended March 31, 2016.2019. This decrease was primarily due to an increase in the proportion of our digital net revenues to packaged goods and other net revenues, as well as lower royalties expense associated withwhich generally have higher costs than our current year title mix as compared to fiscal year 2016.digital games.
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 fiscal years 20172020 and 20162019 were as follows (in millions): | | March 31,
2017 | | % of Net Revenue | | March 31,
2016 | | % of Net Revenue | | $ Change | | % Change | |
March 31,
2020 | | March 31,
2020 | | % of Net
Revenue | | March 31,
2019 | | % of Net
Revenue | | $ Change | | % Change |
| $ | 1,205 |
| | 25 | % | | $ | 1,109 |
| | 25 | % | | $ | 96 |
| | 9 | % | 1,559 | | | 28 | % | | $ | 1,433 | | | 29 | % | | $ | 126 | | | 9 | % |
Research and development expenses increased by $96$126 million, or 9 percent, in fiscal year 2017,2020, as compared to fiscal year 2016.2019. This $96 million increase was primarily due to a (1) $41 million increase in contracted services primarily driven by an increase in development advances to third-party developers associated with the Star Wars franchise, (2) an aggregate $32 million pre-launch loss on previously unrecognized minimum royalty-based commitments and impairment on royalty-based assets, and (3) a $23$67 million increase in personnel-related costs primarily resulting from an increase in headcount. These increases were partially offset by the quarter ended June 30, 2016 containing 13 weeksvariable
compensation and related expenses, a $45 million increase in the prior fiscal year, as well as a reductionstock-based compensation, and an $18 million increase in losses of $10 million from our cash flow hedging program in fiscal 2017 as compared to fiscal 2016. We use hedges to protect against currency exchange rate movements in our research andthird-party development expenses.expense.
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 fiscal years 20172020 and 20162019 were as follows (in millions): | | March 31,
2017 | | % of Net Revenue | | March 31,
2016 | | % of Net Revenue | | $ Change | | % Change | |
March 31,
2020 | | March 31,
2020 | | % of Net
Revenue | | March 31,
2019 | | % of Net
Revenue | | $ Change | | % Change |
| $ | 673 |
| | 14 | % | | $ | 622 |
| | 14 | % | | $ | 51 |
| | 8 | % | 631 | | | 11 | % | | $ | 702 | | | 14 | % | | $ | (71) | | | (10) | % |
Marketing and sales expenses increaseddecreased by $51$71 million, or 810 percent, in fiscal year 2017,2020, as compared to fiscal year 2016.2019. This $51decrease was primarily due to a $66 million increase was driven by higherdecrease in advertising expenses associated with ourand promotional spending resulting from fewer frontline title launches in fiscal year 2017 game launches, primarily Battlefield 1 and Titanfall 2, 2020, as compared to advertising expenses associated with our fiscal year 2016 game launches.2019.
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 fiscal years 20172020 and 20162019 were as follows (in millions): | | March 31,
2017 | | % of Net Revenue | | March 31,
2016 | | % of Net Revenue | | $ Change | | % Change | |
March 31,
2020 | | March 31,
2020 | | % of Net
Revenue | | March 31,
2019 | | % of Net
Revenue | | $ Change | | % Change |
| $ | 439 |
| | 9 | % | | $ | 406 |
| | 9 | % | | $ | 33 |
| | 8 | % | 506 | | | 9 | % | | $ | 460 | | | 9 | % | | $ | 46 | | | 10 | % |
General and administrative expenses increased by $33$46 million, or 810 percent, in fiscal year 2017,2020, as compared to fiscal year 2016.2019. This $33 million increase was primarily due to (1) a $12 million increase in facility-related expense primarily due to office expansions, (2) a $7 million increase in contracted services primarily due to higher legal expenses, and (3) a $6$24 million increase in personnel-related costs resulting fromdriven by an increase in headcount.variable compensation and related expenses, and a $14 million increase in stock-based compensation.
Income Taxes
Provision for (benefit from) income taxes for fiscal years
20172020 and
20162019 was as follows (in millions):
| | | March 31, 2017 | | Effective Tax Rate | | March 31, 2016 | | Effective Tax Rate | |
| March 31, 2020 | | March 31, 2020 | | Effective Tax Rate | | March 31, 2019 | | Effective Tax Rate |
| $ | 243 |
| | 20.1 | % | | $ | (279 | ) | | (31.8 | )% | (1,531) | | | (101.5) | % | | $ | 60 | | | 5.6 | % |
Our effective tax rate for fiscal year 2017 was 20.1 percent.
Our effective tax rate for the fiscal year 2017 differs fromended March 31, 2020 was negative 101.5 percent as compared to 5.6 percent for the statutory rate of 35.0 percent primarily due to non-U.S. profits subject to a reduced or zero tax rates. The effective tax rate for fiscal year 2017 differs from fiscal year 2016 primarily due to the reversal of a significant portion of our deferred tax valuation allowance recordedsame period in fiscal year 2016. Excluding the impact of the reversal of the valuation allowance, our effective tax rate for fiscal year 2016 would have been 19.8 percent, which differs from the statutory rate of 35.0 percent primarily due to non-U.S. profits subject to a reduced or zero tax rates.
In the fourth quarter of fiscal year 2016, we realized significant U.S. pre-tax income for both the fourth quarter and2019. During the fiscal year ended March 31, 2016. As2020, we completed an intra-entity sale of some of our intellectual property rights to our Swiss subsidiary, where our international business is headquartered (the “Swiss intra-entity sale”). The transaction did not result in a result,taxable gain. Under U.S. GAAP, any profit resulting from this intercompany transaction will be eliminated upon consolidation. However, the transaction resulted in a step-up of the Swiss tax-deductible basis in the transferred intellectual property rights and, accordingly, created a temporary difference between the book basis and the tax basis of such intellectual property rights (the “Swiss Deferred Tax Asset”). Our effective tax rate and resulting provision for income taxes for the fiscal year ended March 31, 2020 were significantly impacted by our recognition of the Swiss Deferred Tax Asset related to the Swiss intra-entity sale.
During the fiscal year ended March 31, 2020, we releasedrecognized a $1.840 billion Swiss Deferred Tax Asset, which is net of the impact of a $131 million valuation allowance against alland a $393 million reduction due to the impact of the U.S. federal deferred tax assets and a portiondecision of the Ninth Circuit Court of Appeals in Altera Corp. v Commissioner (“the Altera opinion”). The Altera opinion also requires related parties in an intercompany cost-sharing arrangement to share stock-based compensation expenses. The Altera opinion resulted in the recognition of a one-time charge of $80 million related to prior period U.S. state deferreduncertain tax assetspositions during the fourth quarter of fiscal year 2016. Accordingly,ended March 31, 2020. In total, during the fiscal year ended March 31, 2020, we recorded a $453recognized total one-time tax benefits of
$1.760 billion related to the $1.840 billion Swiss Deferred Tax Asset, partially offset by the $80 million incomeone-time Altera opinion charge.
Excluding the impacts of the Swiss Deferred Tax Asset and Altera opinion, our effective tax benefitrate for the year ended March 31, 2020 would have been 15.0 percent, which was higher than the same periods in fiscal year 2016 for the reversal of a significant portion of our deferred tax valuation allowance.
Because of the release of the valuation allowance2019 primarily due to an increase in U.S. taxes on foreign earnings in fiscal year 2016, we do not anticipate that our effective tax rates for fiscal year 2018 and future periods will be as significantly affected by changes in our deferred tax valuation allowance as they were prior to fiscal year 2017. 2020.
Our effective tax rates for fiscal year 20182021 and future periods will continue to depend on a variety of factors, including changes in our business, such as acquisitions and intercompany transactions, changes in our internationalcorporate structure, changes in the geographic location of business functions or assets, changes in the geographic mix of income, changes in or termination of our agreements with tax authorities, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in our annual pre-tax income or loss. WithWe anticipate that the adoption of ASU 2016-09 in the first quarter of fiscal year 2018, the inclusionimpact of excess tax benefits and tax deficiencies as a component ofmay result in significant fluctuations to our incomeeffective tax expense will increase volatility within our provision for income taxes asrate in the amount of excess tax benefits or deficiencies from stock-based compensation awards are dependent on our stock price at the date the awards vest.future.
Historically, we have considered all undistributed earnings of our foreign subsidiaries to be indefinitely reinvested outside of the United States and, accordingly, no U.S. taxes have been provided thereon. During the fourth quarter of fiscal year 2016, we reevaluated our intent to indefinitely reinvest all earnings of foreign subsidiary companies, and concluded that a portion of
earnings of certain subsidiaries will no longer be considered to be indefinitely reinvested. We currently intend to continue to indefinitely reinvest a substantial majority of the undistributed earnings of our foreign subsidiaries outside of the United States.
Comparison of Fiscal Year 20162019 to Fiscal Year 20152018
Net Revenue
Net Revenue by Product Revenue and Service and Other Revenue
Our Net Revenue by Product revenue and Service and other revenueResults of Operations” of our Annual Report on Form 10-K for fiscal years 2016 and 2015 was as follows (in millions):
|
| | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2016 | | 2015 | | $ Change | | % Change |
| Net revenue: | | | | | | | |
| Product | $ | 2,497 |
| | $ | 2,568 |
| | $ | (71 | ) | | (3 | )% |
| Service and other | 1,899 |
| | 1,947 |
| | (48 | ) | | (2 | )% |
| Total net revenue | $ | 4,396 |
| | $ | 4,515 |
| | $ | (119 | ) | | (3 | )% |
Product Revenue
For fiscal year 2016, Product revenue was $2,497 million, primarily driven by FIFA 16, FIFA 15 and Star WarsBattlefront. Product revenue decreased $71 million, as compared to fiscal year 2015. This decrease was driven by a $434 million decrease primarily from the Need for Speed, Battlefield and FIFA World Cup franchises. This decrease was partially offset by a $363 million increase primarily from Star Wars Battlefront and Dragon Age: Inquisition.
Service and Other Revenue
For fiscal year 2016, Service and other revenue was $1,899 million, primarily driven by FIFA Ultimate Team and Star Wars: The Old Republic. Service and other revenue for fiscal year 2016 decreased $48 million, or 2 percent, as compared to fiscal year 2015. This decrease was driven by a $421 million decrease primarily from Titanfall and Battlefield 4 Premium. This decrease was partially offset by a $373 million increase primarily from the Madden NFL franchise, Need for Speed 2015 and SimCity BuildIt.
Supplemental Net Revenue by Composition
Our net revenue by composition for fiscal years 2016 and 2015 was as follows (in millions): |
| | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2016 | | 2015 | | $ Change | | % Change |
| | | | | | | | |
| Full game downloads | $ | 465 |
| | $ | 420 |
| | $ | 45 |
| | 11 | % |
| Extra content | 1,062 |
| | 912 |
| | 150 |
| | 16 | % |
| Subscriptions, advertising, and other | 338 |
| | 366 |
| | (28 | ) | | (8 | )% |
| Mobile | 544 |
| | 501 |
| | 43 |
| | 9 | % |
| Total Digital | $ | 2,409 |
| | $ | 2,199 |
| | $ | 210 |
| | 10 | % |
| | | | | | | | |
| Packaged goods and other | $ | 1,987 |
| | $ | 2,316 |
| | $ | (329 | ) | | (14 | )% |
| Net revenue | $ | 4,396 |
| | $ | 4,515 |
| | $ | (119 | ) | | (3 | )% |
Digital Net Revenue
For fiscal year 2016, digital net revenue was $2,409 million primarily driven by FIFA Ultimate Team, FIFA Online 3 in Asia, and Star Wars: The Old Republic. Digital net revenue for fiscal year 2016 increased $210 million, or 10 percent, as compared to fiscal year 2015. This increase is due to (1) a $150 million or 16 percent increase in extra content net revenue primarily driven by FIFA Ultimate Team, Madden Ultimate Team, and FIFA Online 3 in Asia, (2)a $45 million or 11 percent increase in full-game download net revenue primarily driven by Star Wars Battlefront, FIFA 16, and Battlefield Hardline, partially offset by Battlefield 4 and Titanfall, (3) a $43 million or 9 percent increase in mobile net revenue primarily driven by SimCity BuildIt, Madden NFL Mobile, and Star Wars: Galaxy of Heroes, partially offset by The Simpsons Tapped Out. These increases were partially offset bya $28 million or 8 percent decrease in subscriptions, advertising, and other net revenue primarily by Battlefield 4 Premium.
Packaged Goods and Other Net Revenue
For fiscal year 2016, packaged goods and other net revenue was $1,987 million, primarily driven by FIFA 16, FIFA 15, Star Wars Battlefront, and Battlefield Hardine. Packaged goods and other net revenue for fiscal year 2016 decreased $329 million, or 14 percent, as compared to fiscal year 2015. This decrease was primarily from Titanfall and the Battlefield, FIFA World Cup, and FIFA franchises, partially offset by Star Wars Battlefront.
Cost of Revenue
Cost of revenue for fiscal years 2016 and 2015 was as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | March 31,
2016 | | % of Related Net Revenue | | March 31,
2015 | | % of Related Net Revenue | | % Change | | Change as a % of Related Net Revenue |
| Cost of revenue: | | | | | | | | | | | |
| Product | $ | 938 |
| | 37.6 | % | | $ | 1,028 |
| | 40.0 | % | | (8.8 | )% | | (2.4 | )% |
| Service and other | 416 |
| | 21.9 | % | | 401 |
| | 20.6 | % | | 3.7 | % | | 1.3 | % |
| Total cost of revenue | $ | 1,354 |
| | 30.8 | % | | $ | 1,429 |
| | 31.7 | % | | (5.2 | )% | | (0.9 | )% |
Cost of Product Revenue
Cost of product revenue decreased by $90 million, or 8.8 percent in fiscal year 2016, as compared to fiscal year 2015. Cost of product revenue decreased primarily due to a loss of $122 million on previously unrecognized licensed intellectual property commitment recognized during fiscal year 2015. Excluding the impact of the $122 million loss, cost of product revenue increased $32 million, or 4 percent, primarily due to an increase in royalty costs driven by Star Wars Battlefront, which was launched during the third quarter of fiscal year 2016, with no comparable royalty-bearing title launched during fiscal year 2015.
Cost of Service and Other Revenue
Cost of service and other revenue increased by $15 million, or 3.7 percent in fiscal year 2016, as compared to fiscal year 2015. The increase was primarily due to an increase in inventory costs due to the launch of Need for Speed 2015 during fiscal year 2016, partially offset by a decrease in inventory costs due to Titanfall, launchedfor the Xbox 360 during fiscal year 2015.
Total Cost of Revenue as a Percentage of Total Net Revenue
During theour fiscal year ended March 31, 2016, total cost2019, filed with the SEC on May 24, 2019 under the subheading “Comparison of revenue as a percentageFiscal Year 2019 to Fiscal Year 2018.”
LIQUIDITY AND CAPITAL RESOURCES
| | | | | | | | | | | | | | | | | |
| | As of March 31, | | | | |
| (In millions) | 2020 | | 2019 | | Increase/(Decrease) |
| Cash and cash equivalents | $ | 3,768 | | | $ | 4,708 | | | $ | (940) | |
| Short-term investments | 1,967 | | | 737 | | | 1,230 | |
| Total | $ | 5,735 | | | $ | 5,445 | | | $ | 290 | |
| Percentage of total assets | 52 | % | | 61 | % | | |
| | Year Ended March 31, | | | | |
| (In millions) | 2020 | | 2019 | | Change |
| Net cash provided by operating activities | $ | 1,797 | | | $ | 1,547 | | | $ | 250 | |
| Net cash provided by (used in) investing activities | (1,357) | | | 169 | | | (1,526) | |
| Net cash used in financing activities | (1,358) | | | (1,253) | | | (105) | |
| Effect of foreign exchange on cash and cash equivalents | (22) | | | (13) | | | (9) | |
| Net increase (decrease) in cash and cash equivalents | $ | (940) | | | $ | 450 | | | $ | (1,390) | |
Research2019, filed with the SEC on May 24, 2019 under the subheading “Liquidity and Development
Research and development expenses for fiscal years 2016 and 2015 were as follows (in millions): |
| | | | | | | | | | | | | | | | | | | |
March 31,
2016 | | % of Net Revenue | | March 31,
2015 | | % of Net Revenue | | $ Change | | % Change |
| $ | 1,109 |
| | 25 | % | | $ | 1,094 |
| | 24 | % | | $ | 15 |
| | 1 | % |
Research and development expenses increased by $15 million, or 1 percent, in fiscal year 2016, as compared to fiscal year 2015. Excluding the estimated $70 million favorable impact of foreign currency exchange rates, we estimate that research and development would have increased by $85 million. This $85 million increase on a constant currency basis was primarily due to (1) a $44 million increase in personnel-related costs primarily resulting from higher payroll taxes, the fiscal year 2016 containing 53 weeks as compared to 52 weeks in fiscal year 2015, and annual salary increases, (2) a $22 million increase in contracted services, primarily related to the Titanfall and UFC franchises, and Unravel, during fiscal year 2016,as compared to the same period in the prior fiscal year, and (3) a $21 million increase in stock-based compensation.
Marketing and Sales
Marketing and sales expenses for fiscal years 2016 and 2015 were as follows (in millions): |
| | | | | | | | | | | | | | | | | | | |
March 31,
2016 | | % of Net Revenue | | March 31,
2015 | | % of Net Revenue | | $ Change | | % Change |
| $ | 622 |
| | 14 | % | | $ | 647 |
| | 14 | % | | $ | (25 | ) | | (4 | )% |
Marketing and sales expenses decreased by $25 million, or 4 percent, in fiscal year 2016, as compared to fiscal year 2015. Excluding the estimated $25 million favorable impact of foreign currency exchange rates, marketing and sales expense remained consistent during the fiscal year ended March 31, 2016 as compared to the fiscal year ended March 31, 2015.
General and Administrative
General and administrative expenses for fiscal years 2016 and 2015 were as follows (in millions): |
| | | | | | | | | | | | | | | | | | | |
March 31,
2016 | | % of Net Revenue | | March 31,
2015 | | % of Net Revenue | | $ Change | | % Change |
| $ | 406 |
| | 9 | % | | $ | 386 |
| | 9 | % | | $ | 20 |
| | 5 | % |
General and administrative expenses increased by $20 million, or 5 percent, in fiscal year 2016, as compared to fiscal year 2015. Excluding the estimated $19 million favorable impact of foreign currency exchange rates, general and administrative expenses would have increased by $39 million. This $39 million increase on a constant currency basis was primarily due to (1) a $18 million increase in facilities-related expenses, (2) a $18 million increase in personnel-related costs primarily resulting from (a) higher payroll taxes, (b) the fiscal year 2016 containing 53 weeks as compared to 52 weeks in fiscal year 2015, (c) and annual salary increases, (3) a $10 million increase in stock-based compensation. This was partially offset by a $6 million decrease in litigation matters during fiscal year 2016 as compared to fiscal year 2015.
Income Taxes
Provision for (benefit from) income taxes for fiscal years 2016 and 2015 was as follows (in millions): |
| | | | | | | | | | | | |
| March 31, 2016 | | Effective Tax Rate | | March 31, 2015 | | Effective Tax Rate |
| $ | (279 | ) | | (31.8 | )% | | $ | 50 |
| | 5.4 | % |
In the fourth quarter of fiscal year 2016, we realized significant U.S. pre-tax income for both the fourth quarter and the fiscal year ended March 31, 2016. As a result, we released the valuation allowance against all of the U.S. federal deferred tax assets
and a portion of the U.S. state deferred tax assets during the fourth quarter of fiscal year 2016. Accordingly, we recorded a $453 million income tax benefit in fiscal year 2016 for the reversal of a significant portion of our deferred tax valuation allowance.
Our effective tax rate for fiscal year 2016 was a tax benefit of 31.8 percent, primarily due to the reversal of the U.S. deferred tax valuation allowance. Excluding the impact of the reversal of the valuation allowance, our effective tax rate for fiscal year 2016 would have been 19.8 percent, which differs from the statutory rate of 35.0 percent primarily due to non-U.S. profits subject to a reduced or zero tax rates.
Our effective tax rate for the fiscal year 2015 differs from the statutory rate of 35.0 percent as a result of the utilization of U.S. deferred tax assets subject to a valuation allowance, excess tax benefit from stock-based compensation deduction allocated directly to contributed capital and non-U.S. profits subject to a reduced or zero tax rates.
Prior to the fourth quarter of fiscal year 2016, we considered all undistributed earnings of our foreign subsidiaries to be indefinitely reinvested outside of the United States and, accordingly, no U.S. taxes had been provided thereon. During the fourth quarter of fiscal year 2016, we issued the Senior Notes and announced a $500 million stock repurchase program. In light of these future obligations, we reevaluated our intent to indefinitely reinvest all earnings of foreign subsidiary companies, and concluded that a portion of earnings of certain subsidiaries will no longer be considered to be indefinitely reinvested. As a result, we recognized a deferred tax liability of $43 million for U.S. income taxes with respect to such earnings. We currently intend to continue to indefinitely reinvest a substantial majority of the undistributed earnings of our foreign subsidiaries outside of the United States.
LIQUIDITY AND CAPITAL RESOURCES
|
| | | | | | | | | | | |
| | As of March 31, |
| (In millions) | 2017 | | 2016 | | 2015 |
| Cash and cash equivalents | $ | 2,565 |
| | $ | 2,493 |
| | $ | 2,068 |
|
| Short-term investments | 1,967 |
| | 1,341 |
| | 953 |
|
| Total | $ | 4,532 |
| | $ | 3,834 |
| | $ | 3,021 |
|
| Percentage of total assets | 59 | % | | 54 | % | | 49 | % |
| | Year Ended March 31, |
| (In millions) | 2017 | | 2016 | | 2015 |
| Cash provided by operating activities | $ | 1,383 |
| | $ | 1,223 |
| | $ | 1,067 |
|
| Cash used in investing activities | (759 | ) | | (484 | ) | | (470 | ) |
| Cash used in financing activities | (534 | ) | | (306 | ) | | (255 | ) |
| Effect of foreign exchange on cash and cash equivalents | (18 | ) | | (8 | ) | | (56 | ) |
| Net increase in cash and cash equivalents | $ | 72 |
| | $ | 425 |
| | $ | 286 |
|
Changes in Cash Flow
Comparison of Fiscal Year 2017 to Fiscal Year 2016
Operating Activities. Cash Net cash provided by operating activities increased $160by $250 million during fiscal year 20172020 as compared to fiscal year 2016. The increase is2019 primarily driven by a $385 million increase in salesbusiness performance related to FIFA 17, Battlefield 1, the sales of Star Wars Jedi: Fallen Order, Need for Speed Heat, and Titanfall 2. ThisApex Legends, and improved collections during fiscal year 2020. The increase was partially offset by a $263 million decrease associated with a net increase in accounts receivable balances as of March 31, 2017 as compared to March 31, 2016 primarily due to the timing of game launcheslarger marketing and advertising payments for new titles, particularly Apex Legends and Anthem, higher cash payments for income taxes, and higher digital sales during the three months ended March 31, 2017.royalty payments.
Investing Activities. Cash Net cash used in investing activities increased $275by $1,526 million during fiscal year 20172020 as compared to fiscal year 20162019 primarily driven by a $585 million increase in the purchase of short-term investments and a $30 million increase in capital expenditures. This was partially offset by a $340 million increase in proceeds from the sales and maturities of short-term investments.
Financing Activities. Cash used in financing activities increased $228 million during fiscal year 2017 as compared to fiscal year 2016 primarily due to the of the issuance of Senior Notes for $989 million offset by the repurchases of our common stock for $510 million, both of which occurred during fiscal 2016. Also, we had a $35 million decrease in proceeds from the exercise of
stock options and a $21 million decrease in excess tax benefit from stock-based compensation, which were offset by a $307 million decrease in repayments related to our Convertible Notes during fiscal year 2017 as compared to fiscal year 2016.
Cash Flow Reclassifications. The adoption of ASU 2016-09 in the first quarter of fiscal year 2018 will require two changes to our cash flow presentation. First, excess tax benefits are required to be presented as operating activities rather than financing activities. Second, cash payments to taxing authorities in connection with shares withheld to meet statutory tax withholding requirements are required to be presented as a financing activity because such payments represent an entity’s cash outflow to reacquire the entity’s shares. We currently classify cash paid to taxing authorities for shares withheld as an operating activity. Both of these changes are expected to increase our cash provided by operating activities and increase our cash used in financing activities. For more information, see Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 1 - Description of Business and Summary of Significant Accounting Policies to the Consolidated Financial Statements.
Comparison of Fiscal Year 2016 to Fiscal Year 2015
Operating Activities. Cash provided by operating activities increased $156 million during fiscal year 2016 as compared to fiscal year 2015. The increase was driven by a $281 million increase in net income, partially offset by the settlement of noncurrent operating obligations.
Investing Activities. Cash used in investing activities increased $14 million during fiscal year 2016 as compared to fiscal year 2015 primarily driven by a $230$2,017 million increase in purchases of short-term investments. ThisThe increase was partially offset by a $214$454 million increase in proceeds from the sales and maturities of short-term investments during fiscal year 20162020 as compared to fiscal year 2015.2019 and the payment of $58 million in connection with mergers and acquisitions activity during fiscal year 2019.
Financing Activities. Cash Net cash used in financing activities increased $51by $105 million during fiscal year 20162020 as compared to fiscal year 2015 due to2019 primarily driven by the payment of $122 million of contingent consideration in connection with our acquisition of RespawnEntertainment, LLC and a $681$15 million increase in repurchases of sharesthe repurchase and retirement of our common stock mainly drivenstock. These increases were partially offset by the repurchase program authorizeda $31 million decrease in February 2016, and $470 million of repayments of our Convertible Notescash paid to taxing authorities in connection with conversions of the Convertible Notes prior to maturity. This was offset by (1) $989 million net proceeds from the issuance of Senior Notes during February 2016, (2) a $64 million increase in excess tax benefit fromwithholding taxes for stock-based compensation recognized, and (3) a $47 million increase in proceeds from the exercise of stock options and ESPP.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 March 31, 2017,2020, our short-term investments had gross unrealized losses of $3$8 million, or less than 1 percent of the total in short-term investments, and gross unrealized gains of less than $1$5 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. Depending on which short-term investments we liquidate to fund these activities, we could recognize a portion, or all, of the gross unrealized gains or losses.
Convertible Notes and Convertible Note Hedge
In July 2011, we issued $632.5 million aggregate principal amount of 0.75% Convertible Senior Notes due 2016 (the “Convertible Notes”). The Convertible Notes matured in July 2016. During fiscal year 2017, we repaid $163 million of the principal balance of the Convertible Notes and issued approximately 2.9 million shares of common stock to noteholders with a fair value of $222 million, resulting in a loss on extinguishment of $0.3 million. During fiscal year 2017, we received 2.9 million shares of our common stock under the Convertible Note Hedge.
Warrants
In connection with the issuance of the Convertible Notes in July 2011, we also issued warrants (the “Warrants”) to independent third parties. The Warrants had a dilutive effect with respect to our common stock to the extent that the market price per share of our common stock exceeded $41.14 on or prior to the expiration date of the Warrants. The Warrants expired on January 12, 2017. We issued a total of 9.6 million shares upon exercise of the Warrants during fiscal year 2017.
See Note 10 - Financing Arrangements to the Consolidated Financial Statements in this Form 10-K as it relates to the Convertibles Notes, the Convertible Note Hedge and Warrants, which is incorporated by reference into this Item 7.
Senior Notes
In February 2016, we issued $600 million aggregate principal amount of the 2021 Notes and $400 million aggregate principal amount of the 2026 Notes. We used the net proceeds of $989 million for general corporate purposes, including the payment of amounts due upon conversion of our Convertible Notes and the repurchase of our common stock, including under the $500
million stock repurchase program approved in February 2016 and completed in March 2016. The effective interest rate is 3.94% for the 2021 Notes and 4.97% for the 2026 Notes. Interest is payable semiannually in arrears, on March 1 and September 1 of each year.
The 2021 Notes are due on March 1, 2021. See
Note 10 -11 — Financing Arrangementsto the Consolidated Financial Statements in this Form 10-K as it relates to our Senior Notes, which is incorporated by reference into this Item 7.Credit Facility
In March 2015,On August 29, 2019, we entered into a $500 million senior 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 March 31, 2017,2020, no amounts were outstanding under the credit facility.Credit Facility. See Note 10 -11 — Financing Arrangements to the Consolidated Financial Statements in this Form 10-K as it relates to our credit facility,Credit Facility, which is incorporated by reference into this Item 7.Financial Condition
We believe that our cash, cash equivalents, short-term investments, cash generated from operations and available financing facilities will be sufficient to meet our operating requirements for at least the next 12 months, including working capital requirements, capital expenditures, debt repayment obligations, and potentially, future acquisitions, stock repurchases, 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 opportunities as they arise. There can be no assurance, however, that suchThe COVID-19 pandemic has caused disruption to capital markets and any additional capital willcould be difficult to obtain, expensive and/or not available to us on favorable terms, if at all, or that it will notall. Such additional capital could also result in substantial dilution to our existing stockholders.
Our foreign subsidiaries will generally be 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 March 31, 2017,2020, approximately $2.8$4.4 billion of our cash, cash equivalents, and short-term investments were domiciled in foreign tax jurisdictions. While we have no plans to repatriate these funds to the United States in the short term, if we choose to do so, we may be required to accrue and pay additional taxes on any portionjurisdictions, of the repatriation where no United States income tax had been previously provided.
In May 2015, our Board of Directors authorized a program to repurchase up to $1which approximately $2.7 billion of our common stock. We repurchased approximately 6.5 million and 6.9 million shares for approximately $508 million and $461 million under this program, respectively, during the fiscal years ended March 31, 2017 and 2016. As of March 31, 2017, $31 million remainedis available for repurchase under this program. We completed repurchases under the May 2015 program in April 2017.
In May 2017,repatriation without a Special Committee of our Board of Directors, on behalf of the full Board of Directors, authorized a new program to repurchase up to $1.2 billion of our common stock. This stock repurchase program expires on May 31, 2019. Under this program, we may purchase stock in the open market or through privately-negotiated transactions in accordance with applicable securities laws, including pursuant to pre-arranged stock trading plans. The timing and actual amount of the stock repurchases will depend on several factors including price, capital availability, regulatory requirements, alternative investment opportunities and other market conditions. We are not obligated to repurchase a specific number of shares under this program and it may be modified, suspended or discontinued at any time. We are actively repurchasing shares under this program.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, includingwhich 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, those related to the impact of the COVID-19 pandemic on our business and on the business of our key partners, 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 maintaining our live services 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, economic conditions in the United States and abroad, the seasonal and cyclical nature of our business and operating results, risks of product returns and the other risks described in the “Risk Factors”“Risk Factors” section, included in Part I, Item 1A of this report.
Contractual Obligations and Commercial Commitments
See Note 11 -13 — Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-K as it relates to our contractual obligations and commercial commitments, which is incorporated by reference into this Item 7.
OFF-BALANCE SHEET ARRANGEMENTS
As of March 31, 2017,2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues and expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.
INFLATION
We believe the impact of inflation on our results of operations has not been significant in any of the past three fiscal years.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
We are exposed to various market risks, including changes in foreign currency exchange rates, interest rates and market prices, which have experienced significant volatility.volatility, including increased volatility in connection with the COVID-19 pandemic. Market risk is the potential loss arising from changes in market rates and market prices. We employ established policies and practices to manage these risks. Foreign currency forward contracts are used to hedge anticipated exposures or mitigate some existing exposures subject to foreign exchange risk as discussed below. While we do not hedge our short-term investment portfolio, we protect our short-term investment portfolio against different market risks, including interest rate risk as discussed below. Our cash and cash equivalents portfolio consists of highly liquid investments with insignificant interest rate risk and original or remaining maturities of three months or less at the time of purchase. We do not enter into derivatives or other financial instruments for speculative trading purposes and do not hedge our market price risk relating to marketable equity securities, if any.
Foreign Currency Exchange Risk
Foreign Currency Exchange Rates. International sales are a fundamental part of our business, and the strengthening of the U.S. dollar (particularly relative to the Euro, British pound sterling, Australian dollar, Chinese yuan, and South Korean won)won and Polish zloty) has a negative impact on our reported international net revenue, but a positive impact on our reported international operating expenses (particularly the Swedish krona and Canadian dollar) because these amounts are translated at lower rates as compared to periods in which the U.S. dollar is weaker. While we use foreign currency hedging contracts to mitigate some foreign currency exchange risk, these activities are limited in the protection that they provide us and can themselves result in losses.
Cash Flow Hedging Activities. We hedge a portion of our foreign currency risk related to forecasted foreign-currency-denominated sales and expense transactions by purchasing foreign currency forward contracts that generally have maturities of 18 months or less. These transactions are designated and qualify as cash flow hedges. Our hedging programs are designed to reduce, but do not entirely eliminate, the impact of currency exchange rate movements in net revenue and research and development expenses.
Balance Sheet Hedging Activities. We use foreign currency forward contracts to mitigate foreign currency exchange risk associated with foreign-currency-denominated monetary assets and liabilities, primarily intercompany receivables and payables. TheThese foreign currency forward contracts generally have a contractual term of three months or less and are transacted near month-end.
We believe the counterparties to our foreign currency forward contracts are creditworthy multinational commercial banks. While we believe the risk of counterparty nonperformance is not material, a sustained decline in the financial stability of financial institutions as a result of disruption in the financial markets could affect our ability to secure creditworthy counterparties for our foreign currency hedging programs.
Notwithstanding our efforts to mitigate some foreign currency exchange risks, there can be no assurance that our hedging activities will adequately protect us against the risks associated with foreign currency fluctuations. As of March 31, 2017,2020, a hypothetical adverse foreign currency exchange rate movement of 10 percent or 20 percent would have resulted in potential declines in the fair value on our foreign currency forward contracts used in cash flow hedging of $100$160 million or $200$320 million, respectively. As of March 31, 2017,2020, a hypothetical adverse foreign currency exchange rate movement of 10 percent or 20 percent would have resulted in potential losses in the Consolidated Statements of Operations on our foreign currency forward contracts used in balance sheet hedging of $25$65 million or $50$130 million, respectively. This sensitivity analysis assumes an adverse shift of all foreign currency exchange rates; however, all foreign currency exchange rates do not always move in suchthe same manner and actual results may differ materially. See Note 4 -5 — Derivative Financial Instruments to the Consolidated Financial Statements in this Form 10-K as it relates to our derivative financial instruments, which is incorporated by reference into this Item 7A.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our short-term investment portfolio. We manage our interest rate risk by maintaining an investment portfolio generally consisting of debt instruments of high credit quality and relatively short maturities. However, because short-term investments mature relatively quickly and, if reinvested, are invested at the then-current market rates, interest income on a portfolio consisting of short-term investments is subject to market fluctuations to a greater extent than a portfolio of longer term investments. Additionally, the contractual terms of the investments do not permit the issuer to call, prepay or otherwise settle the investments at prices less than the stated par value. Our investments are held for purposes other than trading. We do not use derivative financial instruments in our short-term investment portfolio.
As of March 31, 2017,2020, our short-term investments were classified as available-for-sale securities and, consequently, were recorded at fair value with unrealized gains or losses resulting from changes in fair value reported as a separate component of accumulated other comprehensive income (loss), net of tax, in stockholders’ equity.
Notwithstanding our efforts to manage interest rate risks, there can be no assurance that we will be adequately protected against risks associated with interest rate fluctuations. FluctuationsChanges in interest rates could have a significant impact on the fair value of our investment portfolio. The following table presents the hypothetical changes inaffect the fair value of our short-term investment portfolio. To provide a meaningful assessment of the interest rate risk associated with our short-term investment portfolio, aswe performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of the portfolio assuming a 150 basis point parallel shift in the yield curve. As of March 31, 2017, arising from potential changes2020, a hypothetical 150 basis point increase in interest rates. The modeling technique estimates the changerates would have resulted in fair value from immediate hypothetical parallel shiftsa $24 million, or 1% decrease in the yield curvefair market value of plus or minus 50 basis points (“BPS”), 100 BPS, and 150 BPS.our short-term investments.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Valuation of Securities Given an Interest Rate Decrease of X Basis Points | | Fair Value as of March 31, 2017 | | Valuation of Securities Given an Interest Rate Increase of X Basis Points |
| (150 BPS) | | (100 BPS) | | (50 BPS) | | 50 BPS | | 100 BPS | | 150 BPS |
| Corporate bonds | $ | 955 |
| | $ | 951 |
| | $ | 947 |
| | $ | 943 |
| | $ | 939 |
| | $ | 935 |
| | $ | 931 |
|
| U.S. Treasury securities | 421 |
| | 418 |
| | 415 |
| | 413 |
| | 410 |
| | 407 |
| | 404 |
|
| U.S. agency securities | 154 |
| | 153 |
| | 152 |
| | 151 |
| | 151 |
| | 150 |
| | 148 |
|
| Commercial paper | 213 |
| | 213 |
| | 212 |
| | 212 |
| | 211 |
| | 211 |
| | 211 |
|
| Foreign government securities | 115 |
| | 114 |
| | 114 |
| | 113 |
| | 113 |
| | 112 |
| | 112 |
|
| Asset-backed securities | 137 |
| | 137 |
| | 136 |
| | 135 |
| | 134 |
| | 134 |
| | 133 |
|
| Total short-term investments | $ | 1,995 |
| | $ | 1,986 |
| | $ | 1,976 |
| | $ | 1,967 |
| | $ | 1,958 |
| | $ | 1,949 |
| | $ | 1,939 |
|
Item 8: Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
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| Page |
| Consolidated Financial Statements of Electronic Arts Inc. and Subsidiaries: | |
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| |
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| Financial Statement Schedule: | |
The following financial statement schedule of Electronic Arts Inc. and Subsidiaries for the years ended March 31, 2017, 20162020, 2019 and 20152018 is filed as part of this report and should be read in conjunction with the Consolidated Financial Statements of Electronic Arts Inc. and Subsidiaries: | |
| |
| |
Other financial statement schedules have been omitted because the information called for in them is not required or has already been included in either the Consolidated Financial Statements or the Notes thereto.
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | (In millions, except par value data) | March 31, 2017 | | March 31, 2016 | (In millions, except par value data) | March 31, 2020 | | March 31, 2019 |
| ASSETS | | | | ASSETS | | | |
| Current assets: | | | | Current assets: | |
| Cash and cash equivalents | $ | 2,565 |
| | $ | 2,493 |
| Cash and cash equivalents | $ | 3,768 | | | $ | 4,708 | |
| Short-term investments | 1,967 |
| | 1,341 |
| Short-term investments | 1,967 | | | 737 | |
| Receivables, net of allowances of $145 and $159, respectively | 359 |
| | 233 |
| |
| Receivables, net | | Receivables, net | 461 | | | 623 | |
| | Other current assets | 308 |
| | 287 |
| Other current assets | 321 | | | 313 | |
| Total current assets | 5,199 |
| | 4,354 |
| Total current assets | 6,517 | | | 6,381 | |
| Property and equipment, net | 434 |
| | 439 |
| Property and equipment, net | 449 | | | 448 | |
| Goodwill | 1,707 |
| | 1,710 |
| Goodwill | 1,885 | | | 1,892 | |
| Acquisition-related intangibles, net | 8 |
| | 57 |
| Acquisition-related intangibles, net | 53 | | | 87 | |
| Deferred income taxes, net | 286 |
| | 387 |
| Deferred income taxes, net | 1,903 | | | 35 | |
| Other assets | 84 |
| | 103 |
| Other assets | 305 | | | 114 | |
| TOTAL ASSETS | $ | 7,718 |
| | $ | 7,050 |
| TOTAL ASSETS | $ | 11,112 | | | $ | 8,957 | |
| | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| Current liabilities: | | | | Current liabilities: | |
| Accounts payable | $ | 87 |
| | $ | 89 |
| Accounts payable | $ | 68 | | | $ | 113 | |
| Accrued and other current liabilities | 789 |
| | 710 |
| Accrued and other current liabilities | 1,052 | | | 1,052 | |
| 0.75% convertible senior notes due 2016, net | — |
| | 161 |
| |
| | Deferred net revenue (online-enabled games) | 1,539 |
| | 1,458 |
| Deferred net revenue (online-enabled games) | 945 | | | 1,100 | |
| Senior notes, current, net | | Senior notes, current, net | 599 | | | — | |
| Total current liabilities | 2,415 |
| | 2,418 |
| Total current liabilities | 2,664 | | | 2,265 | |
| Senior notes, net | 990 |
| | 989 |
| Senior notes, net | 397 | | | 994 | |
| Income tax obligations | 104 |
| | 80 |
| Income tax obligations | 373 | | | 233 | |
| Deferred income taxes, net | 1 |
| | 2 |
| Deferred income taxes, net | 1 | | | 2 | |
| Other liabilities | 148 |
| | 163 |
| Other liabilities | 216 | | | 132 | |
| Total liabilities | 3,658 |
| | 3,652 |
| Total liabilities | 3,651 | | | 3,626 | |
| Commitments and contingencies (See Note 11) |
| |
| |
| 0.75% convertible senior notes due 2016 (See Note 10) | — |
| | 2 |
| |
Commitments and contingencies (See Note 13) | | Commitments and contingencies (See Note 13) | | | | | |
| | Stockholders’ equity: | | | | Stockholders’ equity: | |
| Preferred stock, $0.01 par value. 10 shares authorized | — |
| | — |
| Preferred stock, $0.01 par value. 10 shares authorized | — | | | — | |
| Common stock, $0.01 par value. 1,000 shares authorized; 308 and 301 shares issued and outstanding, respectively | 3 |
| | 3 |
| |
| Common stock, $0.01 par value. 1,000 shares authorized; 288 and 298 shares issued and outstanding, respectively | | Common stock, $0.01 par value. 1,000 shares authorized; 288 and 298 shares issued and outstanding, respectively | 3 | | | 3 | |
| Additional paid-in capital | 1,049 |
| | 1,349 |
| Additional paid-in capital | — | | | — | |
| Retained earnings | 3,027 |
| | 2,060 |
| Retained earnings | 7,508 | | | 5,358 | |
| Accumulated other comprehensive loss | (19 | ) | | (16 | ) | Accumulated other comprehensive loss | (50) | | | (30) | |
| Total stockholders’ equity | 4,060 |
| | 3,396 |
| Total stockholders’ equity | 7,461 | | | 5,331 | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 7,718 |
| | $ | 7,050 |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 11,112 | | | $ | 8,957 | |
See accompanying Notes to Consolidated Financial Statements.
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | Year Ended March 31, | |
| (In millions, except per share data) | | (In millions, except per share data) | 2020 | | 2019 | | 2018 |
| | | | Year Ended March 31, | |
| (In millions, except per share data) | 2017 | | 2016 | | 2015 | |
| Net revenue: | | | | | | |
| Product | $ | 2,640 |
| | $ | 2,497 |
| | $ | 2,568 |
| |
| Service and other | 2,205 |
| | 1,899 |
| | 1,947 |
| |
| Total net revenue | 4,845 |
| | 4,396 |
| | 4,515 |
| |
| Cost of revenue: | | | | | | |
| Product | 893 |
| | 938 |
| | 1,028 |
| |
| Service and other | 405 |
| | 416 |
| | 401 |
| |
| Total cost of revenue | 1,298 |
| | 1,354 |
| | 1,429 |
| |
| Net revenue | | Net revenue | $ | 5,537 | | | $ | 4,950 | | | $ | 5,150 | |
| | Cost of revenue | | Cost of revenue | 1,369 | | | 1,322 | | | 1,277 | |
| Gross profit | 3,547 |
| | 3,042 |
| | 3,086 |
| Gross profit | 4,168 | | | 3,628 | | | 3,873 | |
| Operating expenses: | | | | | | Operating expenses: | | | | | |
| Research and development | 1,205 |
| | 1,109 |
| | 1,094 |
| Research and development | 1,559 | | | 1,433 | | | 1,320 | |
| Marketing and sales | 673 |
| | 622 |
| | 647 |
| Marketing and sales | 631 | | | 702 | | | 641 | |
| General and administrative | 439 |
| | 406 |
| | 386 |
| General and administrative | 506 | | | 460 | | | 469 | |
| Acquisition-related contingent consideration | — |
| | — |
| | (3 | ) | Acquisition-related contingent consideration | 5 | | | 14 | | | — | |
| Amortization of intangibles | 6 |
| | 7 |
| | 14 |
| Amortization of intangibles | 22 | | | 23 | | | 9 | |
| | Total operating expenses | 2,323 |
| | 2,144 |
| | 2,138 |
| Total operating expenses | 2,723 | | | 2,632 | | | 2,439 | |
| Operating income | 1,224 |
| | 898 |
| | 948 |
| Operating income | 1,445 | | | 996 | | | 1,434 | |
| | Interest and other income (expense), net | (14 | ) | | (21 | ) | | (23 | ) | Interest and other income (expense), net | 63 | | | 83 | | | 15 | |
| Income before provision for (benefit from) income taxes | 1,210 |
| | 877 |
| | 925 |
| Income before provision for (benefit from) income taxes | 1,508 | | | 1,079 | | | 1,449 | |
| Provision for (benefit from) income taxes | 243 |
| | (279 | ) | | 50 |
| Provision for (benefit from) income taxes | (1,531) | | | 60 | | | 406 | |
| Net income | $ | 967 |
| | $ | 1,156 |
| | $ | 875 |
| Net income | $ | 3,039 | | | $ | 1,019 | | | $ | 1,043 | |
| Earnings per share: | | | | | | Earnings per share: | | | | | |
| Basic | $ | 3.19 |
| | $ | 3.73 |
| | $ | 2.81 |
| Basic | $ | 10.37 | | | $ | 3.36 | | | $ | 3.39 | |
| Diluted | $ | 3.08 |
| | $ | 3.50 |
| | $ | 2.69 |
| Diluted | $ | 10.30 | | | $ | 3.33 | | | $ | 3.34 | |
| Number of shares used in computation: | | | | | | Number of shares used in computation: | |
| Basic | 303 |
| | 310 |
| | 311 |
| Basic | 293 | | | 303 | | | 308 | |
| Diluted | 314 |
| | 330 |
| | 325 |
| Diluted | 295 | | | 306 | | | 312 | |
See accompanying Notes to Consolidated Financial Statements.
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, | | | | |
| (In millions) | 2020 | | 2019 | | 2018 |
| Net income | $ | 3,039 | | | $ | 1,019 | | | $ | 1,043 | |
| Other comprehensive income (loss), net of tax: | | | | | |
| Net gains (losses) on available-for-sale securities | (3) | | | 7 | | | (5) | |
| Net gains (losses) on derivative instruments | 17 | | | 88 | | | (121) | |
| Foreign currency translation adjustments | (34) | | | (21) | | | 18 | |
| Total other comprehensive income (loss), net of tax | (20) | | | 74 | | | (108) | |
| Total comprehensive income | $ | 3,019 | | | $ | 1,093 | | | $ | 935 | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| (In millions) | 2017 | | 2016 | | 2015 |
| Net income | $ | 967 |
| | $ | 1,156 |
| | $ | 875 |
|
| Other comprehensive income (loss), net of tax: | | | | | |
| Change in unrealized net gains and losses on available-for-sale securities | (3 | ) | | 4 |
| | 1 |
|
| Reclassification adjustment for net realized gains and losses on available-for-sale securities | (1 | ) | | — |
| | — |
|
| Change in unrealized net gains and losses on derivative instruments | 54 |
| | 5 |
| | 20 |
|
| Reclassification adjustment for net realized gains and losses on derivative instruments | (36 | ) | | (12 | ) | | 11 |
|
| Foreign currency translation adjustments | (17 | ) | | (15 | ) | | (67 | ) |
| Total other comprehensive loss, net of tax | (3 | ) | | (18 | ) | | (35 | ) |
| Total comprehensive income | $ | 964 |
| | $ | 1,138 |
| | $ | 840 |
|
See accompanying Notes to Consolidated Financial Statements.
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, share data in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | Additional Paid-in
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Total
Stockholders’
Equity |
| Shares | | Amount | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Balances as of March 31, 2017 | 308,367 | | | $ | 3 | | | $ | 1,049 | | | $ | 3,027 | | | $ | (19) | | | $ | 4,060 | |
| Cumulative-effect adjustment from the adoption of ASU 2016-09 | — | | | — | | | 9 | | | (8) | | | — | | | 1 | |
| Total comprehensive income (loss) | — | | | — | | | — | | | 1,043 | | | (108) | | | 935 | |
| Stock-based compensation | — | | | — | | | 242 | | | — | | | — | | | 242 | |
| Issuance of common stock | 3,332 | | | — | | | (42) | | | — | | | — | | | (42) | |
| Repurchase and retirement of common stock | (5,329) | | | — | | | (601) | | | — | | | — | | | (601) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Balances as of March 31, 2018 | 306,370 | | | $ | 3 | | | $ | 657 | | | $ | 4,062 | | | $ | (127) | | | $ | 4,595 | |
| Cumulative-effect adjustment from the adoption of ASC 606 | — | | | — | | | — | | | 590 | | | 22 | | | 612 | |
| Cumulative-effect adjustment from the adoption of ASU 2018-02 | — | | | — | | | — | | | (1) | | | 1 | | | — | |
| Total comprehensive income | — | | | — | | | — | | | 1,019 | | | 74 | | | 1,093 | |
| Stock-based compensation | — | | | — | | | 284 | | | — | | | — | | | 284 | |
| Issuance of common stock | 2,722 | | | — | | | (61) | | | — | | | — | | | (61) | |
| Repurchase and retirement of common stock | (10,985) | | | — | | | (880) | | | (312) | | | — | | | (1,192) | |
| Balances as of March 31, 2019 | 298,107 | | | $ | 3 | | | $ | — | | | $ | 5,358 | | | $ | (30) | | | $ | 5,331 | |
| Total comprehensive income (loss) | — | | | — | | | — | | | 3,039 | | | | (20) | | | 3,019 | |
| Stock-based compensation | — | | | — | | | 347 | | | — | | | | — | | | 347 | |
| Issuance of common stock | 2,623 | | | — | | | (29) | | | — | | | | — | | | (29) | |
| Repurchase and retirement of common stock | (12,317) | | | — | | | (318) | | | (889) | | | | — | | | (1,207) | |
| Balances as of March 31, 2020 | 288,413 | | | $ | 3 | | | $ | — | | | $ | 7,508 | | | $ | (50) | | | $ | 7,461 | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity |
| Shares | | Amount | |
| Balances as of March 31, 2014 | 311,442 |
| | $ | 3 |
| | $ | 2,353 |
| | $ | 29 |
| | $ | 37 |
| | $ | 2,422 |
|
| Total comprehensive income (loss) | — |
| | — |
| | — |
| | 875 |
| | (35 | ) | | 840 |
|
| Issuance of common stock | 6,508 |
| | — |
| | (24 | ) | | — |
| | — |
| | (24 | ) |
| Reclassification of equity component of convertible notes | — |
| | — |
| | (31 | ) | | — |
| | — |
| | (31 | ) |
| Repurchase and retirement of common stock | (8,269 | ) | | — |
| | (337 | ) | | — |
| | — |
| | (337 | ) |
| Stock-based compensation | — |
| | — |
| | 144 |
| | — |
| | — |
| | 144 |
|
| Tax benefit from stock-based compensation | — |
| | — |
| | 22 |
| | — |
| | — |
| | 22 |
|
| Balances as of March 31, 2015 | 309,681 |
| | 3 |
| | 2,127 |
| | 904 |
| | 2 |
| | 3,036 |
|
| Total comprehensive income (loss) | — |
| | — |
| | — |
| | 1,156 |
| | (18 | ) | | 1,138 |
|
| Issuance of common stock | 6,645 |
| | — |
| | (49 | ) | | — |
| | — |
| | (49 | ) |
| Reclassification of equity component of convertible notes | — |
| | — |
| | 29 |
| | — |
| | — |
| | 29 |
|
| Settlement of convertible notes | 7,823 |
| | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
| Exercise of convertible note hedge | (7,823 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Repurchase and retirement of common stock | (15,724 | ) | | — |
| | (1,018 | ) | | — |
| | — |
| | (1,018 | ) |
| Stock-based compensation | — |
| | — |
| | 178 |
| | — |
| | — |
| | 178 |
|
| Tax benefit from stock-based compensation | — |
| | — |
| | 83 |
| | — |
| | — |
| | 83 |
|
| Balances as of March 31, 2016 | 300,602 |
| | 3 |
| | 1,349 |
| | 2,060 |
| | (16 | ) | | 3,396 |
|
| Total comprehensive income (loss) | — |
| | — |
| | — |
| | 967 |
| | (3 | ) | | 964 |
|
| Issuance of common stock | 4,626 |
| | — |
| | (55 | ) | | — |
| | — |
| | (55 | ) |
| Reclassification of equity component of convertible notes | — |
| | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
| Settlement of convertible notes | 2,917 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Exercise of convertible note hedge | (2,917 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Repurchase and retirement of common stock | (6,506 | ) | | — |
| | (508 | ) | | — |
| | — |
| | (508 | ) |
| Settlement of warrants | 9,645 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Stock-based compensation | — |
| | — |
| | 196 |
| | — |
| | — |
| | 196 |
|
| Tax benefit from stock-based compensation | — |
| | — |
| | 65 |
| | — |
| | — |
| | 65 |
|
| Balances as of March 31, 2017 | 308,367 |
| | $ | 3 |
| | $ | 1,049 |
| | $ | 3,027 |
| | $ | (19 | ) | | $ | 4,060 |
|
See accompanying Notes to Consolidated Financial Statements.
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, | | | | |
| (In millions) | 2020 | | 2019 | | 2018 |
| OPERATING ACTIVITIES | | | | | |
| Net income | $ | 3,039 | | | $ | 1,019 | | | $ | 1,043 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation, amortization and accretion | 150 | | | 145 | | | 136 | |
| Acquisition-related contingent consideration | 5 | | | 14 | | | — | |
| Stock-based compensation | 347 | | | 284 | | | 242 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Change in assets and liabilities: | | | | | |
| Receivables, net | 164 | | | (88) | | | (25) | |
| | | | | |
| Other assets | 35 | | | (24) | | | 10 | |
| Accounts payable | (36) | | | 59 | | | (44) | |
| Accrued and other liabilities | 119 | | | 3 | | | 43 | |
| Deferred income taxes, net | (1,871) | | | (16) | | | 204 | |
| Deferred net revenue (online-enabled games) | (155) | | | 151 | | | 83 | |
| Net cash provided by operating activities | 1,797 | | | 1,547 | | | 1,692 | |
| INVESTING ACTIVITIES | | | | | |
| Capital expenditures | (140) | | | (119) | | | (107) | |
| | | | | |
| | | | | |
| Proceeds from maturities and sales of short-term investments | 2,142 | | | 1,688 | | | 3,166 | |
| Purchase of short-term investments | (3,359) | | | (1,342) | | | (2,287) | |
| | | | | |
| Acquisition, net of cash acquired | — | | | (58) | | | (150) | |
| Net cash provided by (used in) investing activities | (1,357) | | | 169 | | | 622 | |
| FINANCING ACTIVITIES | | | | | |
| | | | | |
| | | | | |
| Proceeds from issuance of common stock | 62 | | | 61 | | | 78 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Cash paid to taxing authorities for shares withheld from employees | (91) | | | (122) | | | (120) | |
| Repurchase and retirement of common stock | (1,207) | | | (1,192) | | | (601) | |
| Acquisition-related contingent consideration payments | (122) | | | — | | | — | |
| Net cash used in financing activities | (1,358) | | | (1,253) | | | (643) | |
| Effect of foreign exchange on cash and cash equivalents | (22) | | | (13) | | | 22 | |
| Increase (decrease) in cash and cash equivalents | (940) | | | 450 | | | 1,693 | |
| Beginning cash and cash equivalents | 4,708 | | | 4,258 | | | 2,565 | |
| Ending cash and cash equivalents | $ | 3,768 | | | $ | 4,708 | | | $ | 4,258 | |
| Supplemental cash flow information: | | | | | |
| Cash paid during the year for income taxes, net | $ | 170 | | | $ | 100 | | | $ | 57 | |
| Cash paid during the year for interest | $ | 42 | | | $ | 42 | | | $ | 42 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| (In millions) | 2017 | | 2016 | | 2015 |
| OPERATING ACTIVITIES | | | | | |
| Net income | $ | 967 |
| | $ | 1,156 |
| | $ | 875 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation, amortization and accretion | 172 |
| | 197 |
| | 220 |
|
| Stock-based compensation | 196 |
| | 178 |
| | 144 |
|
| Loss on conversion of convertible notes | — |
| | 10 |
| | — |
|
| Acquisition-related contingent consideration | — |
| | — |
| | (3 | ) |
| Change in assets and liabilities: | | | | | |
| Receivables, net | (136 | ) | | 127 |
| | (54 | ) |
| Other assets | 3 |
| | 22 |
| | 106 |
|
| Accounts payable | 5 |
| | 13 |
| | (46 | ) |
| Accrued and other liabilities | (5 | ) | | (252 | ) | | 31 |
|
| Deferred income taxes, net | 100 |
| | (403 | ) | | 1 |
|
| Deferred net revenue (online-enabled games) | 81 |
| | 175 |
| | (207 | ) |
| Net cash provided by operating activities | 1,383 |
| | 1,223 |
| | 1,067 |
|
| INVESTING ACTIVITIES | | | | | |
| Capital expenditures | (123 | ) | | (93 | ) | | (95 | ) |
| Proceeds from maturities and sales of short-term investments | 1,281 |
| | 941 |
| | 727 |
|
| Purchase of short-term investments | (1,917 | ) | | (1,332 | ) | | (1,102 | ) |
| Net cash used in investing activities | (759 | ) | | (484 | ) | | (470 | ) |
| FINANCING ACTIVITIES | | | | | |
| Proceeds from issuance of senior notes, net of issuance costs | — |
| | 989 |
| | — |
|
| Payment of convertible notes | (163 | ) | | (470 | ) | | — |
|
| Proceeds from issuance of common stock | 72 |
| | 107 |
| | 60 |
|
| Excess tax benefit from stock-based compensation | 65 |
| | 86 |
| | 22 |
|
| Repurchase and retirement of common stock | (508 | ) | | (1,018 | ) | | (337 | ) |
| Net cash used in financing activities | (534 | ) | | (306 | ) | | (255 | ) |
| Effect of foreign exchange on cash and cash equivalents | (18 | ) | | (8 | ) | | (56 | ) |
| Increase in cash and cash equivalents | 72 |
| | 425 |
| | 286 |
|
| Beginning cash and cash equivalents | 2,493 |
| | 2,068 |
| | 1,782 |
|
| Ending cash and cash equivalents | $ | 2,565 |
| | $ | 2,493 |
| | $ | 2,068 |
|
| Supplemental cash flow information: | | | | | |
| Cash paid during the year for income taxes, net | $ | 51 |
| | $ | 35 |
| | $ | 2 |
|
| Cash paid during the year for interest | $ | 43 |
| | $ | 4 |
| | $ | 6 |
|
See accompanying Notes to Consolidated Financial Statements.
ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARYBASIS OF SIGNIFICANT ACCOUNTING POLICIESPRESENTATION
We areElectronic Arts is a global leader in digital interactive entertainment. We develop, market, publish and distributedeliver games, content and services that can be played by consumersand watched on a variety of platforms, which include game consoles, PCs, mobile phones and tablets. InWe 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 we use establishedand 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, Mass Effect,The Sims, Apex Legends, Need for Speed The Sims and Plants v. Zombies) or license from others (such as FIFA, Madden NFL and Star Wars). We also publishoffer our players high-quality experiences designed to provide value to players and distribute games developed by third parties (e.g., Titanfall).
A summaryto extend and enhance gameplay. These live services include extra content, subscription offerings and other revenue generated outside of the sale of our significant accounting policies applied in the preparationbase games. And 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 our Consolidated Financial Statements follows:play by offering choice of business model, distribution channel and device.
Consolidation
The accompanying Consolidated Financial Statements include the accounts of Electronic Arts Inc. and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
Fiscal Year
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 yearyears ended March 31, 20172020, 2019 and 20152018 contained 52 weeks each and ended on April 1, 2017March 28, 2020, March 30, 2019 and March 28, 2015,31, 2018 respectively. Our results of operations for the fiscal year ended March 31, 2016 contained 53 weeks and ended on April 2, 2016. For simplicity of disclosure, all fiscal periods are referred to as ending on a calendar month end.
Reclassifications
Certain prior year amounts were reclassified to conform to current year presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and the accompanying notes. Such estimates include sales returns and allowances, provisions for doubtful accounts, accrued liabilities, offering periods for deferred net revenue, multiple-element arrangements, income taxes,relative stand-alone selling price for identified performance obligations in our revenue transactions, losses on royalty commitments, estimates regarding the recoverability of prepaid royalties, inventories, long-lived assets, discount rates used in the measurement and recognition of lease liabilities, assets acquired and liabilities assumed in business combinations, certain estimates related to the measurement and recognition of costs resulting from our stock-based payment awards, unrecognized tax benefits, deferred income tax assets and associated valuation allowances, as well as estimates used in our goodwill, intangibles and short-term investment impairment tests. These estimates generally involve complex issues and require us to make judgments, involve analysis of historical and future trends, can require extended periods of time to resolve, and are subject to change from period to period. In all cases, actual results could differ materially from our estimates.
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 842, Leases (the “New Lease Standard” or “ASC 842”). The FASB issued this standard to increase transparency and comparability among organizations by recognizing right-of-use (“ROU”) lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements.
We adopted the New Lease Standard on April 1, 2019, the beginning of fiscal year 2020, using the optional transition method which allows us to use the effective date of the New Lease Standard as the date of initial application on transition, instead of at the beginning of the earliest comparative period presented. Accordingly, we did not adjust prior periods for the effects of the New Lease Standard. Additionally, we elected to apply the package of practical expedients, which allows us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our assessment of initial direct costs for any leases that exist prior to adoption of the new lease standard.
The adoption of the New Lease Standard on April 1, 2019 resulted in the recognition of operating lease ROU assets of $215 million, current operating lease liabilities of $50 million, and noncurrent operating lease liabilities of $197 million on our Consolidated Balance Sheets. In addition, upon transition, we eliminated prepaid rent assets of $6 million and deferred rent
liabilities of $38 million. Operating lease ROU assets, operating lease liabilities, and noncurrent operating lease liabilities are included in other assets, accrued and other current liabilities, and other liabilities, respectively. The adoption of the New Lease Standard did not have an impact on our Consolidated Statements of Operations or Cash Flows.
| | | | | | | | | | | | | | | | | |
BALANCE SHEETS
(In millions) | Balance at March 31, 2019 | | Adjustments due to New Lease Standard Adoption | | Balance at April 1, 2019 |
| Assets | | | | | |
| Other current assets | $ | 313 | | | $ | (6) | | | $ | 307 | |
| Other assets | 114 | | | 215 | | | 329 | |
| | | | | |
| Liabilities | | | | | |
| Accrued and other current liabilities | $ | 1,052 | | | $ | 47 | | | $ | 1,099 | |
| Other liabilities | 132 | | | 162 | | | 294 | |
| | | | | |
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This update is intended to make more financial and nonfinancial hedging strategies eligible for hedge accounting, simplify the application of hedge accounting by eliminating the requirement to separately measure and report hedge ineffectiveness, and increase transparency around the scope and results of hedging programs. We adopted ASU 2017-12 in the first quarter of fiscal 2020, using a modified-retrospective approach. Upon adoption of ASU 2017-12, we no longer measure and report hedge ineffectiveness separately. We instead present the entire change in the fair value of a hedging instrument in the same Consolidated Statements of Operations line as the hedged item. Additionally, the amount historically excluded from the assessment of hedge effectiveness for our cash flow hedges is now recognized into the Consolidated Statements of Operations in the period when the forecasted transaction is recognized. The cumulative-effect adjustment from the adoption had a de minimis impact on our Consolidated Financial Statements. See Note 5 — Derivative Financial Instruments. Other Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). The update changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. This update replaces the existing incurred loss impairment model with an expected loss model. It also requires credit losses related to available-for-sale debt securities to be recognized as an allowance for credit losses rather than as a reduction to the carrying value of the securities. This update is effective for us beginning in the first quarter of fiscal year 2021. We continue to monitor the economic implications of the COVID-19 pandemic; however based on current market conditions, we do not expect the adoption to have a material impact on our Consolidated Financial Statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This update eliminates, adds, and modifies certain fair value measurement disclosure requirements. This update is effective for us beginning in the first quarter of fiscal 2021. We do not expect the adoption to have a material impact on our Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). This update requires a customer in a cloud computing service arrangement to follow the internal-use software guidance in order to determine which implementation costs to defer and recognize as an asset. This update is effective for us beginning in the first quarter of fiscal year 2021. We do not expect the adoption to have a material impact on our Consolidated Financial Statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This update is effective for us beginning in the first quarter of fiscal year 2022. Early adoption is permitted. We are currently evaluating the impact of this new standard on our Consolidated Financial Statements and related disclosures.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash, Cash Equivalents, and Short-Term Investments
Cash equivalents consist of highly liquid investments with insignificant interest rate risk and original or remaining maturities of three months or less at the time of purchase.
Short-term investments consist of debt securities with original or remaining maturities of greater than three months at the time of purchase, and are accounted for as available-for-sale securities and are recorded at fair value. Cash, cash equivalents and short-term investments are available for use in current operations or other activities such as capital expenditures, business combinations and share repurchases.
Unrealized gains and losses on our short-term investments are recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity, net of tax, until either (1) the security is sold, (2) the security has matured, or (3) we determine that the fair value of the security has declined below its adjusted cost basis and the decline is other-than-temporary. Realized gains and losses on our short-term investments are calculated based on the specific identification method and are reclassified from accumulated other comprehensive income (loss) to interest and other income (expense), net. Determining whether a decline in fair value is other-than-temporary requires management judgment based on the specific facts and circumstances of each security. The ultimate value realized on these securities is subject to market price volatility until they are sold.
Our short-term investments are evaluated for impairment quarterly. We consider various factors in determining whether we should recognize an impairment charge, including the credit quality of the issuer, the duration that the fair value has been less than the adjusted cost basis, severity of the impairment, reason for the decline in value and potential recovery period, the financial condition and near-term prospects of the investees, our intent to sell and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value, and any contractual terms impacting the prepayment or settlement process. If we conclude that an investment is other-than-temporarily impaired, we recognize an impairment charge at that time in our Consolidated Statements of Operations. Based on our evaluation, we did not consider any of our investments to be other-than-temporarily impaired as of March 31, 20172020 and 2016.
Inventories
Inventories consist of materials (including manufacturing royalties paid to console manufacturers), labor and freight-in and are stated at the lower of cost (using the weighted average costing method) or net realizable value. We regularly review inventory quantities on-hand. We write down inventory based on excess or obsolete inventories determined primarily by future anticipated demand for our products. Inventory write-downs are measured as the difference between the cost of the inventory and market value, based upon assumptions about future demand that are inherently difficult to assess. At the point of a loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established basis. Inventories are included in other current assets in the Consolidated Balance Sheets.2019.
Property and Equipment, Net
Property and equipment, net, are stated at cost. Depreciation is calculated using the straight-line method over the following useful lives: |
| | | | | | | |
| Buildings | | 20 to 25 years |
| Computer equipment and software | | 3 to 6 years |
| Equipment, furniture and fixtures, and other | | 3 to 5 years |
| Leasehold improvements | | Lesser of the lease term or the estimated useful lives of the improvements, generally 1 to 1015 years |
We capitalize costs associated with internal-use software development once a project has reached the application development stage. Such capitalized costs include external direct costs utilized in developing or obtaining the software, and payroll and payroll-related expenses for employees who are directly associated with the development of the software. Capitalization of such costs begins when the preliminary project stage is complete and ceases at the point in which the project is substantially complete and is ready for its intended purpose. Once the internal-use software is ready for its intended use, the assets are depreciated on a straight-line basis over each asset’s estimated useful life, which is generally three years. The net book value of capitalized costs associated with internal-use software was $41$56 million and $55$37 million as of March 31, 20172020 and 2016,2019, respectively.
Acquisition-Related Intangibles and Other Long-Lived Assets
We recordrecognize acquisition-related intangible assets, such as acquired developed and core technology, in connection with business combinations. We amortize the cost of acquisition-related intangible assets that have finite useful lives on a straight-line basis over the lesser of their estimated useful lives or the agreement terms, typicallycurrently from twoone to fourteenfive years. We evaluate acquisition-related intangibles and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset group. This includes assumptions about future prospects for the business that the asset relates to and typically involves computations of the estimated future cash flows to be generated by these businesses. Based on these judgments and assumptions, we determine whether we need to take an impairment charge to reduce the value of the asset stated on our Consolidated Balance Sheets to reflect its estimated fair value. When we consider such assets to be impaired, the amount of impairment we recognize is measured by the amount by which the carrying amount of the asset exceeds its fair value.
Goodwill Impairment
In assessing impairment on our goodwill, we first analyze qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-stepa goodwill impairment test. The qualitative factors we assess include long-term prospects of our performance, share price trends and market capitalization, and Company specific events. If we conclude it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, we do not need to perform the two-stepan impairment test. If based on that assessment, we believe it is more likely than not that the fair value of the reporting unit is less than its carrying value a two-stepwe will measure goodwill impairment test will be performed. The first step measures for impairment by applying fair value-based tests at the reporting unit level. The second step (if necessary) measures the amount of impairment by applying fair value-based tests to the individual assets and liabilities within each reporting unit. Reporting units are determined by the components of operating segments that constitute a business for which (1) discrete financial information is available, (2) segment management regularly reviews the operating results of that component, and (3) whether the component has dissimilar economic characteristics to other components. As of March 31, 2017,2020, we have only one reportable segment, which represents our only operating segment.
DuringRevenue Recognition
We adopted ASC Topic 606, Revenue From Contracts with Customers (the “New Revenue Standard” or “ASC 606”), on April 1, 2018, the beginning of fiscal years ended March 31, 2017, 2016year 2019, using the modified retrospective method. The comparative information for periods prior to April 1, 2018 has not been restated and 2015, we completed our annual goodwill impairment testingcontinues to be reported under the accounting standards in the fourth quarter of each year and determined that it was more likely than not that the fair value of our reporting unit exceeded its carrying amount and, as such, we did not need to perform the two-step impairment test.effect for those periods.
Revenue Recognition, Sales Returns and Allowances, and Bad Debt Reserves
We derive revenue principally from sales of interactive softwareour games, and related extra content and services that can be played by customers on a variety of platforms which include game consoles, PCs, mobile phones and tablets. We evaluate revenue recognition based on the criteria set forth in FASB Accounting Standards Codification (“ASC”) 605, Revenue Recognition and ASC 985-605, Software: Revenue Recognition. We classify our revenue as either product revenue or service and other revenue.
Product revenue.Our product revenue includes revenue associated with the sale of software games or related product content or updates, whether delivered digitally (e.g., full-game downloads, extra-content) or via a physical disc (e.g., packaged goods), and licensing of game software to third-parties. Product revenue also includes revenue from mobile full game downloads that do not require our hosting support (e.g., premium mobile games) in order to utilize the game or related content (i.e. can be played with or without an Internet connection), and sales of tangible products such as hardware, peripherals, or collectors’ items.
Service and other revenue. Our service revenue includes revenue recognized from time-based subscriptions, games, content or updates that requires our hosting support in order to utilize the game or related content (i.e., can only be played with an Internet connection). This includes (1) entitlements to content that are accessed through hosting services (e.g., microtransactions for Internet-based, social network and free-to-download mobile games), (2) massively multi-player online (“MMO”) games (both software game and subscription sales), (3) subscriptions for our Battlefield Premium, EA and Origin Access, and Pogo-branded online game services, and (4) allocated service revenue from sales of software games with a service of online activities (e.g., online playability). Our other revenue includes advertising and non-software licensing revenue.
With respect to the allocated service revenue from sales of software games with a service of online activities (“online services”) mentioned above, our allocation of proceeds between product and service revenue for presentation purposes is based on management’s best estimate of the selling price of the online services with the residual value allocated to product revenue. Our estimate of the selling price of the online servicesofferings include, but are comprised of several factors including, but not limited to, prior selling pricesthe 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 theonline 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 Origin Access, Origin Access Premier and EA Access, that generally offers access to a selection of full games, in-game content, online services prices charged separately byand other third-party vendorsbenefits typically for similar service offerings,a recurring monthly or annual fee; and a cost-plus-margin approach. We review the estimated selling price of the online services on a regular basis
•licensing to third parties to distribute and use this methodology consistently to allocate revenue between producthost our games and service for software game sales with online services.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 all fourthe 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 following criteriasales 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).
Online-Hosted Service Games. Sales of our Online-Hosted Service Games are met:determined to have one distinct performance obligation: the online hosting. We recognize revenue from these arrangements as the service is provided.
EvidenceExtra Content.Revenue received from sales of an arrangement. Evidencedownloadable content are derived primarily from the sale of an agreementvirtual currencies and digital in-game content designed to provide value to players and to extend and enhance gameplay. Sales of extra content are accounted for in a manner consistent with the customer that reflectstreatment for our Games with Services and Online-Hosted Service Games as discussed above, depending upon whether or not the termsextra 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 conditionsthe online hosting). If the extra content does not have offline functionality, then the extra content is determined to deliverhave one distinct performance obligation: the related products 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 services must be present.
Fixed or determinable fee. Ifsales-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 arrangement fee is not fixed or determinable,minimum guarantee when we recognize revenuetransfer 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 amount becomes fixed or determinable.
related sales occur by the licensee.
Significant Judgments around Revenue Arrangements
Collection is deemed probable. Collection is deemed probable if we expect
Identifying performance obligations. Performance obligations promised in a contract are identified based on the customer togoods and services that will be able to pay amounts under the arrangement as those amounts become due. If we determine that collection is not probable as the amounts become due, we generally conclude that collection becomes probable upon cash collection.
Delivery. For packaged goods, delivery is considered to occur when a product is shipped and the risk of loss and rewards of ownership have transferred to the customer. For digital downloads, delivery is considered to occur when the software is made available tocustomer 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 download. For services and other, delivery is generally considered to occur as a combined performance obligation.
Determining the service is delivered, whichtransaction price.The transaction price is determined based on the underlyingconsideration 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. See below for additional information regarding our sales returns and price protection reserves. 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 obligation. Ifrelated 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 sold at retail would have a composite offering period equal to the online gameplay period plus time in channel as opposed to digitally-distributed software licenses 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 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 significant uncertaintya consistent pattern of acceptance,delivery for these performance obligations. These performance obligations are generally recognized over an estimated nine-month period beginning in the month after shipment for software licenses sold through retail and an estimated six-month period for digitally-distributed software licenses beginning in the month of sale.
Deferred Net Revenue
Because the majority of our sales transactions include future update rights and online hosting performance obligations, which are subject to a recognition period of generally six to nine months, our deferred net revenue balance is material. This balance increases from period to period by the revenue being deferred for current sales with these service obligations and is reduced by the recognition of revenue from prior sales that were deferred. Generally, revenue is recognized once acceptance is reasonably assured.
as the services are provided.
Online-Enabled GamesPrincipal Agent Considerations
The majorityWe evaluate sales to end customers of our softwarefull games and related content have online connectivity whereby a consumer may be able to download unspecified content or updates on a when-and-if-available basis (“unspecified updates”) for use with the original game software. In addition, we may also offer a service of online activities (e.g., online playability) without a separate fee. U.S. GAAP requires us to account for the consumer’s right to receive unspecified updates or the service of online activities for no additional fee as a “bundled” sale, or multiple-element arrangement.
We have an established historical pattern of providing unspecified updates (e.g., player roster updates to Madden NFL 17) to online-enabled games and related content at no additional charge to the consumer. Because we do not have vendor-specific objective evidence of fair value (“VSOE”) for these unspecified updates, we are required by current U.S. GAAP to recognize as revenue the entire sales price of these online-enabled games and related content over the period we expect to offer the unspecified updates to the consumer (“estimated offering period”).
Other Multiple-Element Arrangements
In some of our multiple-element arrangements, we sell non-software products with software and/or software-related offerings. These non-software products are generally music soundtracks, peripherals or ancillary collectors’ items, such as figurines and comic books. Revenue for these arrangements is allocated to each separate unit of accounting for each deliverable using the relative selling prices of each deliverable in the arrangement based on the selling price hierarchy described below. If the arrangement contains more than one software deliverable, the arrangement consideration is allocated to the software deliverables as a group and then allocated to each software deliverable.
We determine the selling price for a non-software product deliverable based on the following selling price hierarchy: VSOE (i.e., the price we charge when the non-software product is sold separately) if available,via third-party evidence (“TPE”) of fair value (i.e., the price charged by others for similar non-software products) if VSOE is not available, or our best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. Determining the BESP is a subjective process that is based on multiple factors including, but not limited to, recent selling prices and related discounts, market conditions, customer classes, sales channels and other factors. Provided the other three revenue recognition criteria other than delivery have been met, we recognize revenue upon delivery to the customer as we have no further obligations.
Principal Agent Considerations
We evaluate sales of our interactive software games, extra-content, and services from our subscription offerings via third party storefronts, including digital channel 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 primary obligorprincipal in the sale to the end consumer,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 delivery/fulfillment offulfilling the productpromise to provide the specified good or service to the end consumercustomer;
The•which party responsible forhas inventory risk before the billing, collection of fees and refundsspecified good or service has been transferred to the end consumercustomer; and
The storefront and Terms of Sale that govern•which party has discretion in establishing the end consumer’s purchase ofprice for the productspecified good or serviceservice.
The party that sets the pricing with the end consumer and has credit risk
Based on an evaluation of the above indicators, except as discussed below, we have determined that generally the third party is considered the primary obligorprincipal to end consumerscustomers for the sale of our interactive software games.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.
Payment Terms
Substantially all of our transactions have payment terms, whether customary or on an extended basis, of less than one year; therefore, we generally do not adjust the transaction price for the effects of any potential financing components that may exist.
Sales and Value-Added Taxes
Revenue is recorded net of taxes assessed by governmental authorities that are imposed at the time of the specific revenue-producing transaction between us and our customer, such as sales and value-added taxes.
Sales Returns and AllowancesPrice Protection Reserves
Sales returns and Bad Debt Reserves
price protection are considered variable consideration under ASC 606. We reduce revenue for estimated future returns and price protection which may occur with our distributors and retailers (“channel partners”). Price protection represents our practice to provide our channel partners with a credit allowance to lower their wholesale price on a particular productgame unit that they have not resold to end consumers.customers. The amount of the price protection for permanent markdowns is generally the difference between the old wholesale price and the new reduced wholesale price. Credits are also given for short-term promotions that temporarily reduce the wholesale price. In certain countries for our PC and console packaged goods software products, we also have a practice offor allowing channel partners to return older software products in the channel in exchange for a credit allowance. As a general practice, we do not give cash refunds.
We determine our allowance for doubtful accounts by
When evaluating the adequacy of sales returns and price protection reserves, we analyze the following: customer creditworthiness,historical credit allowances, current economicsell-through of our channel partners’ inventory of our products, current trends historical experience, age of current accounts receivable balances,in retail and the video game industry, changes in financial condition or payment termscustomer demand, acceptance of our customers. Significant management judgment is requiredproducts, and other related factors. In addition, we monitor the volume of sales to estimate our allowance for doubtful accountschannel partners and their inventories, as substantial overstocking in any accounting period.the distribution channel could result in high returns or higher price protection in subsequent periods.
Taxes Collected from Customers and Remitted to Governmental Authorities
Taxes assessed by a government authority that are both imposed on and concurrent with specific revenue transactions between us and our customers are presented on a net basis in our Consolidated Statements of Operations.
Concentration of Credit Risk and Significant Customers and Platform Partners
We extend credit to various digital resellers and channel partners.customers. Collection of trade receivables may be affected by changes in economic or other industry conditions and may, accordingly, impact our overall credit risk. Although we generally do not require collateral, we perform ongoing credit evaluations of our customers and maintain reserves for potential credit losses. Invoices are aged based on contractual terms with our customers. The provision for doubtful accounts is recorded as a charge to general and administrative expense when a potential loss is identified. Losses are written off against the allowance when the receivable is determined to be uncollectible. At March 31, 2017,2020, we had threetwo customers who accounted for approximately 27 percent, 2231 percent and 1127 percent of our consolidated gross receivables, respectively. At March 31, 2016,2019, we had two customers who accounted for 2634 percent and 2433 percent of our consolidated gross receivables, respectively.
A majority of our sales are made via digital resellers, channel and channelplatform partners. During the fiscal year ended March 31, 2017,years 2020, 2019, and 2018, approximately 6468 percent, 65 percent, and 67 percent, respectively, of our net revenue was derived from our top ten customers. Though our products and services are available to consumers through a varietycustomers and/or platform partners.
Currently, a majority of our revenue is derived through sales of products and services playable on hardware consoles from Sony and Microsoft. For the fiscal years ended March 31, 2017, 20162020, 2019 and 2015,2018, our net revenue for products and services on Sony’s PlayStation 3 and 4, and Microsoft’s Xbox 360 and One consoles (combined across all four platforms) was 70 percent, 67 percent, 66 percent, and 6670 percent, respectively. These platform partners have significant influence over the products and services that we offer on their platforms. Our agreements with Sony and Microsoft typically give significant control to them over the approval, manufacturing and distribution of our products and services that are distributed through their platform, which could, in certain circumstances, leave us unable to get our products and services approved, manufactured and providedor distributed to customers.
Short-term investments are placed with high quality financial institutions or in short-duration, investment-grade securities. We limit the amount of credit exposure in any one financial institution or type of investment instrument.
Royalties and Licenses
Royalty-based obligations with content licensors and distribution affiliates are either paid in advance and capitalized as prepaid royalties or are accrued as incurred and subsequently paid. These royalty-based obligations are generally expensed to cost of revenue generally at the greater of the contractual rate or an effective royalty rate based on the total projected net revenue for contracts with guaranteed minimums. Prepayments made to thinly capitalized independent software developers and co-publishing affiliates are generally made in connection with the development of a particular product, and therefore, we are generally subject to development risk prior to the release of the product. Accordingly, payments that are due prior to completion of a product are generally expensed to research and development over the development period as the services are incurred. Payments due after completion of the product (primarily royalty-based in nature) are generally expensed as cost of revenue.
Our contracts with some licensors include minimum guaranteed royalty payments, which are initially recorded as an asset and as a liability at the contractual amount when no performance remains with the licensor. When performance remains with the licensor, we record guarantee payments as an asset when actually paid and as a liability when incurred, rather than recording the asset and liability upon execution of the contract.
Each quarter, we also evaluate the expected future realization of our royalty-based assets, as well as any unrecognized minimum commitments not yet paid to determine amounts we deem unlikely to be realized through product and service sales.future revenue. Any impairments or losses determined before the launch of a product are generally charged to research and development expense. Impairments or losses determined post-launch are charged to cost of revenue. We evaluate long-lived royalty-based assets for impairment using undiscounted cash flows when impairment indicators exist. If an impairment exists, then the related assets are
written down to fair value. Unrecognized minimum royalty-based commitments are accounted for as executory contracts, and therefore, any losses on these commitments are recognized when the underlying intellectual property is abandoned (i.e.(i.e., cease use) or the contractual rights to use the intellectual property are terminated.
Advertising Costs
We generally expense advertising costs as incurred, except for production costs associated with media campaigns, which are recognized as prepaid assets (to the extent paid in advance) and expensed at the first run of the advertisement. Cooperative advertising costs are recognized when incurred and are included inclassified as marketing and sales expense if there is a separate identifiable benefit for which we can reasonably estimate the fair value of the benefit identified. Otherwise, they are recognizedclassified as a reduction of revenue and are generally accrued when revenue is recognized. We then reimburse the channel partner when qualifying claims are submitted.
We are also reimbursed by our vendors for certain advertising costs incurred by us that benefit our vendors. Such amounts are recognized as a reduction of marketing and sales expense if the advertising (1) is specific to the vendor, (2) represents an identifiable benefit to us, and (3) represents an incremental cost to us. Otherwise, vendor reimbursements are recognized as a reduction of the cost incurred with the same vendor. Vendor reimbursements of advertising costs of $53$38 million, $51$46 million, and $43$45 million reduced marketing and sales expense for the fiscal years ended March 31, 2017, 20162020, 2019 and 2015,2018, respectively. For the fiscal years ended March 31, 2017, 20162020, 2019 and 2015,2018, advertising expense, net of vendor reimbursements, totaled approximately $281$195 million, $240$271 million, and $228$261 million, respectively.
Software Development Costs
Research and development costs, which consist primarily of software development costs, are expensed as incurred. We are required to capitalize software development costs incurred for computer software to be sold, leased or otherwise marketed after technological feasibility of the software is established or for development costs that have alternative future uses. Under our current practice of developing new games, the technological feasibility of the underlying software is not established until substantially all product development and testing is complete, which generally includes the development of a working model. Software development costs that have been capitalized to date have been insignificant.
Foreign Currency Translation
Generally, the functional currency for our foreign operating subsidiaries is its local currency. Assets and liabilities of foreign operations are translated into U.S. dollars using month-end exchange rates, and revenue and expenses are translated into U.S. dollars using average exchange rates. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income (loss) in stockholders’ equity.
Foreign currency transaction gains and losses are a result of the effect of exchange rate changes on transactions denominated in currencies other than the functional currency. Net foreign currency transaction gains (losses) of $(40)$11 million, $(14)$(9) million, and $(62)$18 million for the fiscal years ended March 31, 2017, 20162020, 2019 and 2015,2018, respectively, are included in interest and other income (expense), net, in our Consolidated Statements of Operations. These net foreign currency transaction gains (losses) are partially offset by net gains (losses) on our foreign currency forward contracts of $46$(4) million, $15$50 million, and $59$(16) million for the fiscal years ended March 31, 2017, 20162020, 2019 and 2015,2018, respectively. See Note 45 for additional information on our foreign currency forward contracts. Income Taxes
We recognize deferred tax assets and liabilities for both the expected impact of differences between the financial statement amount and the tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards. We record
During the fiscal year ended March 31, 2020, we completed an intra-entity sale of some of our intellectual property rights to our Swiss subsidiary, where our international business is headquartered (the “Swiss intra-entity sale”). The transaction did not result in a taxable gain. Under U.S. GAAP, any profit resulting from this intercompany transaction will be eliminated upon consolidation. However, the transaction resulted in a step-up of the Swiss tax-deductible basis in the transferred intellectual property rights and, accordingly, created a temporary difference between the book basis and the tax basis of such intellectual property rights (“Swiss Deferred Tax Asset”). The Swiss Deferred Tax Asset and the one-time tax benefit was measured and will be periodically remeasured based on the Swiss tax rate in effect for the years the asset will be recovered.
During the fiscal year ended March 31, 2020, we recognized $1.840 billion of tax benefits related to the Swiss Deferred Tax Asset, which is net of the impact of a $131 million valuation allowance against deferredand a $393 million reduction due to the impact of the decision of the Ninth Circuit Court of Appeals in Altera Corp. v Commissioner (“the Altera opinion”). The Altera opinion also resulted in the recognition of a one-time charge of $80 million related to prior period U.S. uncertain tax assets whenpositions during the fiscal year ended March 31, 2020. In total, during the fiscal year ended March 31, 2020, we recognized one-time tax benefits of $1.760 billion related to the $1.840 billion Swiss Deferred Tax Asset, partially offset by the $80 million one-time Altera opinion charge.
Every quarter, we perform a realizability analysis to evaluate whether 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,As of March 31, 2020, we are requiredhave recognized a $131 million valuation allowance related to our Swiss deferred tax assets. 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 significantmore weight to evidence that can be objectively verified. It is generally difficult to conclude that a valuation allowance is not needed whenHowever, there is significant negative evidence, such as cumulative lossesjudgment involved in recent years. Forecastsestimating future Swiss taxable income over the 20-year period over which the Swiss deferred tax asset will reverse, specifically related to assumptions about expected growth rates of future Swiss taxable income, which 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 evaluatebased primarily on third party market 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 carry back 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; this evaluation involves assumptions about future activity. Certain taxable
temporary differencesindustry growth data. Actual results 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.
Recently Adopted Accounting Standards
In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Topic 350-40). The amendments of this ASU help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includes the sale or license of software. We adopted ASU 2015-05 in the first quarter of fiscal year 2017. The adoption did notdiffer materially from those estimates could have a material impact on our Consolidated Financial Statements.
Impact of Recently Issued Accounting Standards
In March 2016,valuation allowance assessment. Although objectively verifiable, Swiss interest rates have an impact on the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvementsvaluation allowance and are based on published Swiss guidance. Any significant changes to Employee Share-Based Payment Accounting, related to simplifications of employee share-based payment accounting. This pronouncement eliminates the APIC pool concept and requires that excess tax benefits and tax deficiencies be recorded in the income statement when awards are settled. The pronouncement also addresses simplifications related to statement of cash flows classification, accounting for forfeitures, and minimum statutory tax withholding requirements. We will adopt this new standard in the first quarter of fiscal year 2018.
Upon adoption of ASU 2016-09, excess tax benefits and tax deficiencies from employee share-based award activity will be reflected in the Consolidated Statements of Income as a component of the provision for income taxes, whereas they previously were recognized in additional paid-in-capital. We will also account for forfeitures as they occur, rather than estimate expected forfeitures. We anticipate the adoption of ASU 2016-09 willsuch interest rates could result in a cumulative-effect adjustmentmaterial impact to the valuation allowance. Switzerland has a seven-year carryforward period and does not permit the carry back of $8 million, netlosses. 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.
Share Repurchases
Shares of tax, decreaseour common stock repurchased pursuant to our repurchase program, if any, are retired. The purchase price of such repurchased shares of common stock is recorded as a reduction to additional paid-in capital. If the balance in additional paid-in capital is exhausted, the excess is recorded as a reduction to retained earnings as a resultearnings.
|
| | | | | | | | |
| | Year Ended March 31, |
| (In millions): | 2017 | | 2016 | | 2015 |
| Excess tax benefit from stock-based compensation | 65 |
| | 86 |
| | 22 |
|
| Cash paid to taxing authorities for shares withheld from employees | 130 |
| | 156 |
| | 83 |
|
| Increase to net cash provided by Operating Activities and net cash used in Financing Activities | 195 |
| | 242 |
| | 105 |
|
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (the “New Revenue Standard”), which will replace existing guidance under U.S. GAAP, including industry-specific requirements, and will provide companies with a single principles-based revenue recognition model for recognizing revenue from contracts with customers. The core principle of the New Revenue Standard is that a company should recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. In addition, the FASB has issued several amendments to the New Revenue Standard, including principal versus agent considerations, clarifications on identification of performance obligations, and accounting for licenses of intellectual property. The amendments are intended to address implementation issues that were raised by stakeholders and provide additional practical expedients to reduce the cost and complexity of adoption.
The New Revenue Standard is effective for us beginning in the first quarter of fiscal year 2019 and permits the use of either the full retrospective or modified retrospective transition methods. We anticipate adopting the New Revenue Standard on April 1, 2018 using the modified retrospective method, which recognizes the cumulative effect of initially applying the New Revenue Standard as an adjustment to retained earnings at the adoption date.
The New Revenue Standard will have a significant impact on our Consolidated Financial Statements and related disclosures as it relates to the accounting for substantially all of our transactions with multiple elements or “bundled” arrangements. For example, for sales of online-enabled games as currently reported, we do not have vendor-specific objective evidence of fair value (“VSOE”) for unspecified future updates, and thus, revenue recognized from these sales are recognized ratably over the estimated offering period. However, under the New Revenue Standard, the VSOE requirement for undelivered elements is eliminated, allowing us to essentially “break-apart” our online-enabled games and account for the various promised goods or services identified as separate performance obligations.
For example, for the sale of an online-enabled game, we often have multiple distinct performance obligations such as software, updates, and an online service. The software performance obligation represents the initial game delivered digitally or via physical disc. The updates performance obligation may include software patches or updates, maintenance, and/or additional free content to be delivered in the future. And lastly, the online service performance obligation consists of providing the customer with a service of online activities (e.g., online playability). Under current software revenue recognition rules, we recognize as revenue the entire sales price over the estimated offering period. However, under the New Revenue Standard, we will recognize a portion of the sales price as revenue upon delivery of the software performance obligation with the updates and online services portions recognized over the estimated offering period.
In addition, the entire portion of sales price allocated to updates and online services will be classified as a service revenue under the New Revenue Standard. Therefore, upon adoption, an increased portion of our sales from online-enabled games will be presented as service revenue than is currently reported today.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments (Topic 825-10), which requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. The ASU also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments.
The requirements will be effective for us beginning in the first quarter of fiscal year 2019. We are currently evaluating the impact of this new standard on our Consolidated Financial Statements and related disclosures.
In March 2016, the FASB issued ASU 2016-04, Liabilities – Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products. The amendments in the ASU are designed to provide guidance and eliminate diversity in the accounting for derecognition of prepaid stored-value product liabilities. Typically, a prepaid stored-value product liability is to be derecognized when it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. This is when the likelihood of the product holder exercising its remaining rights becomes remote. This estimate shall be updated at the end of each period. The amendments in this ASU are effective for us beginning in the first quarter of fiscal year 2019. Early adoption is permitted. We are currently evaluating the timing of adoption and impact of this new standard on our Consolidated Financial Statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This update is intended to reduce the existing diversity in practice in how certain transactions are classified in the statement of cash flows. This update is effective for us beginning in the first quarter of fiscal year 2019. Early adoption is permitted, provided that all of the amendments are adopted in the same period. We are currently evaluating the timing of adoption and impact of this new standard on our Consolidated Statements of Cash Flows.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows. This update is effective for us beginning in the first quarter of fiscal year 2019. Early adoption is permitted. We are currently evaluating the timing of adoption and impact of this new standard on our Consolidated Statements of Cash Flows.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this standard to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated guidance is effective for us beginning in the first quarter of fiscal year 2020. Early adoption is permitted. We are currently evaluating the timing of adoption and impact of this new standard on our Consolidated Financial Statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). The standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for us beginning in the first quarter of fiscal year 2021. Early adoption is permitted beginning in the first quarter of fiscal year 2020. We are currently evaluating the timing of adoption and impact of this new standard on our Consolidated Financial Statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350). The standard simplifies the goodwill impairment test. This update removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This update is effective for us beginning in the first quarter of fiscal year 2021. Early adoption is permitted for any impairment tests performed after January 1, 2017. We are currently evaluating the timing of adoption and impact of this new standard on our Consolidated Financial Statements and related disclosures.
(2)(3) FAIR VALUE MEASUREMENTS
There are various valuation techniques used to estimate fair value, the primary one being the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability. We measure certain financial and nonfinancial assets and liabilities at fair value on a recurring and nonrecurring basis.
Fair Value Hierarchy
The three levels of inputs that may be used to measure fair value are as follows:
•Level 1. Quoted prices in active markets for identical assets or liabilities.
•Level 2. Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities.
•Level 3. Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of March 31, 20172020 and 2016,2019, our assets and liabilities that were measured and recorded at fair value on a recurring basis were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using | | | | | | |
| | As of
March 31, 2020 | | Quoted Prices in
Active Markets for Identical
Financial Instruments | | Significant
Other
Observable
Inputs | | Significant
Unobservable
Inputs | | |
| | | | (Level 1) | | (Level 2) | | (Level 3) | | Balance Sheet Classification |
| Assets | | | | | | | | | |
| Bank and time deposits | $ | 78 | | | $ | 78 | | | $ | — | | | $ | — | | | Cash equivalents |
| Money market funds | 1,599 | | | 1,599 | | | — | | | — | | | Cash equivalents |
| Available-for-sale securities: | | | | | | | | | |
| Corporate bonds | 687 | | | — | | | 687 | | | — | | | Short-term investments and cash equivalents |
| U.S. Treasury securities | 603 | | | 603 | | | | | | — | | | Short-term investments and cash equivalents |
| U.S. agency securities | 8 | | | — | | | 8 | | | — | | | Short-term investments |
| Commercial paper | 414 | | | — | | | 414 | | | — | | | Short-term investments and cash equivalents |
| | | | | | | | | |
| Foreign government securities | 42 | | | — | | | 42 | | | — | | | Short-term investments |
| Asset-backed securities | 269 | | | — | | | 269 | | | — | | | Short-term investments |
| Certificates of deposit | 56 | | | — | | | 56 | | | — | | | Short-term investments |
| Foreign currency derivatives | 76 | | | — | | | 76 | | | — | | | Other current assets and other assets |
Deferred compensation plan assets (a) | 13 | | | 13 | | | — | | | — | | | Other assets |
| Total assets at fair value | $ | 3,845 | | | $ | 2,293 | | | $ | 1,552 | | | $ | — | | | |
| Liabilities | | | | | | | | | |
| | | | | | | | | |
| Foreign currency derivatives | $ | 36 | | | $ | — | | | $ | 36 | | | $ | — | | | Accrued and other current liabilities and other liabilities |
Deferred compensation plan liabilities (a) | 14 | | | 14 | | | — | | | — | | | Other liabilities |
| Total liabilities at fair value | $ | 50 | | | $ | 14 | | | $ | 36 | | | $ | — | | | |
| | | | | | Fair Value Measurements at Reporting Date Using | | | | | | Fair Value Measurements at Reporting Date Using | | | |
| | As of March 31, 2017 | | Quoted Prices in Active Markets for Identical Financial Instruments | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | | As of
March 31, 2019 | | Quoted Prices in
Active Markets for Identical
Financial Instruments | | Significant
Other
Observable
Inputs | | Significant
Unobservable
Inputs | | |
| | (Level 1) | | (Level 2) | | (Level 3) | | Balance Sheet Classification | | | (Level 1) | | (Level 2) | | (Level 3) | | Balance Sheet Classification |
| Assets | | | | | | | | | Assets | | | | | | | | | |
| Bank and time deposits | $ | 233 |
| | $ | 233 |
| | $ | — |
| | $ | — |
| | Cash equivalents | Bank and time deposits | $ | 23 | | | $ | 23 | | | $ | — | | | $ | — | | | Cash equivalents |
| Money market funds | 405 |
| | 405 |
| | — |
| | — |
| | Cash equivalents | Money market funds | 2,704 | | | 2,704 | | | — | | | — | | | Cash equivalents |
| Available-for-sale securities: | | | | | | | | | Available-for-sale securities: | |
| Corporate bonds | 963 |
| | — |
| | 963 |
| | — |
| | Short-term investments and cash equivalents | Corporate bonds | 327 | | | — | | | 327 | | | — | | | Short-term investments and cash equivalents |
| U.S. Treasury securities | 460 |
| | 460 |
| | — |
| | — |
| | Short-term investments and cash equivalents | U.S. Treasury securities | 294 | | | 294 | | | — | | | — | | | Short-term investments and cash equivalents |
| U.S. agency securities | 172 |
| | — |
| | 172 |
| | — |
| | Short-term investments and cash equivalents | U.S. agency securities | 57 | | | — | | | 57 | | | — | | | Short-term investments and cash equivalents |
| Commercial paper | 270 |
| | — |
| | 270 |
| | — |
| | Short-term investments and cash equivalents | Commercial paper | 233 | | | — | | | 233 | | | — | | | Short-term investments and cash equivalents |
| | Foreign government securities | 113 |
| | — |
| | 113 |
| | — |
| | Short-term investments | Foreign government securities | 58 | | | — | | | 58 | | | — | | | Short-term investments and cash equivalents |
| Asset-backed securities | 135 |
| | — |
| | 135 |
| | — |
| | Short-term investments | Asset-backed securities | 55 | | | — | | | 55 | | | — | | | Short-term investments and cash equivalents |
| Certificates of deposit | | Certificates of deposit | 2 | | | — | | | 2 | | | — | | | Short-term investments and cash equivalents |
| | Foreign currency derivatives | 19 |
| | — |
| | 19 |
| | — |
| | Other current assets and other assets | Foreign currency derivatives | 33 | | | — | | | 33 | | | — | | | Other current assets and other assets |
Deferred compensation plan assets (a) | 8 |
| | 8 |
| | — |
| | — |
| | Other assets | Deferred compensation plan assets (a) | 11 | | | 11 | | | — | | | — | | | Other assets |
| Total assets at fair value | $ | 2,778 |
| | $ | 1,106 |
| | $ | 1,672 |
| | $ | — |
| | Total assets at fair value | $ | 3,797 | | | $ | 3,032 | | | $ | 765 | | | $ | — | | |
| Liabilities | | | | | | | | | Liabilities | | | | | | | | |
Contingent consideration (b) | | Contingent consideration (b) | $ | 136 | | | $ | — | | | $ | — | | | $ | 136 | | | Accrued and other current liabilities |
| Foreign currency derivatives | 8 |
| | — |
| | 8 |
| | — |
| | Accrued and other current liabilities and other liabilities | Foreign currency derivatives | 16 | | | — | | | 16 | | | — | | | Accrued and other current liabilities and other liabilities |
Deferred compensation plan liabilities (a) | 9 |
| | 9 |
| | — |
| | — |
| | Other liabilities | Deferred compensation plan liabilities (a) | 12 | | | 12 | | | — | | | — | | | Other liabilities |
| Total liabilities at fair value | $ | 17 |
| | $ | 9 |
| | $ | 8 |
| | $ | — |
| | Total liabilities at fair value | $ | 164 | | | $ | 12 | | | $ | 16 | | | $ | 136 | | |
(a)The Deferred Compensation Plan assets consist of various mutual funds. See Note 15 for additional information regarding our Deferred Compensation Plan. (b)The contingent consideration represented the estimated fair value of the additional variable cash consideration payable in connection with our acquisition of Respawn Entertainment, LLC (“Respawn”) that was contingent upon the achievement of certain performance milestones. At March 31, 2019, we estimated fair value using a probability-weighted income approach combined with a real options methodology, and applied a discount rate that appropriately captures the risk associated with the obligation, ranging from 2.9 percent to 3.1 percent. As of March 31, 2020, all performance milestones have been achieved and a total of $140 million in payments for performance milestones was made. See Note 7 in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019 for additional information regarding the Respawn acquisition.
|
| | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using | | |
| | As of March 31, 2016 | | Quoted Prices in Active Markets for Identical Financial Instruments | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | |
| | (Level 1) | | (Level 2) | | (Level 3) | | Balance Sheet Classification |
| Assets | | | | | | | | | |
| Bank and time deposits | $ | 345 |
| | $ | 345 |
| | $ | — |
| | $ | — |
| | Cash equivalents |
| Money market funds | 143 |
| | 143 |
| | — |
| | — |
| | Cash equivalents |
| Available-for-sale securities: | | | | | | | | | |
| Corporate bonds | 623 |
| | — |
| | 623 |
| | — |
| | Short-term investments and cash equivalents |
| U.S. Treasury securities | 407 |
| | 407 |
| | — |
| | — |
| | Short-term investments and cash equivalents |
| U.S. agency securities | 170 |
| | — |
| | 170 |
| | — |
| | Short-term investments and cash equivalents |
| Commercial paper | 81 |
| | — |
| | 81 |
| | — |
| | Short-term investments and cash equivalents |
| Foreign government securities | 122 |
| | — |
| | 122 |
| | — |
| | Short-term investments and cash equivalents |
| Foreign currency derivatives | 16 |
| | — |
| | 16 |
| | — |
| | Other current assets and other assets |
Deferred compensation plan assets (a) | 8 |
| | 8 |
| | — |
| | — |
| | Other assets |
| Total assets at fair value | $ | 1,915 |
| | $ | 903 |
| | $ | 1,012 |
| | $ | — |
| | |
| Liabilities | | | | | | | | | |
| Foreign currency derivatives | 10 |
| | — |
| | 10 |
| | — |
| | Accrued and other current liabilities and other liabilities |
Deferred compensation plan liabilities (a) | 9 |
| | 9 |
| | — |
| | — |
| | Other liabilities |
| Total liabilities at fair value | $ | 19 |
| | $ | 9 |
| | $ | 10 |
| | $ | — |
| | |
| |
(a) | The Deferred Compensation Plan assets consist of various mutual funds. See Note 13 for additional information regarding our Deferred Compensation Plan. |
(3)(4) FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
As of March 31, 20172020 and 2016,2019, our cash and cash equivalents were $2,565$3,768 million and $2,493$4,708 million, respectively. Cash equivalents were valued using quoted market prices or other readily available market information.
Short-Term Investments
Short-term investments consisted of the following as of March 31, 20172020 and 20162019 (in millions): | | | | As of March 31, 2017 | | As of March 31, 2016 | | As of March 31, 2020 | | | As of March 31, 2019 | |
| | Cost or Amortized Cost | | Gross Unrealized | | Fair Value | | Cost or Amortized Cost | | Gross Unrealized | | Fair Value | | Cost or
Amortized
Cost | | Gross Unrealized | | | Fair
Value | | Cost or
Amortized
Cost | | Gross Unrealized | | | Fair
Value |
| | Gains | | Losses | | Gains | | Losses | | | | Gains | | Losses | | | Gains | | Losses | | |
| Corporate bonds | $ | 944 |
| | $ | — |
| | $ | (1 | ) | | $ | 943 |
| | $ | 620 |
| | $ | 1 |
| | $ | — |
| | $ | 621 |
| Corporate bonds | $ | 684 | | | $ | 1 | | | $ | (4) | | | $ | 681 | | | $ | 325 | | | $ | — | | | $ | (1) | | | $ | 324 | |
| U.S. Treasury securities | 414 |
| | — |
| | (1 | ) | | 413 |
| | 389 |
| | 1 |
| | — |
| | 390 |
| U.S. Treasury securities | 530 | | | 4 | | | — | | | 534 | | | 153 | | | — | | | — | | | 153 | |
| U.S. agency securities | 152 |
| | — |
| | (1 | ) | | 151 |
| | 167 |
| | — |
| | — |
| | 167 |
| U.S. agency securities | 8 | | | — | | | — | | | 8 | | | 44 | | | — | | | — | | | 44 | |
| Commercial paper | 212 |
| | — |
| | — |
| | 212 |
| | 50 |
| | — |
| | — |
| | 50 |
| Commercial paper | 377 | | | — | | | — | | | 377 | | | 112 | | | — | | | — | | | 112 | |
| Foreign government securities | 113 |
| | — |
| | — |
| | 113 |
| | 113 |
| | — |
| | — |
| | 113 |
| Foreign government securities | 42 | | | — | | | — | | | 42 | | | 50 | | | — | | | — | | | 50 | |
| Asset-backed securities | 135 |
| | — |
| | — |
| | 135 |
| | — |
| | — |
| | — |
| | — |
| Asset-backed securities | 273 | | | — | | | (4) | | | 269 | | | 53 | | | — | | | — | | | 53 | |
| Certificates of deposit | | Certificates of deposit | 56 | | | — | | | — | | | 56 | | | 1 | | | — | | | — | | | 1 | |
| Short-term investments | $ | 1,970 |
| | $ | — |
| | $ | (3 | ) | | $ | 1,967 |
| | $ | 1,339 |
| | $ | 2 |
| | $ | — |
| | $ | 1,341 |
| Short-term investments | $ | 1,970 | | | $ | 5 | | | $ | (8) | | | $ | 1,967 | | | $ | 738 | | | $ | — | | | $ | (1) | | | $ | 737 | |
The following table summarizes the amortized cost and fair value of our short-term investments, classified by stated maturity as of March 31, 20172020 and 20162019 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2020 | | | | As of March 31, 2019 | | |
| | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value |
| Short-term investments | | | | | | | |
| Due within 1 year | $ | 1,568 | | | $ | 1,567 | | | $ | 449 | | | $ | 448 | |
| Due 1 year through 5 years | 395 | | | 393 | | | 287 | | | 287 | |
| Due after 5 years | 7 | | | 7 | | | 2 | | | 2 | |
| Short-term investments | $ | 1,970 | | | $ | 1,967 | | | $ | 738 | | | $ | 737 | |
|
| | | | | | | | | | | | | | | |
| | As of March 31, 2017 | | As of March 31, 2016 |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| Short-term investments | | | | | | | |
| Due within 1 year | $ | 1,237 |
| | $ | 1,236 |
| | $ | 571 |
| | $ | 571 |
|
| Due 1 year through 5 years | 721 |
| | 719 |
| | 768 |
| | 770 |
|
| Due after 5 years | 12 |
| | 12 |
| | — |
| | — |
|
| Short-term investments | $ | 1,970 |
| | $ | 1,967 |
| | $ | 1,339 |
| | $ | 1,341 |
|
(4)(5) DERIVATIVE FINANCIAL INSTRUMENTS
The assetsAssets or liabilities associated with our derivative instruments and hedging activities are recorded at fair value in other current assets/other assets, or accrued and other current liabilities/other liabilities, respectively, on our Consolidated Balance Sheets. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on the use of the derivative instrument and whether it is designated and qualifies for hedge accounting.
We transact business in various foreign currencies and have significant international sales and expenses denominated in foreign currencies, subjecting us to foreign currency risk. We purchase foreign currency forward contracts, generally with maturities of 18 months or less, to reduce the volatility of cash flows primarily related to forecasted revenue and expenses denominated in certain foreign currencies. Our cash flow risks are primarily related to fluctuations in the Euro, British pound sterling, Canadian dollar, Swedish krona, Australian dollar, Chinese yuan, and South Korean won.won and Polish zloty. In addition, we utilize foreign currency forward contracts to mitigate foreign currency exchange risk associated with foreign-currency-denominated monetary assets and liabilities, primarily intercompany receivables and payables. The foreign currency forward contracts not designated as hedging instruments generally have a contractual term of approximately 3three months or less and are transacted near month-end. We do not use foreign currency forward contracts for speculative trading purposes.
Cash Flow Hedging Activities
Certain of our forward contracts are designated and qualify as cash flow hedges. The effectiveness of the cash flow hedge contracts, including time value, is assessed monthly using regression analysis, as well as other timing and probability criteria. To qualify for hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedges and must be highly effective in offsetting changes to future cash flows on hedged transactions. The derivative assets or liabilities associated with our hedging activities are recorded at fair value in other current assets/other assets, or accrued and other current liabilities/other liabilities, respectively, on our Consolidated Balance Sheets. The effective portion of gains or losses resulting from changes in the fair value of these hedges is initially reported, net of tax, as a component of accumulated other comprehensive income (loss) in stockholders’ equity. The gross amount of the effective portion of gains or losses resulting from changes in the fair value of these hedges is subsequently reclassified into net revenue or research and development expenses, as appropriate, in the period when the forecasted transaction is recognized in our Consolidated Statements of Operations. In the event that the gains or losses in accumulated other comprehensive income (loss) are deemed to be ineffective, the ineffective portion of gains or losses resulting from changes in fair value, if any, is reclassified to interest and other income (expense), net, in our Consolidated Statements of Operations. In the event that the underlying forecasted transactions do not occur, or it becomes remote that they will occur, within the defined hedge period, the gains or losses on the related cash flow hedges are reclassified from accumulated other comprehensive income (loss) to interestnet revenue or research and other income (expense), net,development expenses, in our Consolidated Statements of Operations.
Total gross notional amounts and fair values for currency derivatives with cash flow hedge accounting designation are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2020 | | | | | | As of March 31, 2019 | | | | |
| Notional Amount | | Fair Value | | | | Notional Amount | | Fair Value | | |
| | | Asset | | Liability | | | | Asset | | Liability |
| | | | | | | | | | | |
| Forward contracts to purchase | $ | 316 | | | $ | 1 | | | $ | 19 | | | $ | 295 | | | $ | — | | | $ | 10 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Forward contracts to sell | $ | 1,371 | | | $ | 61 | | | $ | 1 | | | $ | 1,355 | | | $ | 31 | | | $ | 4 | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2017 | | As of March 31, 2016 |
| | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| | | Asset | | Liability | | | Asset | | Liability |
| Forward contracts to purchase | $ | 185 |
| | $ | — |
| | $ | 5 |
| | $ | 148 |
| | $ | 5 |
| | $ | 1 |
|
| Forward contracts to sell | $ | 840 |
| | $ | 19 |
| | $ | 3 |
| | $ | 685 |
| | $ | 11 |
| | $ | 9 |
|
The net impacteffects of the effective portion of gains and losses from our cash flow hedging activitieshedge accounting in our Consolidated Statements of Operations was a gain of $36 million and $12 million for the fiscal years ended March 31, 20172020 and 2016, respectively, and a loss of $11 million for fiscal year ended March 31, 2015.2019 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amount of Gain (Loss) Recognized in the Statements of Operations | | | | | | | | | | |
| Year Ended March 31, | | | | | | | | | | |
| 2020 | | | | 2019 | | | | 2018 | | |
| Net revenue | | Research and development | | Net revenue | | Research and development | | Net revenue | | Research and development |
| Total amounts presented in our Consolidated Statements of Operations in which the effects of cash flow hedges are recorded | $ | 5,537 | | | $ | 1,559 | | | $ | 4,950 | | | $ | 1,433 | | | $ | 5,150 | | | | $ | 1,320 | |
| Gains (losses) on foreign currency forward contracts designated as cash flow hedges | $ | 71 | | | $ | (9) | | | $ | 18 | | | $ | (10) | | | $ | (10) | | | | $ | 5 | |
During fiscal years ended March 31, 2017, 2016 and 2015, we reclassified an immaterial amount of the ineffective portion of gains or losses resulting from changes in fair value into interest and other income (expense), net.
The amount excluded from the assessment of hedge effectiveness during fiscal years ended March 31, 2017, 2016 and 2015 and recognized in interest and other income (expense), net, was immaterial.a gain of $25 million and $10 million during fiscal year ended March 31, 2019 and 2018.
Balance Sheet Hedging Activities
Our foreign currency forward contracts that are not designated as hedging instruments are accounted for as derivatives whereby the fair value of the contracts are reported as other current assets or accrued and other current liabilities on our Consolidated Balance Sheets, and gains and losses resulting from changes in the fair value are reported in interest and other income (expense), net, in our Consolidated Statements of Operations. The gains and losses on these foreign currency forward contracts generally offset the gains and losses in the underlying foreign-currency-denominated monetary assets and liabilities, which are also reported in interest and other income (expense), net, in our Consolidated Statements of Operations.
Total gross notional amounts and fair values for currency derivatives that are not designated as hedging instruments are accounted for as follows (in millions): | | | | As of March 31, 2017 | | As of March 31, 2016 | | As of March 31, 2020 | | | As of March 31, 2019 | |
| | Notional Amount | | Fair Value | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value | | | Notional Amount | | Fair Value | |
| | | Asset | | Liability | | Asset | | Liability | | | | Asset | | Liability | | | | Asset | | Liability |
| Forward contracts to purchase | $ | 87 |
| | $ | — |
| | $ | — |
| | $ | 108 |
| | $ | — |
| | $ | — |
| Forward contracts to purchase | $ | 388 | | | $ | 1 | | | $ | 16 | | | $ | 449 | | | $ | — | | | $ | 2 | |
| | Forward contracts to sell | $ | 166 |
| | $ | — |
| | $ | — |
| | $ | 159 |
| | $ | — |
| | $ | — |
| Forward contracts to sell | $ | 292 | | | $ | 13 | | | $ | — | | | $ | 394 | | | $ | 2 | | | $ | — | |
|
The effect of foreign currency forward contracts not designated as hedging instruments in our Consolidated Statements of Operations for the fiscal years ended March 31, 2017, 20162020, 2019 and 2015,2018, was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | | Amount of Gain (Loss) Recognized in the Statements of Operations | | | | |
| | | Year Ended March 31, | | | | |
| | | 2020 | | 2019 | | 2018 |
| | Interest and other income (expense), net | | | | |
| Total amounts presented in our Consolidated Statements of Operations in which the effects of balance sheet hedges are recorded | | $ | 63 | | | $ | 83 | | | $ | 15 | |
| Gain (losses) on foreign currency forward contracts not designated as hedging instruments | | $ | (4) | | | $ | 25 | | | $ | (26) | |
|
| | | | | | | | | | | | | |
| | Statement of Operations Classification | | Amount of Gain (Loss) Recognized in the Statement of Operations |
| | Year Ended March 31, |
| | 2017 | | 2016 | | 2015 |
| Foreign currency forward contracts not designated as hedging instruments | Interest and other income (expense), net | | $ | 43 |
| | $ | 16 |
| | $ | 58 |
|
(5)(6) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in accumulated other comprehensive income (loss) by component, net of tax, for the fiscal years ended March 31, 2017, 20162020, 2019 and 20152018 are as follows (in millions):
| | | | | | | | | | | | Unrealized Net Gains (Losses) on Available-for-Sale Securities | | Unrealized Net Gains (Losses) on Derivative Instruments | | Foreign Currency Translation Adjustments | | Total |
| | Unrealized Net Gains (Losses) on Available-for-Sale Securities | | Unrealized Net Gains (Losses) on Derivative Instruments | | Foreign Currency Translation Adjustments | | Total | |
| Balances as of March 31, 2014 | $ | (4 | ) | | $ | (10 | ) | | $ | 51 |
| | $ | 37 |
| |
| Balances as of March 31, 2017 | | Balances as of March 31, 2017 | $ | (3) | | | $ | 32 | | | $ | (48) | | | $ | (19) | |
| Other comprehensive income (loss) before reclassifications | 1 |
| | 20 |
| | (67 | ) | | (46 | ) | Other comprehensive income (loss) before reclassifications | (9) | | | (126) | | | 28 | | | (107) | |
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | 11 |
| | — |
| | 11 |
| Amounts reclassified from accumulated other comprehensive income (loss) | 4 | | | 5 | | | (10) | | | (1) | |
| Total other comprehensive income (loss), net of tax | 1 |
| | 31 |
| | (67 | ) | | (35 | ) | Total other comprehensive income (loss), net of tax | (5) | | | (121) | | | 18 | | | (108) | |
| Balances as of March 31, 2015 | $ | (3 | ) | | $ | 21 |
| | $ | (16 | ) | | $ | 2 |
| |
| Balances as of March 31, 2018 | | Balances as of March 31, 2018 | $ | (8) | | | $ | (89) | | | $ | (30) | | | $ | (127) | |
| Cumulative-effect adjustment from the adoption of ASC 606 | | Cumulative-effect adjustment from the adoption of ASC 606 | — | | | 22 | | | — | | | 22 | |
| Cumulative-effect adjustment from the adoption of ASU 2018-02 | | Cumulative-effect adjustment from the adoption of ASU 2018-02 | — | | | 1 | | | — | | | 1 | |
| Balances as of April 1, 2018 | | Balances as of April 1, 2018 | $ | (8) | | | $ | (66) | | | $ | (30) | | | $ | (104) | |
| Other comprehensive income (loss) before reclassifications | 4 |
| | 5 |
| | (15 | ) | | (6 | ) | Other comprehensive income (loss) before reclassifications | 6 | | | 96 | | | (21) | | | 81 | |
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | (12 | ) | | — |
| | (12 | ) | Amounts reclassified from accumulated other comprehensive income (loss) | 1 | | | (8) | | | — | | | (7) | |
| Total other comprehensive income (loss), net of tax | 4 |
| | (7 | ) | | (15 | ) | | (18 | ) | Total other comprehensive income (loss), net of tax | 7 | | | 88 | | | (21) | | | 74 | |
| Balances as of March 31, 2016 | $ | 1 |
| | $ | 14 |
| | $ | (31 | ) | | $ | (16 | ) | |
| Balances as of March 31, 2019 | | Balances as of March 31, 2019 | $ | (1) | | | $ | 22 | | | $ | (51) | | | $ | (30) | |
| Other comprehensive income (loss) before reclassifications | (3 | ) | | 54 |
| | (17 | ) | | 34 |
| Other comprehensive income (loss) before reclassifications | (1) | | | 79 | | | (34) | | | 44 | |
| Amounts reclassified from accumulated other comprehensive income (loss) | (1 | ) | | (36 | ) | | — |
| | (37 | ) | Amounts reclassified from accumulated other comprehensive income (loss) | (2) | | | (62) | | | — | | | (64) | |
| Total other comprehensive income (loss), net of tax | (4 | ) | | 18 |
| | (17 | ) | | (3 | ) | Total other comprehensive income (loss), net of tax | (3) | | | 17 | | | (34) | | | (20) | |
| Balances as of March 31, 2017 | $ | (3 | ) | | $ | 32 |
| | $ | (48 | ) | | $ | (19 | ) | |
| Balances as of March 31, 2020 | | Balances as of March 31, 2020 | $ | (4) | | | $ | 39 | | | $ | (85) | | | $ | (50) | |
The effects on net income of amounts reclassified from accumulated other comprehensive income (loss) for the fiscal years ended March 31, 2017, 20162020, 2019 and 20152018 were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| Statement of Operations Classification | | Amount Reclassified From Accumulated Other Comprehensive Income (Loss) | | | | |
| | Year Ended March 31, | | | | |
| | 2020 | | 2019 | | 2018 |
| (Gains) losses on available-for-sale securities: | | | | | | |
| | | | | | |
| Interest and other income (expense), net | | $ | (2) | | | $ | 1 | | | $ | 4 | |
| Total, net of tax | | (2) | | | 1 | | | 4 | |
| | | | | | |
| (Gains) losses on foreign currency forward contracts designated as cash flow hedges | | | | | | |
| Net revenue | | (71) | | | (18) | | | 10 | |
| Research and development | | | 9 | | | 10 | | | (5) | |
| Total, net of tax | | (62) | | | (8) | | | 5 | |
| | | | | | |
| (Gains) losses on foreign currency translation: | | | | | | |
| Interest and other income (expense), net | | — | | | — | | | (10) | |
| Total, net of tax | | — | | | — | | | (10) | |
| | | | | | |
| Total net (gain) loss reclassified, net of tax | | $ | (64) | | | $ | (7) | | | $ | (1) | |
| | | | | | |
| | | | | | |
|
| | | | | | | | | | | | |
| Statement of Operations Classification | | Amount Reclassified From Accumulated Other Comprehensive Income (Loss) |
| Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
| (Gains) and losses on available-for-sale securities | | | | | | |
| Interest and other income (expense), net | | (1 | ) | | — |
| | — |
|
| Net of tax | | (1 | ) | | — |
| | — |
|
| | | | | | | |
| (Gains) losses on cash flow hedges from forward contracts | | | | | | |
| Net revenue | | (37 | ) | | (23 | ) | | (2 | ) |
| Research and development | | 1 |
| | 11 |
| | 13 |
|
| Net of tax | | (36 | ) | | (12 | ) | | 11 |
|
| | | | | | | |
| Total net (gain) loss reclassified, net of tax | | $ | (37 | ) | | $ | (12 | ) | | $ | 11 |
|
(6)(7) GOODWILL AND ACQUISITION-RELATED INTANGIBLES, NET
The changes in the carrying amount of goodwill for the fiscal year ended March 31, 2017 are as follows (in millions): |
| | | | | | | | | | | |
| | As of
March 31, 2016 | | Effects of Foreign Currency Translation | | As of
March 31, 2017 |
| Goodwill | $ | 2,078 |
| | $ | (3 | ) | | $ | 2,075 |
|
| Accumulated impairment | (368 | ) | | — |
| | (368 | ) |
| Total | $ | 1,710 |
| | $ | (3 | ) | | $ | 1,707 |
|
The changes in the carrying amount of goodwill for the fiscal year ended March 31, 20162020 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| As of
March 31, 2019 | | Activity | | Effects of Foreign Currency Translation | | As of
March 31, 2020 |
| Goodwill | $ | 2,260 | | | $ | — | | | $ | (7) | | | $ | 2,253 | |
| Accumulated impairment | (368) | | | — | | | — | | | (368) | |
| Total | $ | 1,892 | | | $ | — | | | $ | (7) | | | $ | 1,885 | |
|
| | | | | | | | | | | |
| | As of
March 31, 2015 | | Effects of Foreign Currency Translation | | As of
March 31, 2016 |
| Goodwill | $ | 2,081 |
| | $ | (3 | ) | | $ | 2,078 |
|
| Accumulated impairment | (368 | ) | | — |
| | (368 | ) |
| Total | $ | 1,713 |
| | $ | (3 | ) | | $ | 1,710 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of
March 31, 2018 | | Activity | | Effects of Foreign Currency Translation | | As of
March 31, 2019 |
| Goodwill | $ | 2,251 | | | $ | 14 | | | $ | (5) | | | $ | 2,260 | |
| Accumulated impairment | (368) | | | — | | | — | | | (368) | |
| Total | $ | 1,883 | | | $ | 14 | | | $ | (5) | | | $ | 1,892 | |
Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets.
Acquisition-related intangibles consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2020 | | | | | | As of March 31, 2019 | | | | |
| | Gross
Carrying
Amount | | Accumulated
Amortization | | Acquisition-
Related
Intangibles, Net | | Gross
Carrying
Amount | | Accumulated
Amortization | | Acquisition-
Related
Intangibles, Net |
| Developed and core technology | $ | 474 | | | $ | (450) | | | $ | 24 | | | $ | 469 | | | $ | (427) | | | $ | 42 | |
| Trade names and trademarks | 161 | | | (132) | | | 29 | | | 161 | | | (121) | | | 40 | |
| Registered user base and other intangibles | 5 | | | (5) | | | — | | | 5 | | | (5) | | | — | |
| Carrier contracts and related | 85 | | | (85) | | | — | | | 85 | | | (85) | | | — | |
| In-process research and development | — | | | — | | | — | | | 5 | | | — | | | 5 | |
| Total | $ | 725 | | | $ | (672) | | | $ | 53 | | | $ | 725 | | | $ | (638) | | | $ | 87 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2017 | | As of March 31, 2016 |
| | Gross Carrying Amount | | Accumulated Amortization | | Acquisition- Related Intangibles, Net | | Gross Carrying Amount | | Accumulated Amortization | | Acquisition- Related Intangibles, Net |
| Developed and core technology | $ | 412 |
| | $ | (412 | ) | | $ | — |
| | $ | 412 |
| | $ | (368 | ) | | $ | 44 |
|
| Trade names and trademarks | 106 |
| | (98 | ) | | 8 |
| | 106 |
| | (93 | ) | | 13 |
|
| Registered user base and other intangibles | 5 |
| | (5 | ) | | — |
| | 5 |
| | (5 | ) | | — |
|
| Carrier contracts and related | 85 |
| | (85 | ) | | — |
| | 85 |
| | (85 | ) | | — |
|
| Total | $ | 608 |
| | $ | (600 | ) | | $ | 8 |
| | $ | 608 |
| | $ | (551 | ) | | $ | 57 |
|
Amortization of intangibles for the fiscal years ended March 31, 2017, 20162020, 2019 and 20152018 are classified in the Consolidated StatementStatements of Operations as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | Year Ended March 31, | | | | |
| | 2020 | | 2019 | | 2018 |
| Cost of revenue | $ | 12 | | | $ | 4 | | | $ | 2 | |
| | | | | |
| Operating expenses | 22 | | | 23 | | | 9 | |
| Total | $ | 34 | | | $ | 27 | | | $ | 11 | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2017 | | 2016 | | 2015 |
| Cost of service and other | $ | 16 |
| | $ | 33 |
| | $ | 36 |
|
| Cost of product | 27 |
| | 14 |
| | 16 |
|
| Operating expenses | 6 |
| | 7 |
| | 14 |
|
| Total | $ | 49 |
| | $ | 54 |
| | $ | 66 |
|
During fiscal year 2017, we determined that the carrying value of one of our acquisition-related intangible assets was not recoverable. The acquisition-related intangible asset was measured using Level 3 inputs and was written down to a fair value of zero. We recognized an impairment charge of $15 million in cost of product revenue in our Consolidated Statements of Operations. There were no impairment charges for acquisition-related intangible assets during fiscal years 20162020, 2019 and 2015.2018.
Acquisition-related intangible assets are amortized using the straight-line method over the lesser of their estimated useful lives or the agreement terms, currently from 1 to 5 years. As of March 31, 20172020 and 2016,2019, the weighted-average remaining useful life for acquisition-related intangible assets was approximately 1.42.4 and 3.2 years, and 1.6 years, respectively.
As of March 31, 2017,2020, future amortization of finite-lived acquisition-related intangibles that will be recorded in the Consolidated StatementStatements of Operations is estimated as follows (in millions):
| | | | | |
| Fiscal Year Ending March 31, | |
| 2021 | | $ | 22 | |
| 2022 | | 22 | |
| 2023 | 9 | |
| 2024 and thereafter | — | |
| |
| |
| Total | $ | 53 | |
|
| | | |
| Fiscal Year Ending March 31, | |
| 2018 | 6 |
|
| 2019 | 2 |
|
| Total | $ | 8 |
|
(7)(8) ROYALTIES AND LICENSES
Our royalty expenses consist of payments to (1) content licensors, (2) independent software developers, and (3) co-publishing and distribution affiliates. License royalties consist of payments made to celebrities, professional sports organizations, movie studios and other organizations for our use of their trademarks, copyrights, personal publicity rights, content and/or other intellectual property. Royalty payments to independent software developers are payments for the development of intellectual property related to our games. Co-publishing and distribution royalties are payments made to third parties for the delivery of products.
Royalty-based obligations with content licensors and distribution affiliates are either paid in advance and capitalized as prepaid royalties or are accrued as incurred and subsequently paid. These royalty-based obligations are generally expensed to cost of revenue at the greater of the contractual rate or an effective royalty rate based on the total projected net revenue for contracts with guaranteed minimums. Prepayments made to thinly capitalized independent software developers and co-publishing affiliates are generally made in connection with the development of a particular product, and therefore, we are generally subject to development risk prior to the release of the product. Accordingly, payments that are due prior to completion of a product are generally expensed to research and development over the development period as the services are incurred. Payments due after completion of the product (primarily royalty-based in nature) are generally expensed as cost of revenue.
Our contracts with some licensors include minimum guaranteed royalty payments, which are initially recorded as an asset and as a liability at the contractual amount when no performance remains with the licensor. When performance remains with the licensor, we record guarantee payments as an asset when actually paid and as a liability when incurred, rather than recording the asset and liability upon execution of the contract.
Each quarter, we also evaluate the expected future realization of our royalty-based assets, as well as any unrecognized minimum commitments not yet paid to determine amounts we deem unlikely to be realized through product and service sales. Any impairments or losses determined before the launch of a product are generally charged to research and development expense. Impairments or losses determined post-launch are charged to cost of revenue. We evaluate long-lived royalty-based assets for impairment using undiscounted cash flows when impairment indicators exist. If impairment exists, then the assets are written down to fair value. Unrecognized minimum royalty-based commitments are accounted for as executory contracts, and therefore, any losses on these commitments are recognized when the underlying intellectual property is abandoned (i.e., cease use) or the contractual rights to use the intellectual property are terminated.
During fiscal year 2017, we determined that the carrying value of certain of our royalty-based assetsyears 2020, 2019 and certain previously unrecognized minimum royalty-based commitments were not recoverable. We recognized impairment charges of $23 million on the assets and a loss of $19 million on the commitments. Of the total $42 million loss, $10 million was included in cost of service revenue and $32 million was included in research and development expenses in our Consolidated Statements of Operations. During fiscal year 2016,2018 we did not recognize any material losses or impairment charges on royalty-based assets or royalty-based commitments. During fiscal year 2015, we recognized a loss of $122 million on a previously unrecognized licensed intellectual property commitment. The $122 million loss related to the termination of certain rights we previously had to use a licensor’s intellectual property. In addition, because the loss will be paid in installments through March 2022, our accrued loss was computed using the effective interest method. We currently estimate recognizing in future periods through March 2022, approximately $15 million for the accretion of interest expense related to this obligation. This interest expense will be included in cost of product revenue in our Consolidated Statement of Operations.
The current and long-term portions of prepaid royalties and minimum guaranteed royalty-related assets, included in other current assets and other assets, consisted of (in millions):
| | | | | | | | | | | |
| | As of March 31, | | |
| | 2020 | | 2019 |
| Other current assets | $ | 74 | | | $ | 53 | |
| Other assets | 25 | | | 30 | |
| Royalty-related assets | $ | 99 | | | $ | 83 | |
|
| | | | | | | |
| | As of March 31, |
| | 2017 | | 2016 |
| Other current assets | $ | 79 |
| | $ | 54 |
|
| Other assets | 39 |
| | 63 |
|
| Royalty-related assets | $ | 118 |
| | $ | 117 |
|
At any given time, depending on the timing of our payments to our co-publishing and/or distribution affiliates, content licensors, and/or independent software developers, we classify any recognized unpaid royalty amounts due to these parties as accrued liabilities. The current and long-term portions of accrued royalties, included in accrued and other current liabilities and other liabilities, consisted of (in millions):
| | | | | | | | | | | |
| | As of March 31, | | |
| | 2020 | | 2019 |
| Accrued royalties | $ | 171 | | | $ | 144 | |
| | | |
| Other liabilities | 26 | | | 51 | |
| Royalty-related liabilities | $ | 197 | | | $ | 195 | |
|
| | | | | | | |
| | As of March 31, |
| | 2017 | | 2016 |
| Accrued royalties | $ | 165 |
| | $ | 159 |
|
| Other liabilities | 97 |
| | 118 |
|
| Royalty-related liabilities | $ | 262 |
| | $ | 277 |
|
As of March 31, 2017,2020, we were committed to pay approximately $1,140$665 million to content licensors, independent software developers, and co-publishing and/or distribution affiliates, but performance remained with the counterparty (i.e.(i.e., delivery of the product or content or other factors) and such commitments were therefore not recorded in our Consolidated Financial Statements. See Note 1113 for further information on our developer and licensor commitments.
(8)
(9) BALANCE SHEET DETAILS
Property and Equipment, Net
Property and equipment, net, as of March 31, 20172020 and 20162019 consisted of (in millions):
| | | | | | | | | | | |
| | As of March 31, | | |
| | 2020 | | 2019 |
| Computer, equipment and software | $ | 722 | | | $ | 710 | |
| Buildings | 340 | | | 343 | |
| Leasehold improvements | 161 | | | 139 | |
| Equipment, furniture and fixtures, and other | 83 | | | 80 | |
| Land | 65 | | | 66 | |
| Construction in progress | 20 | | | 21 | |
| 1,391 | | | 1,359 | |
| Less: accumulated depreciation | (942) | | | (911) | |
| Property and equipment, net | $ | 449 | | | $ | 448 | |
|
| | | | | | | |
| | As of March 31, |
| | 2017 | | 2016 |
| Computer equipment and software | $ | 723 |
| | $ | 684 |
|
| Buildings | 316 |
| | 313 |
|
| Leasehold improvements | 126 |
| | 129 |
|
| Equipment, furniture and fixtures, and other | 82 |
| | 80 |
|
| Land | 61 |
| | 61 |
|
| Construction in progress | 7 |
| | 15 |
|
| | 1,315 |
| | 1,282 |
|
| Less: accumulated depreciation | (881 | ) | | (843 | ) |
| Property and equipment, net | $ | 434 |
| | $ | 439 |
|
Depreciation expense associated with property and equipment was $115$120 million, $119$121 million and $126$120 million for the fiscal years ended March 31, 2017, 20162020, 2019 and 2015,2018, respectively.
Accrued and Other Current Liabilities
Accrued and other current liabilities as of March 31, 20172020 and 20162019 consisted of (in millions):
| | | | | | | | | | | |
| | As of March 31, | | |
| | 2020 | | 2019 |
| Other accrued expenses | $ | 273 | | | $ | 290 | |
| Accrued compensation and benefits | 326 | | | 238 | |
| Accrued royalties | 171 | | | 144 | |
| Sales returns and price protection reserves | 109 | | | 150 | |
| Contingent consideration | — | | | 136 | |
| Deferred net revenue (other) | 104 | | | 94 | |
Operating lease liabilities (See Note 12) | 69 | | | — | |
| Accrued and other current liabilities | $ | 1,052 | | | $ | 1,052 | |
|
| | | | | | | |
| | As of March 31, |
| | 2017 | | 2016 |
| Accrued compensation and benefits | $ | 267 |
| | $ | 256 |
|
| Other accrued expenses | 210 |
| | 218 |
|
| Accrued royalties | 165 |
| | 159 |
|
| Deferred net revenue (other) | 147 |
| | 77 |
|
| Accrued and other current liabilities | $ | 789 |
| | $ | 710 |
|
Deferred net revenue (other) includes the deferral of subscription revenue, advertising revenue, licensing arrangements, and other revenue for which revenue recognition criteria has not been met.
Deferred Net Revenue (Online-Enabled Games)net revenue
Deferred net revenue (online-enabled games) was $1,539 million and $1,458 million as of March 31, 20172020 and 2016, respectively. Deferred net revenue (online-enabled games) generally includes2019, consisted of (in millions):
| | | | | | | | | | | | | | | |
| As of
March 31, 2020 | | As of
March 31, 2019 | | | | |
| Deferred net revenue (online-enabled games) | $ | 945 | | | $ | 1,100 | | | | | |
| Deferred net revenue (other) | 104 | | | 94 | | | | | |
| Deferred net revenue (noncurrent) | 8 | | | 23 | | | | | |
| Total Deferred net revenue | $ | 1,057 | | | $ | 1,217 | | | | | |
During the unrecognized revenue from bundled salesfiscal years ended March 31, 2020 and 2019, we recognized $1,178 million and $1,054 million of online-enabled games for which we do not have VSOE for the obligation to provide unspecified updates. We recognize revenue from the sale of online-enabled games for which we do not have VSOE for the unspecified updates on a straight-line basis, generally over an estimated nine-month period beginningrevenues, respectively, that were included in the month after shipmentdeferred revenue balance at the beginning of the period.
Remaining Performance Obligations
As of March 31, 2020, revenue allocated to remaining performance obligations consists of our deferred revenue balance of $1,057 million. These balances exclude any estimates for physical games sold through retail and an estimated six-month period for digitally-distributed games. However,future variable consideration as we expensehave elected the costoptional exemption to exclude sales-based royalty revenue. We expect to recognize substantially all of these balances as revenue related to these transactions generally duringover the period in which the product is delivered (rather than on a deferred basis).next 12 months.
(9)
(10) INCOME TAXES
The components of our income before provision for (benefit from) income taxes for the fiscal years ended March 31, 2017, 20162020, 2019 and 20152018 are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | Year Ended March 31, | | | | |
| | 2020 | | 2019 | | 2018 |
| Domestic | $ | 380 | | | $ | 170 | | | $ | 440 | |
| Foreign | 1,128 | | | 909 | | | 1,009 | |
| Income before provision for (benefit from) income taxes | $ | 1,508 | | | $ | 1,079 | | | $ | 1,449 | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2017 | | 2016 | | 2015 |
| Domestic | $ | 382 |
| | $ | 133 |
| | $ | 232 |
|
| Foreign | 828 |
| | 744 |
| | 693 |
|
| Income before provision for (benefit from) income taxes | $ | 1,210 |
| | $ | 877 |
| | $ | 925 |
|
Provision for (benefit from) income taxes for the fiscal years ended March 31, 2017, 20162020, 2019 and 20152018 consisted of (in millions):
| | | | | | | | | | | | | | | | | |
| | Current | | Deferred | | Total |
| Year Ended March 31, 2020 | | | | | |
| Federal | $ | 258 | | | $ | (14) | | | $ | 244 | |
| State | 39 | | | (2) | | | 37 | |
| Foreign | 48 | | | (1,860) | | | (1,812) | |
| $ | 345 | | | $ | (1,876) | | | $ | (1,531) | |
| Year Ended March 31, 2019 | | | | | |
| Federal | $ | 29 | | | $ | (18) | | | $ | 11 | |
| State | 5 | | | — | | | 5 | |
| Foreign | 42 | | | 2 | | | 44 | |
| $ | 76 | | | $ | (16) | | | $ | 60 | |
| Year Ended March 31, 2018 | | | | | |
| Federal | $ | 138 | | | $ | 197 | | | $ | 335 | |
| State | 4 | | | 9 | | | 13 | |
| Foreign | 61 | | | (3) | | | 58 | |
| $ | 203 | | | $ | 203 | | | $ | 406 | |
|
| | | | | | | | | | | |
| | Current | | Deferred | | Total |
| Year Ended March 31, 2017 | | | | | |
| Federal | $ | 86 |
| | $ | 96 |
| | $ | 182 |
|
| State | 3 |
| | 9 |
| | 12 |
|
| Foreign | 51 |
| | (2 | ) | | 49 |
|
| | $ | 140 |
| | $ | 103 |
| | $ | 243 |
|
| Year Ended March 31, 2016 | | | | | |
| Federal | $ | 69 |
| | $ | (376 | ) | | $ | (307 | ) |
| State | 5 |
| | (14 | ) | | (9 | ) |
| Foreign | 36 |
| | 1 |
| | 37 |
|
| | $ | 110 |
| | $ | (389 | ) | | $ | (279 | ) |
| Year Ended March 31, 2015 | | | | | |
| Federal | $ | 10 |
| | $ | 17 |
| | $ | 27 |
|
| State | — |
| | — |
| | — |
|
| Foreign | 21 |
| | 2 |
| | 23 |
|
| | $ | 31 |
| | $ | 19 |
| | $ | 50 |
|
Excess tax benefits from stock-based compensation deductions are allocated to contributed capital before historical net operating losses are utilized to reduce tax expense. The income tax provision includes tax benefits allocated directly to contributed capital of $65 million, $83 million and $22 million for fiscal years 2017, 2016, and 2015, respectively.
The differences between the statutory tax expense rate and our effective tax expense (benefit) rate, expressed as a percentage of income before provision for (benefit from) income taxes, for the fiscal years ended March 31, 2017, 20162020, 2019 and 20152018 were as follows:
| | | | | | | | | | | | | | | | | |
| | Year Ended March 31, | | | | |
| | 2020 | | 2019 | | 2018 |
| Statutory federal tax expense rate | 21.0 | % | | 21.0 | % | | 31.5 | % |
| State taxes, net of federal benefit | 1.0 | % | | 0.7 | % | | 0.8 | % |
| Differences between statutory rate and foreign effective tax rate | (8.4) | % | | (14.4) | % | | (19.1) | % |
| | | | | |
| Tax reform | — | % | | (0.4) | % | | 16.2 | % |
| Excess tax benefit | (0.1) | % | | (1.9) | % | | (3.0) | % |
| Research and development credits | (1.2) | % | | (2.4) | % | | (1.4) | % |
| | | | | |
| Swiss Deferred Tax Asset | (122.1) | % | | — | % | | — | % |
| | | | | |
| The Altera opinion | 5.4 | % | | — | % | | — | % |
| Non-deductible stock-based compensation | 2.3 | % | | 2.3 | % | | 2.7 | % |
| Other | 0.6 | % | | 0.7 | % | | 0.3 | % |
| Effective tax rate | (101.5) | % | | 5.6 | % | | 28.0 | % |
|
| | | | | | | | |
| | Year Ended March 31, |
| | 2017 | | 2016 | | 2015 |
| Statutory federal tax expense rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
| State taxes, net of federal benefit | 1.0 | % | | 0.5 | % | | 0.1 | % |
| Differences between statutory rate and foreign effective tax rate | (19.3 | )% | | (22.1 | )% | | (22.3 | )% |
| Valuation allowance | — | % | | (51.7 | )% | | (9.2 | )% |
| Research and development credits | (0.7 | )% | | (0.6 | )% | | (1.1 | )% |
| Unremitted earnings of foreign subsidiaries | 2.2 | % | | 4.9 | % | | — | % |
| Non-deductible stock-based compensation | 2.3 | % | | 3.1 | % | | 3.5 | % |
| Other | (0.4 | )% | | (0.9 | )% | | (0.6 | )% |
| Effective tax expense (benefit) rate | 20.1 | % | | (31.8 | )% | | 5.4 | % |
Our effective tax rate and resulting provision for income taxes for the fiscal year ended March 31, 2020 were significantly impacted by the Swiss Deferred Tax Asset. During the fiscal year ended March 31, 2020, we recognized total one-time tax benefits of $1.760 billion related to the $1.840 billion Swiss Deferred Tax Asset, partially offset by the $80 million one-time Altera opinion charge.
We generated income in lower tax jurisdictions primarily related to our European, Latin American, and Asia Pacific businesses that are headquartered in Switzerland.
PriorOur effective tax rate and resulting provision for income taxes for the fiscal year ended March 31, 2018 were significantly impacted by the U.S. Tax Cuts and Jobs Act (the “U.S. Tax Act”), enacted on December 22, 2017. The U.S. Tax Act significantly revised the U.S. corporate income tax system by, among other things, lowering U.S. corporate income tax rate to 21 percent, generally implementing a territorial tax system and imposing a one-time transition tax on the fourth quarterdeemed repatriation of fiscal 2016, we considered all undistributed earnings of our foreign subsidiaries to be indefinitely reinvested outside of the United States and, accordingly, no U.S. taxes had been provided thereon. During the fourth quarter of fiscal year 2016, we reevaluated our intent to indefinitely reinvest all earnings of(the “Transition Tax”).
Our foreign subsidiary companies, and concluded that a portion of earnings of certain subsidiaries will no longergenerally be consideredsubject 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. We currently intend to continue to indefinitely reinvest a substantial majority of the undistributed earnings of our foreign subsidiaries outside of the United States.
Undistributed earnings of our foreign subsidiaries that are considered to be indefinitely reinvested are $1,845 million asAs of March 31, 2017. As we currently have no plans to repatriate those earnings, no U.S. income taxes have been provided thereon. Upon distribution2020, approximately
$4.4 billion of those earningsour cash, cash equivalents, and short-term investments were domiciled in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries. As we do not know the time or manner injurisdictions, of which we would repatriate those funds, itapproximately $2.7 billion is not practicable to determine the impact of local taxes, withholding taxes and foreignavailable for immediate repatriation without a material tax credits associated with the future repatriation of such earnings and therefore we cannot quantify the tax liability.cost.
The components of net deferred tax assets, as of March 31, 20172020 and 20162019 consisted of (in millions):
| | | | | | | | | | | |
| | As of March 31, | | |
| | 2020 | | 2019 |
| Deferred tax assets: | | | |
| Accruals, reserves and other expenses | $ | 141 | | | $ | 101 | |
| Tax credit carryforwards | 137 | | | 140 | |
| Stock-based compensation | 37 | | | 33 | |
| | | |
| | | |
| Net operating loss and capital loss carryforwards | 195 | | | 22 | |
| Swiss intra-entity tax asset | 1,818 | | | — | |
| Total | 2,328 | | | 296 | |
| Valuation allowance | (288) | | | (162) | |
| Deferred tax assets, net of valuation allowance | 2,040 | | | 134 | |
| Deferred tax liabilities: | | | |
| Amortization and depreciation | (85) | | | (28) | |
| ASC 606 Revenue Recognition | (43) | | | (66) | |
| Other | (10) | | | (7) | |
| Total | (138) | | | (101) | |
| Deferred tax assets, net of valuation allowance and deferred tax liabilities | $ | 1,902 | | | $ | 33 | |
|
| | | | | | | |
| | As of March 31, |
| | 2017 | | 2016 |
| Deferred tax assets: | | | |
| Accruals, reserves and other expenses | $ | 151 |
| | $ | 171 |
|
| Tax credit carryforwards | 276 |
| | 334 |
|
| Stock-based compensation | 37 |
| | 39 |
|
| Net operating loss & capital loss carryforwards | 25 |
| | 28 |
|
| Total | 489 |
| | 572 |
|
| Valuation allowance | (114 | ) | | (114 | ) |
| Deferred tax assets, net of valuation allowance | 375 |
| | 458 |
|
| Deferred tax liabilities: | | | |
| Amortization and depreciation | (19 | ) | | (27 | ) |
| Unremitted earnings of foreign subsidiaries | (70 | ) | | (43 | ) |
| Prepaids and other liabilities | (1 | ) | | (3 | ) |
| Total | (90 | ) | | (73 | ) |
| Deferred tax assets, net of valuation allowance and deferred tax liabilities | $ | 285 |
| | $ | 385 |
|
In the fourth quarterAs of fiscal year 2016, we realized significant U.S. pre-tax income for both the fourth quarter and the fiscal year ended March 31, 2016. 2020, the ending Swiss intra-entity tax asset balance is $1.818 billion, which is net of a $393 million reduction due to the Altera opinion.
As of March 31, 2020, we maintained a result, we released thetotal valuation allowance against all of the U.S. federal deferred tax assets and a portion of the$288 million related to certain U.S. state deferred tax assets, during the fourth quarter of fiscal year 2016.
As of March 31, 2017, we maintained a valuation allowance of $114 million, primarily related to certain U.S. stateSwiss deferred tax assets, and foreign capital loss carryovers, due to uncertainty about the future realization of these assets. In determining the amount of deferred tax assets that are
Every 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. As of March 31, 2020, we have recognized a $131 million valuation allowance related to be realized, we evaluated the potential to realize theour Swiss deferred tax assets. Our Swiss deferred tax assets through the utilization of tax loss and credit carrybacks, the reversal of existing taxable temporary differences,realizability analysis relies upon future Swiss taxable income exclusiveas the primary source of taxable income but considers all available sources of Swiss income based on the reversalpositive 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 over the 20-year period over which the Swiss deferred tax assets will reverse, specifically related to assumptions about expected growth rates of existingfuture Swiss taxable temporary differences,income, which are based primarily on third party market and certain tax planning strategies.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. 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.
As of March 31, 2017,2020, we have state net operating loss carry forwards of approximately $871 million$1.5 billion of which approximately $99$5 million is attributable to various acquired companies. These carryforwards, if not fully realized, will begin to expire in 2018.2027. Switzerland has a seven-year carryforward period and does not permit the carry back of losses. We also have U.S. federal, California and Canada tax credit carryforwards of $362 million, $96$131 million and $7$5 million, respectively. The U.S. federal tax credit carryforwards will begin to expire in 2024. The California and Canada tax credit carryforwards can be carried forward indefinitely.
The total unrecognized tax benefits as of March 31, 2017, 20162020, 2019 and 20152018 were $389$983 million, $331$417 million and $254$457 million, respectively. A reconciliation of the beginning and ending balance of unrecognized tax benefits is summarized as follows (in millions):
|
| | | | |
Balance as of March 31, 20142017 | $ | 232389 |
|
| Increases in unrecognized tax benefits related to prior year tax positions | 910 |
|
| Decreases in unrecognized tax benefits related to prior year tax positions | (14(12) | ) |
| Increases in unrecognized tax benefits related to current year tax positions | 5075 |
|
| Decreases in unrecognized tax benefits related to settlements with taxing authorities | (6(7) | ) |
| Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations | (7(2) | ) |
| Changes in unrecognized tax benefits due to foreign currency translation | (104 | ) |
Balance as of March 31, 20152018 | 254457 |
|
| Increases in unrecognized tax benefits related to prior year tax positions | 33— |
|
| Decreases in unrecognized tax benefits related to prior year tax positions | (4(41) | ) |
| Increases in unrecognized tax benefits related to current year tax positions | 6343 |
|
| Decreases in unrecognized tax benefits related to settlements with taxing authorities | (10(16) | ) |
| Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations | (4(21) | ) |
| Changes in unrecognized tax benefits due to foreign currency translation | (1(5) | ) |
Balance as of March 31, 20162019 | 331417 |
|
| Increases in unrecognized tax benefits related to prior year tax positions | 3111 |
|
| Decreases in unrecognized tax benefits related to prior year tax positions | (3(4) | ) |
| Increases in unrecognized tax benefits related to current year tax positions | 64468 |
|
| Decreases in unrecognized tax benefits related to settlements with taxing authorities | — |
|
| Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations | (3(5) | ) |
| Changes in unrecognized tax benefits due to foreign currency translation | (3(4) | ) |
Balance as of March 31, 20172020 | $ | 389983 |
|
A portion of our unrecognized tax benefits will affect our effective tax rate if they are recognized upon favorable resolution of the uncertain tax positions.
As of March 31, 2017,2020, approximately $362$722 million of the unrecognized tax benefits would affect our effective tax rate, and approximately $27 milliona portion of which would result in adjustments to the deferred taxbe impacted by a valuation allowance.
Interest and penalties related to estimated obligations for tax positions taken in our tax returns are recognized in income tax expense in our Consolidated Statements of Operations. The combined amount of accrued interest and penalties related to tax positions taken on our tax returns and included in non-current other liabilities was approximately $14$34 million as of March 31, 20172020 and $15$17 million as of March 31, 2016.2019.
We file income tax returns in the United States, including various state and local jurisdictions. Our subsidiaries file tax returns in various foreign jurisdictions, including Sweden, Italy, Canada, France, Germany, Switzerland and the United Kingdom. The IRS is currently examining our returns for fiscal years 2009 through 2011, and weWe remain subject to income tax examination by the IRS for fiscal years after 2013.
We are also currently under income tax examination in2015. In addition, as of the United Kingdom for fiscal years 2010 through 2015, France for fiscal years 2014 through 2016, Spain for fiscal years 2014 through 2015, and India for fiscal years 2009 through 2012. Weperiod ended March 31, 2020, we remain subject to income tax examination for several other jurisdictions including in Sweden for fiscal years after 2013, Italy for fiscal years after 2015, Germany for fiscal years after 2012, France for fiscal years after 2016, the United Kingdom for fiscal years after 2015, and2017, Canada for fiscal years after 2012, and Switzerland for fiscal years after 2007.2010.
We are also currently under income tax examination in the United States for fiscal year 2017, Germany for fiscal years 2013 through 2016, Sweden for fiscal years 2016 through 2017, and Italy for fiscal year 2016.
We are subject to income tax examinations in various jurisdictions with respect to fiscal years after 2010. The timing of theand potential resolution of income tax examinations is highly uncertain. While we continue to measure our uncertain andtax positions, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. Although potential resolutionaccrued. A final determination of Altera is reasonably possible within the next 12 months. If the Altera opinion stands, it would result in a $541 million reduction of our gross unrecognized tax benefits; approximately $148 million of which relates to gross U.S. uncertain tax positions involve multiple tax periodsrecognized as of March 31, 2020 and jurisdictions, itapproximately $393 millionof which reduced the Swiss Deferred Tax Asset recognized as of March 31, 2020.
It is also reasonably possible that aan additional reduction of up to $50$25 million of unrecognized tax benefits may occur within the next 12 months, someunrelated to the Altera opinion, a portion of which depending on the nature of the settlement or expiration of statutes of limitations, may affect the Company’s income tax provision and therefore benefit the resultingwould impact our effective tax rate. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements.settlements and tax interpretations.
(10)
(11) FINANCING ARRANGEMENTS
0.75% Convertible Senior Notes Due 2016
In July 2011, we issued $632.5 million aggregate principal amount of 0.75% Convertible Senior Notes due 2016 (the “Convertible Notes”). The Convertible Notes matured on July 15, 2016. The Convertible Notes paid interest semiannually in arrears at a rate of 0.75% per annum. The Convertible Notes were convertible into cash and shares of our common stock based on an initial conversion value of 31.5075 shares of our common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $31.74 per share).
Upon conversion of the Convertible Notes, holders received cash up to the principal amount of each Convertible Note, and any excess conversion value was delivered in shares of our common stock. During fiscal year 2017, we repaid $163 million of the principal balance of the Convertible Notes and issued approximately 2.9 million shares of common stock to noteholders with a fair value of $222 million, resulting in a loss on extinguishment of $0.3 million.
The carrying and fair values of the Convertible Notes are as follows (in millions):
|
| | | | | | | |
| As of
March 31, 2017 | | As of
March 31, 2016 |
| Principal amount of Convertible Notes | $ | — |
| | $ | 163 |
|
| Unamortized debt discount of the liability component | — |
| | (2 | ) |
| Net carrying value of Convertible Notes | $ | — |
| | $ | 161 |
|
| | | | |
| Fair value of Convertible Notes (Level 2) | $ | — |
| | $ | 338 |
|
Convertible Note Hedge and Warrants Issuance
In July 2011, we entered into certain agreements designed to reduce the potential dilution with respect to our common stock upon conversion of the Convertible Notes (“the Convertible Note Hedge”). The Convertible Note Hedge provided us with the option to acquire, on a net settlement basis, approximately 19.9 million shares of our common stock, equal to the number of shares of our common stock that notionally underlie the Convertible Notes at a strike price of $31.74, which corresponds to the conversion price of the Convertible Notes. During fiscal year 2017, we received 2.9 million shares of our common stock under the Convertible Note Hedge, which offsets the 2.9 million shares of common stock we issued for the Convertible Notes noted above.
Separately, in July 2011 we also entered into privately negotiated warrant transactions with certain counterparties whereby we sold to independent third parties warrants (the “Warrants”) to acquire up to 19.9 million shares of our common stock (which is also equal to the number of shares of our common stock that notionally underlie the Convertible Notes), with a strike price of $41.14. The Warrants expired on January 12, 2017. We issued a total of 9.6 million shares upon exercise of the Warrants during fiscal year 2017.
Effect of conversion on earning per share (“EPS”)
Prior to conversion of the Convertible Notes, we included the effect of the additional potential dilutive shares if our common stock price exceeded $31.74 per share using the treasury stock method. If the average price of our common stock exceeds $41.14 per share for a quarterly period, we also included the effect of the additional potential dilutive shares related to the Warrants using the treasury stock method. Prior to conversion, the Convertible Note Hedge was not considered for purposes of the EPS calculation, as its effect would have been anti-dilutive. Upon conversion, the Convertible Note Hedge offset the dilutive effect of the Notes when the stock price was above $31.74 per share. See Note 15 for additional information related to our EPS.
Senior Notes
In February 2016, we issued $600 million aggregate principal amount of 3.70% Senior Notes due March 1, 2021 (the “2021 Notes”) and $400 million aggregate principal amount of 4.80% Senior Notes due March 1, 2026 (the “2026 Notes,” and together with the 2021 Notes, the “Senior Notes”). Our proceeds were $989 million, net of discount of $2 million and issuance costs of $9 million. Both the discount and issuance costs are being amortized to interest expense over the respective terms of the 2021 Notes and the 2026 Notes using the effective interest rate method. The effective interest rate is 3.94% for the 2021 Notes and 4.97% for the 2026 Notes. Interest is payable semiannually in arrears, on March 1 and September 1 of each year.
The carrying and fair values of the Senior Notes are as follows (in millions):
| | | | | | | | | | | |
| As of
March 31, 2020 | | As of
March 31, 2019 |
| Senior Notes: | | | |
| 3.70% Senior Notes due 2021 | $ | 600 | | | $ | 600 | |
| 4.80% Senior Notes due 2026 | 400 | | | 400 | |
| Total principal amount | $ | 1,000 | | | $ | 1,000 | |
| Unaccreted discount | (1) | | | (1) | |
| Unamortized debt issuance costs | (3) | | | (5) | |
| Net carrying value of Senior Notes | $ | 996 | | | $ | 994 | |
| | | |
| Fair value of Senior Notes (Level 2) | $ | 1,030 | | | $ | 1,039 | �� |
|
| | | | | | |
| As of
March 31, 2017 | As of
March 31, 2016 |
| Senior Notes: | | |
| 3.70% Senior Notes due 2021 | $ | 600 |
| $ | 600 |
|
| 4.80% Senior Notes due 2026 | 400 |
| 400 |
|
| Total principal amount | $ | 1,000 |
| $ | 1,000 |
|
| Unaccreted discount | (2 | ) | (2 | ) |
| Unamortized debt issuance costs | (8 | ) | (9 | ) |
| Net carrying value of Senior Notes | $ | 990 |
| $ | 989 |
|
| | | |
| Fair value of Senior Notes (Level 2) | $ | 1,054 |
| $ | 1,039 |
|
As of March 31, 2017,2020, the remaining life of the 2021 Notes and 2026 Notes is approximately 3.90.9 years and 8.95.9 years, respectively.
The Senior Notes are senior unsecured obligations and rank equally with all our other existing and future unsubordinated obligations and any indebtedness that we may incur from time to time under our Credit Facility.
The 2021 Notes and the 2026 Notes are redeemable at our option at any time prior to February 1, 2021 or December 1, 2025, respectively, subject to a make-whole premium. Within one and three months of maturity, we may redeem the 2021 Notes or the 2026 Notes, respectively, at a redemption price equal to 100% of the aggregate principal amount plus accrued and unpaid interest. In addition, upon the occurrence of a change of control repurchase event, the holders of the Senior Notes may require us to repurchase all or a portion of the Senior Notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. The Senior Notes also include covenants that limit our ability to incur liens on assets and to enter into sale and leaseback transactions, subject to certain allowances.
Credit Facility
In March 2015,On August 29, 2019, we entered into a $500 million senior unsecured revolving credit facility (“Credit Facility”) with a syndicate of banks. The Credit Facility terminates on March 19, 2020.August 29, 2024 unless the maturity is extended in accordance with its terms. The Credit Facility contains an option to arrange with existing lenders and/or new lenders to provide up to an aggregate of $250$500 million in additional commitments for revolving loans. Proceeds of loans made under the Credit Facility may be used for general corporate purposes.
The loans bear interest, at our option, at the base rate plus an applicable spread or an adjusted LIBOR rate plus an applicable spread, in each case with such spread being determined based on our consolidated leverage ratio for the preceding fiscal quarter.debt credit ratings. We are also obligated to pay other customary fees for a credit facility of this size and type. Interest is due and payable in arrears quarterly for loans bearing interest at the base rate and at the end of an interest period (or at each three month interval in the case of loans with interest periods greater than three months) in the case of loans bearing interest at the adjusted LIBOR rate. Principal, together with all accrued
and unpaid interest, is due and payable on March 19, 2020.at maturity. We may prepay the loans and terminate the commitments, in whole or in part, at any time without premium or penalty, subject to certain conditions.
The credit agreement contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, incur subsidiary indebtedness, grant liens, and dispose of all or substantially all assets, and pay dividends or make distributions, in each case subject to customary exceptions for a credit facility of this size and type. We are also required to maintain compliance with a capitalization ratio and maintain a minimum leveldebt to EBITDA ratio. As of total liquidity.March 31, 2020, we were in compliance with the debt to EBITDA ratio.
The credit agreement contains customary events of default, including among others, non-payment defaults, covenant defaults, cross-defaults to material indebtedness, bankruptcy and insolvency defaults, material judgment defaults and a change of control
default, in each case, subject to customary exceptions for a credit facility of this size and type. The occurrence of an event of default could result in the acceleration of the obligations under the credit facility, an obligation by any guarantors to repay the obligations in fullCredit Facility and an increase in the applicable interest rate.
As of March 31, 20172020 and 2016,2019, no amounts were outstanding under the Credit Facility. $2 million of debt issuance costs that were paid in connection with obtaining this credit facility are being amortized to interest expense over the 5-year term of the Credit Facility.
Interest Expense
The following table summarizes our interest expense recognized for fiscal years 2017, 2016,2020, 2019, and 20152018 that is included in interest and other income (expense), net on our Consolidated Statements of Operations (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, | | | | |
| 2020 | | 2019 | | 2018 |
| Amortization of debt discount | $ | — | | | $ | (1) | | | $ | — | |
| Amortization of debt issuance costs | (2) | | | (2) | | | (2) | |
| Coupon interest expense | (42) | | | (41) | | | (42) | |
| Other interest expense | — | | | (1) | | | — | |
| Total interest expense | $ | (44) | | | $ | (45) | | | $ | (44) | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2017 | | 2016 | | 2015 |
| Amortization of debt discount | (2 | ) | | (17 | ) | | (22 | ) |
| Amortization of debt issuance costs | (2 | ) | | (3 | ) | | (3 | ) |
| Coupon interest expense | (42 | ) | | (7 | ) | | (5 | ) |
| Other interest expense | (1 | ) | | (1 | ) | | (1 | ) |
| Total interest expense | $ | (47 | ) | | $ | (28 | ) | | $ | (31 | ) |
(12) LEASES
(11) COMMITMENTS AND CONTINGENCIESOur leases primarily consist of facility leases for our offices and development studios, data centers, and server equipment, with remaining lease terms up to 15 years. Our lease terms may include options to extend or terminate the lease. When it is reasonably certain that we will exercise that option, we include the renewals or reduced lease terms in our calculation of operating lease liabilities. All of our leases are classified as operating leases.
We determine if an arrangement is or contains a lease at contract inception. The contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In determining if a contract is or contains a lease, we apply judgment whether the contract provides the right to obtain substantially all of the economic benefits, the right to direct, or control the use of the identified asset throughout the period of use.
Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of future lease payments over the lease term. In determining the present value of the future lease payments, we use our incremental borrowing rate as none of our leases provide an implicit rate. Our incremental borrowing rate is an assumed rate based on our credit rating, credit history, current economic environment, and the lease term. Operating lease ROU assets are further adjusted for any payments made, incentives received, and initial direct costs incurred prior to the commencement date.
Operating lease ROU assets are amortized on a straight-line basis over the lease term and recognized as lease expense within cost of revenue or operating expenses on our Consolidated Statements of Operations. Operating lease liabilities decrease by lease payments we make over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
Some of our operating leases contain lease and non-lease components. Non-lease components primarily include fixed payments for common area maintenance and utilities. We elected to account for lease and non-lease components as a single lease component. Variable lease and non-lease components are recognized on our Consolidated Statements of Operations as incurred.
The components of lease expense are as follows (in millions):
| | | | | |
| Year Ended March 31, 2020 |
| Operating lease costs | $ | 70 | |
| Variable lease costs | 37 | |
| Short-term lease costs | 14 | |
| Total lease expense | $ | 121 | |
Supplemental cash and noncash information related to our operating leases are as follows (in millions):
| | | | | |
| Year Ended March 31, 2020 |
| Cash paid for amounts included in the measurement of lease liability | $ | 69 | |
| ROU assets obtained in exchange for new lease obligations | $ | 52 | |
Weighted average remaining lease term and discount rate are as follows:
| | | | | |
| At March 31, 2020 |
| Lease term | 4.5 years |
| Discount rate | 3.2 | % |
Operating lease ROU assets and liabilities recorded on our Consolidated Balance Sheets as of April 1, 2019 and March 31, 2020 are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Balance at April 1, 2019 | | Balance as of March 31, 2020 | | Balance Sheet Classification |
| Operating lease ROU assets | $ | 215 | | | $ | 193 | |
| Other assets |
| | | | |
|
| Operating lease liabilities | $ | 50 | | | $ | 69 | |
| Accrued and other current liabilities |
| Noncurrent operating lease liabilities | 197 | | | 155 | |
| Other liabilities |
| Total operating lease liabilities | $ | 247 | |
| $ | 224 | |
|
|
Future minimum lease payments under operating leases as of March 31, 2020 were as follows (in millions):
| | | | | | | | |
| Fiscal Years Ending March 31, |
| |
| 2021 |
| $ | 74 | |
| 2022 |
| 58 | |
| 2023 |
| 33 | |
| 2024 |
| 28 | |
| 2025 |
| 21 | |
| | |
| Thereafter |
| 28 | |
| Total future lease payments |
| 242 | |
| Less imputed interest |
| (18) | |
| Total operating lease liabilities |
| $ | 224 | |
Future minimum lease payments as of March 31, 2019, prior to our adoption of the New Lease CommitmentsStandard, were as follows (in millions):
| | | | | | | | |
| Fiscal Years Ending March 31, |
| |
| 2020 |
| $ | 52 | |
| 2021 |
| 54 | |
| 2022 |
| 44 | |
| 2023 |
| 36 | |
| 2024 |
| 28 | |
| Thereafter |
| 50 | |
| Total future lease payments |
| $ | 264 | |
As of March 31, 2017,2020, we leased certain facilities, furniturehave entered into two office leases that have not yet commenced with aggregate future lease payments of approximately $169 million. These office leases are expected to commence in fiscal year 2021 and equipment under non-cancelable operating2023, and will have lease agreements. We were required to pay property taxes, insuranceterms of 15 and normal maintenance costs for certain12 years, respectively.
Table of these facilities and any increases over the base year of these expenses on the remainder of our facilities.Contents
(13) COMMITMENTS AND CONTINGENCIES
Development, Celebrity, League and Content Licenses: Payments and Commitments
The products we produce in our studios are designed and created by our employee designers, artists, software programmers and by non-employee software developers (“independent artists” or “third-party developers”). We typically advance development funds to the independent artists and third-party developers during development of our games, usually in installment payments made upon the completion of specified development milestones. Contractually, these payments are generally considered advances against subsequent royalties on the sales of the products. These terms are set forth in written agreements entered into with the independent artists and third-party developers.
In addition, we have certain celebrity, league and content license contracts that contain minimum guarantee payments and marketing commitments that may not be dependent on any deliverables. Celebrities and organizations with whom we have contracts include, but are not limited to: FIFA (Fédération Internationale de Football Association), FIFPRO Foundation, FAPL (Football Association Premier League Limited), and DFL Deutsche Fußball Liga GmbHE.V. (German Soccer League) (professional soccer); Dr. Ing. h.c. F. Porsche AG, Ferrari S.p.A. (Need For Speed and Real Racing games)Liga Nacional De Futbol Profesional (professional soccer); National Basketball Association and National Basketball Players Association (professional basketball); PGA TOUR (professional golf); National Hockey League and NHL Players’ Association (professional hockey); National Football League Properties and PLAYERS Inc. (professional football); Zuffa,William Morris Endeavor Entertainment LLC (Ultimate Fighting Championship)(professional mixed martial arts); ESPN (content in EA SPORTS games); Disney Interactive (Star Wars); and Fox Digital Entertainment, Inc. (The Simpsons); Universal Studios Inc. (Pets); and Respawn.. These developer and content license commitments represent the sum of (1) the cash payments due under non-royalty-bearing licenses and services agreements and (2) the minimum guaranteed payments and advances against royalties due under royalty-bearing licenses and services agreements, the majority of which are conditional upon performance by the counterparty. These minimum guarantee payments and any related marketing commitments are included in the table below.
The following table summarizes our minimum contractual obligations as of March 31, 20172020 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ending March 31, | | | | | | | | | | | | |
| Total | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | |
| Unrecognized commitments | | | | | | | | | | | | | | | | |
| Developer/licensor commitments | | $ | 665 | | | $ | 178 | | | $ | 248 | | | $ | 90 | | | $ | 87 | | | $ | 58 | | | $ | 4 | | | |
| Marketing commitments | | 282 | | | 95 | | | 85 | | | 39 | | | 37 | | | 26 | | | — | | | |
| Senior Notes interest | 134 | | | 38 | | | 20 | | | 19 | | | 19 | | | 19 | | | 19 | | | |
| Operating lease imputed interest | 18 | | | 6 | | | 4 | | | 3 | | | 2 | | | 1 | | | 2 | | | |
| Operating leases not yet commenced | 169 | | | — | | | — | | | 8 | | | 12 | | | 12 | | | 137 | | | |
| Other purchase obligations | 105 | | | 46 | | | 45 | | | 10 | | | 2 | | | 2 | | | — | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total unrecognized commitments | 1,373 | | | 363 | | | 402 | | | 169 | | | 159 | | | 118 | | | 162 | | | |
| | | | | | | | | | | | | | | |
| Recognized commitments | | | | | | | | | | | | | | | |
| Senior Notes principal and interest | 1,003 | | | 603 | | | — | | | — | | | — | | | — | | | 400 | | | |
| Operating leases | 224 | | | 68 | | | 54 | | | 30 | | | 26 | | | 20 | | | 26 | | | |
| Transition Tax and other taxes | 66 | | | 22 | | | 24 | | | 3 | | | 4 | | | 4 | | | 9 | | | |
| Licensing commitments | 53 | | | 26 | | | 27 | | | — | | | — | | | — | | | — | | | |
| Total recognized commitments | 1,346 | | | 719 | | | 105 | | | 33 | | | 30 | | | 24 | | | 435 | | | |
| | | | | | | | | | | | | | | |
| Total Commitments | $ | 2,719 | | | $ | 1,082 | | | $ | 507 | | | $ | 202 | | | $ | 189 | | | $ | 142 | | | $ | 597 | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fiscal Year Ending March 31, |
| | Total | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter |
| Unrecognized commitments | | | | | | | | | | | | | |
| Developer/licensor commitments | $ | 1,140 |
| | $ | 208 |
| | $ | 271 |
| | $ | 226 |
| | $ | 175 |
| | $ | 179 |
| | $ | 81 |
|
| Marketing commitments | 445 |
| | 78 |
| | 83 |
| | 116 |
| | 72 |
| | 72 |
| | 24 |
|
| Operating leases | 212 |
| | 35 |
| | 34 |
| | 31 |
| | 29 |
| | 22 |
| | 61 |
|
| Senior Notes interest | 258 |
| | 38 |
| | 41 |
| | 41 |
| | 41 |
| | 19 |
| | 78 |
|
| Other purchase obligations | 95 |
| | 35 |
| | 19 |
| | 13 |
| | 7 |
| | 4 |
| | 17 |
|
| Total unrecognized commitments | 2,150 |
| | 394 |
| | 448 |
| | 427 |
| | 324 |
| | 296 |
| | 261 |
|
| | | | | | | | | | | | | | |
| Recognized commitments | | | | | | | | | | | | | |
| Senior Notes principal and interest | 1,003 |
| | 3 |
| | — |
| | — |
| | 600 |
| | — |
| | 400 |
|
| Licensing and lease obligations | 126 |
| | 23 |
| | 24 |
| | 25 |
| | 26 |
| | 28 |
| | — |
|
| Total recognized commitments | 1,129 |
| | 26 |
| | 24 |
| | 25 |
| | 626 |
| | 28 |
| | 400 |
|
| | | | | | | | | | | | | | |
| Total Commitments | $ | 3,279 |
| | $ | 420 |
| | $ | 472 |
| | $ | 452 |
| | $ | 950 |
| | $ | 324 |
| | $ | 661 |
|
The unrecognized amounts represented in the table above reflect our minimum cash obligations for the respective fiscal years, but do not necessarily represent the periods in which they will be recognized and expensed in our Consolidated Financial Statements.
In addition, the amounts in the table above are presented based on the dates the amounts are contractually due as of March 31, 2017;2020; however, certain payment obligations may be accelerated depending on the performance of our operating results. Furthermore, up to $32$20 million of the unrecognized amounts in the table above may be payable, at the licensor’s election, in shares of our common stock, subject to a $10 million maximum during any fiscal year. The number of shares to be issued will be based on their fair market value at the time of issuance.
In addition to what is included in the table above, as of March 31, 2017,2020, we had a liability for unrecognized tax benefits and an accrual for the payment of related interest totaling $104$352 million, of which we are unable to make a reasonably reliable estimate of when cash settlement with a taxing authority will occur.
Total rent expense for our operating leases was $91 million, $89 million and $97 million for the fiscal years ended March 31, 2017, 2016 and 2015, respectively.
Legal Proceedings
On July 29, 2010, Michael Davis, a former NFL running back, filed a putative class action in the United States District Court for the Northern District of California against the Company, alleging that certain past versions of Madden NFL included the images of certain retired NFL players without their permission. In March 2012, the trial court denied the Company’s request to dismiss the complaint on First Amendment grounds. In January 2015, that trial court decision was affirmed by the Ninth Circuit Court of Appeals and the case was remanded back to the United States District Court for the Northern District of California. On February 2, 2017, the United States District Court for the Northern District of California denied the plaintiffs’ motion for class certification.
We are also subject to claims and litigation arising in the ordinary course of business. We do not believe that any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on our Consolidated Financial Statements.
(12)
(14) PREFERRED STOCK
As of March 31, 20172020 and 2016,2019, we had 10,000,00010 million shares of preferred stock authorized but unissued. The rights, preferences, and restrictions of the preferred stock may be designated by our Board of Directors without further action by our stockholders.
(13)
(15) STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
Valuation Assumptions
We estimate the fair value of stock-based awards on the date of grant. We recognize compensation costscost for stock-based awards to employees based on the awards’ estimated grant-date fair value using a straight-line approach over the service period for which such awards are expected to vest. We account for forfeitures as they occur.
The determinationestimation of the fair value of market-based restricted stock units, stock options and ESPP purchase rights is affected by assumptions regarding subjective and complex variables. Generally, our assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes. We determineestimate the fair value of our stock-based awards as follows:
•Restricted Stock Unitsand Performance-Based Restricted Stock Units. The fair value of restricted stock units and performance-based restricted stock units (other than market-based restricted stock units) is determined based on the quoted market price of our common stock on the date of grant.
•Market-Based Restricted Stock Units. Market-based restricted stock units consist of grants of performance-based restricted stock units to certain members of executive management that vest contingent upon the achievement of pre-determined market and service conditions (referred to herein as “market-based restricted stock units”). The fair value of our market-based restricted stock units is determinedestimated using a Monte-Carlo simulation model. Key assumptions for the Monte-Carlo simulation model are the risk-free interest rate, expected volatility, expected dividends and correlation coefficient.
•Stock Options and Employee Stock Purchase Plan. The fair value of stock options and stock purchase rights granted pursuant to our equity incentive plans and our 2000 Employee Stock Purchase Plan, as amended (“ESPP”), respectively, is determinedestimated using the Black-Scholes valuation model based on the multiple-award valuation method. Key assumptions of the Black-Scholes valuation model are the risk-free interest rate, expected volatility, expected term and expected dividends. The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant for the expected term of the option. Expected volatility is based on a combination of historical stock price volatility and implied volatility of publicly-traded options on our common stock. ExpectedAn expected term is determinedestimated based on historical exercise behavior, post-vesting termination patterns, options outstanding and future expected exercise behavior.
There were an insignificant number of stock options granted during fiscal years 20172020, 2019, and 2016.2018.
The estimated assumptions used in the Black-Scholes valuation model to value our stock option grants and ESPP purchase rights were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | ESPP Purchase Rights | | | | |
| | | | | | | Year Ended March 31, | | | | |
| | | | | | | 2020 | | 2019 | | 2018 |
| Risk-free interest rate | | | | | | 1.5 - 1.9% | | | 2.2 - 2.5% | | | 1.1 - 2.0% | |
| Expected volatility | | | | | | 23 - 37% | | 29 - 33% | | 28 - 30% |
| Weighted-average volatility | | | | | | 26 | % | | 33 | % | | 29 | % |
| Expected term | | | | | | 6 - 12 months | | 6 - 12 months | | 6 - 12 months |
| Expected dividends | | | | | | None | | None | | None |
|
| | | | | | | | | | | | |
| | | Stock Option Grants | | ESPP Purchase Rights |
| | | Year Ended March 31, | | Year Ended March 31, |
| | | 2015 | | 2017 | | 2016 | | 2015 |
| Risk-free interest rate | | 1.1 - 1.9% |
| | 0.5 - 0.8% |
| | 0.3 - 0.6% |
| | 0.04 - 0.2% |
|
| Expected volatility | | 36 - 40% |
| | 25 - 32% |
| | 32 - 36% |
| | 30 - 35% |
|
| Weighted-average volatility | | 38 | % | | 27 | % | | 33 | % | | 34 | % |
| Expected term | | 4.5 years |
| | 6 - 12 months |
| | 6 - 12 months |
| | 6 - 12 months |
|
| Expected dividends | | None |
| | None |
| | None |
| | None |
|
The assumptions used in the Monte-Carlo simulation model to value our market-based restricted stock units were as follows:
| | | | | | | | | | | | | | | | | |
| | | | | |
| | Year Ended March 31, | | | | |
| 2020 | | 2019 | | 2018 |
| Risk-free interest rate | 1.6 - 1.8% | | | 2.6 | % | | 1.5 - 1.6% | |
| Expected volatility | 14 - 65% | | | 16 - 47% | | | 17 - 46% | |
| Weighted-average volatility | 29 | % | | 28 | % | | 28 | % |
| Expected dividends | None | | None | | | None | |
|
| | | | | | | | |
| | Year Ended March 31, |
| | 2017 | | 2016 | | 2015 |
| Risk-free interest rate | 0.8 | % | | 1.0 | % | | 0.9 | % |
| Expected volatility | 16 - 57% |
| | 14 - 53% |
| | 16 - 79% |
|
| Weighted-average volatility | 29 | % | | 26 | % | | 30 | % |
| Expected dividends | None |
| | None |
| | None |
|
Stock-Based Compensation Expense
Employee stock-based compensation expense recognized during the fiscal years ended March 31, 2017, 2016 and 2015 was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. Upon adoption of ASU 2016-09 in the first quarter of fiscal year 2018, forfeitures will be accounted for as they occur rather than estimated.
The following table summarizes stock-based compensation expense resulting from stock options, restricted stock units, market-based restricted stock units, and the ESPP purchase rights included in our Consolidated Statements of Operations (in millions): |
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2017 | | 2016 | | 2015 |
| Cost of revenue | | $ | 3 |
| | $ | 2 |
| | $ | 2 |
|
| Research and development | | 109 |
| | 103 |
| | 82 |
|
| Marketing and sales | | 31 |
| | 24 |
| | 21 |
|
| General and administrative | | 53 |
| | 49 |
| | 39 |
|
| Stock-based compensation expense | | $ | 196 |
| | $ | 178 |
| | $ | 144 |
|
During the fiscal years ended March 31, 2017 and 2016, we recognized $43 million and $38 million, respectively, of deferred income tax benefit related to our stock-based compensation expense. During the fiscal year ended March 31, 2015, we did not recognize any benefit from income taxes related to our stock-based compensation expense.
As of March 31, 2017, our total unrecognized compensation cost related to restricted stock units and market-based restricted stock units was $275 million and is expected to be recognized over a weighted-average service period of 1.5 years. Of the $275 million of unrecognized compensation cost, $35 million relates to market-based restricted stock units. As of March 31, 2017, our total unrecognized compensation cost related to stock options was $2 million and is expected to be recognized over a weighted-average service period of 0.4 years.
Summary of Plans and Plan Activity
Equity Incentive Plans
OurAt our Annual Meeting of Stockholders, held on August 8, 2019, our stockholders approved the 2019 Equity Incentive Plan (the “2019 Equity Plan”), which replaced our 2000 Equity Incentive Plan, as amended (the “Equity“2000 Equity Plan”). Our 2019 Equity Plan allows us to grant options to purchase our common stock and to grant restricted stock, restricted stock units and stock appreciation rights to our employees, officers, and directors.directors, up to a maximum of 13.5 million shares, plus any shares authorized for grant or subject to awards under the 2000 Equity Plan that are not delivered to participants for any reason. Pursuant to the 2019 Equity Plan, incentive stock options may be granted to employees and officers and non-qualified options may be granted to employees, officers, and directors, at not less than 100 percent of the fair market value on the date of grant.
At our Annual Meeting of Stockholders, held on July 28, 2016, our stockholders approved (a) an amendment to our Equity Plan to increase the number of shares of common stock authorized under the Equity Plan by 12.9 million shares, and (b) an amendment to the ESPP to increase the number of shares authorized under the ESPP by 3.0 million shares. Approximately 24.322.4 million options or 17.015.7 million restricted stock units were available for grant under our 2019 Equity Plan as of March 31, 2017.2020.
Stock Options
Options granted under the 2019 Equity Plan and the 2000 Equity Plan generally expire ten years from the date of grantgrant. All outstanding options are fully vested and generally vest according to one of the following schedules:exercisable.
35 month vesting with 1/3 vesting after 11, 23 and 35 months;
Three-year vesting with 1/3 vesting at the end of each year;
50 month vesting with 24% of the shares vesting after 12 months and 2% vesting monthly over the following 38 months.
The following table summarizes our stock option activity for the fiscal year ended March 31, 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options
(in thousands) | | Weighted-
Average
Exercise Prices | | Weighted-
Average
Remaining
Contractual
Term (in years) | | Aggregate
Intrinsic Value
(in millions) |
| Outstanding as of March 31, 2019 | | 1,375 | | | $ | 30.63 | | | | | |
| Granted | | 5 | | | 97.16 | | | | | |
| Exercised | | (306) | | | 30.96 | | | | | |
| Forfeited, cancelled or expired | | — | | | — | | | | | |
| Outstanding as of March 31, 2020 | | 1,074 | | | $ | 30.85 | | | 3.89 | | $ | 69 | |
| Vested and expected to vest | | 1,074 | | | $ | 30.85 | | | 3.89 | | $ | 69 | |
| Exercisable as of March 31, 2020 | | 1,074 | | | $ | 30.85 | | | 3.89 | | $ | 69 | |
|
| | | | | | | | | | | | | |
| | | Options (in thousands) | | Weighted- Average Exercise Prices | | Weighted- Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in millions) |
| Outstanding as of March 31, 2016 | | 3,278 |
| | $ | 35.09 |
| | | | |
| Granted | | 6 |
| | 74.93 |
| | | | |
| Exercised | | (876 | ) | | 40.04 |
| | | | |
| Forfeited, cancelled or expired | | (31 | ) | | 35.75 |
| | | | |
| Outstanding as of March 31, 2017 | | 2,377 |
| | $ | 33.35 |
| | 5.30 | | $ | 134 |
|
| Vested and expected to vest | | 2,358 |
| | $ | 33.38 |
| | 5.29 | | $ | 132 |
|
| Exercisable as of March 31, 2017 | | 1,903 |
| | $ | 33.61 |
| | 4.88 | | $ | 106 |
|
The aggregate intrinsic value represents the total pre-tax intrinsic value based on our closing stock price as of March 31, 2017,2020, which would have been received by the option holders had all the option holders exercised their options as of that date. The weighted-average grant date fair values
Table of stock options granted during fiscal year 2015 was $12.01. The Contents
total intrinsic values of stock options exercised during fiscal years 2017, 2016,2020, 2019, and 20152018 were $39$22 million, $38$24 million and $22$43 million, respectively. We issue new common stock from our authorized shares upon the exercise of stock options.
The following table summarizes outstanding and exercisable stock options as of March 31, 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding and Exercisable | | | | | | | | | | | | |
Range of
Exercise Prices | | Number
of Shares
(in thousands) | | Weighted-
Average
Remaining
Contractual
Term (in years) | | Weighted-
Average
Exercise
Prices | | Potential
Dilution | | | | | | |
| $11.53 - $22.42 | | 7 | | | 1.81 | | $ | 16.80 | | | — | % | | | | | | |
| 26.25 - 26.25 | | 550 | | | 3.59 | | 26.25 | | | 0.2 | % | | | | | | |
| 33.60 - 37.12 | | 517 | | | 4.23 | | 35.92 | | | 0.2 | % | | | | | | |
| $11.53 - $37.12 | | 1,074 | | | 3.89 | | $ | 30.85 | | | 0.4 | % | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable |
Range of Exercise Prices | | Number of Shares (in thousands) | | Weighted- Average Remaining Contractual Term (in years) | | Weighted- Average Exercise Prices | | Potential Dilution | | Number of Shares (in thousands) | | Weighted- Average Exercise Prices | | Potential Dilution |
| $11.53 - $23.61 | | 178 |
| | 2.48 | | $ | 19.40 |
| | 0.1 | % | | 178 |
| | $ | 19.40 |
| | 0.1 | % |
| 26.25 - 26.25 | | 950 |
| | 6.58 | | 26.25 |
| | 0.3 | % | | 770 |
| | 26.25 |
| | 0.2 | % |
| 33.60 - 35.70 | | 597 |
| | 7.22 | | 35.45 |
| | 0.2 | % | | 372 |
| | 35.30 |
| | 0.1 | % |
| 36.00 - 58.14 | | 652 |
| | 2.44 | | 45.59 |
| | 0.2 | % | | 583 |
| | 46.59 |
| | 0.2 | % |
| $11.53 - $58.14 | | 2,377 |
| | 5.30 | | $ | 33.35 |
| | 0.8 | % | | 1,903 |
| | $ | 33.61 |
| | 0.6 | % |
Potential dilution is computed by dividing the options in the related range of exercise prices by 308288 million shares of common stock, which were issued and outstanding as of March 31, 2017.2020.
Restricted Stock Units
We grant restricted stock units under our 2019 Equity Plan to employees worldwide. Restricted stock units are unfunded, unsecured rights to receive common stock upon the satisfaction of certain vesting criteria. Upon vesting, a number of shares of common stock equivalent to the number of restricted stock units is typically issued net of required tax withholding requirements, if any. Restricted stock units are subject to forfeiture and transfer restrictions. Vesting for restricted stock units is based on the holders’ continued employment with us through each applicable vest date. If the vesting conditions are not met, unvested restricted stock units will be forfeited.
Generally, our Our restricted stock units generally vest accordingover 35 months to one of the following vesting schedules:four years.
One-year vesting with 100% cliff vesting at the end of one year;
35 month vesting with 1/3 vesting after 11, 23 and 35 months;
Three-year vesting with 1/3 vesting at the end of each year;
Three-year vesting with 2/3 and 1/3 vesting after 24 and 36 months;
Three-year vesting with 1/4, 7/20, 1/5, and 1/5 of the shares vesting respectively at the end of each of the first 6 months, 1st, 2nd, and 3rd years;
40 month vesting with 1/3 vesting after 16, 28, and 40 months;
41 month vesting with 1/3 vesting after 17, 29 and 41 months;
Four-year vesting with 1/4 vesting at the end of each year or;
42 month vesting with 2/5, 7/20, 1/5, 1/20 of shares vesting respectively after 6, 18, 30, 42 months.
Each restricted stock unit granted reduces the number of shares available for grant by 1.43 shares under our 2019 Equity Plan. The following table summarizes our restricted stock units activity, excluding performance-based and market-based restricted stock unit activity which is discussed below, for the fiscal year ended March 31, 2017:2020:
| | | | | | | | | | | | | | | | |
| | Restricted
Stock Units
(in thousands) | | Weighted-
Average Grant
Date Fair Values | | |
| Outstanding as of March 31, 2019 | | 4,960 | | | $ | 111.03 | | | |
| Granted | | 4,297 | | | 93.52 | | | |
| Vested | | (2,445) | | | 108.42 | | | |
| Forfeited or cancelled | | (595) | | | 106.22 | | | |
| Outstanding as of March 31, 2020 | | 6,217 | | | $ | 100.42 | | | |
|
| | | | | | | |
| | | Restricted Stock Units (in thousands) | | Weighted- Average Grant Date Fair Values |
| Balance as of March 31, 2016 | | 7,157 |
| | $ | 44.04 |
|
| Granted | | 2,734 |
| | 76.60 |
|
| Vested | | (4,126 | ) | | 37.28 |
|
| Forfeited or cancelled | | (612 | ) | | 58.34 |
|
| Balance as of March 31, 2017 | | 5,153 |
| | $ | 65.03 |
|
The grant date fair value of restricted stock units is based on the quoted market price of our common stock on the date of grant. The weighted-average grant date fair values of restricted stock units granted during fiscal years 2017, 2016,2020, 2019, and 20152018 were $76.60, $64.40$93.52, $128.76 and $37.22$110.05 respectively. The fair values of restricted stock units that vested during fiscal years 2017, 2016,2020, 2019, and 20152018 were $320$240 million,, $372 $300 million and $209$289 million, respectively.
Performance-Based Restricted Stock Units
Our performance-based restricted stock units cliff vest after a four-year performance period contingent upon the achievement of pre-determined performance-based milestones based on our non-GAAP net revenue and free cash flow as well as service conditions. If these performance-based milestones are not met but service conditions are met, the performance-based restricted stock units will not vest, in which case any compensation expense we have recognized to date will be reversed. Each quarter, we update our assessment of the probability that the non-GAAP net revenue and free cash flow performance milestones will be achieved. We amortize the fair values of performance-based restricted stock units over the requisite service period. The performance-based restricted stock units contain threshold, target and maximum milestones for each of non-GAAP net revenue and free cash flow. The number of shares of common stock to be issued at vesting will range from 0 to 200 percent of the target number of performance-based restricted stock units attributable to each performance-based milestone based on the company’s performance as compared to these threshold, target and maximum performance-based milestones. Each performance-based milestone is weighted evenly where 50 percent of the total performance-based restricted stock units that vest
will be determined based on non-GAAP net revenue and the other 50 percent will be determined based on free cash flow. The number of shares that vest based on each performance-based milestone is independent from the other.
The following table summarizes our performance-based restricted stock unit activity, presented with the maximum number of shares that could potentially vest, for the fiscal year ended March 31, 2020:
| | | | | | | | | | | | | |
| Performance-
Based Restricted
Stock Units
(in thousands) | | Weighted-
Average Grant
Date Fair Value | | |
| Outstanding as of March 31, 2019 | 579 | | | $ | 110.51 | | | |
| Granted | — | | | — | | | |
| Forfeited or cancelled | — | | | — | | | |
| Outstanding as of March 31, 2020 | 579 | | | $ | 110.51 | | | |
Market-Based Restricted Stock Units
Our market-based restricted stock units vest contingent upon the achievement of pre-determined market and service conditions. If these market conditions are not met but service conditions are met, the market-based restricted stock units will not vest; however, any compensation expense we have recognized to date will not be reversed. The number of shares of common stock to be issued at vesting will range from zero percent0 to 200 percent of the target number of market-based restricted stock units based on our total stockholder return (“TSR”) relative to the performance of companies in the NASDAQ-100 Index for each measurement period, generally over either a one-year, two-year cumulative, and three-year cumulative period or a two-year and four-year cumulative period. In the table below, we present shares granted at 100 percent of target of the number of market-based restricted stock units that may potentially vest. The maximum number of shares of common stock issuable upon the vesting of all market-based restricted stock units granted during fiscal year 2017 is approximately 0.7 million. As of March 31, 2017, the maximum number of shares issuable upon the vesting of all market-based restricted stock units outstanding is approximately 1.3 million.
The following table summarizes our market-based restricted stock unit activity, presented with the maximum number of shares that could potentially vest, for the year ended March 31, 20172020:
| | | | | | | | Market-Based
Restricted Stock
Units
(in thousands) | | Weighted-
Average Grant
Date Fair Value | |
| | | Market-Based Restricted Stock Units (in thousands) | | Weighted- Average Grant Date Fair Value | |
| Balance as of March 31, 2016 | | 636 |
| | $ | 64.49 |
| |
| Outstanding as of March 31, 2019 | | Outstanding as of March 31, 2019 | | 958 | | | $ | 155.64 | | |
| Granted | | 353 |
| | 98.04 |
| Granted | | 1,313 | | | 109.04 | | |
| Vested | | (558 | ) | | 50.08 |
| Vested | | (93) | | | 109.05 | | |
| Vested above target | | 238 |
| | 44.99 |
| |
| | Forfeited or cancelled | | (28 | ) | | 84.94 |
| Forfeited or cancelled | | (280) | | | 137.08 | | |
| Balance as of March 31, 2017 | | 641 |
| | $ | 87.37 |
| |
| Outstanding as of March 31, 2020 | | Outstanding as of March 31, 2020 | | 1,898 | | | $ | 128.41 | | |
The weighted-average grant date fair values of market-based restricted stock units granted during fiscal years 2017, 2016,2020, 2019, and 20152018 were $98.04, $79.81,$109.04, $185.24, and $48.14,$140.93, respectively. The fair values of market-based restricted stock units that vested during fiscal years 2017, 2016,2020, 2019, and 20152018 were $42$9 million, $47$54 million, and $23$48 million, respectively.
ESPP
Pursuant to our ESPP, eligible employees may authorize payroll deductions of between 2 percent and 10 percent of their compensation to purchase shares of common stock at 85 percent of the lower of the market price of our common stock on the date of commencement of the applicable offering period or on the last day of each six-month purchase period.
The following table summarizes our ESPP activity for fiscal years ended March 31, 2017, 20162020, 2019 and 2015:2018:
|
| | | | | | | | | |
| | | Shares Issued
(in millions) | | Exercise Prices for Purchase Rights | | Weighted-Average Fair Values of Purchase Rights |
| Fiscal Year 2015 | | 1.4 |
| | $22.64 - $32.16 | | $ | 8.26 |
|
| Fiscal Year 2016 | | 0.9 |
| | $32.16 - $54.78 | | $ | 12.97 |
|
| Fiscal Year 2017 | | 0.7 |
| | $54.60 - $67.56 | | $ | 17.93 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Shares Issued
(in millions) | | Exercise Prices for Purchase Rights | | Weighted-Average Fair Values of Purchase Rights |
| Fiscal Year 2018 | | 0.6 | | | $67.56 - $99.82 | | | $ | 21.57 | |
| Fiscal Year 2019 | | 0.5 | | | $89.46 - $107.51 | | | $ | 31.88 | |
| Fiscal Year 2020 | | 0.7 | | | $74.70 - $74.89 | | | $ | 29.05 | |
The fair values were estimated on the date of grant using the Black-Scholes valuation model. We issue new common stock out of the ESPP’s pool of authorized shares. As of March 31, 2017, 7.42020, 5.6 million shares were available for grant under our ESPP.
Stock-Based Compensation Expense
The following table summarizes stock-based compensation expense resulting from stock options, restricted stock units, market-based restricted stock units, performance-based restricted stock units, and the ESPP purchase rights included in our Consolidated Statements of Operations (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended March 31, | | | | |
| | | 2020 | | 2019 | | 2018 |
| Cost of revenue | | $ | 4 | | | $ | 4 | | | $ | 3 | |
| Research and development | | 229 | | | 184 | | | 146 | |
| Marketing and sales | | 37 | | | 33 | | | 32 | |
| General and administrative | | 77 | | | 63 | | | 61 | |
| Stock-based compensation expense | | $ | 347 | | | $ | 284 | | | $ | 242 | |
During the fiscal years ended March 31, 2020, 2019 and 2018, we recognized $43 million, $40 million and $29 million, respectively, of deferred income tax benefit related to our stock-based compensation expense.
As of March 31, 2020, our total unrecognized compensation cost related to restricted stock units, market-based restricted stock units, and performance-based restricted stock units was $534 million and is expected to be recognized over a weighted-average service period of 1.8 years. Of the $534 million of unrecognized compensation cost, $452 million relates to restricted stock units, $75 million relates to market-based restricted stock units, and $7 million relates to performance-based restricted stock units at a 68 percent average payout. As of March 31, 2020, there were no unrecognized compensation cost related to stock options as they were fully vested.
Deferred Compensation Plan
We have a Deferred Compensation Plan (“DCP”) for the benefit of a select group of management or highly compensated employees and directors, which is unfunded and intended to be a plan that is not qualified within the meaning of section 401(a) of the Internal Revenue Code. The DCP permits the deferral of the annual base salary and/or director cash compensation up to a maximum amount. The deferrals are held in a separate trust, which has been established by us to administer the DCP. The trust is a grantor trust and the specific terms of the trust agreement provide that the assets of the trust are available to satisfy the claims of general creditors in the event of our insolvency. The assets held by the trust are classified as trading securities and are held at fair value on our Consolidated Balance Sheets. The assets and liabilities of the DCP are presented in other assets and other liabilities on our Consolidated Balance Sheets, respectively, with changes in the fair value of the assets and in the deferred compensation liability recognized as compensation expense. The estimated fair value of the assets was $8$13 million and $8$11 million as of March 31, 20172020 and 2016,2019, respectively. As of March 31, 20172020 and 2016, $92019, $14 million and $9$12 million were recorded, respectively, to recognize undistributed deferred compensation due to employees.
401(k) Plan, Registered Retirement Savings Plan and ITP Plan
We have a 401(k) plan covering substantially all of our U.S. employees, a Registered Retirement Savings Plan covering substantially all of our Canadian employees, and an ITP pension plan covering substantially all our Swedish employees. These plans may permit us to make discretionary contributions to employees’ accounts based on our financial performance. We contributed an aggregate of $28$29 million,, $27 $43 million and $27$31 million to these plans in fiscal years 2017, 2016,2020, 2019, and 2015,2018, respectively.
Stock Repurchase Program
In May 2014,2015, our Board of Directors authorized a two-year program to repurchase up to $1 billion of our common stock. We repurchased approximately 0.3 million for approximately $31 million under this program during the fiscal year ended March 31, 2018. In May 2017, a Special Committee of our Board of Directors, on behalf of the full Board of Directors, authorized a two-year program to repurchase up to $750 million of our common stock. Since inception, we have repurchased approximately 9.2 million shares for approximately $394 million under this program. This program was superseded and replaced by a new stock repurchase program approved in May 2015.
In May 2015, our Board of Directors authorized a program to repurchase up to $1$1.2 billion of our common stock. We repurchased approximately 6.50.6 million and 6.95.0 million shares for approximately $508$76 million and $461$570 million under this program, respectively, during the fiscal years ended March 31, 20172019 and 2016. As of March 31, 2017, $31 million remained available for repurchase under this program. We completed repurchases under the May 2015 program in April 2017.
In February 2016, our Board of Directors authorized a $500 million stock repurchase program. This program was incremental to the two-year $1 billion stock repurchase program announced in May 2015. We repurchased approximately 7.8 million shares for approximately $500 million under this program. We completed repurchases under the February 2016 program during the quarter ended March 31, 2016.
2018. In May 2017,2018, a Special Committee of our Board of Directors, on behalf of the full Board of Directors, authorized a new program to repurchase up to $1.2$2.4 billion of our common stock. This stock repurchaseWe repurchased approximately 12.3 million and 10.4 million shares for approximately $1,207 million and $1,116 million under this program, expiresrespectively, during the fiscal years ended March 31, 2020 and 2019. The May 2018 program was scheduled to expire on May 31, 2019. Under this2020, however we completed repurchases under the May 2018 program we may purchase stock in the open market or through privately-negotiated transactions in accordance with applicable securities laws, including pursuant to pre-arranged stock trading plans. The timing and actual amount of the stock repurchases will depend on several factors including price, capital availability, regulatory requirements, alternative investment opportunities and other market conditions. We are not obligated to repurchase a specific number of shares under this program and it may be modified, suspended or discontinued at any time. We are actively repurchasing shares under this program.April 2020.
The following table summarizes total shares repurchased during fiscal years 2017, 2016,2020, 2019, and 2015:2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | May 2014 Program | | May 2015 Program | | February 2016 Program | | Total |
| (In millions) | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount |
| Fiscal Year 2015 | 8.2 |
| | $ | 337 |
| | — |
| | $ | — |
| | — |
| | $ | — |
| | 8.2 |
| | $ | 337 |
|
| Fiscal Year 2016 | 1.0 |
| | $ | 57 |
| | 6.9 |
| | $ | 461 |
| | 7.8 |
| | $ | 500 |
| | 15.7 |
| | $ | 1,018 |
|
| Fiscal Year 2017 | — |
| | $ | — |
| | 6.5 |
| | $ | 508 |
| | — |
| | $ | — |
| | 6.5 |
| | $ | 508 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | May 2015 Program | | | | | | | | May 2017 Program | | | | May 2018 Program | | | | Total | | |
| (In millions) | | | | | Shares | | Amount | | | | | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year 2018 | | | | | 0.3 | | | $ | 31 | | | | | | | 5.0 | | | $ | 570 | | | — | | | $ | — | | | 5.3 | | | $ | 601 | |
| Fiscal Year 2019 | | | | | — | | | $ | — | | | | | | | 0.6 | | | $ | 76 | | | 10.4 | | | $ | 1,116 | | | 11.0 | | | $ | 1,192 | |
| Fiscal Year 2020 | | | | | — | | | $ | — | | | | | | | — | | | $ | — | | | 12.3 | | | $ | 1,207 | | | 12.3 | | | $ | 1,207 | |
(14)
(16) INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net, for the fiscal years ended March 31, 2017, 20162020, 2019 and 20152018 consisted of (in millions):
| | | | | | | | | | | | | | | | | |
| | Year Ended March 31, | | | | |
| | 2020 | | 2019 | | 2018 |
| | | | | |
| Interest expense | (44) | | | (45) | | | (44) | |
| Interest income | 100 | | | 88 | | | 50 | |
| Net gain (loss) on foreign currency transactions | 11 | | | (9) | | | 18 | |
| Net gain (loss) on foreign currency forward contracts | (4) | | | 50 | | | (16) | |
| Other income (expense), net | — | | | (1) | | | 7 | |
| Interest and other income (expense), net | $ | 63 | | | $ | 83 | | | $ | 15 | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2017 | | 2016 | | 2015 |
| Loss on conversion of Convertible Notes | $ | — |
| | $ | (10 | ) | | $ | — |
|
| Interest expense | (47 | ) | | (28 | ) | | (31 | ) |
| Interest income | 25 |
| | 15 |
| | 10 |
|
| Net gain (loss) on foreign currency transactions | (40 | ) | | (14 | ) | | (62 | ) |
| Net gain (loss) on foreign currency forward contracts | 46 |
| | 15 |
| | 59 |
|
| Other income, net | 2 |
| | 1 |
| | 1 |
|
| Interest and other income (expense), net | $ | (14 | ) | | $ | (21 | ) | | $ | (23 | ) |
(15)(17) EARNINGS PER SHARE
The following table summarizes the computations of basic earnings per share (“Basic EPS”) and diluted earnings per share (“Diluted EPS”). Basic EPS is computed as net income divided by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation plans including stock options, restricted stock, restricted stock units and ESPP purchase rights warrants, and other convertible securities using the treasury stock method.
| | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, | | | | | |
| (In millions, except per share amounts) | 2020 | | 2019 | | 2018 | |
| Net income | $ | 3,039 | | | $ | 1,019 | | | $ | 1,043 | | |
| Shares used to compute earnings per share: | | | | | | |
| Weighted-average common stock outstanding — basic | 293 | | | 303 | | | 308 | | |
| Dilutive potential common shares related to stock award plans and from assumed exercise of stock options | 2 | | | 3 | | | 4 | | |
| | | | | | |
| | | | | | |
| Weighted-average common stock outstanding — diluted | 295 | | | 306 | | | 312 | | |
| Earnings per share: | | | | | | |
| Basic | $ | 10.37 | | | $ | 3.36 | | | $ | 3.39 | | |
| Diluted | $ | 10.30 | | | $ | 3.33 | | | $ | 3.34 | | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| (In millions, except per share amounts) | 2017 | | 2016 | | 2015 |
| Net income | $ | 967 |
| | $ | 1,156 |
| | $ | 875 |
|
| Shares used to compute earnings per share: | | | | | |
| Weighted-average common stock outstanding — basic | 303 |
| | 310 |
| | 311 |
|
| Dilutive potential common shares related to stock award plans and from assumed exercise of stock options | 4 |
| | 6 |
| | 9 |
|
| Dilutive potential common shares related to the Convertible Notes | 1 |
| | 6 |
| | 4 |
|
| Dilutive potential common shares related to the Warrants | 6 |
| | 8 |
| | 1 |
|
| Weighted-average common stock outstanding — diluted | 314 |
| | 330 |
| | 325 |
|
| Earnings per share: | | | | | |
| Basic | $ | 3.19 |
| | $ | 3.73 |
| | $ | 2.81 |
|
| Diluted | $ | 3.08 |
| | $ | 3.50 |
| | $ | 2.69 |
|
For the fiscal years ended March 31, 20172020 and 2016,2019, 2 million restricted stock units and market-based restricted stock units were excluded from the treasury stock method computation of diluted shares as their inclusion would have had an antidilutive effect. For the fiscal year ended March 31, 2018, an immaterial amount of options to purchase, restricted stock units and market-based restricted stock to be releasedunits were excluded from the treasury stock method computation of diluted shares as their inclusion would have had an antidilutive effect.
For the fiscal year ended March 31, 2015, stock options to purchase,Our performance-based restricted stock units, and restricted stock to be released in the amount of 3 millionwhich are considered contingently issuable shares, wereare also excluded from the treasury stock method computation because the related performance-based milestones were not achieved as of diluted shares as their inclusion would have had an antidilutive effect.the end of the fiscal years ended March 31, 2020, 2019 and 2018.
(18) SEGMENT AND REVENUE INFORMATION
Our reporting segment is based upon: our internal organizational structure; the manner in which our operations are managed; the criteria used by our Chief Executive Officer, our Chief Operating Decision Maker (“CODM”), to evaluate segment performance; the availability of separate financial information; and overall materiality considerations. Our CODM currently reviews total company operating results to assess overall performance and allocate resources. As of March 31, 2017,2020, we have only one reportable segment, which represents our only operating segment.
Information about our total net revenue by timing of recognition for the fiscal years ended March 31, 2020 and 2019 is presented below (in millions):
| | | | | | | | | | | |
| Year Ended March 31, | | |
| 2020 | | 2019 |
| Net revenue by timing of recognition | | | |
| Revenue recognized at a point in time | $ | 2,043 | | | $ | 1,902 | |
| Revenue recognized over time | 3,494 | | | 3,048 | |
| Net revenue | $ | 5,537 | | | $ | 4,950 | |
Generally, performance obligations that are recognized upfront upon transfer of control are classified as revenue recognized at a point in time, while performance obligations that are recognized over the Estimated Offering Period or subscription period as the services are provided are classified as revenue recognized over time.
Revenue recognized at a point in time includes revenue allocated to the software license performance obligation. This also includes revenue from the licensing of software to third-parties.
Revenue recognized over time includes service revenue allocated to the future update rights and the online hosting performance obligations. This also includes service revenue allocated to the future update rights from the licensing of software to third-parties, software that offers an online-only service such as our Ultimate Team game mode, and subscription services.
Information about our total net revenue by composition and by platform for the fiscal years ended March 31, 2017, 20162020, 2019 and 20152018 is presented below (in millions):
| | | | | | | | | | | | | | | | | |
| | Year Ended March 31, | | | | |
| | 2020 | | 2019 | | 2018 |
| Net revenue by composition | | | | | |
| Full game downloads | $ | 809 | | | $ | 680 | | | $ | 707 | |
| Live services | 2,813 | | | 2,216 | | | 2,083 | |
| Mobile | 692 | | | 814 | | | 660 | |
| Total Digital | 4,314 | | | 3,710 | | | 3,450 | |
| | | | | |
| Packaged goods and other | 1,223 | | | 1,240 | | | 1,700 | |
| Net revenue | $ | 5,537 | | | $ | 4,950 | | | $ | 5,150 | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2017 | | 2016 | | 2015 |
| Digital | $ | 2,874 |
| | $ | 2,409 |
| | $ | 2,199 |
|
| Packaged goods and other | 1,971 |
| | 1,987 |
| | 2,316 |
|
| Net revenue | $ | 4,845 |
| | $ | 4,396 |
| | $ | 4,515 |
|
Digital net revenue includes full game downloads, live services, and mobile revenue. Full game downloads includes revenue from digital sales of full games on console and PC. Live services includes revenue from sales of extra content for console, PC, browser games, game software licensed to our third-party publishing partners who distribute our games digitally, subscriptions, and advertising. Mobile includes revenue from the sale of full games and extra content on mobile phones and tablets.
Packaged goods net revenue includes sales ofrevenue from software that is distributedsold physically. This includes (1) sales of our internally-developed and co-publishednet revenue from game software distributedsold physically through traditional channels such as brick and mortar retailers, and (2) our software licensing revenue from third parties (for example, makers of console platforms, personal computers or computer accessories) who include certain of our products for sale with their products (“(for example, OEM bundles”), and (3) sales through our Switzerland distribution business.bundles). Other revenue includes our non-software licensing revenue.
Digital revenue includes full-game downloads, extra content, subscriptions, advertising and other, and mobile revenue. Digital revenue includes internally-developed and co-published game software distributed through our direct-to-consumer platform Origin, distributed wirelessly through mobile carriers, or licensed to our third-party publishing partners who distribute our games digitally.
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2017 | | 2016 | | 2015 |
| Platform net revenue | | | | | |
| Xbox One, PlayStation 4 | $ | 3,056 |
| | $ | 2,183 |
| | $ | 1,505 |
|
| Xbox 360, PlayStation 3 | 331 |
| | 752 |
| | 1,485 |
|
| Other consoles | 3 |
| | 7 |
| | 21 |
|
| Total consoles | 3,390 |
| | 2,942 |
| | 3,011 |
|
| PC / Browser | 773 |
| | 814 |
| | 878 |
|
| Mobile | 627 |
| | 548 |
| | 504 |
|
| Other | 55 |
| | 92 |
| | 122 |
|
| Net revenue | $ | 4,845 |
| | $ | 4,396 |
| | $ | 4,515 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, | | | | |
| | 2020 | | 2019 | | 2018 |
| Platform net revenue | | | | | |
| Console | $ | 3,774 | | | $ | 3,333 | | | $ | 3,635 | |
| PC / Browser | 1,017 | | | 780 | | | 827 | |
| Mobile | 727 | | | 824 | | | 672 | |
| Other | 19 | | | 13 | | | 16 | |
| Net revenue | $ | 5,537 | | | $ | 4,950 | | | $ | 5,150 | |
Information about our operations in North America and internationally as of and for the fiscal years ended March 31, 2017, 20162020, 2019 and 20152018 is presented below (in millions):
| | | | | | | | | | | | | | | | | |
| | Year Ended March 31, | | | | |
| | 2020 | | 2019 | | 2018 |
| Net revenue from unaffiliated customers | | | | | |
| North America | $ | 2,270 | | | $ | 1,906 | | | $ | 2,090 | |
| International | 3,267 | | | 3,044 | | | 3,060 | |
| Net revenue | $ | 5,537 | | | $ | 4,950 | | | $ | 5,150 | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2017 | | 2016 | | 2015 |
| Net revenue from unaffiliated customers | | | | | |
| North America | $ | 2,119 |
| | $ | 1,907 |
| | $ | 1,956 |
|
| International | 2,726 |
| | 2,489 |
| | 2,559 |
|
| Total | $ | 4,845 |
| | $ | 4,396 |
| | $ | 4,515 |
|
| | | | | | | | | | | |
| | As of March 31, | | |
| | 2020 | | 2019 |
| Long-lived assets | | | |
| North America | $ | 375 | | | $ | 371 | |
| International | 74 | | | 77 | |
| Total | $ | 449 | | | $ | 448 | |
|
| | | | | | | |
| | As of March 31, |
| | 2017 | | 2016 |
| Long-lived assets | | | |
| North America | $ | 369 |
| | $ | 368 |
|
| International | 65 |
| | 71 |
|
| Total | $ | 434 |
| | $ | 439 |
|
We attribute net revenue from external customers to individual countries based on the location of the legal entity that sells the products and/or services. Note that revenue attributed to the legal entity that makes the sale is often not the country where the consumer resides. For example, revenue generated by our Swiss legal entitiesentity includes digital revenue from consumers who reside outside of Switzerland, including consumers who reside outside of Europe. Revenue generated by our Swiss legal entitiesentity during fiscal years 2017, 2016,2020, 2019, and 20152018 represents $1,886$2,586 million, $1,643$2,303 million and $1,462$2,272 million or 3947 percent, 3747 percent and 3244 percent of our total net revenue, respectively. Revenue generated in the United States represents over 99 percent of our total North America net revenue. There were no other countries with net revenue greater than 10 percent.
In fiscal year 2017,2020, our direct sales to Sony and Microsoft represented approximately 1932 percent and 17 percent of total net revenue, respectively. In fiscal year 2016,2019, our direct sales to Sony and Microsoft represented approximately 1629 percent and 1416 percent of total net revenue, respectively. In fiscal 2015,year 2018, our direct sales to MicrosoftSony and GameStop Corp.Microsoft represented approximately 1027 percent and 1116 percent of total net revenue, respectively.
(18)
(19) QUARTERLY FINANCIAL AND MARKET INFORMATION (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | Year Ended |
| (In millions, except per share data) | June 30 | | September 30 | | December 31 | | March 31 | |
| Fiscal 2017 Consolidated | | | | | | | | | |
| Net revenue | $ | 1,271 |
| | $ | 898 |
| | $ | 1,149 |
| | $ | 1,527 |
| | $ | 4,845 |
|
| Gross profit | 1,092 |
| | 497 |
| | 633 |
| | 1,325 |
| | 3,547 |
|
| Operating income (loss) | 560 |
| | (49 | ) | | (4 | ) | | 717 |
| | 1,224 |
|
| Net income (loss) | 440 |
|
| (38 | ) |
| (1 | ) |
| 566 |
|
| 967 |
|
| Common Stock | | | | | | | | | |
| Earnings (loss) per share — Basic | $ | 1.46 |
| | $ | (0.13 | ) | | $ ( | 0.00) |
| | $ | 1.84 |
| | $ | 3.19 |
|
| Earnings (loss) per share — Diluted | $ | 1.40 |
| | $ | (0.13 | ) | | $ ( | 0.00) |
| | $ | 1.81 |
| | $ | 3.08 |
|
| Common stock price per share | | | | | | | | | |
| High | $ | 77.25 |
| | $ | 85.40 |
| | $ | 85.56 |
| | $ | 91.51 |
| | $ | 91.51 |
|
| Low | $ | 61.85 |
| | $ | 75.38 |
| | $ | 75.58 |
| | $ | 78.64 |
| | $ | 61.85 |
|
| Fiscal 2016 Consolidated | | | | | | | | | |
| Net revenue | $ | 1,203 |
| | $ | 815 |
| | $ | 1,070 |
| | $ | 1,308 |
| | $ | 4,396 |
|
| Gross profit | 1,030 |
| | 406 |
| | 524 |
| | 1,082 |
| | 3,042 |
|
| Operating income (loss) | 512 |
| | (119 | ) | | (31 | ) | | 536 |
| | 898 |
|
| Net income (loss) | 442 |
|
| (140 | ) |
| (45 | ) |
| 899 |
| (a) | 1,156 |
|
| Common Stock | | | | | | | | | |
| Earnings (loss) per share — Basic | $ | 1.42 |
| | $ | (0.45 | ) | | $ | (0.14 | ) | | $ | 2.93 |
| | $ | 3.73 |
|
| Earnings (loss) per share — Diluted | $ | 1.32 |
| | $ | (0.45 | ) | | $ | (0.14 | ) | | $ | 2.79 |
| | $ | 3.50 |
|
| Common stock price per share | | | | | | | | | |
| High | $ | 68.00 |
| | $ | 75.16 |
| | $ | 76.77 |
| | $ | 70.83 |
| | $ | 76.77 |
|
| Low | $ | 56.03 |
| | $ | 63.43 |
| | $ | 65.04 |
| | $ | 55.50 |
| | $ | 55.50 |
|
| |
(a) | Net income includes an income tax benefit recorded in the fourth quarter of fiscal year 2016 for the reversal of a significant portion of our deferred tax valuation allowance. |
Our common stock is traded | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | | | | | | | Year
Ended |
| (In millions, except per share data) | June 30 | | September 30 | | December 31 | | March 31 | | |
| Fiscal 2020 Consolidated | | | | | | | | | |
| Net revenue | $ | 1,209 | | | $ | 1,348 | | | $ | 1,593 | | | $ | 1,387 | | | $ | 5,537 | |
| Gross profit | 1,022 | | | 943 | | | 1,085 | | | 1,118 | | | 4,168 | |
| Operating income | 415 | | | 268 | | | 361 | | | 401 | | | 1,445 | |
| Net income | 1,421 | | (a) | 854 | | (a) | 346 | | | 418 | | | 3,039 | |
| Common Stock | | | | | | | | | |
| Earnings per share — Basic | $ | 4.78 | | | $ | 2.89 | | | $ | 1.18 | | | $ | 1.44 | | | $ | 10.37 | |
| Earnings per share — Diluted | $ | 4.75 | | | $ | 2.89 | | | $ | 1.18 | | | $ | 1.43 | | | $ | 10.30 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Fiscal 2019 Consolidated | | | | | | | | | |
| Net revenue | $ | 1,137 | | | $ | 1,286 | | | $ | 1,289 | | | $ | 1,238 | | | $ | 4,950 | |
| Gross profit | 922 | | | 868 | | | 876 | | | 962 | | | 3,628 | |
| Operating income | 300 | | | 258 | | | 242 | | | 196 | | | 996 | |
| Net income | 293 | | | 255 | | | 262 | | | 209 | | | 1,019 | |
| Common Stock | | | | | | | | | |
| Earnings per share — Basic | $ | 0.96 | | | $ | 0.84 | | | $ | 0.87 | | | $ | 0.70 | | | $ | 3.36 | |
| Earnings per share — Diluted | $ | 0.95 | | | $ | 0.83 | | | $ | 0.86 | | | $ | 0.69 | | | $ | 3.33 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
(a) During the fiscal year ended March 31, 2020, we recognized total one-time tax benefits of $1.760 billion related to the $1.840 billion Swiss Deferred Tax Asset, partially offset by the $80 million one-time Altera opinion charge. Of this amount, we recognized tax benefits of $1.17 billion and $630 million, during the quarters ended June 30, 2019 and September 30, 2019, respectively. See Note 2 — Summary of Significant Accounting Policies - Income Taxes for more information on the NASDAQ Global Select Market under the symbol “EA”. The prices for the common stock in the table above represent the high and low closing sales prices as reported on the NASDAQ Global Select Market.
Swiss intra-entity sale.
Report of Independent Registered Public Accounting Firm
TheTo the Stockholders and Board of Directors and Stockholders
Electronic Arts Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Electronic Arts Inc. and subsidiaries (the Company) as of April 1, 2017March 28, 2020 and April 2, 2016, andMarch 30, 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended April 1, 2017. In connection with our audits ofMarch 28, 2020, and the related notes and Schedule II (collectively, the consolidated financial statements, we also have audited the related financial statement schedule.statements). We also have audited the Company’s internal control over financial reporting as of April 1, 2017,March 28, 2020, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 28, 2020 and March 30, 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended March 28, 2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 28, 2020 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principles
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of March 31, 2019, due to the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 842, Leases. As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue recognition as of April 1, 2018, due to the adoption of FASB ASC Topic 606, Revenue From Contracts with Customers.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion,
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements referredthat were communicated or required to above present fairly, in all material respects, the financial position of Electronic Arts Inc. and subsidiaries as of April 1, 2017 and April 2, 2016, and the results of their operations and their cash flows for each of the years in the three-year period ended April 1, 2017, in conformity with U.S. generally accepted accounting principles, and the related financial statement schedule, when considered in relationbe communicated to the basicaudit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, presents fairly,and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Assessment of the Estimated Offering Period
As discussed in Note 2 to the consolidated financial statements, revenue for transactions that include future update rights and/or online hosting performance obligations are subject to deferral and recognized over the Estimated Offering Period. Determining the Estimated Offering Period is inherently subjective because it is not an explicitly defined period. The Company’s methodology and model to determine the Estimated Offering Period considers the following inputs and assumptions:
•the average period of time customers are online,
•for physical games sold at retail, the 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,
•known and expected online gameplay trends, and
•disclosed service periods for competitors’ games.
We identified the assessment of the Estimated Offering Period as a critical audit matter. Due to the complexity and subjectivity of the methods and assumptions used within the Company’s model, challenging auditor judgment was required to evaluate the results of the procedures performed over the Estimated Offering Period.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process to determine the Estimated Offering Period, including controls over the relevance and reliability of data used to estimate the inputs and assumptions, and the Company’s review of the Estimated Offering Period concluded for use in recognizing revenue. We evaluated the method and model the Company used to develop the Estimated Offering Period against the accounting requirements and considered potential management bias in developing or applying their methodology. We computed the average period of time customers are online as well as the 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 by using the Company’s internal data. We compared the results of this computation against the periods used by the Company in their Estimated Offering Period model. We evaluated other third-party data, such as publicly available competitor data and compared it against the third-party data used by the Company in their model. We evaluated known and expected online gameplay trends and performed a sensitivity analysis of the Company’s Estimated Offering Period to assess the impact of potential changes in the Estimated Offering Period on revenue. We evaluated the overall results of the procedures performed over the Estimated Offering Period.
Evaluation of the realizability of the Swiss deferred tax assets
As discussed in Notes 2 and 10 to the consolidated financial statements, during the year ended March 28, 2020, the Company recognized $1.840 billion of deferred tax benefits related to an intra-entity sale of some of its intellectual property rights to its Swiss subsidiary, which is net of the impact of a $131 million valuation allowance and a $393 million reduction due to the Altera opinion. The Company periodically performs an analysis to determine whether it is more likely than not that all material respects,or a portion of its Swiss deferred tax assets will be realized. The Company’s realizability analysis considers whether sufficient taxable income will be generated by the information set forth therein. Also in our opinion, Electronic Arts Inc. maintained, in all material respects, effective internal controlSwiss subsidiary over financial reportingthe 20-year period over which the Swiss deferred tax assets will generally reverse. The Company determined that there is a greater than
50% likelihood that its Swiss deferred tax assets will not be fully realized. As a result, the Company reduced the Swiss deferred tax assets by a valuation allowance of approximately $131 million as of April 1, 2017,March 28, 2020.
We identified the evaluation of the realizability of the Company’s Swiss deferred tax assets as a critical audit matter. This evaluation required especially challenging auditor judgment to assess the Company’s estimated future Swiss taxable income over the 20-year period over which the Swiss deferred tax assets will generally reverse. Specifically, the Company’s assumptions of expected future growth rates of Swiss taxable income were based primarily on criteria establishedthird-party market and industry growth data. Changes in Internal Control - Integrated Framework (2013) issuedassumptions regarding estimated future Swiss taxable income could have a significant impact on the realization of the Company’s Swiss deferred tax assets and the amount of the valuation allowance.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s income tax process over the valuation allowance, including controls over the process to develop estimates of future Swiss taxable income. We performed a sensitivity analysis of the valuation allowance to assess the impact of reasonably possible changes in expected future growth rates. We compared the Company’s estimated future Swiss taxable income to historical growth rates and other projected financial information prepared by COSO.the Company. We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the Company’s benchmarking study of third-party market and industry growth data by assessing the relevance and reliability of the benchmarking data.
/s/ KPMG LLP
We have served as the Company’s auditor since 1987.
Santa Clara, California
May 24, 201720, 2020
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A: Controls and Procedures
Definition and Limitations of Disclosure Controls
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management evaluates these controls and procedures on an ongoing basis.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. These limitations include the possibility of human error, the circumvention or overriding of the controls and procedures and reasonable resource constraints. In addition, because we have designed our system of controls based on certain assumptions, which we believe are reasonable, about the likelihood of future events, our system of controls may not achieve its desired purpose under all possible future conditions. Accordingly, our disclosure controls and procedures provide reasonable assurance, but not absolute assurance, of achieving their objectives.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures, believe that as of the end of the period covered by this report, our disclosure controls and procedures were effective in providing the requisite reasonable assurance that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding the required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Our internal control over financial reporting is designed to provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. There are inherent limitations to the effectiveness of any system of internal control over financial reporting. These limitations include the possibility of human error, the circumvention or overriding of the system and reasonable resource constraints. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with our policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of the end of our most recently completed fiscal year. In making its assessment, management used the criteria set forth in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management believes that, as of the end of our most recently completed fiscal year, our internal control over financial reporting was effective.
KPMG LLP, our independent registered public accounting firm, has issued an auditors’ report on the effectiveness of our internal control over financial reporting. That report appears on page 80.81.
Changes in Internal Control over Financial Reporting
There has been no change in our internal controls over financial reporting identified in connection with our evaluation that occurred during the fiscal quarter ended March 31, 20172020 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
Item 9B: Other Information
None.
PART III
Item 10: Directors, Executive Officers and Corporate Governance
The information required by Item 10, other than the information regarding executive officers, which is included in Part I, Item 1 of this report, is incorporated herein by reference to the information to be included in our 20172020 Proxy under the heading “Board of Directors & Corporate Governance.” The information regarding compliance with Section 16(c) of the Exchange Act is incorporated herein by reference to the information to be included in the 2017 Proxy under the sub-heading “Section 16(a) Beneficial Ownership Reporting Compliance.”
Item 11: Executive Compensation
The information required by Item 11 is incorporated herein by reference to the information to be included in the 20172020 Proxy under the headings “Director Compensation and Stock Ownership Guidelines” and “Compensation Discussion and Analysis” and “Executive Compensation” and the subheadings “Committee“Compensation Committee Report on Executive Compensation” and “Compensation Committee Interlocks and Insider Participation.”
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 is incorporated herein by reference to the information to be included in the 20172020 Proxy under the heading “Security Ownership of Certain Beneficial Owners and Management” and the subheading “Equity Compensation Plan Information.”
Item 13: Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 is incorporated herein by reference to the information to be included in the 20172020 Proxy under the sub-headingssubheadings “Director Independence,” and “Certain Relationships and Related“Related Person Transactions.Transaction Policy.”
Item 14: Principal Accounting Fees and Services
The information required by Item 14 is incorporated herein by reference to the information to be included in Proposal 43 of the 20172020 Proxy under the sub-headingssubheadings “Fees of Independent Auditors” and “Pre-Approval“Pre-approval Procedures.”
PART IV
Item 15: Exhibits and Financial Statement SchedulesStatements
| |
(a) | Documents filed as part of this report |
(a)Documents filed as part of this report
2. Financial Statement Schedule: See Schedule II on Page 8487 of this report. 3. Exhibits: The exhibits listed in the accompanying index to exhibits on Page 8588 are filed or incorporated by reference as part of this report.
SIGNATURES
|
| | |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. |
| | |
| ELECTRONIC ARTS INC. |
| | |
| By: | /s/ Andrew Wilson |
| | Andrew Wilson |
| | Chief Executive Officer |
| | Date: May 24, 2017 |
| | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on the 24th of May 2017.
|
|
| | |
Name | | Title |
| | |
/s/ Andrew Wilson | | Chief Executive Officer |
Andrew Wilson | | |
| | |
/s/ Blake Jorgensen | | Executive Vice President, |
Blake Jorgensen | | Chief Financial Officer |
| | |
/s/ Kenneth A. Barker | | Senior Vice President, |
Kenneth A. Barker | | Chief Accounting Officer |
| | (Principal Accounting Officer) |
| | |
Directors: | | |
/s/ Lawrence F. Probst III | | Chairman of the Board |
Lawrence F. Probst III | | |
| | |
/s/ Leonard S. Coleman | | Director |
Leonard S. Coleman | | |
| | |
/s/ Jay C. Hoag | | Director |
Jay C. Hoag | | |
| | |
/s/ Jeffrey T. Huber | | Director |
Jeffrey T. Huber | | |
| | |
/s/ Vivek Paul | | Director |
Vivek Paul | | |
| | |
/s/ Talbott Roche | | Director |
Talbott Roche
| | |
| | |
/s/ Richard A. Simonson | | Director |
Richard A. Simonson | | |
| | |
/s/ Luis A. Ubiñas | | Director |
Luis A. Ubiñas | | |
| | |
/s/ Denise F. Warren | | Director |
Denise F. Warren | | |
| | |
/s/ Andrew Wilson | | Director |
Andrew Wilson | | |
ELECTRONIC ARTS INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended March 31, 2017, 20162020, 2019 and 20152018
(In millions)
|
| | | | | | | | | | | | | | | | |
Allowance for Doubtful Accounts, Price Protection and Returns | Balance at Beginning of Period | | Charged to Revenue, Costs and Expenses | | Charged (Credited) to Other Accounts(a) | | Deductions(b) | | Balance at End of Period |
| Year Ended March 31, 2017 | $ | 159 |
| | 298 |
| | (8 | ) | | (304 | ) | | $ | 145 |
|
| Year Ended March 31, 2016 | $ | 140 |
| | 269 |
| | 11 |
| | (261 | ) | | $ | 159 |
|
| Year Ended March 31, 2015 | $ | 186 |
| | 361 |
| | (66 | ) | | (341 | ) | | $ | 140 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Doubtful Accounts,
Price Protection and Returns | Balance at
Beginning
of Period | | Charged to
Revenue,
Costs and
Expenses | | Charged
(Credited)
to Other
Accounts | | Deductions | | Balance at
End of
Period |
| Year Ended March 31, 2020 | $ | 7 | | | (1) | | | — | | | — | | | $ | 6 | |
| Year Ended March 31, 2019 | $ | 165 | | | — | | | (158) | | (a) | — | | | $ | 7 | |
| Year Ended March 31, 2018 | $ | 145 | | | 288 | | | 35 | | (b) | (303) | | (c) | $ | 165 | |
| |
(a) | Primarily other reclassification adjustments and the translation effect of using the average exchange rate for expense items and the year-end exchange rate for the balance sheet item (allowance account). |
| |
(b) | Primarily the utilization of returns allowance and price protection reserves. |
(a)Upon adoption of the New Revenue Standard, allowances for sales returns and price protection were reclassified to current liabilities as these reserve balances are considered refund liabilities. For additional information on the adoption impact, see Note 1 under the heading “Recently Adopted Accounting Standards” included in our Annual Report on Form 10-K for our fiscal year ended March 31, 2019, filed with the SEC on May 24, 2019.
(b) Primarily other reclassification adjustments and the translation effect of using the average exchange rate for expense items and the year-end exchange rate for the balance sheet item (allowance account).
(c) Primarily the utilization of returns allowance and price protection reserves.
ELECTRONIC ARTS INC.
20172020 FORM 10-K ANNUAL REPORT
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | Incorporated by Reference | | | | | | Filed
Herewith |
| Number | | Exhibit Title | | Form | | File No. | | Filing Date | | |
| | | | 8-K | | 000-17948 | | 8/9/2019 | | |
| | | | | | | | | | |
| | | | Incorporated by Reference | | Filed
Herewith
|
Number | | Exhibit Title | | Form | | File No. | | Filing Date | |
3.01 | | Amended and Restated Certificate of Incorporation | | 10-Q | | 000-17948 | | 11/3/2004 | | |
| | | | | | | | | | |
3.02 | | Amended and Restated Bylaws | | 8-K/A8-K | | 000-17948 | | 5/27/20168/9/2019 | | |
| | | | | | | | | | |
| | | | 10-K10-Q | | 000-17948 | | 5/22/20092/6/2018 | | |
| | | | | | | | | | |
| | | | 10-K | | 000-17948 | | 5/24/2019 | | |
| | | | | | | | | | |
| | | | 8-K | | 000-17948 | | 2/24/2016 | | |
| | | | | | | | | | |
4.03 | | | | 8-K | | 000-17948 | | 2/24/2016 | | |
| | | | | | | | | | |
| | | | 10-K | | 000-17948 | | 6/4/2004 | | |
| | | | | | | | | | |
| | | | 8-K | | 000-17948 | | 8/1/20165/18/2018 | | |
| | | | | | | | | | |
| | | | 10-Q | | 000-17948 | | 8/6/2007 | | |
| | | | | | | | | | |
| | | | 8-K | | 000-17948 | | 2/15/20175/18/2018 | | |
| | | | | | | | | | |
| | | | 10-K | | 000-17948 | | 5/22/2009 | | |
| | | | | | | | | | |
| | | | 8-K | | 000-17948 | | 5/22/201518/2018 | | |
| | | | | | | | | | |
10.07* | | | | 8-K | | 000-17948 | | 6/28/20165/20/2019 | | |
| | | | | | | | | | |
10.08* | | | | 8-K | | 000-17948 | | 5/22/201518/2018 | | |
| | | | | | | | | | |
10.09* | | | | 8-K | | 000-17948 | | 5/23/201620/2019 | | |
| | | | | | | | | | |
| | | | 8-K | | 000-17948 | | 5/22/2017 | | X |
| | | | | | | | | | |
10.11* | | | | 8-K | | 000-17948 | | 11/12/2019 | | |
| | | | | | | | | | |
| | | | 8-K | | 000-17948 | | 6/7/2017 | | |
| | | | | | | | | | |
| | | | 10-Q | | 000-17948 | | 11/7/2017 | | |
| | | | | | | | | | |
| | | | 8-K | | 000-17948 | | 8/1/2016 | | |
| | | | | | | | | | |
10.12* | | | | 8-K | | 000-17948 | | 8/1/2016 | | |
| | | | | | | | | | |
10.13* | | | | 8-K | | 000-17948 | | 8/9/2019 | | |
| | | | | | | | | | |
| | | | 8-K | | 000-17948 | | 9/17/2013 | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
10.14* | |
| | Incorporated by Reference | | | | | | Filed
Herewith |
| Number | | Exhibit Title | | Form | | File No. | | Filing Date | | |
| | | | 8-K | | 000-17948 | | 7/31/2012 | | |
| | | | | | | | | | |
10.15* | | | | 10-Q | | 000-17948 | | 8/5/2014 | | |
| | | | | | | | | | |
10.16* | | | | 10-Q | | 000-17948 | | 11/4/2014 | | |
| | | | | | | | | | |
10.17* | | | | 10-Q | | 000-17948 | | 11/8/2016 | | |
|
| | | | | | | | | | |
| | | | Incorporated by Reference | | Filed
Herewith
|
Number | | Exhibit Title | | Form | | File No. | | Filing Date | |
10.18* | | Employment Agreement for Patrick Söderlund, dated September 17, 2013 | | 10-Q | | 000-17948 | | 11/5/2013 | | |
| | | | | | | | | | |
10.19 | | Lease agreement between ASP WT, L.L.C. (“Landlord”) and Tiburon Entertainment, Inc. for space at Summit Park I, dated June 15, 2004 | | 10-Q | | 000-17948 | | 8/3/2004 | | |
| | | | | | | | | | |
10.20 | | First amendment to lease, dated December 13, 2005, by and between Liberty Property Limited Partnership, a Pennsylvania limited partnership and Electronic Arts - Tiburon, a Florida corporation f/k/a Tiburon Entertainment, Inc. | | 10-Q | | 000-17948 | | 2/8/2006 | | |
| | | | | | | | | | |
10.21 | | Second amendment to Lease, dated May 8, 2009, by and between Liberty Property Limited Partnership, a Pennsylvania limited partnership and Electronic Arts - Tiburon, a Florida corporation f/k/a Tiburon Entertainment, Inc. | | 10-Q | | 000-17948 | | 8/10/2009 | | |
| | | | | | | | | | |
10.22 | | Third amendment to lease, dated December 24, 2009, by and between Liberty Property Limited Partnership, a Pennsylvania limited partnership and Electronic Arts - Tiburon, a Florida corporation f/k/a Tiburon Entertainment, Inc. | | 10-Q | | 000-17948 | | 2/9/2010 | | |
| | | | | | | | | | |
10.23 | | Fourth Amendment to lease, dated May 16, 2014, by and between Liberty Property Limited Partnership, a Pennsylvania limited partnership and Electronic Arts - Tiburon, a Florida corporation f/k/a Tiburon Entertainment, Inc. | | 10-K | | 000-17948 | | 5/21/2014 | | |
| | | | | | | | | | |
10.24** | | First Amended North American Territory Rider to the Global PlayStation®3 Format Licensed Publisher Agreement, dated September 11, 2008, by and between the Electronic Arts Inc. and Sony Computer Entertainment America Inc.
| | 10-Q | | 000-17948 | | 11/10/2009 | | |
| | | | | | | | | | |
10.25** | | Sony Computer Entertainment Europe Limited Regional Rider to the Global PlayStation®3 Format Licensed Publisher Agreement, dated December 17, 2008, by and between EA International (Studio and Publishing) Limited and Sony Computer Entertainment Europe Limited
| | 10-Q | | 000-17948 | | 11/10/2009 | | |
| | | | | | |
10.26** | | Global PlayStation®3 Format Licensed Publisher Agreement, dated September 11, 2008, by and between the Electronic Arts Inc. and Sony Computer Entertainment America Inc.
| | 10-Q/A | | 000-17948 | | 4/30/2010 | | |
| | | | | | | | | |
10.27** | | Global PlayStation®3 Format Licensed Publisher Agreement, dated December 17, 2008, by and between EA International (Studio and Publishing) Limited and Sony Computer Entertainment Europe Limited
| | 10-Q/A | | 000-17948 | | 4/30/2010 | | |
| | | | | | | | | | |
10.28** | | Xbox2 Publisher License Agreement, dated May 15, 2005, by and among Electronic Arts Inc., Electronic Arts C.V. and Microsoft Licensing, GP | | 10-Q/A | | 000-17948 | | 4/30/2010 | | |
| | | | | | | | | | |
10.29** | | Durango Publisher License Agreement, dated June 29, 2012, by and among Electronic Arts Inc., EA International (Studio & Publishing) Ltd., Microsoft Licensing, GP and Microsoft Corporation | | 10-K | | 000-17948 | | 5/21/2014 | | |
| | | | | | | | | | |
10.30 | | | | 10-Q | | 000-17948 | | 8/8/2018 | | |
| | | | | | | | | | |
| | | | 8-K | | 000-17948 | | 3/20/20158/29/2019 | | |
|
| | | | | | | | | | |
| | | | Incorporated by Reference | | Filed
Herewith
|
Number | | Exhibit Title | | Form | | File No. | | Filing Date | |
12.1 | | Ratio of Earnings to Fixed Charges | | | | | | | | X |
| | | | | | | | | | |
21.1 | | Subsidiaries of the Registrant | | | | | | | | X |
23.1 | | | | | | | | | | |
| | | | | | | | | | X |
| | | | | | | | | | |
| | | | | | | | | | X |
| | | | | | | | | | |
| | | | | | | | | | X |
| | | | | | | | | | |
| Additional exhibits furnished with this report: | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | X |
| | | | | | | | | | |
| | | | | | | | | | X |
| | | | | | | | | | |
101.INS† | | XBRL Instance Document | | | | | | | | X |
| | | | | | | | | | |
101.SCH† | | XBRL Taxonomy Extension Schema Document | | | | | | | | X |
| | | | | | | | | | |
101.CAL† | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.DEF† | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.LAB† | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.PRE† | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | X |
|
| | | | |
| * | Management contract or compensatory plan or arrangement. |
| ** | Confidential portions of these documents have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment that was granted in accordance with Exchange Act Rule 24b-2. |
† | Attached as Exhibit 101 to this Annual Report on Form 10-K for the year ended March 31, 20172020 are the following formatted in eXtensible Business Reporting Language (“XBRL”): (1) Consolidated Balance Sheets, (2) Consolidated Statements of Operations, (3) Consolidated Statements of Comprehensive Income (Loss), (4) Consolidated Statements of Stockholders’ Equity, (5) Consolidated Statements of Cash Flows, and (6) Notes to Consolidated Financial Statements. |
SIGNATURES
| | | | | | | | |
| Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | |
| ELECTRONIC ARTS INC. | |
| By: | /s/ Andrew Wilson |
| | Andrew Wilson |
| | Chief Executive Officer |
| | Date: May 20, 2020 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on the 20th of May 2020. | | |
| | | | | | | | |
| Name | | Title |
| | |
| /s/ Andrew Wilson | | Chief Executive Officer |
| Andrew Wilson | | |
| | |
| /s/ Blake Jorgensen | | Chief Operating Officer and |
| Blake Jorgensen | | Chief Financial Officer |
| | |
| | |
| /s/ Kenneth A. Barker | | Chief Accounting Officer |
| Kenneth A. Barker | | (Principal Accounting Officer) |
| | |
| | |
| Directors: | | |
| /s/ Lawrence F. Probst III | | Chairman of the Board |
| Lawrence F. Probst III | | |
| | |
| /s/ Leonard S. Coleman | | Director |
| Leonard S. Coleman | | |
| | |
| /s/ Jay C. Hoag | | Director |
| Jay C. Hoag | | |
| | |
| /s/ Jeffrey T. Huber | | Director |
| Jeffrey T. Huber | | |
| | |
| /s/ Talbott Roche | | Director |
Talbott Roche
| | |
| | |
| /s/ Richard A. Simonson | | Director |
| Richard A. Simonson | | |
| | |
| /s/ Luis A. Ubiñas | | Director |
| Luis A. Ubiñas | | |
| | |
| /s/ Heidi Ueberroth | | Director |
| Heidi Ueberroth | | |
| | |
| /s/ Andrew Wilson | | Director |
| Andrew Wilson | | |
