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, 20192022
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) | | | (I.R.S. Employer
Identification No.) |
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Delaware | | 94-2838567 |
(State or other jurisdiction of
incorporation or organization)
| | (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
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| Common Stock, $0.01 par value | | EA | | NASDAQNasdaq Global Select Market
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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, every Interactive Data File required to be submitted 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 such files). Yes þ No ¨
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¨ | ¨ | | | | | | | | | |
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. þ
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 28, 2018,October 1, 2021, the last business day of our second fiscal quarter, was $35,963$40,956 million.
As of May 20, 2019,23, 2022, there were 297,261,219279,893,605 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 20192022 Annual Meeting of Stockholders (the “2019“2022 Proxy”) are incorporated by reference into Part III hereof. The 20192022 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 20192022 Proxy is not deemed to be filed as part hereof.
ELECTRONIC ARTS INC.
20192022 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 | | |
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| PART II | |
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| Item 7 | | |
| Item 7A | | |
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| Item 9 | | |
| Item 9A | | |
| Item 9B | | |
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| PART III | |
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| Item 11 | | |
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| 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. We use words such as “anticipate,” “believe,” “expect,” “intend,” “estimate”, “plan”, “predict”, “seek”, “goal”, “will”, “may”, “likely”, “should”, “could” (and the negative of any of these terms), “future” and similar expressions to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our business, projections of markets relevant to our business, uncertain events and assumptions and other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements consist of, among other things, statements related to our business, operations and financial results, industry prospects, our future financial performance, and our business plans and objectives, and may include certain assumptions that underlie the forward-looking statements. These forward-looking statements are not guarantees of future performance and reflect management’s current expectations. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that might cause or contribute to such differences include those discussed in Part I, Item 1A of this Annual Report under the heading “Risk Factors” beginning on page 9.Page 10. 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, with a mission to inspire the world to play.entertainment. We develop, market, publish and distributedeliver games, content and services that can be played and watchedexperienced on a variety of platforms, including game consoles, PCs, mobile phones and tablets.
What We Offer
Our Strategic Pillars
There are threeAt our core pillars to our strategy:
•Players First
•Commitment to Digital
•One EA
These strategic pillars are built on our focus of deliveringis a broad and deep portfolio of intellectual property from which we create innovative games and servicescontent that engages players across a wide range of geographies, platforms and business models.
Players First
Players are the foundation of our success, and we are committedenable us to thinking about players first in everything we do. Our goal is 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 Apex Legends, Battlefield, and enduring value, by connecting with our players across platforms and social channels, and by delivering flexibility and innovation in our business models. In fiscal year 2019, we continued to innovate for players by including frontline titles in our Origin Access Premier subscription service, publishing our first free-to-play console game, Apex Legends, and investing in more ways to reach our players, suchThe Sims) or license from others (such as cloud gaming and esports.
Our games and services are based on a portfolio of intellectual property that includes established brands such as FIFA, Madden NFL, Star Wars, Battlefield,and the 300+ licenses within our global football ecosystem). To grow our core business, we are focusing on innovation and new experiences for our franchises; building ongoing profitable and predictable revenue streams through live services, including our mobile business; and reaching more players whenever and wherever they want to play.
We develop and publish games and services across diverse genres, such as sports, racing, first-person shooter, action, role-playing and simulation. We believe that our portfolio, live services offerings, use of multiple business models and distribution channels, and network of hundreds of millions of unique active accounts 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., our global football franchise, Madden NFL, F1), our console, PC and mobile catalog titles, and our live services. We have added to the breadth of our portfolio in recent years by, among other things, launching Apex Legends, one of the most successful ongoing franchises in our industry, expanding the ways in which players can engage with The Sims 4, adding new modes through which players can engage with our sports franchises and Need for Speed. We also have invested,by bringing new experiences to our portfolio through mergers and acquisitions activity. The breadth of our portfolio provides sources of re-occurring revenue which contribute to stability in our financial results. Revenue from our global football franchise, including the annualized console and PC game which is consistently one of the best-selling games in the marketplace, as well as from FIFA Ultimate Team, is material to our business and will continue to invest,be so. Starting in fiscal year 2024, our global football franchise will transition to a new EA SPORTS FC brand. Our vision for the future of interactive football with EA SPORTS FC is to create the largest football club in the world, and we believe this is the right opportunity for us so that we can continue delivering innovation and growing to connect more fans on a global scale for years to come. We also seek to add to our portfolio by investing in developing and establishing new brands, as well as investing in our partnerships with external game developers to create games and incontent that we bring to market.
Live services net revenue, particularly extra content net revenue, has been material to our business, and we expect it to continue to be so. Through our live services offerings, we offer our players high-quality experiences designed to provide value to players and extend and enhance gameplay. These live services include extra content, subscription offerings and other revenue generated outside of the sale of our base games. Our digital live services and other net revenue represented 71 percent of our total net revenue during fiscal year 2019 launched two new intellectual properties – Anthem and Apex Legends. We will continue to develop and publish a broad and deep portfolio of games and services that engage players across geographies, platforms and business models.
Commitment to Digital
Players increasingly purchase our games as digital downloads, as opposed to purchasing physical discs, and engage with the2022. Our most popular live services that we provide on an ongoing basis. Our live services provide additional depth and engagement opportunities for our players and include in-game purchases,are the extra content subscriptions, and esports. For example,purchased for the Ultimate Team mode associated with our sports franchises and extra content purchased for our Apex Legends franchise. Ultimate Team allows players
to collect current and former professional players in order to build and compete as a personalized team. Live services net revenue generated from extra content purchased within Ultimate Team, a substantial portion of which was derived from FIFA Ultimate Team, and for our Apex Legends franchise, is material to our business.
The strength of our mobile business has grown in recent years from net revenue of $727 million in fiscal year 2020 and $718 million in fiscal year 2021 to $1,059 million in fiscal year 2022. We expect new launches and acquired games, and live services providedas well as expertise and technologies leveraged across our portfolio, to drive further growth in mobile net revenue during fiscal year 2023. For example, we expect to launch Apex Legends Mobile, our first mobile experience based on the successful Apex Legends console and PC franchise in fiscal year 2023. And, in fiscal year 2022, we acquired Glu Mobile, Inc. and their portfolio of hit mobile franchises, as well as Playdemic Limited, makers of Golf Clash, one of the most successful ongoing mobile sports titles. These acquisitions bring new mobile franchises and live services, as well as the teams and technologies responsible for them, to our Battlefield, Star Warsmobile portfolio and Sims franchises, have extended the life of those games by engagingorganization.
We are focused on reaching more players over longer periods of time. The digital transformation also is creating opportunities in platforms, content modelswhenever and the way in which playerswherever they want to play and promoting positive play as they engage with our games and services. We aim to offer safe, fun and inclusive environments in which to play. For example, we
have leveraged brandsin certain of our games and assets from franchises historically associatedcountries in which we operate, we provide players with traditional gaming, such as FIFA, Madden NFL, Star Wars, The Sims,information about their engagement and SimCity, to create free-to-play gamestools that are monetized through live services provided with the game.allow players, or their parents, more control of their experiences. We also offer subscription services, suchmonitor gameplay for disruptive behaviors through reporting tools and detection models designed to flag offensive or inappropriate language and take action as EA Access, Origin Access and Origin Access Premier, as we look to build deeper relationships with our players and offer increased choice and flexibility for our players to try new games.needed.
The portion of our revenue attributable to our digital business has significantly increased from 59 percent in fiscal year 2017 to 67 percent in fiscal year 2018 and 75 percent during fiscal year 2019. We believe that we can add value to our digital revenue, which generally hasnetwork by making it easier for players to connect to a higher gross margin than our packaged goods revenue, will continue to increase during fiscal year 2020 relative to packaged goods revenue as we continue to focus on developingworld of play by offering choice of business model, distribution channel and monetizing products and services that can be delivered digitally.
One EA
As a global leader in digital interactive entertainment, we have an opportunity to leverage our scale to market and deliver engagingdevice. Our games and services to more players across more platforms. Our “One EA” model provides strategic advantages. For example, we have moved much of our PC and console development to one game engine. This creates operational flexibility as our development teams code on a consistent engine and will allow us to transition our products and services to new platforms quickly and cost-effectively. In addition, we’ve brought together our marketing, publishing and analytics functions as a single go-to-market unit and simplified their processes and decision-making in order to improve effectiveness and build flexibility into our marketing strategies.
We also are strengthening the technology that connects our players to each other and to the games they love. We are adopting consistent, cross-company methodologies to better understand our players’ needs and continue to invest in technological infrastructure that enables us to 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, including esports broadcasts. This connection also allows us to market and deliver content and services for popular franchises like FIFA, Battlefield and Star Wars to our players more efficiently.
Our Games and Services
We develop, market, publish and deliver games and services that can be played and watchedexperienced on a variety of platforms, including 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 digital distribution channelstraditional single-game purchase or through subscription offerings; and through retail channels. We believe that flexibility across platforms, distribution channels and business models maximizes the opportunity for players to access and enjoycertain of our games and services are available through a “free-to-play” model whereby players download the game for free and increases engagementengage with services provided on an ongoing basis. For example, we develop products and services within our global football franchise that allow players to engage through multiple business models, distribution channels and devices, including: (1) our annualized console and PC games and services. New platforms, engagement modelsassociated services, which can be purchased through both digital distribution and business models are expected to continue to emergeretail channels and also is available through subscription services; (2) FIFA Mobile, a mobile free-to-play offering; and (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 countries.
Digitally, our console games and live services can be purchased through third-party storefronts, such as the digital stores of our console platform partners Sony, Microsoft and Nintendo.partners. Our direct sales to Sony and Microsoft represented approximately 2933 percent and 16 percent of total net revenue, respectively, in fiscal year 2019; approximately 27 percent and 16 percent of total net revenue, respectively, in fiscal year 2018; and approximately 19 percent and 17 percent of total net revenue, respectively, in fiscal year 2017.2022. 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 and services on their platforms in certain Asian territories, such as our partnerships with Tencent Holdings Limited for FIFA Online in China and Nexon Co. Ltd. for FIFA Online in ChinaKorea. From time to time, third parties will publish games and Korea, respectively. Playersservices under a license to certain of our intellectual property assets.
We also canoffer our EA Play subscription service on consoles and PC as we look to build deeper relationships with our players and offer increased choice and flexibility for our players to try new games. EA Play allows players access to a selection of our console and PC games and services through our EA Access, Origin Access and Origin Access Premier subscription services.for a monthly or annual fee. Our packaged goods games are sold directly to mass market retailers, electronics specialty stores and game software specialty stores or through distribution arrangements.
In our games New distribution methods and services, we use brands that we either wholly own (such as Battlefield, The Sims, Apex Legends, Anthem, Need for Speed and Plants v. Zombies) or license from others (such as FIFA, Madden NFL and Star Wars). We develop and publish games and servicesacross diverse genres, such as sports, first-person shooter, action, role-playing and simulation, and offer our games and services through diverse business models are expected to continue to emerge in the future, and distribution channels, such as retail download, subscription and free-to-play. we intend to evaluate these opportunities on a case-by-case basis.
Our Future Opportunity
We believe that the breadthfuture of entertainment is interactive and depththat the consumption of our portfolioentertainment and our flexibility in business models and distribution channels provide ussports is deeply social, with strategic advantages. These advantages include the opportunity to engage an increasing number of players across more platformsour network using games to stay connected to friends, and geographies and a recurring source of revenue from, among other things,to express themselves. While we continue to anchor 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), the associated live services and our subscriptions business.
Our largest and most popular game is FIFA, the annualized version of which is consistently one of the best-selling games in the marketplace. Net revenue from FIFA 19, FIFA 18,and FIFA 17 represented approximately 14 percent of our total net revenue in fiscal year 2019 and approximately 11 percent of our total net revenue in each of fiscal year 2018 and 2017.
Within and alongside our games, we offer live services, including in-game purchases, downloadablebusiness on delivering amazing content and esports, that provide additional depthservices to more players whenever and engagement opportunities forwherever they want to play, our players. Our live services net revenue comprised 45 percent of our total net revenue during fiscal year 2019 and we expect that live services net revenue will continue to be material to our business. Our most popular live servicegoal is the Ultimate Team mode associated with our sports franchises. Ultimate Team allows players to collect current and former professional players in order to build from our core alongside these secular shifts and compete as, a personalized team. Net revenue from Ultimate Team represented approximately 28 percent, 21 percent and 16 percentinvest in new areas of our total net revenue during fiscal year 2019, 2018 and 2017, respectively, a substantial portion ofopportunity which was derived from FIFA Ultimate Team.
We also are investing in a number of long-term initiatives that we believe will allow ustranslate into sustained growth. These include:
•Providing creation tools for the community to better serve and deepen our engagementengage more deeply with our players. For example, we focuscontent and experiences;
•Aggregating and distributing our content and experiences to more players, on esports throughmore platforms, in more geographies, and more business models; and
•Harnessing the power of the social ecosystems in and around our Competitive Gaming Division. games.
We believe that the interest and enthusiasm that surrounds esports will drive engagement and monetization in our live services in addition to providing revenue through partnerships with sponsors and broadcasters. In addition, we are pursuing technology underlying cloud gaming and subscriptions, which we see as future growth opportunities.
will be influenced by our ability to realize the potential of our core while at the same time creating growth around that core. We aspire to create socially-connected ecosystems through which players can access amazing content, experiences, and tools that allow everyone to play, watch and create together.
Significant Relationships
Sony & Microsoft. Under the terms of agreements we have entered into with Sony ComputerInteractive Entertainment Inc.LLC and its affiliates and with Microsoft Corporation and its affiliates, we are authorized to develop, market, publish, and distribute disc-based products and digitally-delivered softwareservices, and we authorize Sony and Microsoft to distribute our digital products and services, compatible with PlayStation and Xbox consoles, respectively. Under these 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”royalty percentage on the revenue they derive from their sales of our products and services. Our transactions for packaged 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. 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 charges consumers for content purchased within the application or charges consumers a one-time fee to download the 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,countries, including China and Korea. Our players access games from the publishers’ platformsonline 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, platforms, business models and distribution 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, Tencent, NetEase, Tencent,Netmarble, Warner Brothers, Sony, Microsoft and Nintendo, primarily with respect to developing games and services that operate on consoles, PCs and/or mobile devices.
In addition, the gaming, technology/internet, social networking and entertainment industries have converged in recent years which has brought us into more direct competition with larger, well-funded technology companies such as Amazon.com, Inc., Alphabet Inc., Meta Platforms, Inc., Microsoft Corporation, and Netflix, Inc. These companies have strengthened their interactive entertainment capabilities, and we expect them to continue to do so. Their greater financial and other resources may provide larger budgets to develop and market tools, technologies, products and services that gain consumer success and shift player time and engagement away from our products and services. We also continue to expect new entrants to emerge.
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, publisher reputation, reliability, security, creativity, price, marketing, and quality of customer service.
Recently, our industry has undergone a period of increased consolidation which increases competitive pressure on us as interactive entertainment companies grow through acquisition – such as Take Two Interactive’s recent acquisition of Zynga – or as larger, well-funded technology companies strengthen their interactive entertainment capabilities – such as Microsoft’s recently announced definitive agreement to acquire Activision Blizzard.
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. We alsoproperty, 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, including ransomware attacks. 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.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 various and complex laws and regulations domestically and internationally, including laws and regulations related to gaming, user privacy, data collection and retention, consumer protection, protection of minors, online safety, content, advertising, localization, information security, intellectual property, competition, sanctions, addressing climate change, taxation, and taxation,employment, 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 in particular are subject to new laws or regulations or evolving interpretations and application of existing laws and regulations. For example, theregulations, including those related to gambling. The growth and development of electronic commerce, virtual items and virtual currency havehas prompted calls for new laws and regulations orand resulted in the application of existing laws or regulations to these business models.
that have limited or restricted the sale of our products and services in certain territories.
Seasonality
We have historically experienced the highest percentage of our net bookings in our third fiscal quarter due to seasonal holiday demand and the launch timing of our games. While we expect this trend to continue in fiscal year 2020,2023, there is no assurance that it will. In addition, we defer the recognition of a portion of
Human Capital
An inclusive, healthy and safe culture and diverse and engaged workforce is essential to our net revenue over an extended period of time.ability to execute our growth opportunities and build on-going and meaningful relationships with our communities. As a result, the quarter in which we generate the highest net bookings may be different from the quarter in which we recognized the highest amount of net revenue.
Employees
As of March 31, 2019, we had approximately 9,700 regular, full-time employees, over 6,000 of whom were outside the United States. We believe thatknowledge-based business, our ability to attract, train, motivate and retain qualified employees is a critical factor in the successful development of our products and services. As of March 31, 2022, we employed approximately 12,900 people globally, with 64 percent located internationally. Our Board and its Committees oversee our human capital management programs, practices and strategies and additional information on how they oversee these matters can be found in our annual Proxy Statement.
We are focused on supporting our employees across the full employee lifecycle and have implemented programs and practices designed to promote inclusion and diversity, employee engagement and employee wellness. For example, we support employee resource groups (“ERGs”) which are a critical component of our people strategy, bringing together employees with common interests or backgrounds to develop themselves personally and professionally, as well as supporting the Company’s goals and objectives. Our ERGs also celebrate allyship, a critical component for connecting employees and creating a sense of belonging. In addition, to support our employees during the COVID-19 pandemic, we have enhanced our programs to provide additional temporary support, including payments to assist with work from home costs and care needs, a pandemic care leave program, and additional services for mental and physical health.
Inclusion and Diversity
The global market for our products and services is diverse. We believe that a diverse, equitable and inclusive workplace that creates representative games and promotes positive play will engage a greater audience and lead to growth in our future success will depend,business. And, creating amazing games and services starts with a workplace that is as diverse as the communities we serve. We work to embed inclusion across our systems and processes in large measure,order to (1) attract, develop and retain talent that can thrive and do their best work, (2) develop relatable content and games, (3) enable expansion into new and diverse markets and (4) bridge to better representation that authentically reflects players around the world.
Our most recently published Company-wide gender and racial/ethnic representation, as well as our EEO-1 report (U.S. government reporting), are available on our abilitywebsite at https://www.ea.com/commitments/inclusion-and-diversity. To accelerate our progress with respect to continue attracting,representation, we strive to (1) create inclusive people systems and practices with diversity, equity and inclusion at the center, (2) create a belonging culture that welcomes different viewpoints and enables employees to do the best work of their careers, and (3) equip leaders with training motivating and retaining qualified employees. Approximately 8education that increases understanding and provides tools and behaviors to be inclusive managers.
Our commitments to inclusion, diversity and equity extend to compensating our employees fairly based on the work that they perform. We consider our pay equity philosophy at each stage at which compensation decisions are made, including when hiring and promoting employees and through our annual review cycle. In addition, we annually partner with an independent outside firm to review employees’ pay and promote fairness and a lack of unconscious bias in our compensation philosophy and practices, resulting in equitable base pay.
Talent Acquisition, Development and Retention
Our talent planning and hiring strategies are aligned with our strategic vision. We are building a diverse and talented workforce to shape the future of our business, and are committed to the development and growth of the next generation of diverse talent through community outreach and STEAM (Science, Technology, Engineering, Arts and Mathematics) education. We are dedicated to recruitment, hiring and development practices that promote the growth of underrepresented talent. Substantially all of our hiring includes diverse candidates in the initial pool, and we go further by setting aspirational targets for the inclusion of candidates from underrepresented communities at later stages of the recruiting process that we believe can lead to better outcomes. This strategic focus on hiring has led to positive hiring outcomes, including at the executive level. In each of the last four years, we have hired underrepresented talent above our current representation rates.
We are focused on promoting the total wellness of our people and maintain resources, programs and services to support employees' physical, mental, familial and financial health. We offer a wide range of benefits, such as comprehensive health insurance and time-off and leave programs, including specialized programs around key life events.
All regular, full-time employees are asked to complete an Engagement Survey twice per year, which helps EA understand how to improve the employee experience. 81 percent of employees participated in our most recent Engagement Survey, conducted in December 2021. We also conduct regular manager surveys, and during fiscal year 2022, offered ongoing access to targeted surveys to better understand the needs of our employees as they navigated the COVID-19 pandemic. Results of all employee surveys are evaluated and shared across the organization, including with our Board of whom workDirectors, and inform opportunities for further improvement in our DICE development studio in Sweden, are represented by a union.
people practices.
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”). The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the 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, 2021 Impact Report 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 Our Executive Officers
The following table sets forth information regarding our executive officers as of May 23, 2019:25, 2022: |
| | | | | | | | | | | | | |
| Name | | Age | | Position |
| Andrew Wilson | | 4447 | | Chief Executive Officer, Chair of the Board |
Blake JorgensenChristopher Suh | | 5951 | | Chief Operating Officer and Chief Financial Officer |
| Laura Miele | | 4952 | | Chief StudiosOperating Officer |
| Kenneth Moss | | 5356 | | Chief Technology Officer |
| Christopher Bruzzo | | 4952 | | Chief MarketingExperience Officer |
Joel Linzner | | 67 | | Executive Vice President, Worldwide Business Affairs |
| Mala Singh | | 4851 | | Chief People Officer |
Matthew BilbeyJacob J. Schatz | | 4353 | | Executive Vice President of Strategic GrowthChief Legal Officer & Corporate Secretary |
Kenneth A. BarkerEric Kelly | | 5250 | | Senior Vice President, Chief Accounting Officer |
Jacob J. Schatz | | 50 | | Executive 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 2013.2013 and was appointed Chair of the Board of Directors in August 2021. 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 as a director of Intel Corporation and is chairman of the board of the privately-held World Surf League.League and is a member of the Board of Trustees of the Paley Center for Media. Mr. Wilson has served on the board of directors of Intel Corporation within the last five years.
Mr. Jorgensen Suh has served as EA’sEA's Chief Financial Officer since September 2012March 2022. Prior to joining EA, Mr. Suh had a 25-year career at Microsoft Corporation, a technology company, serving most recently as Corporate Vice President and Chief Financial Officer of its Cloud & AI division from January 2018 to February 2022 and as EA’sGeneral Manager, Investor Relations from January 2013 to January 2018. Mr. Suh received both his MBA and undergraduate degrees from the University of Washington. Mr. Suh also serves on the Board of Directors of Cardlytics, Inc.
Ms. Miele has served as EA's Chief Operating Officer since April 2018. Prior to joining EA, he served as Executive Vice President, 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, Chief Financial Officer of Yahoo! Inc. Mr. Jorgensen earned his M.B.A. from Harvard Business School and his undergraduate degree from Stanford University.
Ms. Miele has served as EA’s Chief Studios Officer since April 2018.October 2021. Ms. Miele joined the Company in March 1996 and has held several positions at the Company, including Chief Studios Officer from April 2018 to October 2021, Executive Vice President, Global Publishing from April 2016 to April 2018, Senior Vice President of Americas Publishing from June 2014 to April 2016, General Manager of the Company’s Star Wars business from June 2013 to June 2014, and several senior roles in the Company's marketing organization.
Mr. Moss has served as EA’sEA'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. Prior to CrowdEye, Mr. Moss served in various technology roles at Microsoft, including leadership roles, for 20 years. Mr. Moss graduated from Princeton University.
Mr. Bruzzo has served as EA’sEA's Chief Experience Officer since September 2021. Mr. Bruzzo has been with EA since 2014, serving as Executive Vice President, Marketing, Commercial and Positive Play from October 2020 to September 2021 and as Chief Marketing Officer sincefrom September 2014.2014 to October 2020. 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. Bruzzo serves on the Board of Directors of Boot Barn Holdings, Inc.
Mr. LinznerMs. Singh 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. Singh has served as EA’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. Bilbey 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 Senior Vice President, Chief Accounting Officer since April 2006. From February 2012 to September 2012, he Ms. Singh 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 their Vice President and Corporate Controller from October 2002 as well as at Deloitte & Touche as an audit partner. Mr. Barker serves on the Board of Directors of Gatepath, a non-profit organization,Sovos Brands.
Mr. Schatz,EA’s Chief Legal Officer, has led EA's legal function and on the Accounting Advisory Board for the University of Notre Dame. Mr. Barker graduated from the University of Notre Dame.
Mr. Schatz has served as EA’s General Counsel and Corporate Secretary since June 2014. Mr. Schatz joined EA in 1999, and prior toholding several roles within EA's legal department until his current role, he servedappointment as Deputy General Counsel and as Vice President from 2006 toin 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.
Mr. Kelly has served as EA's Chief Accounting Officer since August 2021. Since joining EA in 2003, Mr. Kelly has held several positions within EA's finance organization, including Vice President and Worldwide Controller from January 2014 to August 2021 and finance leadership roles such as CFO of Asia and European Financial Controller. Mr. Kelly holds a B.S. in Accounting from Villanova University and is a licensed Certified Public Accountant.
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 occur, 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.
STRATEGIC RISKS
Our business is intensely competitive. We may not deliver successful and engaging products and services, or consumers may prefer our competitors’ products or services over our own.
Competition in our business is intense. Many new products and services are regularly introduced, but only a relatively small number of products and associated services drive significant engagement and account for a significant portion of total revenue. Our competitors range from established interactive entertainment companies to emerging start-ups. In addition, the gaming, technology/internet, and entertainment industries have converged in recent years and larger, well-funded technology companies have strengthened their interactive entertainment capabilities resulting in more direct competition with us. We expect them to continue to pursue and strengthen these businesses. Their greater financial and other resources may provide larger budgets to recruit our key creative and technical talent, develop and market products and services that gain consumer success and shift player time and engagement away from our products and services, or otherwise disrupt our operations. We also expect new competitors to continue to emerge throughout the world. If our competitors develop 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, or if our marketing strategies are not innovative or fail to resonate with players, particularly during key selling periods, our revenue, margins, and profitability will decline.
We strive to create innovative and high-quality products and services that allow us to build on-going and meaningful relationships with our community. However, innovative and high-quality titles, even if highly-reviewed, may not meet our expectations or the expectations of our players. Many financially successful products and services within our industry are iterations of prior titles with large established consumer bases and significant brand recognition, which makes competing in certain categories challenging. In addition, 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. A significant portion of our revenue historically has been derived from products 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 global football franchise, annualized versions of which are consistently one of the best-selling games in the marketplace. Any events or circumstances that negatively impact our global football franchise, such as product or service quality, our transition to a new EA SPORTS FC brand, other products that take a portion of consumer spending and time, the delay or cancellation of a product or service launch, increased competition for key licenses, or real or perceived security risks, could negatively impact our financial results to a disproportionate extent.
The increased importance of live services, including extra content, to our business heightens the risks associated with the 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 services are the extra content available for the Ultimate Team mode associated with our sports franchises and extra content purchased within Apex Legends. Any events or circumstances that negatively impact our ability to reliably provide content or sustain engagement for Ultimate Team, particularly FIFA Ultimate Team, or Apex Legends, would negatively impact our financial results to a disproportionate extent.
We may not meet our product and live service development schedules and key events, sports seasons and/or movies that are tied to our product and live service release schedule may be delayed, cancelled or poorly received.
Our ability to meet 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 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, factors related to the COVID-19 pandemic, and, in certain cases, approvals from third parties. We have experienced development delays for our products and services 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 - such as our sports franchises and the associated Ultimate Team live service - in conjunction 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 business and operating results could be materially adversely affected.
Our industry changes rapidly and we may fail to anticipate or successfully implement new or evolving technologies, or adopt successful business strategies, distribution methods or services.
Rapid changes in our industry require us to anticipate, sometimes years in advance, the ways in which our business can remain competitive in the market. We have invested, and in the future may invest, in new business and marketing strategies, tools and 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 our mobile business through seeking to maximize our mobile live services, meaningfully expanding key franchises on the mobile platform and through mergers and acquisitions activity. Successfully monetizing mobile games is difficult and requires that we deliver valuable and entertaining player experiences that engage significant number of players or that we are able to otherwise monetize our mobile games. The success of our mobile games depends, in part, on unpredictable and volatile factors beyond our control including consumer preferences, competing games, new mobile platforms and the availability of other entertainment experiences. Such endeavors involve significant risks and uncertainties. No assurance can be given that the tools and technology we choose to implement, the business and marketing strategies we choose to adopt and the products, services and platform strategies that we pursue will achieve financial results that meet or exceed our expectations. Our reputation and brand could also be adversely affected. We also may miss opportunities or fail to respond quickly enough to industry change, including the adoption of tools and technology or distribution methods or develop products, services or new ways to engage with our games that become popular with consumers, which could adversely affect our financial results.
Our product and service development process usually starts with particular platforms and distribution methods in mind, and a range of technical development, feature and ongoing 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 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 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.
Stakeholders have high expectations for the quality and integrity of our business, culture, products and services. We may be unsuccessful in meeting these expectations or make business decisions to meet these expectations that impact our short-term financial results.
Expectations regarding the quality, performance and integrity of our business, culture, products and services are high. Players and other stakeholders have sometimes been critical of our industry, brands, products, services, online communities, business models and/or practices for a wide variety of reasons, including perceptions about gameplay fun, fairness, game content, features or services, or objections to certain of our practices. These negative responses may not be foreseeable. We also may not effectively manage our 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 content, features and services for our games, after taking into consideration, among other things, feedback from our community or geopolitical events even if those decisions negatively impacted our operating results in the short term. For example, in response to the current conflict in Ukraine, we stopped sales of our games and content in Russia and Belarus, worked with our platform partners to remove our
games and live services from their stores, and took other actions. These actions had a negative impact on our financial results and may impact our future development processes. We expect to continue to take actions as appropriate, including actions that may result in additional expenditures and the loss of revenue.
We aim to offer our players fun, fair and safe environments in which to play and invest in, and deploy, tools and technologies to promote positive play and facilitate players’ faith in their gameplay experience. Although we expend resources, and expect to continue to expend resources, to promote positive play, our efforts may not be successful due to scale, limitations of existing technologies or other factors. If our efforts are unsuccessful, negative sentiment about our business may increase and our brand and reputation may be harmed, scrutiny from governmental bodies and consumer groups may occur, and our financial and operating results may be adversely impacted.
Certain of our games and features on our platforms support online features that allow players and viewers to communicate with one another and post content, in real time, that is visible to other players and viewers. From time to time, this “user generated content” may contain objectionable and offensive content that is distributed and disseminated by third parties and our brands may be negatively affected by such actions. If we fail to appropriately respond to the dissemination of such content, we may be subject to lawsuits and governmental regulation, our players may not engage with our products and services and/or may lose confidence in our brands and our financial results may be adversely affected.
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, distributed workforce models. 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.
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 in part on accurately predicting which consoles, systems and devices will be successful in the marketplace and providing engaging and commercially successful games and services for those 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 incur significant expense to adjust our product portfolio and development efforts in response to changing consumer preferences. 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 and we may be unable to fully recover the investments we have made in developing our products and services; or new consoles, systems or devices may take market share away from those for which we have devoted significant resources, causing us to not be able to reach our intended audience and take advantage of meaningful revenue opportunities.
In fiscal year 2021, our key console partners Sony and Microsoft each released new generation consoles. In periods of transition, sales of products for legacy generation consoles typically slow or decline in response to the 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. This console transition may have a comparable impact on our live services business, potentially increasing the impact on our financial results. The transition could accelerate faster or slower than we expect. For example, production of new generation consoles from Sony and Microsoft has been slower than expected because of semiconductor chip shortages and global supply chain disruptions. We do not control the 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. For a period of time, we will also develop, market and operate games and services on both legacy and new generation consoles simultaneously. As a result of these factors, our operating results during console transitions may be more volatile and difficult to predict.
We may experience declines or fluctuations in the re-occurring portion of our business.
Our business model includes revenue that we deem re-occurring in nature, such as revenue from our annualized sports franchises (e.g., Madden NFL, global football), 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 re-occurring in nature. Consumer demand has declined and fluctuated, and could in the future decline or fluctuate, as a result of a number of 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 re-occurring 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. In addition, 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. For example, we have devoted financial and operational resources to our subscription 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. Any failure to successfully implement new business models could materially impact our financial and operating results.
Acquisitions, investments, divestitures and other strategic transactions could result in operating difficulties and other negative consequences.
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) investments in, or transactions with, strategic partners, and (3) investments in new businesses as part of our long-term business strategy. These acquisitions and other transactions involve significant challenges and risks including that the transaction does not advance our business strategy or strategic goals, that we do not realize a satisfactory return on our investment or cannot realize anticipated tax benefits, that we acquire liabilities and/or litigation from acquired companies or liabilities and/or litigation results from the transactions, that our due diligence process does not identify significant issues, liabilities or other challenges, diversion of management’s attention from our other businesses, and 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 and costs associated with the integration of business systems and technologies, and acquired products and services, 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 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, 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. Other competitors may assume certain licenses and create competing products, impacting our sales. Competition for these licenses has increased, and may continue to 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.
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 platform partners, third-party service providers, vendors, licensing partners, development partners and licensees. 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, 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, 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.
OPERATIONAL RISKS
The COVID-19 pandemic and the various responses to it have affected how we are operating our business and the duration and extent to which this will impact our future operations and financial results is uncertain.
The COVID-19 pandemic and the various responses to it have affected how we and our partners are operating our businesses and have affected our operating results. The duration and extent to which this will impact our future operations and results remains uncertain. We have established and continue to maintain, protocols to promote the health and safety of our workforce and business partners. We are beginning to re-open our office locations and resume business travel as it is appropriate to do so, consistent with the health and safety of our employees and in compliance with any local legal restrictions or requirements. The reintroduction of employees to the workplace could introduce operational risk, negatively impact productivity, and give rise to claims by employees or otherwise adversely affect our business. As we begin to re-open our offices, employees may be offered more flexibility in the amount of time they work in an office, which may adversely impact the productivity of certain employees. The long-term effects of the COVID-19 pandemic on the future of work are not certain and may present operational challenges and impact our ability to attract and retain talent, and our teams’ ability to collaborate creatively, each of which may adversely affect our business.
Certain of our development teams have worked for an extended period in a distributed environment, whereas these teams historically collaborated in-person on the creative and technical process required to develop high-quality products and services at scale. This has disrupted, and may continue to disrupt, the productivity of our workforce and the creative process to which our teams are accustomed. Companies in our industry have experienced issues related to game and service quality during the current work-from-home period, and we have changed the launch date of key products because of challenges associated with a distributed development environment. In addition, the longer-term impact to our creative and technical development processes is unknown and the associated risks, including with respect to game quality and developmental delays, which may cause us to delay or cancel additional release dates, may be heightened as the work-from-home period persists.
The extent of the impact of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the duration and spread of the pandemic, future waves of COVID-19 infections and variants, the extent, speed and effectiveness of worldwide containment and vaccination efforts and the impact of these and other factors on our employees, customers, partners and vendors. If we are not able to flexibly respond to and manage the impact of these and other currently unknown impacts related to the COVID-19 pandemic, our business will be harmed.
To the extent that the COVID-19 pandemic harms our business and results of operations, many of the other risks described in this “Risk Factors” section may be heightened.
Catastrophic events may disrupt our business.
Natural disasters, cyber-incidents, weather events, wildfires, power disruptions, telecommunications failures, pandemics, health crises and other public health events, 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 conduct 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, any of which may prevent us from executing against our business strategies and/or cause a decrease in consumer demand for our products and services.
We recognize the inherent physical risks associated with climate change. Natural disasters and weather events linked to climate change are increasing in size and scope and certain of our office locations are located in areas that are vulnerable to climate change effects. Climate-related events and their impact on critical infrastructure in areas in which we do business have the potential to disrupt our business and operations, and/or the businesses and operations of our partners, and may cause us to incur additional costs to maintain or resume operations.
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 or online stores selling our products and services, cause delay or interruption in our product or live services offerings, allow breaches of data security or result in the loss of critical data. 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 decrease in consumer demand for our products and services could materially impact our reputation and brand, financial condition and operating results.
We have and may continue to experience security breaches and cyber threats.
The integrity of our and our 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, which may include individuals or groups, including state-sponsored attackers. These actions include cyber-attacks, including ransomware, 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 consumer and employee personal information, our intellectual property and other assets. In addition, our systems and networks could be harmed or improperly accessed due to error by employees or third parties that are authorized to access these networks and systems. We also rely on technological infrastructure provided by third-party business partners to support the online functionality of our products and services, who are also subject to these same cyber risks. Both our partners and we have expended, and expect to continue to expend, financial and operational resources to guard against cyber risks and to help protect our data and systems. However, the techniques used by malfeasant actors change frequently, continue to evolve in sophistication and volume, and often are not detected for long periods of time.
As a result of the COVID-19 pandemic, remote access to our networks and systems, and the networks and systems of our partners, has increased substantially. We expect to resume operations in our offices under a hybrid work model where our workforce will spend a portion of their time working in offices and a portion of time working remotely. While we and our partners have taken steps to secure our networks and systems, these networks and systems may be more vulnerable to a successful cyber-attack or information security incident in this hybrid working model. The costs to respond to, mitigate, and/or notify affected parties of cyber-attacks and other security vulnerabilities are significant. It may also be necessary for us to take additional extraordinary measures and make additional expenditures to take appropriate responsive and preventative steps. 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, responsive measures and preventative measures have included, and could in the future include, the loss of proprietary and personal data and interruptions or delays in our business operations, exploitation of our data, as well as loss of player confidence and damage to our brand and reputation, financial expenses and financial loss. In addition, such events could cause us to be non-compliant with applicable regulations, and 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 expect future events to occur.
In 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 have included the illegitimate or unauthorized 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 designed to generate virtual items or currency illegitimately or to execute account takeover attacks against our players. We anticipate such activity to continue. These abuses and exploits, and the steps that we take to address these abuses 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 or cause harm to our reputation and brand.
We may experience outages, disruptions or degradations in our services, products and/or technological infrastructure.
The reliable performance of our products and services depends on the continuing operation and availability of our information technology systems and those of our external service providers, including third-party “cloud” computing services. Our games and services are complex software products and maintaining the sophisticated internal and external technological infrastructure required to reliably deliver these games and services is expensive and complicated. The reliable delivery and stability of our products and services has been, and could in the future be, adversely impacted by outages, disruptions, failures or degradations in our network and related infrastructure, as well as in the online platforms or services of key business partners that offer, support or host our products and services. In addition, the supply chain of hardware needed to maintain this technological infrastructure has been disrupted and geopolitical events, including the Russian invasion of Ukraine and any indirect effects, may further complicate existing supply chain constraints. The reliability and stability of our products and services has been affected by events outside of our control as well as by events within our control, such as the migration of data among data centers and to third-party hosted environments, the performance of upgrades and maintenance on our systems, and online demand for our products and services that exceeds the capabilities of our technological infrastructure.
If we or 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 available 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 only 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, therefore negatively impacting engagement, reputation, brand and revenue growth.
Attracting, managing and retaining our talent is critical to our success.
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. The market for highly-skilled workers and leaders in our industry is extremely competitive, particularly in the geographic locations in which many of our key personnel are located and has recently intensified further due to industry trends. 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 strive to provide a workplace culture that is diverse, equitable, inclusive and safe and have invested in policies, practices, tools and people in this regard. If we cannot successfully recruit, train, motivate and retain qualified employees, develop and maintain a diverse, equitable, inclusive and safe work environment, or replace key employees following their departure, our reputation and brand may be negatively impacted and our ability to develop and manage our business will be impaired.
We rely on the consoles, systems and devices of partners who have significant influence over the products and services that we offer in the marketplace.
A 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 typically provide these partners with significant control over the approval and distribution of the products and services that we develop for their consoles, systems and devices. For products and services delivered via digital channels, each respective 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. Our partners could choose to exclude our products and services from, or de-emphasize the promotion of our products and services within, some or all of their distribution channels in order to promote their own products and services or those of our competitors. In addition, we are dependent on these partners to invest in, and upgrade, the capabilities of their systems in a manner that corresponds to the preferences of consumers. Failure by these partners to keep pace with consumer preferences could have an adverse impact on the 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 significant 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 these 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. These partners also control the information technology systems through which online sales of our products and service channels are captured. If our partners establish terms that restrict our offerings, significantly impact the financial terms on which these products or services are offered to our customers, or their information technology systems experience 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.
A significant portion of our packaged goods sales are made to a relatively small number of retail 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 credit extended to these partners, we could be vulnerable to collection risk if one or more of these partners experienced continued deterioration of their business or declared bankruptcy. Additionally, receivables from these partners generally increase in our December fiscal quarter as sales of our products generally increase in anticipation of the holiday season which exposes us to heightened risk at that time of year. Having a significant portion of our 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.
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.
LEGAL AND COMPLIANCE RISKS
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 global data privacy, 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 complaints, 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 practices, including allowing improper or unauthorized access, acquisition or misuse and/or uninformed disclosure of consumer, employee and other information, or a perception that we do not adequately secure this information or provide consumers with adequate notice about the information that they authorize us to collect and disclose could result in brand, reputational, or other harms to the business, result in costly remedial measures, deter current and potential customers from using our products and services and cause our financial results to be materially affected.
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 us, negatively impact our ability to offer our products and services, and could result in legal liability, costly remedial measures, governmental and regulatory investigations, harm our profitability, reputation and brand, and/or 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.
Government regulations applicable to us may negatively impact our business.
We are a global company subject to various and complex laws and regulations domestically and internationally, including laws and regulations related to consumer protection, protection of minors, online safety, content, advertising, localization, information security, intellectual property, competition, sanctions, addressing climate change, taxation, and employment, among others. Many of these laws and regulations are continuously evolving and developing, and the application to, and impact on, us is uncertain. 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. Any 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 and features within our games and services 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. We are also introducing features into our games and services that allow players to create and share user-generated content. Such content may be objectionable or offensive and decrease engagement with our products and services, cause a loss of confidence in our brands and expose us to liability and regulatory oversight, particularly as applicable global laws and regulations are introduced and evolve. New laws related to these business models and features or the interpretation or application of current laws 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 or require pre-approval processes of uncertain length before our games and services can be offered. Adoption of ratings systems,
censorship, restrictions on distribution and changes to approval processes or the status of any approvals could harm our business by limiting the products we are able to offer to our 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.
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. 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 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 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 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.
Our products and brands are subject to intellectual property infringement, including in jurisdictions that do not adequately protect our products and intellectual property rights.
We regard our products, brands and intellectual property as proprietary and take measures to protect our assets 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. Further, our products and services are available worldwide and the laws of some countries, particularly in Asia, either do not protect our products, brands and intellectual property to the same extent as the laws of the United States or are poorly enforced. Legal protection of our rights may be ineffective in countries with weaker intellectual property enforcement mechanisms. In addition, certain 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, our practices and methodologies may not be effective against all eventualities.
FINANCIAL RISKS
Our financial results are subject to currency and interest rate fluctuations.
International sales are a fundamental part of our business. For our fiscal year ended March 31, 2022, international net revenue comprised 57 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, and volatility in foreign currency exchange rates remains elevated as compared to historic levels. Strengthening of the U.S. dollar, particularly relative to the Euro, British pound sterling, Australian dollar, Japanese yen, Chinese yuan, South Korean 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 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. In addition, interest rate volatility can decrease the amount of interest earned on our 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 $1.9 billion in senior unsecured notes outstanding as well as an unsecured $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.
This indebtedness and any indebtedness that we may incur in the future 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 for other purposes, including capital expenditures, share repurchases, acquisitions or otherwise funding our growth strategy;
•Limiting our flexibility in planning for, or reacting to, changes in our business and our industry; and
•Increasing our vulnerability to downturns in our business or 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 requires us to maintain compliance with a 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. There can be no assurance that any refinancing or additional financing would be available on terms that are favorable or acceptable to us, if at all. 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 of 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 laws could 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 challenged and audited, and may continue to, challenge and audit our methodologies for calculating our income taxes, which could increase 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, changes in our geographic mix of earnings, changes in the elections we make, changes in the valuation of our deferred tax assets and liabilities, changes in our corporate structure, changes in applicable accounting rules, or changes in applicable tax laws or interpretations of existing income and withholding tax laws, as well as other factors. The impact of excess tax benefits and tax deficiencies could result in significant fluctuations to our effective tax rate.
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, and could continue to affect, our effective tax rates and cash taxes, and could cause us to change the way in which we structure our business and result in other costs. In particular, recently proposed changes to tax regulations in the United States and among the countries in the Organization for Economic Co-operation and Development could materially impact our provision for income taxes and cash taxes. Our effective tax rate also could be adversely affected by changes in our valuation allowances for deferred tax assets. Our valuation allowances, in turn, can be impacted by several factors with respect to our business and industry. Significant judgment is involved in determining the amount of valuation allowances, and actual financial results also may differ materially from our current estimates and could have a material impact on our assessments.
We are 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. Several 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 other non-income taxes. There 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 scope. If these foreign taxes are applied to us, it could have an adverse and material impact on our business and financial performance.
GENERAL RISKS
Our business is subject to economic, market, public health 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, political instability, and adverse political developments in or around any of the countries in which we do business, particularly conditions that negatively impact discretionary consumer spending and consumer demand or increase our operating costs, including conflict, inflation, slower growth, recession and other macroeconomic conditions have had, and could continue to have, a material adverse impact on our business and operating results. In addition, relations between the United States and countries in which we have operations and sales have fluctuated over time resulting in the adoption or expansion of trade restrictions, including economic sanctions, that have a negative impact on our financial results and development processes.
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 other forms of entertainment, and critical reviews and public tastes and preferences, which may change rapidly and cannot necessarily be predicted.
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 our 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), changes in securities analysts’ estimates of our future financial performance, ratings or recommendations, our results or future financial guidance falling below our expectations and analysts’ and investors’ expectations, the failure of our capital return programs to meet analysts’ and investors’ expectations, the announcement and integration of any acquisitions we may make, departure of key personnel, cyberattacks, or factors largely outside of our control including, those affecting interactive gaming, entertainment, and/or technology companies generally, national or international economic 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.
Our business is subject to many risks and uncertainties, which may affect our future 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. We may not deliver “hit” products and services, or consumers may prefer our competitors’ products or services over our own.
Competition in our industry is intense. Many new products and services are regularly introduced in each major industry segment (console, mobile and PC), but only a relatively small number of “hit” titles account for a significant portion of total revenue in each segment. 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 effort to focus on developing high-quality and engaging products and services with the potential to become hits. High-quality titles, even if highly-reviewed, may not turn into a hit. Many hit products and services within our industry are iterations of prior hits with large established consumer bases and significant brand recognition, which makes competing in certain 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 products and services based on a few popular franchises, and the underperformance of a single major title could 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, the annualized version of which is 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 revenue to our business heightens the risks associated with our limited product portfolio. 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 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 industry changes rapidly and we may fail to anticipate orsuccessfully implement new or evolving technologies, or adopt successful business strategies, distribution methods or services.
Rapid changes in our industry require us to anticipate, sometimes years in advance, the ways in which 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 investments will achieve expected returns. For example, we are investing in the technological infrastructure that we expect will enable us to 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. We also recently expanded our free-to-play business model by launching our first free-to-play console game. Such endeavors may involve significant risks and uncertainties, and 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 be successful. If we do not successfully evolve our business in a manner that meets or exceeds player expectations, our reputation and brand may be materially adversely affected and our financial condition and operating results may be impacted. We also may miss opportunities to adopt technology or distribution methods or develop products, 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 alternatives, 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 ongoing 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 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 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.
Our industry is prone to, and our systems and networks are subject to, cyber-attacks, computer viruses, worms, phishing attacks, malicious software programs and other information security incidents that seek to exploit, disable, damage, disrupt or gain access to our networks, our products and services, supporting technological infrastructure, intellectual property and other assets. We expect these threats to our systems and networks to continue. In addition, we rely on technological infrastructure provided by third-party business partners to support the online functionality of our products and services. These business partners, as well as our channel partners, also are subject to cyber risks and threats. Both our partners and we have expended, and expect to continue to expend, financial and operational resources to implement certain systems, processes and technologies to guard against cyber risks and to help protect our data and systems. However, the techniques used to exploit, disable, damage, disrupt or gain access to our networks, our products and services, supporting technological infrastructure, intellectual property and other assets change frequently, continue to evolve in sophistication and volume, and often are not detected for long periods of time. Our systems, processes and technologies, and the systems, processes and technologies of our business partners, may not be adequate against all eventualities. The costs to respond to, mitigate, and/or notify affected parties of cyber-attacks and other security vulnerabilities are significant. Any failure to prevent or mitigate security breaches or cyber risks, or detect or respond adequately to a security breach or cyber risk, could result in a loss of anticipated revenue, interruptions to our products and services, cause us to incur significant remediation and notification costs, degrade the user experience, cause consumers to lose confidence in our products and services and cause us to incur significant legal and financial costs. This could harm our business, reputation and brand, disrupt our relationships with partners and customers and diminish our competitive position.
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 include 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 abuses and exploits, and the steps that we take to address these abuses 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 harm to our reputation and brand.
Our business could be adversely affected if our consumer protection, data privacy and security practices are not adequate, or perceived as being inadequate, to prevent data breaches, or by the application of consumer protection and data privacy and security laws generally.
In the course of our business, we collect, process, store and use consumer, employee and other information, including personal information, passwords, credit card information gameplay details and banking information. Although we expend, and expect to continue to expend, financial and operational resources to create and enforce security measures, policies and controls that are designed to protect this information from improper or unauthorized access, acquisition and misuse and/or uninformed disclosure, our security measures, policies and controls may not be able successful against all eventualities. The improper or unauthorized access, acquisition or misuse and/or uninformed disclosure of consumer and other information, or a perception that we do not adequately secure this information or provide consumers with adequate notice about the information that they authorize us to disclose, 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. In addition, third party vendors and business partners receive access to 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 us, negatively impact our ability to offer our products and 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 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.
As a global company, we are subject to global data privacy, data protection, localization, security and consumer-protection laws and regulations. These laws and regulations are emerging and evolving in countries worldwide and the interpretation and application of these laws and regulations in the United States, Europe and elsewhere often are uncertain, contradictory and changing. For example, the European General Data Protection Regulation (GDPR) applies to us, creating a range of new compliance obligations regarding the treatment of personal data. In addition, the GDPR contains significant penalties for non-compliance. It is possible that these laws may be interpreted or applied in a manner that is adverse to us, unforeseen, or otherwise inconsistent with our practices or that we may not adequately adapt our internal policies and/or procedures to evolving regulations, any of which could result in litigation, regulatory investigations and potential legal liability, require us to change our practices in a manner adverse to our business or limit access to our products and services in certain countries. 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, disruptions or degradations in our services, products and/or technological infrastructure.
The reliable performance of our products and services increasingly depends on the continuing operation and availability of our information technology systems and those of our external service providers, including third-party “cloud” computing services. Our games and services are complex software products, and maintaining the sophisticated internal and external technological infrastructure required to reliably deliver these games and services is expensive and complex. The reliable delivery and stability of our products and services could be adversely impacted by outages, disruptions, failures or degradations in our network and related infrastructure, as well as in the online platforms or services of key business partners who offer, support or host our products and services. Possible causes of these outages, disruptions, failures or degradations include natural disasters, power loss, terrorism, cyber-attacks, computer viruses, bugs or other malware or ransomware that may harm our systems or the systems of our external business partners. In addition, the migration of data among data centers and to third-party hosted environments and the performance of upgrades and maintenance on our systems could impact the reliability and stability of our products and services if not managed properly.
If we or 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 available 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 only 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 consumers. 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, but it is possible that we may fail to scale effectively and grow this technical infrastructure to accommodate these increased demands, which may adversely affect the reliable and stable performance of our games and services, therefore negatively impacting engagement, reputation, brand and revenue growth.
Negative perceptions about and responses to our brands, products, services and/or business practices 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 may be critical of our brands, products, services, 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 of our 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 our 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. Negative sentiment about gameplay fairness, 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 platforms developed by third parties and our ability to develop commercially successful products and services for those platforms.
The success of our business is driven in part by the commercial success and adequate supply of third-party platforms for which we develop our products and services or through which our products and services are distributed. Our success also depends on our ability to accurately predict which platforms and distribution methods will be successful in the marketplace, our ability to develop commercially successful products and services for these platforms, our ability to simultaneously manage products and services on multiple platforms and our ability to effectively transition our products and services to new platforms. We must make product development decisions and commit significant resources well in advance of the commercial availability of new platforms, and we may incur 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 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 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 platform for which we 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.
Government regulations applicable to us may negatively impact our business.
We are a global company subject to various and complex laws and regulations domestically and internationally, including laws and regulations related to consumer protection, 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. 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 interpretation. Any 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. For example, the growth and development of electronic commerce, virtual items and virtual currency have prompted calls for new laws and regulations, or the application of existing laws or regulations, that could limit or restrict the sale of our products and services or otherwise impact our products and services. 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, our skill-based competitions in the future could become subject to evolving laws and regulations. New laws related to these business models or changes in 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, lessen the engagement with, and growth of, profitable business models, and expose us to increased compliance costs, significant liability, 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 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.
We may not meet our product development schedules or key events, sports seasons and/or movies that are tied to our product and service release schedule to may be delayed, cancelled or poorly received.
Our ability to meet product development schedules is affected by a number of factors both within 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 and significant content for our ongoing live services - such as within our Ultimate Team live service - 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.
Historically our business has been highly seasonal with the highest percentage of our sales occurring in the quarter ending in December. While we expect this trend to continue in fiscal year 2020, there is no assurance that it will be so. If we miss key selling periods for products or services for any reason, including product delays or product cancellations our sales likely will suffer significantly. Additionally, macroeconomic conditions or the occurrence of unforeseen events that negatively impact consumer or retailer buying patterns, particularly during the quarter ending in December, likely will harm our financial performance disproportionately.
Our marketing and advertising efforts may fail to resonate with 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 and streaming services, event sponsorship, partnerships with influencers and content creators and direct communications with consumers including via email. Furthermore, 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. Our ability to sell our products and services is dependent in part upon the success of these programs, and changes to consumer preferences, actions by influencers or content creators, marketing regulations, technology changes or service disruptions may negatively impact our ability to reach our customers or otherwise negatively impact our marketing campaigns or the franchises associated with those marketing campaigns. Moreover, if the marketing for our products and services is not innovative, agile or fails to resonate with our customers, 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.
We may not attract, train, motivate and retain key personnel.
The market for technical, creative, marketing and other personnel essential to the development, marketing and support of our products and services and management of our businesses is extremely competitive, particularly in the geographic 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 hire and retain senior executives and other personnel that we deem critical to our success. If we cannot successfully recruit, train, motivate and retain qualified employees, or replace key employees following their departure, 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, 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), the associated live services and our subscriptions business. 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. Furthermore, we may cease to offer games and services that we previously had deemed to be recurring in nature. Consumer demand may decline or fluctuate as a result of a number of 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 platforms 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 popularity, reputation and brand of these partners could also 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 significantly greater or less than our forecasts. In addition, 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. For example, we have devoted financial and operational resources to our subscription 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 number of factors, including satisfaction with our products and services, our ability to provide engaging products and services, third parties offering their products and services within our subscription, platform providers providing access to our subscription, products and services offered by our competitors, reliability of our infrastructure and the infrastructure of our platform partners, pricing, the actual or perceived security of our and our platform 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 or remediation of the internal control 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 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 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, 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 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.
We rely on the systems of our platform partners who have significant influence over the products and services that we offer on their systems.
A significant percentage of our digital net revenue is attributable to sales of products and services through our significant platform partners, including Sony, Microsoft, Nintendo, Apple and Google. The concentration of a material portion of our digital sales in these platform partners exposes us to risks associated with these businesses. Any deterioration in the businesses of our platform 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 platform partners typically give them significant control over the approval, manufacturing and distribution of the products and services that we develop for their platform. In particular, our arrangements with Sony and Microsoft could, in certain circumstances, leave us unable to get our products and services approved, manufactured or distributed to consumers. For our digital products and services delivered via digital channels maintained by, among others, Sony, Microsoft, Nintendo, Apple and Google, each respective platform 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 platform partners to invest in, and upgrade, digital commerce capabilities in a manner than corresponds to the way in which consumers purchase our products and services. Failure by our platform partners to keep pace with consumer preferences could have an adverse impact on our ability to merchandise and commercialize our products and services which could harm our business and/or financial results.
Moreover, certain of our platform 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 platform 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 platform partners control the information technology systems through which online sales of our products and service channels are captured. If our platform partners establish terms that restrict our offerings through their platforms, significantly impact the financial terms on which these products or services are offered to our customers, or their information technology systems experiences outages that impact our players’ ability to access our games or make in-game purchases or cause an unanticipated delay in reporting, our business and/or financial results could be materially affected.
Our business is subject to economic and market conditions, particularly risks generally associated with the entertainment industry.
Our business is subject to economic and market 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, including inflation, slower growth, recession and other macroeconomic conditions, including those resulting from geopolitical issues and uncertainty, could have a material adverse impact on our business and operating results. For example, the government of the United Kingdom has initiated a process to leave the European Union (“Brexit”) and may do so without an agreement governing the terms and conditions of their exit. Brexit has caused economic and legal uncertainty in the region and may result in macroeconomic conditions that adversely affect our business. In addition, evolving immigration rules and trade regimes could negatively impact our business. We have taken precautionary measures with respect to these matters, in relation to Brexit and otherwise, but given the significant uncertainty our precautions may not be adequate.
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 other forms of entertainment, and critical reviews and public tastes and preferences, which may change rapidly and cannot necessarily be predicted.
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, 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 reasonable resource or technical constraints. Therefore, 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 consumers 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 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.
Our products and brands are subject to the threat of piracy, unauthorized copying and other forms of intellectual property infringement.
We regard our products and brands as proprietary and take measures to protect our products, brands and other confidential information 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 and other forms of unauthorized copying and use of our content and brands are persistent problems for us, and policing is difficult. Further, the laws of some countries in which our products are or may be distributed either do not protect our products 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. In addition, although we take steps to enforce and police our rights, factors such asthe proliferation of technology designed to circumvent the protection measures used by our business partners or by us, the availability of broadband access to the Internet, the refusal of Internet service providers or platform holders to remove infringing content in certain instances, and the proliferation of online channels through which infringing product is distributed all have contributed to an expansion in unauthorized copying of our products and brands.
We may experience outages, disruptions and/or degradations of our infrastructure.
We may experience outrages, disruptions and/or degradations of our infrastructure, including information technology system failures and network disruptions that harm our ability to conduct normal business operations. These may be caused by natural disasters, cyber-incidents, weather events, power disruptions, telecommunications failures, failed upgrades of existing systems or migrations to new systems, acts of terrorism or other events, including cyber-attacks or malicious software programs that exploit vulnerabilities. System redundancy may be ineffective or inadequate, and our disaster recovery planning may not be sufficient for all eventualities. Such failures or disruptions could prevent access to our products, services or online stores selling our products and services, interruption in our ability to conduct critical business functions, breaches of data security or the loss of critical data. Our corporate headquarters in Redwood City, CA and our studios in Los Angeles, California, Seattle, Washington and in Burnaby, British Columbia 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 results in the disruption or degradation of any of our critical business or information technology systems could harm our ability to conduct normal business operations and materially impact our reputation and brand, financial condition and operating results.
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. We also could be more vulnerable to collection risk if one or more of these partners experienced a deterioration of their business or declared bankruptcy. Additionally, receivables from these partners generally increase in our December fiscal quarter as sales of our products generally increase in anticipation of the holiday season. Having a significant portion of our 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.
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.
Our financial results are subject to currency fluctuations.
International sales are a fundamental part of our business. For our fiscal year ended March 31, 2019, international net revenue comprised 61 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 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;
Limiting our flexibility in planning for, or reacting to, changes in our business and our 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 includes a maximum capitalization ratio and minimum liquidity requirements. 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, exposure to additional tax liabilities, changes to tax laws and interpretations of tax laws could 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 may challenge our methodologies for calculating our income tax provision or its underlying assumptions, which could increase 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 could be adversely affected by our profit levels, changes in our business, 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 tax laws, as well as other factors. For example, the outcome of Altera Corp. v. Commissioner, currently pending before the Ninth Circuit Court of Appeals, as well as future regulations and 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. Further changes to U.S. federal, state or international tax laws applicable to corporate multinationals, particularly in Switzerland, where our international publishing business is headquartered, and changes in such jurisdictions’ interpretations, decisions, policies or positions with respect to existing tax laws could adversely affect our effective tax rates, cause us to change the way in which we structure our business or result in other costs.
We are required to pay taxes other than income taxes, such as payroll, sales, use, value-added, net worth, property and goods and services taxes, in both the United States and foreign jurisdictions. Several foreign jurisdictions have introduced new digital services taxes on revenue of companies that provide certain digital services. There is limited guidance about the applicability to these new taxes to our business and significant uncertainty as to of the digital services that will be deemed in scope. If these new taxes are applied to the Company’s revenue in these foreign jurisdictions, it could have an adverse impact on our business and financial performance. Furthermore, we are regularly subject to audit by tax authorities with respect to both income and such other non-income taxes. Unfavorable audit results or tax rulings, or other changes resulting in significant additional tax liabilities, could have material adverse effects upon our earnings, cash flows, and financial condition.
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 impact our reported financial position and financial results. For more information on recently adopted accounting standards and recently issued accounting standards applicable to 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 Basis of Presentation under the subheadings “Recently Adopted Accounting Standards” and “Other Recently Issued Accounting 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 our 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), changes in securities analysts’ estimates of our future financial performance, ratings or recommendations, our results or future financial guidance falling below our expectations and analysts’ and investors’ expectations, factors affecting the entertainment, computer, software, Internet, media or electronics industries, the announcement and integration of any acquisitions we may make, departure of key personnel, cyberattacks, national or international economic 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
Not applicable.
Item 3: Legal Proceedings
On July 29, 2010, Michael Davis, a former NFL running back, filed a putative class action inRefer to Note 14 of 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. The parties reached a settlement in this matter in March 2019 that was not materialNotes to the Company’s financial results and on May 7, 2019, the United States District Court for the Northern District of California dismissed the case.Governmental authorities in Belgium have sought to limit or discontinue the use of in-game mechanics involving a randomized selection of virtual items. On August 10, 2018, we were notified that the Belgian Gambling Commission made a referral to the Belgian Public Prosecutor’s Office regarding the use such mechanics in the FIFA Ultimate Team serviceConsolidated Financial Statements included in FIFA 18. On February 1, 2019, we discontinued the saleItem 8 of FIFA Points in Belgium after discussions with Belgian authorities. We do not expect Belgian authorities to pursue the matter further. The Company does not believe that its products and services violate applicable gambling laws and continues to engage with appropriate governmental authorities in Belgium.this Annual Report on Form 10-K for disclosures regarding our legal proceedings.
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 for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Holders
There were approximately 849674 holders of record of our common stock as of May 20, 2019.23, 2022. 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 NASDAQNasdaq Global Select Market under the symbol “EA”.
Dividends
In November 2020, we initiated and declared a quarterly cash dividend of $0.17 per share of common stock, which was recently increased to $0.19 per share of common stock in May 2022. We have not paid anyaggregate cash dividends and do not anticipate payingof $193 million during the fiscal year ended March 31, 2022. We currently expect to continue to pay comparable cash dividends on a quarterly basis in the foreseeable future.future; however, future declarations of dividends and the establishment of future record dates and payment dates are subject to the final determination of our Board of Directors or a designated Committee of our Board of Directors.
Issuer Purchases of Equity Securities
In May 2017, a Special Committee ofNovember 2020, our Board of Directors, on behalf of the full Board of Directors authorized a program to repurchase up to $1.2 billion of our common stock. We repurchased approximately 0.6 million and 5.0 million shares for approximately $76 million and $570 million under this program, respectively, during the fiscal years ended March 31, 2019 and 2018. This program was superseded and replaced by a new stock repurchase program approved in May 2018.
In May 2018, a Special Committee of our Board of Directors, on behalf of the full Board of Directors, authorized a program to repurchase up to $2.4$2.6 billion of our common stock. This stock repurchase program supersedes and replaces the May 2017 program, and expires on May 31, 2020.November 4, 2022. Under this program, we may purchase stock in the open market or through privately-negotiatedprivately 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 repurchased approximately 10.49.5 million shares for approximately $1,116$1,300 million under this program during the fiscal year ended March 31, 2019.2022. We are actively repurchasing shares under this program.
The following table summarizes the number of shares repurchased in the fourth quarter of the fiscal year ended March 31, 2019:
|
| | | | | | | | | | | | | | |
| 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 30, 2018 - January 26, 2019 | | 1,015,281 |
| | $ | 85.91 |
| | 1,015,281 |
| | $ | 1,498 |
|
| January 27, 2019 - February 23, 2019 | | 983,646 |
| | $ | 93.59 |
| | 983,646 |
| | $ | 1,406 |
|
| February 24, 2019 - March 30, 2019 | | 1,230,755 |
| | $ | 98.42 |
| | 1,230,755 |
| | $ | 1,285 |
|
| | | 3,229,682 |
| | $ | 93.02 |
| | 3,229,682 |
| |
|
2022: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 2, 2022 - January 29, 2022 | | 734,201 | | | $ | 133.52 | | | 734,201 | | | $ | 877 | |
| January 30, 2022 - February 26, 2022 | | 736,647 | | | $ | 133.07 | | | 736,647 | | | $ | 779 | |
| February 27, 2022 - April 2, 2022 | | 1,025,385 | | | $ | 125.79 | | | 1,025,385 | | | $ | 650 | |
| | 2,496,233 | | | $ | 130.21 | | | 2,496,233 | | | |
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, 20142017 through March 31, 2019,2022, for our common stock, the S&P 500 Index (to which EA was added in July 2002), the NASDAQNasdaq 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 NASDAQNasdaq Composite Index,
and the RDG Technology Composite Index
|
| | | | |
| * | Based on $100 invested on March 31, 20142017 in stock or index, including reinvestment of dividends. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, |
| | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
| Electronic Arts Inc. | $ | 100 | | | $ | 135 | | | $ | 114 | | | $ | 112 | | | $ | 152 | | | $ | 142 | |
| S&P 500 Index | 100 | | | 114 | | | 125 | | | 116 | | | 182 | | | 210 | |
| Nasdaq Composite Index | 100 | | | 121 | | | 134 | | | 135 | | | 233 | | | 252 | |
| RDG Technology Composite Index | 100 | | | 124 | | | 147 | | | 159 | | | 273 | | | 313 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, |
| | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
| Electronic Arts Inc. | $ | 100 |
| | $ | 203 |
| | $ | 228 |
| | $ | 309 |
| | $ | 418 |
| | $ | 350 |
|
| S&P 500 Index | 100 |
| | 113 |
| | 115 |
| | 134 |
| | 153 |
| | 168 |
|
| NASDAQ Composite Index | 100 |
| | 118 |
| | 119 |
| | 146 |
| | 176 |
| | 195 |
|
| RDG Technology Composite Index | 100 |
| | 118 |
| | 122 |
| | 152 |
| | 193 |
| | 226 |
|
Item 6: Selected Financial Data
ELECTRONIC ARTS INC. AND SUBSIDIARIES
SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA
(In millions, except per share data)
[Reserved]
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| STATEMENTS OF OPERATIONS DATA | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Net revenue (a) | $ | 4,950 |
| | $ | 5,150 |
| | $ | 4,845 |
| | $ | 4,396 |
| | $ | 4,515 |
|
| Cost of revenue | 1,322 |
| | 1,277 |
| | 1,298 |
| | 1,354 |
| | 1,429 |
|
| Gross profit | 3,628 |
| | 3,873 |
| | 3,547 |
| | 3,042 |
| | 3,086 |
|
| Total operating expenses | 2,632 |
| | 2,439 |
| | 2,323 |
| | 2,144 |
| | 2,138 |
|
| Operating income | 996 |
| | 1,434 |
| | 1,224 |
| | 898 |
| | 948 |
|
| Interest and other income (expense), net | 83 |
| | 15 |
| | (14 | ) | | (21 | ) | | (23 | ) |
| Income before provision for income taxes | 1,079 |
| | 1,449 |
| | 1,210 |
| | 877 |
| | 925 |
|
| Provision for (benefit from) income taxes | 60 |
| | 406 |
| (b) | 243 |
| | (279 | ) | (c) | 50 |
|
| Net income | $ | 1,019 |
| | $ | 1,043 |
| | $ | 967 |
| | $ | 1,156 |
| | $ | 875 |
|
| Earnings per share: | | | | | | | | | |
| Basic | $ | 3.36 |
| | $ | 3.39 |
| | $ | 3.19 |
| | $ | 3.73 |
| | $ | 2.81 |
|
| Diluted | $ | 3.33 |
| | $ | 3.34 |
| | $ | 3.08 |
| | $ | 3.50 |
| | $ | 2.69 |
|
| Number of shares used in computation: | | | | | | | | | |
| Basic | 303 |
| | 308 |
| | 303 |
| | 310 |
| | 311 |
|
| Diluted | 306 |
| | 312 |
| | 314 |
| | 330 |
| | 325 |
|
| | As of March 31, |
| BALANCE SHEETS DATA | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Cash and cash equivalents | $ | 4,708 |
| | $ | 4,258 |
| | $ | 2,565 |
| | $ | 2,493 |
| | $ | 2,068 |
|
| Short-term investments | 737 |
| | 1,073 |
| | 1,967 |
| | 1,341 |
| | 953 |
|
| Working capital | 4,116 |
| | 3,513 |
| | 2,784 |
| | 1,936 |
| | 973 |
|
| Total assets | 8,957 |
| | 8,584 |
| | 7,718 |
| | 7,050 |
| | 6,147 |
|
| 0.75% convertible senior notes due 2016, net | — |
| | — |
| | — |
| | 163 |
| | 633 |
|
| Senior notes, net | 994 |
| | 992 |
| | 990 |
| | 989 |
| | — |
|
| Other long-term liabilities | 367 |
| | 506 |
| | 253 |
| | 245 |
| | 333 |
|
| Total liabilities | 3,626 |
| | 3,989 |
| | 3,658 |
| | 3,652 |
| | 3,080 |
|
| Total stockholders’ equity | 5,331 |
| | 4,595 |
| | 4,060 |
| | 3,396 |
| | 3,036 |
|
| |
(a) | On April 1, 2018, at the beginning of fiscal year 2019, we adopted the New Revenue Standard, which significantly changes 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 New Revenue Standard, please see Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 1 under the heading “Recently Adopted Accounting Standards”. |
| |
(b) | 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. |
| |
(c) | 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. |
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, 2019,2022, 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, with a mission to inspire the world to play.entertainment. We develop, market, publish and deliver games, content and services that can be played and watchedexperienced on a variety of platforms, including game consoles, PCs, mobile phones and tablets. InAt our core is a portfolio of intellectual property from which we create innovative games and services, we usecontent that enable us to build on-going and meaningful relationships with a community of players, creators and viewers. Our portfolio includes brands that we either wholly own (such as Battlefield, The Sims, Apex Legends Anthem, Need for Speed, Battlefield, and Plants v. Zombies)The Sims) or license from others (such as FIFA, Madden, NFLStar Wars, and Star Wars)the 300+ licenses within our global football ecosystem). We developThrough our live services offerings, we offer our players high-quality experiences designed to provide value to players, and publishextend and enhance gameplay. These live services include extra content, subscription offerings and other revenue generated in addition to the sale of our base games and services across diverse genres, such as sports, first-person shooter, action, role-playingfree-to-play games. In addition, we are focused on reaching more players whenever and simulation, and offer our games and services through diverse business models and distribution channels, such as retail, download, subscription and free-to-play.wherever they want to play. We believe that the breadthwe can add value to our network by making it easier for players to connect to a world of play by offering choice of business model, distribution channel and depth of our portfolio and our flexibility in business models and distribution channels provide us with strategic advantages.
device.
Financial Results
Our key financial results for our fiscal year ended March 31, 20192022 were as follows:
•Total net revenue was $4,950$6,991 million, down 4up 24 percent year-over-year. Under the Old Revenue Standard,On a constant currency basis, we estimate total net revenue would have been $4,843$6,883 million, up 22 percent year-over-year.
•Live services and other net revenue was $4,998 million, up 24 percent year-over-year.
•Gross margin was 73.4 percent, remained constant year-over-year.
•Operating expenses were $4,003 million, up 30 percent year-over-year. On a constant currency basis, we estimate that
operating expenses would have been $3,970 million, up 29 percent year-over-year.
•Operating income was $1,129 million, up 8 percent year-over-year.
•Net income was $789 million, down 6 percent year over year.year-over-year.
Digital net revenue was $3,710 million, up 8 percent year-over-year. Under the Old Revenue Standard, digital net revenue would have been $3,447 million, down less than 1 percent year over year.
Gross margin was 73.3 percent, down 2 percentage points year-over-year. Under the Old Revenue Standard, gross margin would have been 76.6 percent, up 1 percentage point year-over-year.
Operating expenses were $2,632 million, up 8 percent year-over-year.
Operating income was $996 million, down 31 percent year-over-year. Under the Old Revenue Standard, operating income would have been $1,077 million, down 25 percent year-over-year.
Net income was $1,019 million, down 2 percent year-over-year. Under the Old Revenue Standard, net income would have been $1,086 million, up 4 percent year-over-year.
•Diluted earnings per share was $3.33, consistent year-over-year. Under the Old Revenue Standard, diluted earnings per share would have been $3.55, up 6$2.76, down 4 percent year-over-year.
•Operating cash flow was $1,547$1,899 million, down 92 percent year-over-year.
•Total cash, cash equivalents and short-term investments were $5,445$3,062 million.
•We repurchased 11approximately 9.5 million shares of our common stock for $1,192approximately $1,300 million.
•We paid cash dividends of $193 million during the fiscal year ended March 31, 2022.
•On May 9, 2022, we declared a quarterly cash dividend of $0.19 per share of our common stock, payable June 22, 2022 to shareholders of record as of the close of business on June 8, 2022.
From time to time, we make comparisons of current periods to prior periods with reference to constant currency. ForConstant currency comparisons are based on translating local currency amounts in the fiscal year ended March 31, 2019,current period at actual foreign exchange rates from the prior comparable period, net of the impact of hedging activities. 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 did not have a material impact on our net revenue and operating expenses.
rates.
Trends in Our Business
Digital Business. Players increasingly purchaseCOVID-19 Impact. We continue to monitor the impact of the COVID-19 pandemic to our games as digital downloads, as opposedpeople and our business. Since the initial outbreak, we have focused on actions to purchasing physical discs, and engage with the live services that we provide on an ongoing basis. Our live services provide additional depth and engagement opportunities forsupport our people, our players, and communities around the world that have been affected by the COVID-19 pandemic. The well-being of our people is our top priority as conditions continue to fluctuate around the world. We are re-opening our office locations and resuming business travel as it is appropriate to do so, consistent with the health and safety of our employees and in compliance with any local legal restrictions or requirements. During the pandemic, longer-term trends that benefit our business accelerated. Live services and other net revenue has increased and we have also experienced a significant increase in the percentage of our games purchased digitally over the past two fiscal years.
These trends may not be indicative of results for future periods, particularly if the trend towards digital adoption decelerates, or as a result of global macroeconomic effects related or unrelated to the COVID-19 pandemic. See the section titled “Risk Factors” in Part I, Item 1A of this Annual Report for further discussion of the possible impact of the COVID-19 pandemic to our workforce and business.
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 in-game purchases, extra content, subscriptions,subscription offerings and esports.other revenue generated in addition to the sale of our base games and free-to-play games. Our net revenue attributable to live services comprised 45 percent of our total net revenue duringand other was $4,998 million, $4,016 million and $3,650 million for fiscal year 2019years 2022, 2021 and 2020, respectively, and we expect that live services net revenue will continue to be material to our business. Within live services and other, net revenue attributable to extra content was $3,910 million, $3,068 million and $2,826 million for fiscal years 2022, 2021 and 2020, respectively. Extra content net revenue has increased as more players engage with our games and services, and purchase additional content designed to provide value to players and extend and enhance gameplay. Our most popular live service isservices are the extra content purchased for the Ultimate Team mode associated with our sports franchises. franchises and extra content purchased for our Apex Legends franchise. Ultimate Team allows players to collect current and former professional players in order to build and compete as a personalized team. Net revenue from Ultimate Team represented approximately 28 percent of our totalLive services net revenue during fiscal year 2019,generated from extra content purchased within the Ultimate Team mode associated with our sports franchises, a substantial portion of which was derived from FIFA Ultimate Team. Our digital transformation also, and for our Apex Legends franchise, is creating opportunities in platforms, content modelsmaterial to our business.
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 the way in whichother factors, over time we expect players engage withto purchase an increasingly higher proportion of our games digitally; therefore we expect net revenue attributable to digital full game downloads to increase over time and services. For example,net revenue attributable to sales of packaged goods to decrease.
Our net revenue attributable to digital full game downloads was $1,282 million, $918 million and $811 million during fiscal years 2022, 2021 and 2020, respectively; while our net revenue attributable to packaged goods sales decreased from $1,076 million in fiscal year 2020 to $695 million in fiscal year 2021 and $711 million in fiscal year 2022. In addition, as measured based on total units sold on Microsoft’s Xbox One and Xbox Series X and Sony’s PlayStation 4 and 5 rather than by net revenue, we have leveraged brandsestimate that 65 percent, 62 percent, and assets49 percent of our total units sold during fiscal years 2022, 2021 and 2020 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 franchises historically associated traditional gaming, such as FIFA, Madden NFL, The Sims, SimCity,significant retail partners in North America, Europe and Star Wars,Asia, and applying internal sales estimates with respect to create free-to-playretail partners from which we do not obtain data. We believe that these percentages are reasonable estimates of the proportion of our games that are monetized throughdigitally downloaded in relation to our total number of units sold for the applicable period of measurement.
Increases in consumer adoption of digital purchase of games combined with increases in our live services providedrevenue generally results in expansion of our gross margin, as costs associated with selling a game digitally is generally less than selling the game. We also offer subscription services,same game through traditional retail and distribution channels.
Increased Competition. Competition in our business is intense. Our competitors range from established interactive entertainment companies to emerging start-ups. In addition, the gaming, technology/internet, and entertainment industries have converged in recent years and larger, well-funded technology companies have strengthened their interactive entertainment capabilities resulting in more direct competition with us. For example, companies such as EA Access, Origin AccessAmazon.com, Inc., Alphabet Inc., Meta Platforms, Inc., Microsoft Corporation, and Origin Access Premier, as we lookNetflix, Inc. have increased investment and resources dedicated to build deeper relationships with our players and offer increased choice and flexibility for our players to try new games.
The portion of our revenue attributable to our digital business has significantly increased from 59 percent in fiscal year 2017 to 67 percent in fiscal year 2018 and 75 percent during fiscal year 2019.interactive entertainment capabilities. We expect this portion of our businessthem to continue to increase during fiscal year 2020 relativepursue and strengthen these businesses. Their greater financial or other resources may provide larger budgets to packaged goods revenue as we continue to focus on developingdevelop and monetizingmarket tools, technologies, products and services that can be delivered digitally.
Technological Infrastructure. As our digital business has grown, our gamesgain consumer success and services increasingly depend on the reliability, availabilityshift player time and security of our technological infrastructure. We are investing and expect to continue to invest in technology, hardware and software to support our games and services, including with respect to security protections. Our industry is prone to, and our systems and networks are subject to, cyber-attacks, computer viruses, worms, phishing attacks, malicious software programs, and other information security incidents that seek to exploit, disable, damage, disrupt or gain access to our networks,engagement away from our products and services, supporting technological infrastructure, intellectual property and other assets. We expect these threats toservices. In addition, our systems and networks to continue.
Rapidly Changing Industry. We operate inleading position within the interactive entertainment industry makes us a dynamic industry that regularly experiences periods of rapid, fundamental change. In order to remain successful, we are required to anticipate, sometimes years in advance, the ways in whichprime target for recruiting our products and services will compete in the market. We adapt our business by investing inexecutives, as well as key creative and technical talent, resulting in retention challenges and new technologies, evolvingincreased cost to retain and incentivize our business strategies and distribution methods and developing new and engaging products and services. In fiscal 2019, we launched two new intellectual properties (Anthem and Apex Legends), brought Apex Legends to marketkey people.
Recently, our industry has undergone a period of increased consolidation which increases competitive pressure on us as our first free-to-play console product, added frontline titles to our Origin Access Premier subscription service, and invested in more ways to reach our players now and in the future,interactive entertainment companies grow through acquisition – such as cloud gaming and esports. We expectTake Two Interactive’s recent acquisition of Zynga – or as larger, well-funded technology companies strengthen their interactive entertainment capabilities – such as Microsoft’s recently announced definitive agreement to continue to invest in our business to remain competitive, including investments in, among other things, technology to connect our players to each other and to the games they love and the infrastructure to power our games and services. We are adopting consistent, cross-company methodologies to better understand our players’ needs and continue to invest in technology that enables us to 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 typesacquire Activision Blizzard.
Free-to-Play Games. The global adoption of mobile devices and a business model for those devices that allows consumers to try new games with no up-front cost, and that are monetized through thea live service associated with the game, particularly extra content sales, has led to significant sales growth in the mobile gaming industry. Similarly, sales of extra content are the primary driver of our mobile business. We are investing resources in our mobile business, seeking to maximize our mobile live services, innovate on mobile with our franchises, and through mergers and acquisitions activity have brought new mobile franchises and live services, as well as the teams and technologies responsible for them, to our mobile portfolio and organization. We expect thethese factors to drive growth in mobile gaming industry to continue to grow during our 2020net revenue in fiscal year.2023. Likewise, the consumer acceptance of free-to-play, live service-based, online PC and console games has broadened our consumer base and thishas begun to expand into the console market. For example, within our business, we offer Apex Legends as a free-to-play, live service business model is beginning to gain consumer acceptance with respect toservice-based PC and console games.game. We expect extra content revenue generated from mobile, PC and console free-to-play games to remaincontinue to be an important part of our business.
Concentration of Sales Among the Most Popular Games. In all major segments of our industry, we see a large portion of games sales concentrated on the most popular titles. Similarly, a significant portion of our revenue historically has been derived from games based on a few popular franchises, several of which we have released on an annual or bi-annual basis. In particular, we have historically derived a significant portion of our net revenue from our largest and most popular game, FIFA,global football franchise, the annualized version of which is consistently one of the best-selling games in the marketplace. We have invested in over 300 individual partnerships and licenses to create our global football ecosystem and starting in fiscal year 2024, our global football franchise will transition to a new EA SPORTS FC brand. Our vision for the future of interactive football with EA SPORTS FC is to create the largest football club in the world, and we believe this is the right opportunity for us so that we can continue delivering innovation and growing to connect more fans on a global scale for years to come.
RecurringRe-occurring Revenue Sources. Our business model includes revenue that we deem recurringre-occurring in nature, such as revenue from our annualized sports franchises (e.g., FIFA,global football, Madden NFL), our console, PC and mobile catalog titles (i.e., titles that did not launch in the current fiscal year), the associated live services and our subscriptions business.live services. 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. As we continue to incorporate new business models and modalities of play into our games, our goal is to continue to look for opportunities to expand the recurringre-occurring portion of our business.
Net Bookings. In order to improve transparency into our business, we disclose an operating performance metric, net bookings. Net bookings is defined as the net amount of products and services sold digitally or sold-in physically in the period. Net bookings is calculated by adding total net revenue to the change in deferred net revenue for online-enabled games and, for periods after the fourth quarter of fiscal 2018, mobile platform fees.games.
The following is a calculation of our total net bookings for the periods presented: | | | | | | | | | | | |
| Year Ended March 31, |
| (In millions) | 2022 | | 2021 |
| Total net revenue | $ | 6,991 | | | $ | 5,629 | |
| Change in deferred net revenue (online-enabled games) | 524 | | | 561 | |
| Net bookings | $ | 7,515 | | | $ | 6,190 | |
|
| | | | | | | |
| | Year Ended March 31, |
(In millions)
| 2019 | | 2018 |
| Total net revenue | $ | 4,950 |
| | $ | 5,150 |
|
| Change in deferred net revenue (online-enabled games) | 182 |
| | 30 |
|
| Mobile platform fees | (188 | ) | | — |
|
| Net bookings | $ | 4,944 |
| | $ | 5,180 |
|
Net bookings were $4,944$7,515 million for fiscal 2019year 2022 primarily driven by sales related to our FIFA Ultimate Teamfranchise, Apex Legends,FIFA 19, Madden NFL 19, 22, and The Sims 4and Battlefield V. Net bookings decreased $236increased $1,325 million or 521 percent as compared to fiscal 2018year 2021 primarily due primarily to a decrease in Star Wars Battlefront II, Needincreased year-over-year sales for Speed PaybackApex Legends and Mass Effect: Andromeda,the FIFA franchise, and new games added to our portfolio through acquisitions activity, including F1 2021 and several mobile titles, partially offset by Battlefield V, Anthem the Star Wars franchise and Apex Legends. DigitalThe Sims 4. Live services and other net bookings were $3,722$5,370 million for fiscal 2019 driven by sales of FIFA Ultimate Team, The Sims 4year 2022, and Madden NFL 19, an increase of $184increased $778 million or 517 percent as compared to fiscal 2018.year 2021. The increase in digitallive services and other net bookings was driven by growthdue primarily to an increase in live services which grew $211sales of extra content for Apex Legends, sales of extra content for new games added to our mobile portfolio through acquisitions activity, and sales of extra content for FIFA Ultimate Team. Full game net bookings were $2,145 million for fiscal year 2022, and increased $547 million or 1034 percent year-over-year,as compared to fiscal year 2021 primarily due to growth in bookings associated with FIFAUltimate Team and bookings from Apex Legends; and full game downloads which grew $56 million or 8 percent year-over-year, due to continued growth in digital downloads of our games. In particular, Battlefield V, Anthem and2042, the FIFA franchise, were downloaded at a greater rate than comparable titles in previous fiscal years. These increases wereand F1 2021, partially offset by the Star Wars franchise and UFC 4.
Mergers and Acquisitions
Acquisition of Glu Mobile. On April 29, 2021, we completed the acquisition of 100% of the equity interests of Glu Mobile Inc., a decreaseleading global developer and publisher of $83 million or 13 percentmobile games for a total purchase price of $2.0 billion, net of cash acquired of $332 million. The acquisition of Glu is expected to accelerate our mobile growth by creating a combined organization with ongoing live services across multiple games and genres. We also believe that the acquisition will create value by adding Glu’s expertise in casual sports and lifestyle genres to new titles based on our intellectual property. Glu was integrated into the Company for financial reporting purposes during the first fiscal quarter of fiscal year 2022.
Acquisition of Playdemic. On September 20, 2021, we completed the acquisition of 100% of the equity interests of Playdemic Limited, a private limited company incorporated in England and Wales for a total purchase price of $1.4 billion, net of cash acquired. The acquisition of Playdemic is intended to be another step in our strategy of continued leadership in sports and mobile business primarily due to declines from aging titles across our portfolio.
Recent Developments
Internal Transferexpansion. Playdemic was integrated into the Company for financial reporting purposes during the second quarter of Intellectual Property Rights. Subsequent to the fiscal year ended March 31, 2019, we completed an intra-entity sale of some of our intellectual property rights to our Swiss subsidiary, where our international business is headquartered. This transaction will result in the recognition of a deferred tax asset, which we estimate at approximately $2.3 billion, subject to a realizability analysis. 2022.
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 COVID-19 pandemic. As a result, actual results may differ materially from our estimates.
For a complete discussion of our critical accounting policies and estimates with respect to revenue recognition for revenue transactions occurring prior to April 1, 2018, which were accounted for under ASC 605, Revenue Recognition (the “Old Revenue Standard” or “ASC 605”), refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and 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 our games, and related extra-contentextra content and services that can be played by customersexperienced on a variety of platforms which include game consoles, PCs, mobile phones and tablets. Our product and service offerings include, but are not limited to, the following:
•full games with both online and offline functionality (“Games with Services”), which generally includes (1) the initial game delivered digitally or via physical disc at the time of sale and typically provide access to offline core game content (“software license”); (2) updates on a when-and-if-available basis, such as software patches or updates, and/or additional free content to be delivered in the future (“future update rights”); and (3) a hosted connection for online playability (“online hosting”);
•full games with online-only functionality which require an Internet connection to access all gameplay and functionality (“Online-Hosted Service Games”);
•extra content related to Games with Services and Online-Hosted Service Games which provides access to additional in-game content;
•subscriptions, such as Origin Access, Origin Access PremierEA Play and EA Access,Play Pro, that generally offersoffer access to a selection of full games, in-game content, online services and other benefits typically for a recurring monthly or annual fee; and
•licensing our games to third parties to distribute and host our games.
Effective April 1, 2018, we evaluate revenue recognition based on the criteria set forth in ASC 606, Revenue from Contracts with Customers.
games and content.
We evaluate and recognize revenue by:
•identifying the contract(s) with the customer;
•identifying the performance obligations in the contract;
•determining the transaction price;
•allocating the transaction price to performance obligations in the contract; and
•recognizing revenue as each performance obligation is satisfied through the transfer of a promised good or service to a customer (i.e., “transfer of control”).
Certain of our full game and/or extra content are sold to resellers with a contingency that the full game and/or extra content cannot be resold prior to a specific date (“Street Date Contingency”). We recognize revenue for transactions that have a Street
Date Contingency when the Street Date Contingency is removed and the full game and/or extra content can be resold by the reseller. For digital full game and/or extra content downloads sold to customers, we recognize revenue when the full game and/or extra content is made available for download to the customer.
Online-Enabled Games
Games with Services. Our sales of Games with Services are evaluated to determine whether the software license, future update rights and the online hosting are distinct and separable. Sales of Games with Services are generally determined to have three distinct performance obligations: software license, future update rights, and the online hosting.
Since we do not sell the performance obligations on a stand-alone basis, we consider market conditions and other observable inputs to estimate the stand-alone selling price for each performance obligation. We recognize revenue from these arrangements upon transfer of control for each performance obligation. For the portionGames with Services, generally 75 percent of the transactionsales price is allocated to the software license revenue isperformance obligation and recognized at a point in time when control of the license has been transferred to the customer. For the portion of the transaction priceThe remaining 25 percent is allocated to the future update rights and the online hosting revenue isperformance obligations and recognized ratably as the services are provided.service is provided (over the Estimated Offering Period).
Online-Hosted Service Games. Sales of our Online-Hosted Service Games are determined to have one distinct performance obligation: the online hosting. We recognize revenue from these arrangements as the service is provided.
Extra Content.Revenue received from sales of downloadable content are derived primarily from the sale of virtual currencies and digital in-game content that are designed to our customers toextend and enhance their gameplayplayers’ game experience. Sales of extra content are accounted for in a manner consistent with the treatment for our Games with Services and Online-Hosted Service Games as discussed above, depending upon whether or not the extra content has offline functionality.
That is, if the extra content has offline functionality, then the extra content is accounted for similarly to Games with Services (generally determined to have three distinct performance obligations: software license, future update rights, and the online hosting). If the extra content does not have offline functionality, then the extra content is determined to have one distinct performance obligation: the online-hosted service offering.
Subscriptions
RevenueSales of our subscriptions are deemed to be one performance obligation and we recognize revenue from subscriptions is recognizedthese arrangements ratably over the subscription term as the serviceperformance obligation is provided.
satisfied.
Licensing Revenue
In certain countries, weWe utilize third-party licensees to distribute and host our games and content in accordance with license agreements, for which the licensees typically pay us a fixed minimum guarantee and/or sales-based royalties. These arrangements typically include multiple performance obligations, such as a time-based license of software and future update rights. We recognize as revenue a portion of the minimum guarantee when we transfer control of the license of software (generally upon commercial launch) and the remaining portion ratably over the contractual term in which we provide the licensee with future update rights. Any sales-based royalties are generally recognized as the related sales occur by the licensee.
Revenue Classification
We classify our revenue as either product revenue or service and other revenue. Generally, performance obligations that are recognized upfront upon transfer of control are classified as product revenue, while performance obligations that are recognized over the Estimated Offering Period or subscription period as the services are provided are classified as service revenue.
Product revenue. Our product revenue includes revenue allocated to the software license performance obligation. Product revenue also includes revenue from the licensing of software to third-parties.
Service and other revenue. Our service revenue includes revenue allocated to the future update rights and the online hosting performance obligations. This also includes 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.
Significant Judgments around Revenue Arrangements
Identifying performance obligations. Performance obligations promised in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct, (i.e., the customer can benefit from the goods or services either on its own or together with other resources that are readily available), and are distinct in the context of the contract (i.e., it is separately identifiable from other goods or services in the contract). To the extent a contract includes multiple promises, we must apply judgment to determine whether those promises are separate and distinct performance obligations. If these criteria are not met, the promises are accounted for as a combined performance obligation.
Determining the transaction price.The transaction price is determined based on the consideration that we will be entitled to receive in exchange for transferring our goods and services to the customer. Determining the transaction price often requires significant 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 externalanalysis, pre-release versus post-release costs, and pricing of similar or same products and services such as software licenses and maintenance support withindata from competitors to the enterprise software industry.extent the data is available. 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 relatedservice-related performance obligations (i.e., future update rights and online hosting). Determining the Estimated Offering Period is inherently subjective and is subject to regular revision. Generally, we consider the average period of time customers are online when estimating the offering period. We also consider the estimated period of time between the date a game unit is sold to a reseller and the date the reseller sells the game unit to the customer (i.e., time in channel). Based on these two factors, we then consider the method of distribution. For example, games and extra content sold at retail would have a composite offering period equal to the online gameplay period plus time in channel as opposed to digitally-distributed software licensesgames and extra content which are delivered immediately via digital download and therefore, the offering period is estimated to be only the online gameplay period.
Additionally, we consider results from prior analyses, known and expected online gameplay trends, as well as disclosed service periods for competitors’ games in determining the Estimated Offering Period for future sales.We believe this provides a reasonable depiction of the transfer of future update rights and online hosting to our customers, as it is the best representation of the time period during which our games and extra content are played.experienced. We recognize revenue for future update rights and online hosting performance obligations ratably on a straight-line basis over this period as there is a consistent pattern of delivery for these performance obligations. ThesePrior to July 1, 2020, these performance obligations arewere generally recognized over an estimated nine-month period beginning in the month after shipment for software licensesgames and extra content sold through retail and an estimated six-month period for digitally-distributed software licensesgames and extra content beginning in the month of sale.
During the three months ended September 30, 2020, we completed our annual evaluation of the Estimated Offering Period and as a result, for sales after July 1, 2020, revenue for service-related performance obligations for games and extra content sold through retail are recognized over an estimated ten-month period beginning in the month of sale, and revenue for service-related performance obligations for digitally-distributed games and extra content is recognized over an estimated eight-month period beginning in the month of sale. The fiscal year 2021 change in Estimated Offering period did not impact the amount of net bookings or the operating cash flows that we report. During the fiscal year ended March 31, 2022, this change to our Estimated Offering Period resulted in an increase in net revenue of $331 million and net income of $252 million, and an increase of $0.88 diluted earnings per share. During the fiscal year ended March 31, 2021, this change to our Estimated Offering Period resulted in a decrease in net revenue of $333 million and net income of $280 million, and a decrease of $0.96 diluted earnings per share.
Deferred Net Revenue
BecauseDuring the majoritythree months ended September 30, 2021, we completed our annual evaluation of the Estimated Offering Period. We have noted consumers are playing certain of our Online Hosted Service Games, such as PC and console free-to-play games, for longer periods of time than in prior years as players engage with services we provide that are designed to enhance and extend gameplay, and as such, have concluded that the Estimated Offering Period for such games should be lengthened. As a result, for all new sales transactions include future update rights and online hostingafter July 1, 2021, the revenue that we recognize for service-related performance obligations which are subjectrelated to our PC and console free-to-play games is recognized generally over a recognition periodtwelve-month period. This change in Estimated Offering Period did not impact the amount of generally sixnet bookings or the operating cash flows that we report. During the fiscal year ended March 31, 2022, this change to nine months, our deferredEstimated Offering Period resulted in a decrease in net revenue balance is material. This balance increases from period to period by the revenue being deferred for current sales with these service obligationsof $131 million and is reduced by the recognitionnet income of revenue from prior sales that were deferred. Generally, revenue is recognized as the services are provided.
$100 million, and a decrease of $0.35 diluted earnings per share.
Principal Agent Considerations
We evaluate sales to end customers of our full games and related content via third-party storefronts, including digital storefronts such as Microsoft’s Xbox Store, Sony’s PlayStation Store, Apple App Store, and Google Play Store, in order to determine whether or not we are acting as the principal in the sale to the end customer, which we consider in determining if revenue should be reported gross or net of fees retained by the third-party storefront. An entity is the principal if it controls a good or service before it is transferred to the end customer. Key indicators that we evaluate in determining gross versus net treatment include but are not limited to the following:
•the underlying contract terms and conditions between the various parties to the transaction;
•which party is primarily responsible for fulfilling the promise to provide the specified good or service to the end customer;
•which party has inventory risk before the specified good or service has been transferred to the end customer; and
•which party has discretion in establishing the price for the specified good or service.
Based on an evaluation of the above indicators, except as discussed below, we have determined that generally the third party is considered the principal to end customers for the sale of our full games and related content. We therefore report revenue related to these arrangements net of the fees retained by the storefront. However, for sales arrangements via Apple App Store and Google Play Store, EA is considered the principal to the end customer and thus, we report revenue on a gross basis and mobile platform fees are reported within cost of revenue.
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 Price Protection Reserves
Sales returns and 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 game unit that they have not resold to customers. The amount of the price protection for permanent markdowns is 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 we also have a practice for allowing channel partners to return older products in the channel in exchange for a credit allowance.
When evaluating the adequacy of sales returns and price protection reserves, we analyze the following: historical credit allowances, current sell-through of our channel partners’ inventory of our products, current trends in retail and the video game industry, changes in customer demand, acceptance of our 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 products in the distribution channels are exposed to rapid changes in customer preferences, market conditions or technological obsolescence due to new platforms, product updates or competing 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 reserves would change and would impact the transaction price and thus, the total net revenue and related balance sheet accounts that we report.
Fair Value Estimates
Business Combinations.Combinations. We must estimate the fair value of assets acquired, liabilities assumed, and contingencies assumed, acquired in-process technology and contingent consideration issued in a business combination. Our assessment of the estimated fair value
of each of these can have a material effect on our reported results as intangible assets are amortized over various estimated useful lives. Furthermore, the estimated fair value assigned to an acquired asset or liability has a direct impact on the amount we recognize as goodwill, which is an asset that is not amortized. DeterminingAccounting for business combinations requires us to make significant estimates and assumptions with respect to intangible assets.
Although we believe the fairassumptions and estimates we have made are reasonable, they are based in part on historical experience, market conditions, and information obtained from the management of the acquired companies and are inherently uncertain and unpredictable. Examples of critical estimates used in valuing certain of the intangible assets and in determining the useful lives for the assets we have acquired or may acquire in the future include, but are not limited to:
•future expected revenues and cash flows;
•expected use of the acquired assets;
•the acquired company’s trade name and trademarks, as well as assumptions about the period of time the acquired trade name and trademarks will continue to be used in our portfolio;
•expected costs to develop in-process research and development into commercially viable products and estimated cash flows from the projects when completed;
•discount rates used to determine the present value of assets acquired requires an assessment of the highest and best use or the expected price to sell the asset and the related expected future cash flows. Determining the fair value of acquired in-process technology also requires an assessment of our expectations related to the use of that technology. Determining the fair value of an assumed liability requires an assessment of the expected cost to transfer the liability. Determining the fair value of contingent consideration requires an assessment of the probability-weighted expectedestimated future cash flows, over the period in which the obligation is expectedare typically derived from a weighted-average cost of capital analysis and adjusted to be settled, and applying a discount rate that appropriately captures the risk associated with the obligation. The significant unobservable inputs used in the fair value measurement of the contingent consideration payable are forecasted earnings. Significant changes in forecasted earnings would result in significantly higher or lower fair value measurement. This fair value assessment is also required in periods subsequent to a business combination. reflect inherent risks.
Such estimates are inherently difficult and subjective and can have a material impact on our Consolidated Financial Statements.
Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates, or actual results.
Income Taxes
We recognize deferred tax assets and liabilities for both (1) the expected impact of differences between the financial statement amount and the tax basis of assets and liabilities and (2) the expected future tax benefit to be derived from tax losses and tax credit carryforwards. We do not recognize any deferred taxes related to the U.S. taxes on foreign earnings as we recognize these taxes as a period cost.
We record a valuation allowance against deferred tax assets when it is considered more likely than not that all or a portion of our deferred tax assets will not be realized. In making this determination, we are required to give significant weight to evidence that can be objectively verified. It is generally difficult to conclude that a valuation allowance is not needed when there is significant negative evidence, such as cumulative losses in recent years. Forecasts of future taxable income are considered to be less objective than past results. Therefore, cumulative losses weigh heavily in the overall assessment.
In addition to considering forecasts of future taxable income, we are also required to evaluate and quantify other possible sources of taxable income in order to assess the realization of our deferred tax assets, namely the reversal of existing deferred tax liabilities, the carryback of losses and credits as allowed under current tax law, and the implementation of tax planning
strategies. Evaluating and quantifying these amounts involves significant judgments. Each source of income must be evaluated based on all positive and negative evidence;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.
On December 22, 2017, the Tax Cuts and Jobs Act (the “U.S. Tax Act”) was enacted which significantly revised the U.S. corporate income tax system by, among other things, lowering the U.S. corporate income tax ratesEvery quarter, we perform a realizability analysis to 21 percent, generally implementingevaluate whether it is more likely than not that all or a territorial tax system, and imposing a one-time transition tax on the deemed repatriationportion of undistributed earnings of foreign subsidiaries (the “Transition Tax”). We have concluded the accounting under the U.S. Tax Act within the time period set forth in SAB 118, the SEC guidance that allowed for a measurement period of up to one year after the enactment date of the U.S. Tax Act to finalize the recording of the related tax impacts, including the impacts of the Transition Tax, the remeasurement of U.S.our deferred tax assets will not be realized. 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 liabilities as a result of the reduction of the U.S. corporate tax rate, and the accounting policy electionnegative evidence. We give more weight to evidence that can be objectively verified. However, there is judgment involved in estimating future Swiss taxable income, specifically related to U.S. taxesassumptions about expected growth rates of future Swiss taxable income, which are based primarily on foreign earnings. We recorded tax expense of $235 million relatedthird party market and industry growth data. Actual results that differ materially from those estimates could have a material impact on our valuation allowance assessment. Although objectively verifiable, Swiss interest rates have an impact on the valuation allowance and are based on published Swiss guidance. Any significant changes to such interest rates could result in a material impact to the U.S. Tax Act forvaluation allowance. Switzerland has a seven-year carryforward period and does not permit the fiscal year ended March 31, 2018, $192 millioncarry back of which relates tolosses. Changes in Estimated Offering Period and actions we take in connection with acquisitions could also impact the Transition Tax. During the fiscal year ended March 31, 2019, we made no material adjustments toutilization of our provisional amounts recognized due to the U.S. Tax Act during the fiscal year ended March 31, 2018.
The U.S. Tax Act creates new U.S. taxes on foreign earnings. An accounting policy election is available to either recognize theSwiss deferred tax impacts of the U.S. taxes on foreign earnings or to account for them as a period cost. We have elected to account for the impacts of these new taxes as a period cost.
Prior to the U.S. Tax Act, a substantial majority of undistributed earnings of our foreign subsidiaries were considered to be indefinitely reinvested. As a result of the U.S. Tax Act, substantially all previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax. Any future earnings of our foreign subsidiaries are generally available for repatriation without a material incremental U.S. tax cost.asset.
As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each jurisdiction in which we operate prior to the completion and filing of tax returns for such periods. This process requires estimating both our geographic mix of income and our uncertain tax positions in each jurisdiction where we operate. These estimates involve complex issues and require us to make judgments about the likely application of the tax law to our situation,
as well as with respect to other matters, such as anticipating the positions that we will take on tax returns prior to our preparing the returns and the outcomes of disputes with tax authorities. The ultimate resolution of these issues may take extended periods of time due to examinations by tax authorities and statutes of limitations. In addition, changes in our business, including acquisitions, 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
RESULTS OF OPERATIONS
Our fiscal year is reported on a 52- or 53-week period that ends on the Saturday nearest March 31. Our results of operations for the fiscal year ended March 31, 2019, 2018 and 20172022 contained 52 weeks each and ended on March 30, 2019,April 2, 2022. Our results of operations for the fiscal year ended March 31, 20182021 contained 53 weeks and ended on April 1, 2017, respectively.3, 2021. For simplicity of disclosure, all fiscal periods are referred to as ending on a calendar month end.
Net Revenue
Net revenue consists of sales generated from (1) full games sold as digital downloads or as packaged goods and designed for play on game consoles, and PCs (2) full games forand mobile phones and tablets (3)(2) live services associated with these games, such as extra-content, (4)(3) subscriptions that generally offer access to a selection of full games, in-game content, online services and other benefits, and (5)(4) licensing our games to third parties to distribute and host our games.
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 20192022 to Fiscal Year 2018
On April 1, 2018, we adopted the New Revenue Standard, which significantly changes the way in which we recognize revenue, including the way in which we present mobile platform fees. We elected to apply the New Revenue Standard using the modified retrospective method. Because of that election, revenue for the fiscal year ended March 31, 2018 has not been restated and is reported under the accounting standards in effect for that period. In order to facilitate year-over-year comparisons, in the Net Revenue and Cost of Revenue tables below, we have quantified the amount of the year-over-year change attributable to (1) the adoption of the New Revenue Standard, (2) the change in the way in which we present mobile platform fees and (3) our operations. The amount attributable to our operations is equivalent to the difference between current and prior period net revenues under the Old Revenue Standard. For more information on the adoption of the New Revenue Standard, including information related to the change in how we report mobile revenue, please see Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 1 under the heading “Recently Adopted Accounting Standards”.2021Net Revenue
Net revenue from our operations for fiscal year 2019 decreased $3072022 was $6,991 million, primarily driven by sales related to our FIFA and Madden franchises, Apex Legends, and The Sims 4. Net revenue for fiscal year 2022 increased $1,362 million, as compared to fiscal year 2018. This decrease was driven by a $742 million decrease in revenue primarily from the Battlefield franchise and Mass Effect: Andromeda. This decrease was partially offset by a $435 million increase in revenue primarily from the FIFA and The Sims franchises.
Net Revenue by Product Revenue and Service and Other Revenue
Our Net Revenue by Product revenue and Service and other revenue for fiscal years 2019 and 2018 was as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | | | | | | | Changes due to: |
| | 2019 | | 2018 | | Total Change | | ASC 606 Adoption | | Mobile Platform Fees under ASC 606 | | Operational |
| Net revenue: | | | | | | | | | | | |
| Product | $ | 1,593 |
| | $ | 2,586 |
| | $ | (993 | ) | | $ | (611 | ) | | $ | — |
| | $ | (382 | ) |
| Service and other | 3,357 |
| | 2,564 |
| | 793 |
| | 530 |
| | 188 |
| | 75 |
|
| Total net revenue | $ | 4,950 |
| | $ | 5,150 |
| | $ | (200 | ) | | $ | (81 | ) | | $ | 188 |
| | $ | (307 | ) |
Product Revenue
Product net revenue from our operations for fiscal year 2019 decreased $382 million, as compared to fiscal year 2018. This decrease was driven by a $635 million decrease primarily from Battlefield I and Mass Effect: Andromeda. This decrease was partially offset by a $253 million increase primarily from The Sims 4 and Need for Speed Payback and the UFC franchise.
Service and Other Revenue
Service and other net revenue from our operations for fiscal year 2019 increased $75 million, as compared to fiscal year 2018.2021. This increase was driven by a $281$1,839 million increase in net revenue primarily from driven by increased year-over-year sales for the FIFA Ultimate Team franchise and Apex Legends.Legends, new games added to our portfolio through acquisitions activity, including F1 2021 and several mobile titles, and Battlefield 2042. This increase was partially offset by a $206$477 million decrease in net revenue primarily from the Star Wars, and Battlefield franchises and The Sims, Need for Speed 2015, SimCity Mobile and Mass Effect: Andromeda. UFC franchises.
Supplemental Net Revenue by Composition
As we continue to evolve our business has evolved, and management focuses less on the differentiation between our packaged goods business and our digital business and more ofon our products are delivered to consumers digitally,full game sales and live services that extend and enhance gameplay, we place a significant emphasis and focus on assessing our business performance through a review ofpresent net revenue by composition.composition to align with this management view.
Our net revenue by composition for fiscal years 20192022 and 20182021 was as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| 2022 | | 2021 | | $ Change | | % Change |
| Net revenue: | | | | | | | |
| Full game downloads | $ | 1,282 | | | $ | 918 | | | $ | 364 | | | 40 | % |
| Packaged goods | 711 | | | 695 | | | 16 | | | 2 | % |
| Full game | $ | 1,993 | | | $ | 1,613 | | | $ | 380 | | | 24 | % |
| | | | | | | |
| Live services and other | $ | 4,998 | | | $ | 4,016 | | | $ | 982 | | | 24 | % |
| Total net revenue | $ | 6,991 | | | $ | 5,629 | | | $ | 1,362 | | | 24 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | | | | | | | Changes due to: |
| | 2019 | | 2018 | | Total Change | | ASC 606 Adoption | | Mobile Platform Fees under ASC 606 | | Operational |
| Net revenue: | | | | | | | | | | | |
| Full game downloads | $ | 680 |
| | $ | 707 |
| | $ | (27 | ) | | $ | 49 |
| | $ | — |
| | $ | (76 | ) |
| Live services | 2,216 |
| | 2,083 |
| | 133 |
| | 9 |
| | — |
| | 124 |
|
| Mobile | 814 |
| | 660 |
| | 154 |
| | 17 |
| | 188 |
| | (51 | ) |
| Total Digital | $ | 3,710 |
| | $ | 3,450 |
| | $ | 260 |
| | $ | 75 |
| | $ | 188 |
| | $ | (3 | ) |
| | | | | | | | | | | | |
| Packaged goods and other | $ | 1,240 |
| | $ | 1,700 |
| | $ | (460 | ) | | $ | (156 | ) | | $ | — |
| | $ | (304 | ) |
| Total net revenue | $ | 4,950 |
| | $ | 5,150 |
| | $ | (200 | ) | | $ | (81 | ) | | $ | 188 |
| | $ | (307 | ) |
DigitalFull Game Net Revenue
DigitalFull game net revenue includes full-gamefull game downloads live services, and mobile revenue.packaged goods. Full game downloaddownloads includes revenue from digital sales of full games on console, and PC. Live services include 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.
Digital net revenue from our operations for fiscal year 2019 decreased $3 million, as compared to fiscal year 2018. This decrease was due to a $76 million decrease in full-game download revenue primarily driven by Battlefield 1 and a $51 million decrease in mobile revenue primarily driven by Madden Mobile and SimCity Mobile, partiallyoffset by a $124 million increase in live services revenue primarily driven by our Ultimate Team game mode.
Packaged Goods and Other Net Revenue
Packaged goods net revenue includes revenue from software that is distributedsold physically. This includes (1) net 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 productsfull games for sale with their products (for example, OEMOriginal Equipment Manufacturer (“OEM”) bundles). Other
Full game net revenue includes our non-software licensing revenue.
Packaged goods and other net revenue from our operations for fiscal year 2019 decreased $3042022 was $1,993 million, primarily driven by sales related to our FIFA franchise, Madden NFL 22, Battlefield 2042, and It Takes Two.Full game net revenue for fiscal year 2022 increased $380 million, or 24 percent, as compared to fiscal year 2018.2021. This decreaseincrease was primarily driven by a $448$364 million decreaseincrease in full game downloads net revenue primarily driven by year-over-year growth in the FIFA franchise, Battlefield 2042, It Takes Two, and Mass Effect Trilogy Remaster, partially offset by the Star Wars franchise.
Live Services and Other Net Revenue
Live services and other net revenue includes revenue from Battlefield 1sales of extra content for console, PC and Mass Effect: Andromedamobile games, licensing revenue from third-party publishing partners who distribute our games digitally, subscriptions, advertising, and non-software licensing.
Live services and other net revenue for fiscal year 2022 was $4,998 million, primarily driven by sales of extra content for FIFA Ultimate Team, Apex Legends, The Sims 4,Madden Ultimate Team, and Star Wars: Galaxy of Heroes. Live services and other net revenue for fiscal year 2022 increased $982 million, or 24 percent, as compared to fiscal year 2021. This increase was primarily driven by sales of extra content for FIFA Ultimate Team, Apex Legends and new games added to our mobile portfolio through acquisitions activity, partially offset by a $144 million increase primarily from Star Wars Battlefront II, UFC 3 and year-over-year decrease in sales of extra content for The Sims 4.
Cost of Revenue
Cost of revenue for fiscal years 2019 and 2018 was as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | | | | | | | Changes due to: |
| | 2019 | | 2018 | | Total Change | | ASC 606 Adoption | | Mobile Platform Fees under ASC 606 | | Operational |
| Cost of revenue: | | | | | | | | | | | |
| Product | $ | 517 |
| | $ | 822 |
| | (305 | ) | | $ | (120 | ) | | $ | — |
| | $ | (185 | ) |
| Service and other | 805 |
| | 455 |
| | 350 |
| | 120 |
| | 188 |
| | 42 |
|
| Total cost of revenue | $ | 1,322 |
| | $ | 1,277 |
| | $ | 45 |
| | $ | — |
| | $ | 188 |
| | $ | (143 | ) |
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) inventory costs, (4) expenses for defective products, (5) write-offs of post launch prepaid royalty costs and losses on previously unrecognized licensed intellectual property commitments, (6) amortization of certain intangible assets, (7) personnel-related costs, and (8) 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 product revenue from operations decreased by $185 million during fiscal year 2019, as compared to fiscal year 2018. This decrease was primarily due to a decrease in inventory and royalty costs associated with Star Wars Battlefront II, which launched during fiscal year 2018, with no comparable royalty-bearing title launched during fiscal year 2019.
Cost of Service and Other Revenue
Cost of service and other revenue consists primarily of (1) royalty costs, (2) data center, bandwidth and server costs associated with hosting our online games and websites, (3) inventory costs, (4) payment processing fees and (5) 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)., (3) data center, bandwidth and server costs associated with hosting our online games and websites, (4) inventory costs, (5) payment processing fees, (6) amortization and impairment of certain intangible assets, (7) personnel-related costs, (8) manufacturing royalties, and (9) warehousing and distribution costs.
Cost of servicerevenue for fiscal years 2022 and other2021 was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31,
2022 | | % of Net
Revenue | | March 31,
2021 | | % of Net
Revenue | | % Change | | Change as a % of Net Revenue |
| $ | 1,859 | | | 27 | % | | $ | 1,494 | | | 27 | % | | 24 | % | | — | % |
Cost of Revenue
Cost of revenue increased by $42$365 million, or 24 percent during fiscal year 2019,2022, as compared to fiscal year 2018.2021. This increase was primarily due to costs associatedan increase in platform and hosting fees due to new games added to our mobile portfolio through acquisitions activity and higher engagement with Anthem and Apex Legendswhich launched as online-only titles during fiscal year 2019, an increase in acquisition-related intangible amortization, and resultedan increase in significant data center, bandwidthroyalty costs driven by It Takes Two and server usage.the growth in the FIFA franchise.
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 20192022 and 20182021 were as follows (in millions): | | March 31,
2019 | | % of Net Revenue | | March 31,
2018 | | % of Net Revenue | | $ Change | | % Change | |
March 31,
2022 | | March 31,
2022 | | % of Net
Revenue | | March 31,
2021 | | % of Net
Revenue | | $ Change | | % Change |
| $ | 1,433 |
| | 29 | % | | $ | 1,320 |
| | 26 | % | | $ | 113 |
| | 9 | % | 2,186 | | | 31 | % | | $ | 1,778 | | | 32 | % | | $ | 408 | | | 23 | % |
Research and development expenses increased by $113$408 million, or 923 percent, in fiscal year 2019,2022, as compared to fiscal year 2018.2021. This $113 million increase was primarily due to (1) a $65$229 million increase in personnel-related costs primarily resulting from an increase in headcount due to ouracquisitions and continued investment in our studios, and the Respawn acquisition, partially offset by reduction of variable compensation and related expenses, (2) a $38$71 million increase in stock-based compensation, primarily in connection with the Respawn acquisition, (3) a $22$60 million increase in facilities-related costs,studio-related contracted services, and (4) ana $31 million increase in lossesfacility-related costs.
a $41 million decrease in development advances primarily resulting from the extinguishment of development advances payable to Respawn as a result of our acquisition.
Marketing and Sales
Marketing and sales expenses consist of personnel-related costs, related overhead costs, advertising, marketing and promotional expenses, personnel-related costs, and related overhead costs, net of qualified advertising cost reimbursements from third parties.
Marketing and sales expenses for fiscal years 20192022 and 20182021 were as follows (in millions): | | March 31,
2019 | | % of Net Revenue | | March 31,
2018 | | % of Net Revenue | | $ Change | | % Change | |
March 31,
2022 | | March 31,
2022 | | % of Net
Revenue | | March 31,
2021 | | % of Net
Revenue | | $ Change | | % Change |
| $ | 702 |
| | 14 | % | | $ | 641 |
| | 12 | % | | $ | 61 |
| | 10 | % | 961 | | | 14 | % | | $ | 689 | | | 12 | % | | $ | 272 | | | 39 | % |
Marketing and sales expenses increased by $61$272 million, or 1039 percent, in fiscal year 2019,2022, as compared to fiscal year 2018.2021. This $61 million increase was primarily due to an increase in advertising and promotional spending associated withprimarily on our 2019 game launches, particularlywith respect to the marketingmobile titles, Battlefield 2042, and promotional campaigns associated with our two new intellectual properties, Anthem and Apex Legends.
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 (“IT”), related overhead costs, fees for professional services such as legal and accounting, and allowances for doubtful accounts.
General and administrative expenses for fiscal years 20192022 and 20182021 were as follows (in millions): | | March 31,
2019 | | % of Net Revenue | | March 31,
2018 | | % of Net Revenue | | $ Change | | % Change | |
March 31,
2022 | | March 31,
2022 | | % of Net
Revenue | | March 31,
2021 | | % of Net
Revenue | | $ Change | | % Change |
| $ | 460 |
| | 9 | % | | $ | 469 |
| | 9 | % | | $ | (9 | ) | | (2 | )% | 673 | | | 10 | % | | $ | 592 | | | 11 | % | | $ | 81 | | | 14 | % |
General and administrative expenses decreasedincreased by $9$81 million, or 214 percent, in fiscal year 2019,2022, as compared to fiscal year 2018.2021. This $9 million decreaseincrease was primarily due to a $24 million decrease in contracted services primarily due to lower legal expenses. This decrease was partially offset by an $11$22 million increase primarily in IT securityacquisition-related transaction and integration costs, and a $6$16 million increase in personnel-related costs primarily resulting from an increase in headcount.headcount, a $15 million increase in IT-related costs, a $13 million increase in stock-based compensation, and a $7 million increase in contracted services.
Amortization and Impairment of Intangibles
Amortization and impairment of intangibles for fiscal years 2022 and 2021 were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31,
2022 | | % of Net
Revenue | | March 31,
2021 | | % of Net
Revenue | | $ Change | | % Change |
| $ | 183 | | | 3 | % | | $ | 30 | | | 1 | % | | $ | 153 | | | 510 | % |
Amortization and impairment of intangibles increased by $153 million in fiscal year 2022, as compared to fiscal year 2021, due to an increase in acquired intangible assets from recent acquisitions, and impairment charges of $34 million recorded in fiscal year 2022.
Income Taxes
Provision for (benefit from) income taxes for fiscal years 20192022 and 20182021 was as follows (in millions): | | | March 31, 2019 | | Effective Tax Rate | | March 31, 2018 | | Effective Tax Rate | |
| March 31, 2022 | | March 31, 2022 | | Effective Tax Rate | | March 31, 2021 | | Effective Tax Rate |
| $ | 60 |
| | 5.6 | % | | $ | 406 |
| | 28.0 | % | 292 | | | 27.0 | % | | $ | 180 | | | 17.7 | % |
Our effective tax rate for the fiscal year ended March 31, 20192022 was 5.627.0 percent as compared 28.0to 17.7 percent for the same period in fiscal year 2018. 2021.
During the fiscal year ended March 31, 2022, we completed intra-entity sales of intellectual property rights related to recent acquisitions to our U.S. and Swiss intellectual property owners (the “Acquired IP intra-entity sales”). The transactions resulted in overall taxable gains. Under U.S. GAAP, any profit resulting from the Acquired IP intra-entity sales was eliminated upon
consolidation. However, the transactions resulted in a step-up of the U.S. and 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. As a result, we recognized a $64 million net tax benefit for the current and deferred tax impacts of the sales.
In addition, during the fiscal year ended March 31, 2022, we recognized a $29 million tax charge to increase the valuation allowance on Swiss deferred tax assets that are not more likely than not to be realized. The Acquired IP intra-entity sales and the change in valuation allowance had the effect of reducing our effective tax rate for the fiscal year ended March 31, 2022 by 3.2 percentage points.
Our effective tax rate and resulting provision for income taxes for the fiscal year ended March 31, 2019 was significantly lower than the same period2021 includes a $141 million tax benefit for changes in fiscal year 2018 due to the recognition of the impacts of the U.S. Tax Act in fiscal year ended March 31, 2018, a change in the mix of earnings,uncertain tax positions and the lower statutory tax rate appliedvaluation allowance related to earnings realized in the U.S. The U.S. Tax Act significantly revised the U.S. corporate income tax system by, among other things, lowering the U.S. corporate income tax rate to 21 percent, generally implementing a territorial tax system and imposing the Transition Tax.
We have concluded the accounting under the U.S. Tax Act within the time period set forth in SAB 118, the SEC guidance that allowed for a measurement period of up to one year after the enactment date of the U.S. Tax Act to finalize the recording of the related tax impacts, including the impacts of the Transition Tax, the remeasurement of U.S.our Swiss deferred tax assets and liabilities as a resultassets. This benefit had the effect of the reduction of the U.S. corporatereducing our effective tax rate and the accounting policy election related to U.S. taxes on foreign earnings. We recorded tax expense of $235 million related to the U.S. Tax Act for the fiscal year ended March 31, 2018, $192 million of which relates to the Transition Tax. During the year ended March 31, 2019, we made no material adjustments to our provisional amounts recognized due to the U.S. Tax Act during the fiscal year ended March 31, 2018.
The U.S. Tax Act creates new U.S. taxes on foreign earnings. An accounting policy election is available to either recognize the deferred tax impacts of the U.S. taxes on foreign earnings or to account for them as a period cost. We have elected to account for the impacts of these new taxes as a period cost.
2021 by 13.9 percentage points.
Our effective tax rates for fiscal year 2020 and future periods will continue to depend on a variety of factors, including changes in our business, such as acquisitions and intercompany transactions, our corporate structure, the geographic location of business functions or assets, the geographic mix of income, 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. We anticipate that the impact of excess tax benefits, and tax deficiencies, and changes in valuation allowances may result in significant fluctuations to our effective tax rate in the future.
Subsequent to the fiscal year ended March 31, 2019, we completed an intra-entity sale of some of our intellectual property rights to our Swiss subsidiary, where our international business is headquartered. 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. As a result, this transaction will result in the recognition of a deferred tax asset, which we estimate at approximately $2.3 billion, subject to a realizability analysis. The deferred tax asset will be recognized as a one-time tax benefit in our consolidated financial statements during the three months ending June 30, 2019. This deferred tax asset will reverse over a 20-year period and is subject to a periodic realizability analysis. The deferred tax asset and the one-time tax benefit will be measured based on the Swiss tax rate expected to apply in the years the asset will be recovered. We will not recognize any deferred taxes related to the U.S. taxes on foreign earnings associated with this transfer due to our policy election to recognize these taxes as a period cost. We do not expect the transaction to impact our cash taxes or our operating cash flow in fiscal year 2020.
Comparison of Fiscal Year 20182021 to Fiscal Year 20172020
LIQUIDITY AND CAPITAL RESOURCES | | | | | | | | | | | | | | | | | |
| | As of March 31, | | |
| (In millions) | 2022 | | 2021 | | Increase/(Decrease) |
| Cash and cash equivalents | $ | 2,732 | | | $ | 5,260 | | | $ | (2,528) | |
| Short-term investments | 330 | | | 1,106 | | | (776) | |
| Total | $ | 3,062 | | | $ | 6,366 | | | $ | (3,304) | |
| Percentage of total assets | 22 | % | | 48 | % | | |
| | | | | |
| | Year Ended March 31, | | |
| (In millions) | 2022 | | 2021 | | Change |
| Net cash provided by operating activities | $ | 1,899 | | | $ | 1,934 | | | $ | (35) | |
| Net cash used in investing activities | (2,804) | | | (505) | | | (2,299) | |
| Net cash used in financing activities | (1,620) | | | (15) | | | (1,605) | |
| Effect of foreign exchange on cash and cash equivalents | (3) | | | 78 | | | (81) | |
| Net increase (decrease) in cash and cash equivalents | $ | (2,528) | | | $ | 1,492 | | | $ | (4,020) | |
|
| | | | | | | | | | | |
| | As of March 31, | | |
| (In millions) | 2019 | | 2018 | | Increase/(Decrease) |
| Cash and cash equivalents | $ | 4,708 |
| | $ | 4,258 |
| | $ | 450 |
|
| Short-term investments | 737 |
| | 1,073 |
| | (336 | ) |
| Total | $ | 5,445 |
| | $ | 5,331 |
| | $ | 114 |
|
| Percentage of total assets | 61 | % | | 62 | % | | |
| | Year Ended March 31, | | |
| (In millions) | 2019 | | 2018 | | Change |
| Net cash provided by operating activities | $ | 1,547 |
| | $ | 1,692 |
| | $ | (145 | ) |
| Net cash provided by investing activities | 169 |
| | 622 |
| | (453 | ) |
| Net cash used in financing activities | (1,253 | ) | | (643 | ) | | (610 | ) |
| Effect of foreign exchange on cash and cash equivalents | (13 | ) | | 22 |
| | (35 | ) |
| Net increase in cash and cash equivalents | $ | 450 |
| | $ | 1,693 |
| | $ | (1,243 | ) |
Resources.”
Changes in Cash Flow
Operating Activities. Net cash provided by operating activities decreased by $145$35 million during fiscal year 20192022, as compared to fiscal year 2018. The decrease is2021, primarily driven by lowerhigher cash receipts related to a decrease in net bookings andpayments for income taxes, higher personnel-related payments primarily from an increase in headcount, higher marketing and advertising payments, higher cash paidpayments for taxes, partiallyroyalties, and higher cash payments for platform and hosting fees. These decreases were offset by lower royalty paymentshigher cash generated due to improved performance as we executed against our strategic pillars and higher interest income.increased engagement with our products and services which led to growth in our business.
Investing Activities. Net cash provided byused in investing activities decreasedincreased by $453$2,299 million during fiscal year 20192022, as compared to fiscal year 20182021, primarily driven by a $1,478$2,357 million decrease in proceeds from thematurities and sales and maturities of short-term investments. This was partiallyinvestments, higher payments of $2,152 million in connection with acquisitions completed during fiscal year 2022, and a $64 million increase in capital expenditures. These increases were offset by a $945$2,274 million decrease in the purchase of short-term investments and a $92 million decrease in payments in connection with mergers and acquisitions activity.investments.
Financing Activities. Net cash used in financing activities increased by $610$1,605 million during fiscal year 20192022, as compared to fiscal year 20182021, primarily due todriven by net proceeds from the issuance of the 2031 Notes and 2051 Notes for $1,478 million during fiscal year 2021, a $591$571 million increase in the repurchase and retirement of our common stock.stock, a $95 million increase in cash dividend payments during fiscal year 2022, and a $52 million increase in cash paid to taxing authorities in connection with employee withholding taxes for stock-based compensation. These increases were offset by a repayment of $600 million of our 2021 Notes during fiscal year 2021.
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, 2019,2022, our short-term investments had gross unrealized losses of $1 million, or less than 1 percent of the total in short-term investments, and gross unrealized gains of less than $1$2 million, or less than 1 percent of the total in short-term investments. From time to time, we may liquidate some or all of our short-term investments to fund operational needs or other activities, such as capital expenditures, business acquisitions or stock repurchase programs.
Senior Notes
In February 2016,2021, we issued $600$750 million aggregate principal amount of the 20212031 Notes and $750 million aggregate principal amount of the 2051 Notes. The effective interest rate is 1.98% for the 2031 Notes and 3.04% for the 2051 Notes. Interest is payable semiannually in arrears, on February 15 and August 15 of each year.
In February 2016, we issued $400 million aggregate principal amount of the 2026 Notes. We used the net proceeds of $989 million for general corporate purposes, including the payment of our formerly outstanding convertible notes and repurchases of our common stock. 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.
See Note 12 — 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, 2019,2022, no amounts were outstanding under the credit facility.Credit Facility. See Note 12 — 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
Our material cash requirements as of March 31, 2022 are set forth in our Note 14 — Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-K, which is incorporated by reference into this Item 7. We expect capital expenditures to be approximately $200 million in fiscal year 2023 due to facility buildouts. We believe that our cash, cash equivalents, short-term investments, cash generated from operations and available financing facilities will be sufficient to meet these material cash requirements, which include licensing intellectual property from professional sports leagues and players associations used in our EA SPORTS titles (e.g., the 300+ licenses within our global football ecosystem, NFL Properties LLC, NFL Players Association and NFL Players Inc. on behalf of OneTeam Partners, LLC) and third-party content and celebrities (e.g., Disney Interactive), debt repayment obligations of $1.9 billion, and to fund our operating requirements for at least the next 12 months includingand beyond. Our operating requirements include working capital requirements, capital expenditures, debt repayment obligations,the remaining portion of our $2.6 billion share repurchase program, quarterly cash dividend, which is currently $0.19 per share, subject to declaration by our Board of Directors or a designated Committee of the Board of Directors, 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 such additional capital will be available to us on favorable terms, if at all, or that it will not result in substantial dilution to our existing stockholders. In May 2018, a Special Committee
During fiscal year 2022, we returned $1,493 million to stockholders through our Board of Directors, on behalf of the full Board of Directors, authorized a program to repurchase up to $2.4 billion of our common stock. This stock repurchase program supersedes and replaces the May 2017 program, and expires on May 31, 2020. 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 repurchasedreturn programs, repurchasing approximately 10.49.5 million shares for approximately $1,116$1,300 million under thisand $193 million through our quarterly cash dividend program during thewhich was initiated in November 2020.
During fiscal year ended2022, we also completed mergers and acquisitions activity, including the acquisitions of 100% of the equity interests of Glu and Playdemic for cash considerations of $2.0 billion and $1.4 billion, net of cash acquired, respectively, and one other immaterial acquisition.
Our foreign subsidiaries are generally subject to U.S. tax, and to the extent earnings from these subsidiaries can be repatriated without a material tax cost, such earnings will not be indefinitely reinvested. As of March 31, 2019. We are actively repurchasing shares under this program.
2022, approximately $2.0 billion of our cash and cash equivalents were domiciled in foreign tax jurisdictions. All of our foreign cash is available for repatriation without a material tax cost.
We have a “shelf” registration statement on Form S-3 on file with the SEC. This shelf registration statement, which includes a base prospectus, allows us at any time to offer any combination of securities described in the prospectus in one or more offerings. Unless otherwise specified in a prospectus supplement accompanying the base prospectus, we would use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes, which may include funding for working capital, financing capital expenditures, research and development, marketing and distribution efforts, and if opportunities arise, for acquisitions or strategic alliances. Pending such uses, we may invest the net proceeds in interest-bearing securities. In addition, we may conduct concurrent or other financings at any time.
Our ability to maintain sufficient liquidity could be affected by various risks and uncertainties including, but not limited to, those related to, customer demand and acceptance of our products, our ability to collect our accounts receivable as they become due, successfully achieving our product release schedules and attaining our forecasted sales objectives, economic and geopolitical 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” section, included in Part I, Item 1A of this report. Contractual Obligations and Commercial Commitments
See Note 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, 2019,2022, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii)arrangements.
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. 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, Japanese yen, 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 the 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-denominatedforeign 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-denominatedforeign 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, 2019,2022, 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 $159$215 million or $318$430 million, respectively. As of March 31, 2019,2022, 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 $84$90 million or $167$181 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 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, 2019,2022, 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, including unrealized gains and unrealized losses not related to credit losses, 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, 2019, arising from potential changes2022, 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 $3 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, 2019 | | 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 | $ | 328 |
| | $ | 328 |
| | $ | 326 |
| | $ | 324 |
| | $ | 323 |
| | $ | 322 |
| | $ | 321 |
|
| U.S. Treasury securities | 154 |
| | 154 |
| | 153 |
| | 153 |
| | 152 |
| | 151 |
| | 151 |
|
| U.S. agency securities | 44 |
| | 44 |
| | 44 |
| | 44 |
| | 43 |
| | 43 |
| | 43 |
|
| Commercial paper | 112 |
| | 112 |
| | 112 |
| | 112 |
| | 112 |
| | 112 |
| | 112 |
|
| Foreign government securities | 51 |
| | 50 |
| | 50 |
| | 50 |
| | 50 |
| | 49 |
| | 49 |
|
| Asset-backed securities | 54 |
| | 53 |
| | 53 |
| | 53 |
| | 52 |
| | 52 |
| | 51 |
|
| Certificates of deposit | 1 |
| | 1 |
| | 1 |
| | 1 |
| | 1 |
| | 1 |
| | 1 |
|
| Total short-term investments | $ | 744 |
| | $ | 742 |
| | $ | 739 |
| | $ | 737 |
| | $ | 733 |
| | $ | 730 |
| | $ | 728 |
|
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, 2019, 2018 and 2017 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, 2022 | | March 31, 2021 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 2,732 | | | $ | 5,260 | |
| Short-term investments | 330 | | | 1,106 | |
| Receivables, net | 650 | | | 521 | |
| Other current assets | 439 | | | 326 | |
| Total current assets | 4,151 | | | 7,213 | |
| Property and equipment, net | 550 | | | 491 | |
| Goodwill | 5,387 | | | 2,868 | |
| Acquisition-related intangibles, net | 962 | | | 309 | |
| Deferred income taxes, net | 2,243 | | | 2,045 | |
| Other assets | 507 | | | 362 | |
| TOTAL ASSETS | $ | 13,800 | | | $ | 13,288 | |
| | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 101 | | | $ | 96 | |
| Accrued and other current liabilities | 1,388 | | | 1,341 | |
| Deferred net revenue (online-enabled games) | 2,024 | | | 1,527 | |
| Total current liabilities | 3,513 | | | 2,964 | |
| Senior notes, net | 1,878 | | | 1,876 | |
| Income tax obligations | 386 | | | 315 | |
| Deferred income taxes, net | 1 | | | 43 | |
| Other liabilities | 397 | | | 250 | |
| Total liabilities | 6,175 | | | 5,448 | |
Commitments and contingencies (See Note 14) | 0 | | 0 |
| Stockholders’ equity: | | | |
| Preferred stock, $0.01 par value. 10 shares authorized | — | | | — | |
| Common stock, $0.01 par value. 1,000 shares authorized; 280 and 286 shares issued and outstanding, respectively | 3 | | | 3 | |
| Additional paid-in capital | — | | | — | |
| Retained earnings | 7,607 | | | 7,887 | |
| Accumulated other comprehensive income (loss) | 15 | | | (50) | |
| Total stockholders’ equity | 7,625 | | | 7,840 | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 13,800 | | | $ | 13,288 | |
|
| | | | | | | |
| (In millions, except par value data) | March 31, 2019 | | March 31, 2018 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 4,708 |
| | $ | 4,258 |
|
| Short-term investments | 737 |
| | 1,073 |
|
| Receivables, net of allowances of $7 and $165, respectively | 623 |
| | 385 |
|
| Other current assets | 313 |
| | 288 |
|
| Total current assets | 6,381 |
| | 6,004 |
|
| Property and equipment, net | 448 |
| | 453 |
|
| Goodwill | 1,892 |
| | 1,883 |
|
| Acquisition-related intangibles, net | 87 |
| | 71 |
|
| Deferred income taxes, net | 35 |
| | 84 |
|
| Other assets | 114 |
| | 89 |
|
| TOTAL ASSETS | $ | 8,957 |
| | $ | 8,584 |
|
| | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 113 |
| | $ | 48 |
|
| Accrued and other current liabilities | 1,052 |
| | 821 |
|
| Deferred net revenue (online-enabled games) | 1,100 |
| | 1,622 |
|
| Total current liabilities | 2,265 |
| | 2,491 |
|
| Senior notes, net | 994 |
| | 992 |
|
| Income tax obligations | 233 |
| | 250 |
|
| Deferred income taxes, net | 2 |
| | 1 |
|
| Other liabilities | 132 |
| | 255 |
|
| Total liabilities | 3,626 |
| | 3,989 |
|
Commitments and contingencies (See Note 13) |
| |
|
| Stockholders’ equity: | | | |
| Preferred stock, $0.01 par value. 10 shares authorized | — |
| | — |
|
| Common stock, $0.01 par value. 1,000 shares authorized; 298 and 306 shares issued and outstanding, respectively | 3 |
| | 3 |
|
| Additional paid-in capital | — |
| | 657 |
|
| Retained earnings | 5,358 |
| | 4,062 |
|
| Accumulated other comprehensive loss | (30 | ) | | (127 | ) |
| Total stockholders’ equity | 5,331 |
| | 4,595 |
|
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 8,957 |
| | $ | 8,584 |
|
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) | 2022 | | 2021 | | 2020 |
| Net revenue | $ | 6,991 | | | $ | 5,629 | | | $ | 5,537 | |
| Cost of revenue | 1,859 | | | 1,494 | | | 1,369 | |
| Gross profit | 5,132 | | | 4,135 | | | 4,168 | |
| Operating expenses: | | | | | |
| Research and development | 2,186 | | | 1,778 | | | 1,559 | |
| Marketing and sales | 961 | | | 689 | | | 631 | |
| General and administrative | 673 | | | 592 | | | 506 | |
| Acquisition-related contingent consideration | — | | | — | | | 5 | |
| Amortization and impairment of intangibles | 183 | | | 30 | | | 22 | |
| Total operating expenses | 4,003 | | | 3,089 | | | 2,723 | |
| Operating income | 1,129 | | | 1,046 | | | 1,445 | |
| Interest and other income (expense), net | (48) | | | (29) | | | 63 | |
| Income before provision for (benefit from) income taxes | 1,081 | | | 1,017 | | | 1,508 | |
| Provision for (benefit from) income taxes | 292 | | | 180 | | | (1,531) | |
| Net income | $ | 789 | | | $ | 837 | | | $ | 3,039 | |
| Earnings per share: | | | | | |
| Basic | $ | 2.78 | | | $ | 2.90 | | | $ | 10.37 | |
| Diluted | $ | 2.76 | | | $ | 2.87 | | | $ | 10.30 | |
| Number of shares used in computation: | | | | | |
| Basic | 284 | | | 289 | | | 293 | |
| Diluted | 286 | | | 292 | | | 295 | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| (In millions, except per share data) | 2019 | | 2018 | | 2017 |
| Net revenue: | | | | | |
| Product | $ | 1,593 |
| | $ | 2,586 |
| | $ | 2,640 |
|
| Service and other | 3,357 |
| | 2,564 |
| | 2,205 |
|
| Total net revenue | 4,950 |
| | 5,150 |
| | 4,845 |
|
| Cost of revenue: | | | | | |
| Product | 517 |
| | 822 |
| | 893 |
|
| Service and other | 805 |
| | 455 |
| | 405 |
|
| Total cost of revenue | 1,322 |
| | 1,277 |
| | 1,298 |
|
| Gross profit | 3,628 |
| | 3,873 |
| | 3,547 |
|
| Operating expenses: | | | | | |
| Research and development | 1,433 |
| | 1,320 |
| | 1,205 |
|
| Marketing and sales | 702 |
| | 641 |
| | 673 |
|
| General and administrative | 460 |
| | 469 |
| | 439 |
|
| Acquisition-related contingent consideration | 14 |
| | — |
| | — |
|
| Amortization of intangibles | 23 |
| | 9 |
| | 6 |
|
| Total operating expenses | 2,632 |
| | 2,439 |
| | 2,323 |
|
| Operating income | 996 |
| | 1,434 |
| | 1,224 |
|
| Interest and other income (expense), net | 83 |
| | 15 |
| | (14 | ) |
| Income before provision for income taxes | 1,079 |
| | 1,449 |
| | 1,210 |
|
| Provision for income taxes | 60 |
| | 406 |
| | 243 |
|
| Net income | $ | 1,019 |
| | $ | 1,043 |
| | $ | 967 |
|
| Earnings per share: | | | | | |
| Basic | $ | 3.36 |
| | $ | 3.39 |
| | $ | 3.19 |
|
| Diluted | $ | 3.33 |
| | $ | 3.34 |
| | $ | 3.08 |
|
| Number of shares used in computation: | | | | | |
| Basic | 303 |
| | 308 |
| | 303 |
|
| Diluted | 306 |
| | 312 |
| | 314 |
|
See accompanying Notes to Consolidated Financial Statements.
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| (In millions) | 2022 | | 2021 | | 2020 |
| Net income | $ | 789 | | | $ | 837 | | | $ | 3,039 | |
| Other comprehensive income (loss), net of tax: | | | | | |
| Net gains (losses) on available-for-sale securities | (3) | | | 4 | | | (3) | |
| Net gains (losses) on derivative instruments | 76 | | | (68) | | | 17 | |
| Foreign currency translation adjustments | (8) | | | 64 | | | (34) | |
| Total other comprehensive income (loss), net of tax | 65 | | | — | | | (20) | |
| Total comprehensive income | $ | 854 | | | $ | 837 | | | $ | 3,019 | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| (In millions) | 2019 | | 2018 | | 2017 |
| Net income | $ | 1,019 |
| | $ | 1,043 |
| | $ | 967 |
|
| Other comprehensive income (loss), net of tax: | | | | | |
| Net gains (losses) on available-for-sale securities | 7 |
| | (5 | ) | | (4 | ) |
| Net gains (losses) on derivative instruments | 88 |
| | (121 | ) | | 18 |
|
| Foreign currency translation adjustments | (21 | ) | | 18 |
| | (17 | ) |
| Total other comprehensive income (loss), net of tax | 74 |
| | (108 | ) | | (3 | ) |
| Total comprehensive income | $ | 1,093 |
| | $ | 935 |
| | $ | 964 |
|
See accompanying Notes to Consolidated Financial Statements.
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except 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, 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 | |
| Total comprehensive income (loss) | — | | | $ | — | | | $ | — | | | $ | 837 | | | $ | — | | | $ | 837 | |
| Stock-based compensation | — | | | $ | — | | | $ | 435 | | | $ | — | | | $ | — | | | $ | 435 | |
| Issuance of common stock | 3,685 | | | $ | — | | | $ | (66) | | | $ | — | | | $ | — | | | $ | (66) | |
| Repurchase and retirement of common stock | (5,633) | | | $ | — | | | $ | (369) | | | $ | (360) | | | $ | — | | | $ | (729) | |
| Cash dividends declared ($0.34 per common share) | — | | | $ | — | | | $ | — | | | $ | (98) | | | $ | — | | | $ | (98) | |
| Balances as of March 31, 2021 | 286,465 | | | $ | 3 | | | $ | — | | | $ | 7,887 | | | $ | (50) | | | $ | 7,840 | |
| Total comprehensive income (loss) | — | | | $ | — | | | $ | — | | | $ | 789 | | | $ | 65 | | | $ | 854 | |
| Stock-based compensation | — | | | $ | — | | | $ | 528 | | | $ | — | | | $ | — | | | $ | 528 | |
| Awards assumed upon acquisition | — | | | $ | — | | | $ | 23 | | | $ | — | | | $ | — | | | $ | 23 | |
| Issuance of common stock | 3,108 | | | $ | — | | | $ | (127) | | | $ | — | | | $ | — | | | $ | (127) | |
| Repurchase and retirement of common stock | (9,522) | | | $ | — | | | $ | (424) | | | $ | (876) | | | $ | — | | | $ | (1,300) | |
| Cash dividends declared ($0.68 per common share) | — | | | $ | — | | | $ | — | | | $ | (193) | | | $ | — | | | $ | (193) | |
| Balances as of March 31, 2022 | 280,051 | | | $ | 3 | | | $ | — | | | $ | 7,607 | | | $ | 15 | | | $ | 7,625 | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity |
| Shares | | Amount | |
| Balances as of March 31, 2016 | 300,602 |
| | $ | 3 |
| | $ | 1,349 |
| | $ | 2,060 |
| | $ | (16 | ) | | $ | 3,396 |
|
| Total comprehensive income (loss) | — |
| | — |
| | — |
| | 967 |
| | (3 | ) | | 964 |
|
| Reclassification of equity component of convertible notes | — |
| | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
Settlement of convertible notes
| 2,917 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Exercise of convertible note hedge
| (2,917 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Settlement of warrants | 9,645 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Stock-based compensation | — |
| | — |
| | 196 |
| | — |
| | — |
| | 196 |
|
| Tax benefit from stock-based compensation | — |
| | — |
| | 65 |
| | — |
| | — |
| | 65 |
|
| Issuance of common stock | 4,626 |
| | — |
| | (55 | ) | | — |
| | — |
| | (55 | ) |
| Repurchase and retirement of common stock | (6,506 | ) | | — |
| | (508 | ) | | — |
| | — |
| | (508 | ) |
| 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 (See Note 1) | — |
| | — |
| | — |
| | 590 |
| | 22 |
| | 612 |
|
Cumulative-effect adjustment from the adoption of ASU 2018-02 (See Note 1) | — |
| | — |
| | — |
| | (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 |
|
See accompanying Notes to Consolidated Financial Statements.
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| (In millions) | 2022 | | 2021 | | 2020 |
| OPERATING ACTIVITIES | | | | | |
| Net income | $ | 789 | | | $ | 837 | | | $ | 3,039 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation, amortization, accretion and impairment | 486 | | | 181 | | | 150 | |
| Acquisition-related contingent consideration | — | | | — | | | 5 | |
| Stock-based compensation | 528 | | | 435 | | | 347 | |
| Change in assets and liabilities: | | | | | |
| Receivables, net | (77) | | | (41) | | | 164 | |
| Other assets | (157) | | | (70) | | | 35 | |
| Accounts payable | (7) | | | 18 | | | (36) | |
| Accrued and other liabilities | 169 | | | 136 | | | 119 | |
| Deferred income taxes, net | (329) | | | (143) | | | (1,871) | |
| Deferred net revenue (online-enabled games) | 497 | | | 581 | | | (155) | |
| Net cash provided by operating activities | 1,899 | | | 1,934 | | | 1,797 | |
| INVESTING ACTIVITIES | | | | | |
| Capital expenditures | (188) | | | (124) | | | (140) | |
| Proceeds from maturities and sales of short-term investments | 1,329 | | | 3,686 | | | 2,142 | |
| Purchase of short-term investments | (554) | | | (2,828) | | | (3,359) | |
| Acquisitions, net of cash acquired | (3,391) | | | (1,239) | | | — | |
| Net cash used in investing activities | (2,804) | | | (505) | | | (1,357) | |
| FINANCING ACTIVITIES | | | | | |
| Proceeds from issuance of senior notes, net of issuance costs | — | | | 1,478 | | | — | |
| Payment of senior notes | — | | | (600) | | | — | |
| Proceeds from issuance of common stock | 77 | | | 86 | | | 62 | |
| Cash dividends paid | (193) | | | (98) | | | — | |
| Cash paid to taxing authorities for shares withheld from employees | (204) | | | (152) | | | (91) | |
| Repurchase and retirement of common stock | (1,300) | | | (729) | | | (1,207) | |
| Acquisition-related contingent consideration payment | — | | | — | | | (122) | |
| Net cash used in financing activities | (1,620) | | | (15) | | | (1,358) | |
| Effect of foreign exchange on cash and cash equivalents | (3) | | | 78 | | | (22) | |
| Increase (decrease) in cash and cash equivalents | (2,528) | | | 1,492 | | | (940) | |
| Beginning cash and cash equivalents | 5,260 | | | 3,768 | | | 4,708 | |
| Ending cash and cash equivalents | $ | 2,732 | | | $ | 5,260 | | | $ | 3,768 | |
| Supplemental cash flow information: | | | | | |
| Cash paid during the year for income taxes, net | $ | 629 | | | $ | 340 | | | $ | 170 | |
| Cash paid during the year for interest | 56 | | | 40 | | | $ | 42 | |
| Non-cash investing activities: | | | | | |
| Change in accrued capital expenditures | $ | 19 | | | $ | 17 | | | $ | (8) | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| (In millions) | 2019 | | 2018 | | 2017 |
| OPERATING ACTIVITIES | | | | | |
| Net income | $ | 1,019 |
| | $ | 1,043 |
| | $ | 967 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation, amortization and accretion | 145 |
| | 136 |
| | 172 |
|
| Acquisition-related contingent consideration | 14 |
| | — |
| | — |
|
| Stock-based compensation | 284 |
| | 242 |
| | 196 |
|
| Change in assets and liabilities: | | | | | |
| Receivables, net | (88 | ) | | (25 | ) | | (136 | ) |
| Other assets | (24 | ) | | 10 |
| | 3 |
|
| Accounts payable | 59 |
| | (44 | ) | | 5 |
|
| Accrued and other liabilities | 3 |
| | 43 |
| | 190 |
|
| Deferred income taxes, net | (16 | ) | | 204 |
| | 100 |
|
| Deferred net revenue (online-enabled games) | 151 |
| | 83 |
| | 81 |
|
| Net cash provided by operating activities | 1,547 |
| | 1,692 |
| | 1,578 |
|
| INVESTING ACTIVITIES | | | | | |
| Capital expenditures | (119 | ) | | (107 | ) | | (123 | ) |
| Proceeds from maturities and sales of short-term investments | 1,688 |
| | 3,166 |
| | 1,281 |
|
| Purchase of short-term investments | (1,342 | ) | | (2,287 | ) | | (1,917 | ) |
| Acquisition, net of cash acquired | (58 | ) | | (150 | ) | | — |
|
| Net cash provided by (used in) investing activities | 169 |
| | 622 |
| | (759 | ) |
| FINANCING ACTIVITIES | | | | | |
| Payment of convertible notes | — |
| | — |
| | (163 | ) |
| Proceeds from issuance of common stock | 61 |
| | 78 |
| | 72 |
|
Cash paid to taxing authorities for shares withheld from employees
| (122 | ) | | (120 | ) | | (130 | ) |
| Repurchase and retirement of common stock | (1,192 | ) | | (601 | ) | | (508 | ) |
| Net cash used in financing activities | (1,253 | ) | | (643 | ) | | (729 | ) |
| Effect of foreign exchange on cash and cash equivalents | (13 | ) | | 22 |
| | (18 | ) |
| Increase in cash and cash equivalents | 450 |
| | 1,693 |
| | 72 |
|
| Beginning cash and cash equivalents | 4,258 |
| | 2,565 |
| | 2,493 |
|
| Ending cash and cash equivalents | $ | 4,708 |
| | $ | 4,258 |
| | $ | 2,565 |
|
| Supplemental cash flow information: | | | | | |
| Cash paid during the year for income taxes, net | $ | 100 |
| | $ | 57 |
| | $ | 51 |
|
| Cash paid during the year for interest | $ | 42 |
| | $ | 42 |
| | $ | 43 |
|
See accompanying Notes to Consolidated Financial Statements.
ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
We areElectronic Arts is a global leader in digital interactive entertainment, with a mission to inspire the world to play.entertainment. We develop, market, publish and deliver games, content and services that can be played and watchedexperienced on a variety of platforms, including game consoles, PCs, mobile phones and tablets. InAt our core is a portfolio of intellectual property from which we create innovative games and services, we usecontent that enable us to build on-going and meaningful relationships with a community of players, creators and viewers. Our portfolio includes brands that we either wholly own (such as Battlefield, The Sims, Apex Legends Anthem, Need for Speed, Battlefield, and Plants v. Zombies)The Sims) or license from others (such as FIFA, Madden, NFLStar Wars, and Star Wars)the 300+ licenses within our global football ecosystem). We developThrough our live services offerings, we offer our players high-quality experiences designed to provide value to players and publishextend and enhance gameplay. These live services include extra content, subscription offerings and other revenue generated in addition to the sale of our base games and services across diverse genres, such as sports, first-person shooter, action, role-playingfree-to-play games. In addition, we are focused on reaching more players whenever and simulation, and offer our games and services through diverse business models and distribution channels, such as retail, download, subscription and free-to-play.wherever they want to play. We believe that the breadthwe can add value to our network by making it easier for players to connect to a world of play by offering choice of business model, distribution channel and depth of our portfolio and our flexibility in business models and distribution channels provide us with strategic advantages.
A summary of our significant accounting policies applied in the preparation of our Consolidated Financial Statements follows: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 year ended March 31, 2019, 2018 and 20172022 contained 52 weeks each and ended on March 30, 2019,April 2, 2022. Our results of operations for the fiscal years ended March 31, 20182021 and 2020 contained 53 and 52 weeks and ended on April 1, 20173, 2021 and March 28, 2020, respectively. For simplicity of disclosure, all fiscal periods are referred to as ending on a calendar month end.
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 offering periods for deferred net revenue, sales returns and allowances, provisions for doubtful accounts, accrued liabilities, offering periods for deferred net revenue, relative stand-alone selling price for identified performance obligations in our revenue transactions, income taxes, 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
On April 1, 2018, we adopted six new accounting standards which are discussed below. Other than Accounting Standards Codification (“ASC”) Topic 606, Revenue From Contracts with Customers (the “New Revenue Standard” or “ASC 606”), these other accounting standards did not have a material impact to our Consolidated Financial Statements.
In May 2014, the FASB issued the New Revenue Standard which replaced ASC Topic 605, Revenue Recognition (the “Old Revenue Standard” or “ASC 605”), including industry-specific requirements, and provided 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.
We adopted the New Revenue Standard on April 1, 2018, the beginning of fiscal yearDecember 2019, using the modified retrospective method. We elected to apply the New Revenue Standard only to contracts that were not completed as of the adoption date. The comparative information for periods prior to April 1, 2018 has not been restated and continues to be reported under the accounting standards in effect for those periods.
The net cumulative effect adjustment upon adoption resulted in an increase to retained earnings of $590 million, net of tax, and included the impact from the following adjustments to our Consolidated Balance Sheet at April 1, 2018:
|
| | | | | | | | | | | |
BALANCE SHEETS
(In millions) | Balance at March 31, 2018 | | Adjustments due to New Revenue Standard Adoption | | Balance at April 1, 2018 |
| Assets | | | | | |
| Receivables, net | $ | 385 |
| | $ | 158 |
| | $ | 543 |
|
| Deferred income taxes, net | 84 |
| | (64 | ) | | 20 |
|
| | | | | | |
| Liabilities | | | | | |
| Accrued and other current liabilities | | | | | |
| Sales return and price protection reserves | $ | — |
| | $ | 158 |
| | $ | 158 |
|
| Deferred net revenue (other) | 108 |
| | (3 | ) | | 105 |
|
| Deferred net revenue (online-enabled games) | 1,622 |
| | (673 | ) | | 949 |
|
| | | | | | |
| Stockholders’ Equity | | | | | |
| Retained earnings | $ | 4,062 |
| | $ | 590 |
| | $ | 4,652 |
|
| Accumulated other comprehensive income (loss) | (127 | ) | | 22 |
| | (105 | ) |
The most significant impacts of the New Revenue Standard were:
The accounting for our transactions as multiple elements or “bundled” arrangements. Under prior software revenue recognition accounting standards, because we did not have vendor-specific objective evidence of fair value (“VSOE”) for unspecified future updates or online hosting, we were not able to account for performance obligations separately, and therefore, the entire sales price of most transactions that had multiple performance obligations was recognized ratably over the period we expected to provide the future updates and/or online hosting performance obligations (the “Estimated Offering Period”). Under the New Revenue Standard, this VSOE requirement was eliminated and was replaced with a requirement for us to determine our best estimate of the stand-alone selling price of each performance obligation and allocate the transaction price to each distinct performance obligation on a relative stand-alone selling price basis. Therefore, we are now able to account for performance obligations separately.
For example, for an individual sale of a game with both online and offline functionality, we typically have three distinct performance obligations; (1) the software license; (2) a right to receive future updates; and (3) online hosting. The software license performance obligation represents the game that is delivered digitally or via physical disc at the time of sale and typically provides access to offline core game content. The future update rights performance obligation includes 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. The online hosting performance obligation consists of providing the customer with a hosted connection for online playability.
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 under the New Revenue Standard, generally 75 percent of the sales price is allocated to the software license performance obligation and recognized at a point in time upon delivery (which is usually at or near the same time as the booking of the transaction), and the remaining 25 percent is allocated to the future update rights and the online hosting performance obligations and recognized ratably over the Estimated Offering Period. For sales prior to April 1, 2018, our deferred net revenue balances decreased by $740 million upon adoption of the New Revenue Standard because the software license performance obligation had been delivered in the prior fiscal year.
Mobile platform fees. The adoption of the New Revenue Standard also changed how we present mobile platform fees after March 31, 2018. Previously, mobile platform fees retained by third-party application storefronts such as the Apple App Store and Google Play, were reported on a net basis (i.e. as a reduction of net revenue) because we previously determined that generally, the third party was considered the primary obligor. Upon adoption of the New Revenue Standard, we concluded that we are the principal in the transactions, resulting in mobile platform fees now being reported within cost of revenue rather than as a reduction of net revenue. We recognized $64 million of mobile platform fees at April 1, 2018 as an increase to our deferred net revenue balances. Mobile platform fees for the fiscal year ended March 31, 2019 was $188 million and accordingly increased both service and other net revenue and cost of
revenue by this amount relative to the same period a year ago. While this change also decreased our gross margin percentage, it does not have a material impact on our annual total gross profit or overall profitability.
Increased portion of our sales from games with services are presented as service revenue. The amount of the transaction price allocated to future update rights and the online hosting performance obligations are presented as service revenue under the New Revenue Standard (previously, revenue associated with future update rights were generally presented as product revenue). Therefore, for the fiscal year ended March 31, 2019, approximately $530 million of revenue for future update rights are now presented as service revenue under the New Revenue Standard as compared to product revenue under the Old Revenue Standard.
Sales returns and price protection reserves. Upon adoption, our sales returns and price protection reserves are now presented within accrued and other liabilities (previously, these allowances were presented as contra-assets within receivables on our Consolidated Balance Sheets). We reclassified $158 million of sales returns and price protection reserves on April 1, 2018.
The adoption of the New Revenue Standard impacted our Consolidated Balance Sheet as of March 31, 2019 and our Consolidated Statements of Operations for the fiscal year ended March 31, 2019 as follows:
|
| | | | | | | | | | | |
| | As of March 31, 2019 |
BALANCE SHEETS (In millions) | Under New Revenue Standard | | Under Old Revenue Standard | | $ Change |
| Assets | | | | | |
| Receivables, net | $ | 623 |
| | $ | 473 |
| | $ | 150 |
|
| Other current assets | 313 |
| | 311 |
| | 2 |
|
| Deferred income taxes, net | 35 |
| | 86 |
| | (51 | ) |
| Other assets | 114 |
| | 112 |
| | 2 |
|
| | | | | | |
| Liabilities | | | | | |
| Accrued and other current liabilities | | | | | |
| Sales return and price protection reserves | $ | 150 |
| | $ | — |
| | $ | 150 |
|
| Deferred net revenue (other) | 94 |
| | 362 |
| | (268 | ) |
| Deferred net revenue (online-enabled games) | 1,100 |
| | 1,404 |
| | (304 | ) |
| Other liabilities | 132 |
| | 120 |
| | 12 |
|
| | | | | | |
| Stockholders’ Equity | | | | | |
| Retained earnings | $ | 5,358 |
| | $ | 4,835 |
| | $ | 523 |
|
| Accumulated other comprehensive loss | (30 | ) | | (20 | ) | | (10 | ) |
|
| | | | | | | | | | | | | | |
| | Year Ended March 31, 2019 |
| (In millions, except per share data) | Under New Revenue Standard | | Under Old Revenue Standard | | $ Change | | % Change |
| Net revenue: | | | | | | | |
| Product | $ | 1,593 |
| | $ | 2,204 |
| | $ | (611 | ) | | (28 | )% |
| Service and other | 3,357 |
| | 2,639 |
| | 718 |
| | 27 | % |
| Total net revenue | 4,950 |
| | 4,843 |
| | 107 |
| | 2 | % |
| Cost of revenue: | | | | | | | |
| Product | 517 |
| | 637 |
| | (120 | ) | | (19 | )% |
| Service and other | 805 |
| | 497 |
| | 308 |
| | 62 | % |
| Total cost of revenue | 1,322 |
| | 1,134 |
| | 188 |
| | 17 | % |
| Gross profit | 3,628 |
| | 3,709 |
| | (81 | ) | | (2 | )% |
| Operating expenses: | | | | | | | |
| Total operating expenses | 2,632 |
| | 2,632 |
| | — |
| | — | % |
| Operating income | 996 |
| | 1,077 |
| | (81 | ) | | (8 | )% |
| Interest and other income (expense), net | 83 |
| | 83 |
| | — |
| | — | % |
| Income before provision for income taxes | 1,079 |
| | 1,160 |
| | (81 | ) | | (7 | )% |
| Provision for income taxes | 60 |
| | 74 |
| | (14 | ) | | (19 | )% |
| Net income | $ | 1,019 |
| | $ | 1,086 |
| | $ | (67 | ) | | (6 | )% |
| Earnings per share: | | | | | | | |
| Basic | $ | 3.36 |
| | $ | 3.58 |
| | $ | (0.22 | ) | | (6 | )% |
| Diluted | $ | 3.33 |
| | $ | 3.55 |
| | $ | (0.22 | ) | | (6 | )% |
Refer to the following sections of our Consolidated Financial Statements for the additional disclosures required by the New Revenue Standard:
| |
• | See Note 2 — Summary of Significant Accounting Policies, for our updated revenue accounting policy, including significant judgments, under ASC 606. For a discussion of our revenue recognition policy as it relates to revenue transactions accounted for prior to April 1, 2018, which were accounted for under ASC 605, refer to our Annual Report on Form 10-K for the fiscal year ended March 31, 2018. |
| |
• | See Note 10 — Balance Sheet Details, for a discussion on our contract liabilities (“deferred net revenue”) and our remaining performance obligations. We had an immaterial amount of contract assets as of April 1, 2018 and March 31, 2019. |
In January 2016, the FASB issued ASU 2016-01, Financial Instruments2019-12, Simplifying the Accounting for Income Taxes (Topic 825-10), which requires that most equity investments be measured at fair value, with subsequent changes740). The amendments in fair value recognizedthis update simplify the accounting for income taxes by removing certain exceptions to the general principles in net income.Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. We adopted ASU also impacts financial liabilities under2019-12 in the fair value option and the presentation and disclosure requirements for financial instruments.first quarter of fiscal year 2022. The adoptionamendments did not have a material impact on our Consolidated Financial Statements.Statements upon adoption.
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 clarified and amended existing guidance with respect to transactions in which a taxpayer realizes a step-up in tax basis of goodwill. As we integrate acquired intellectual property into our global operating structure, we may realize a tax basis step-up in goodwill. In such situations, we are required to assess whether the ASU are designedintegration relates to provide guidance and eliminate diversity in the accounting for derecognition of prepaid stored-value product liabilities. Typically,acquisition or is a prepaid stored-value product liabilityseparate transaction. When the integration is a separate transaction, we may be required to be derecognized when it is probable that a significant reversalrecognize deferred tax assets to the extent the stepped-up tax basis exceeds the associated U.S. GAAP basis. This assessment requires judgment around key indicators such as whether the tax basis step-up was contemplated as part of the recognized breakage amount will not subsequently occur. Thisoriginal acquisition to which the intellectual property relates, whether the integration results in cash taxes, and whether the integration is when the likelihoodachieved through a simple tax
election. See Note 11 — Income Taxes for a discussion of the product holder exercising its remaining rights becomes remote. This estimate shall be updated atprospective application of this standard to our intra-entity transfers of recently acquired intellectual property during the end of each period. The adoption did not have a material impact on our Consolidated Financial Statements. 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. The adoption did not have a material impact on our Consolidated Financial Statements.
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. The adoption did not have a material impact on our Consolidated Financial Statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This update gives the option to reclassify to retained earnings tax effects related to items in accumulated other comprehensive income that the FASB refers to as having been stranded in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act. The adoption did not have a material impact on our Consolidated Financial Statements.fiscal year ended March 31, 2022.
Other Recently Issued Accounting Standards
In February 2016,October 2021, the FASB issued ASU 2016-02, Leases (Topic 842)2021-08, Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805). The FASB issuedamendments in this standard to increase transparencyupdate require that an acquirer recognize and comparability among organizations by recognizing right-of-use leasemeasure contract assets and contract liabilities on the balance sheet and disclosing key information about leasing arrangements. In July 2018, the FASB issued ASU 2018-11, Targeted Improvements, which provides entitiesacquired in a business combination in accordance with optional transition relief by allowing entities 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. We will adopt this standard using this optional transition method beginning in the first quarter of fiscal year 2020, when the updated guidance is effective for us, and accordingly, we will not adjust prior periods for the effects of the new lease standard. Additionally, we will elect 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. While we are continuing to evaluate the impact of this new standard, we estimate approximately $200 million to $300 million would be recognized on our Consolidated Balance Sheet upon adoption as a result of establishing right-of-use lease assets and liabilities for our operating leases with terms of more than 12 months. We do not expect this new standard to have a material impact on our Consolidated Statements of Operations or Cash Flows.
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. It eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The recognition of the amount historically excluded from the assessment of hedge effectiveness for our cash flow hedges under the new guidance will be recognized into the consolidated statement of operations at contract maturity rather than over the contract term, and will be recognized into net revenue or research and development expenses, as appropriate. ASU 2017-12 also amends the disclosure requirements by requiring revised tabular disclosures that focus on the effect of hedge accounting by income statement line.606. This update is effective for us beginning in the first quarter of fiscal year 2020. We do not expect the adoption to have a material impact on our Consolidated Financial Statements.
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. 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. ASU 2016-13 is effective for us beginning in the first quarter of fiscal year 2021. We are currently evaluating the impact of this new standard 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 changes the fair value measurement disclosure requirements. It summarizes the key provisions including the new, eliminated, and modified disclosure requirements. This update is effective for us beginning in the first quarter of fiscal year 2021.2024. 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 2018,November 2021, the FASB issued ASU 2018-15, Intangibles—Goodwill2021-10, Disclosures by Business Entities about Government Assistance (Topic 832). The amendments in this update establish Topic 832 and Other—Internal-Use Software (Subtopic 350-40). This update requiresrequire additional disclosures regarding government grants and money contributions when entities accounted for transactions with a customer ingovernment by analogizing to 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.grant or contribution accounting model. This update is effective for us beginning in the first fiscal quarter of fiscal year 2021.2023. Early adoption is permitted. We are currently evaluatingplan to adopt this provision in the timingfirst fiscal quarter of adoption andfiscal year 2023. This update is not expected to have a material impact of this new standard on our Consolidated Financial Statements andor 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 less than a year, 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.due to an expected credit loss, or (4) we intend to, or more likely than not would be required to, sell a security in an unrealized loss position before the recovery of its amortized cost basis. 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-temporarydue to an expected credit loss 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 allowances and impairment quarterly. WeFor investments in an unrealized loss position, we consider various factors in determining whether we should recognize an allowance for expected credit losses or an impairment charge, including the credit quality of the issuer, changes to the duration thatrating of the security by rating agencies, the extent to which fair value has beenis less than the adjustedamortized 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, weprocess, among other factors. We recognize an impairment charge at that timeallowance for credit losses, up to the amount of unrealized loss when appropriate, and write down the amortized cost basis of the investment if we intend to, or it is more likely than not we will be required to, sell the investment before the recovery of its amortized cost basis. Allowances for credit losses and write-downs are recognized in our Consolidated Statements of Operations.Operations, and unrealized losses not related to credit losses are recognized in other comprehensive income (loss). Based on our evaluation, we did not considerrecognize an allowance for credit losses, nor did we recognize any of our investments to be other-than-temporarily impairedimpairments, as of March 31, 20192022 and 2018.2021.
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 | | 32 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. We also capitalize costs associated with the purchase of software licenses. 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 $37$86 million and $35$72 million as of March 31, 20192022 and 2018,2021, respectively.
Business Combinations
We must estimate the fair value of assets acquired, liabilities assumed, and acquired in-process technology in a business combination at the acquisition date. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair values of the tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in the Consolidated Statement of Operations.
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 generally on a straight-line basis over the lesser of their estimated useful lives or the agreement terms, currently from one to nineseven 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 a 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 an 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 we will measure goodwill for impairment by applying fair value-based tests at the reporting unit level. 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, 2019,2022, we have only one reportable segment, which represents our only operating segment.
Revenue Recognition
We derive revenue principally from sales of our games, and related extra-contentextra content and services that can be played by customersexperienced on a variety of platforms which include game consoles, PCs, mobile phones and tablets. Our product and service offerings include, but are not limited to, the following:
•full games with both online and offline functionality (“Games with Services”), which generally includes (1) the initial game delivered digitally or via physical disc at the time of sale and typically provide access to offline core game content (“software license”); (2) updates on a when-and-if-available basis, such as software patches or updates, and/or additional free content to be delivered in the future (“future update rights”); and (3) a hosted connection for online playability (“online hosting”);
•full games with online-only functionality which require an Internet connection to access all gameplay and functionality (“Online-Hosted Service Games”);
•extra content related to Games with Services and Online-Hosted Service Games which provides access to additional in-game content;
•subscriptions, such as Origin Access, Origin Access PremierEA Play and EA Access,Play Pro, that generally offersoffer access to a selection of full games, in-game content, online services and other benefits typically for a recurring monthly or annual fee; and
•licensing our games to third parties to distribute and host our games.
Effective April 1, 2018, we evaluate revenue recognition based on the criteria set forth in ASC 606, Revenue from Contracts with Customers.
games and content.
We evaluate and recognize revenue by:
•identifying the contract(s) with the customer;
•identifying the performance obligations in the contract;
•determining the transaction price;
•allocating the transaction price to performance obligations in the contract; and
•recognizing revenue as each performance obligation is satisfied through the transfer of a promised good or service to a customer (i.e., “transfer of control”).
Certain of our full game and/or extra content are sold to resellers with a contingency that the full game and/or extra content cannot be resold prior to a specific date (“Street Date Contingency”). We recognize revenue for transactions that have a Street Date Contingency when the Street Date Contingency is removed and the full game and/or extra content can be resold by the reseller. For digital full game and/or extra content downloads sold to customers, we recognize revenue when the full game and/or extra content is made available for download to the customer.
Online-Enabled Games
Games with Services. Our sales of Games with Services are evaluated to determine whether the software license, future update rights and the online hosting are distinct and separable. Sales of Games with Services are generally determined to have three distinct performance obligations: software license, future update rights, and the online hosting.
Since we do not sell the performance obligations on a stand-alone basis, we consider market conditions and other observable inputs to estimate the stand-alone selling price for each performance obligation. We recognize revenue from these arrangements upon transfer of control for each performance obligation. For the portionGames with Services, generally 75 percent of the transactionsales price is allocated to the software license revenue isperformance obligation and recognized at a point in time when control of the license has been transferred to the customer. For the portion of the transaction priceThe remaining 25 percent is allocated to the future update rights and the online hosting revenue isperformance obligations and recognized ratably as the services are provided.service is provided (over the Estimated Offering Period).
Online-Hosted Service Games. Sales of our Online-Hosted Service Games are determined to have one distinct performance obligation: the online hosting. We recognize revenue from these arrangements as the service is provided.
Extra Content.Revenue received from sales of downloadable content are derived primarily from the sale of virtual currencies and digital in-game content that are designed to our customers toextend and enhance their gameplayplayers’ game experience. Sales of extra content are accounted for in a manner consistent with the treatment for our Games with Services and Online-Hosted Service Games as discussed above, depending upon whether or not the extra content has offline functionality.
That is, if the extra content has offline functionality, then the extra content is accounted for similarly to Games with Services (generally determined to have three distinct performance obligations: software license, future update rights, and the online hosting). If the extra content does not have offline functionality, then the extra content is determined to have one distinct performance obligation: the online-hosted service offering.
Subscriptions
RevenueSales of our subscriptions are deemed to be one performance obligation and we recognize revenue from subscriptions is recognizedthese arrangements ratably over the subscription term as the serviceperformance obligation is provided.
satisfied.
Licensing Revenue
In certain countries, weWe utilize third-party licensees to distribute and host our games and content in accordance with license agreements, for which the licensees typically pay us a fixed minimum guarantee and/or sales-based royalties. These arrangements typically include multiple performance obligations, such as a time-based license of software and future update rights. We recognize as revenue a portion of the minimum guarantee when we transfer control of the license of software (generally upon commercial launch) and the remaining portion ratably over the contractual term in which we provide the licensee with future update rights. Any sales-based royalties are generally recognized as the related sales occur by the licensee.
Revenue Classification
We classify our revenue as either product revenue or service and other revenue. Generally, performance obligations that are recognized upfront upon transfer of control are classified as product revenue, while performance obligations that are recognized over the Estimated Offering Period or subscription period as the services are provided are classified as service revenue.
Product revenue. Our product revenue includes revenue allocated to the software license performance obligation. Product revenue also includes revenue from the licensing of software to third-parties.
Service and other revenue. Our service revenue includes revenue allocated to the future update rights and the online hosting performance obligations. This also includes 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.
Significant Judgments around Revenue Arrangements
Identifying performance obligations. Performance obligations promised in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct, (i.e., the customer can benefit from the goods or services either on its own or together with other resources that are readily available), and are distinct in the context of the contract (i.e., it is separately identifiable from other goods or services in the contract). To the extent a contract includes multiple promises, we must apply judgment to determine whether those promises are separate and distinct performance obligations. If these criteria are not met, the promises are accounted for as a combined performance obligation.
Determining the transaction price.The transaction price is determined based on the consideration that we will be entitled to receive in exchange for transferring our goods and services to the customer. Determining the transaction price often requires significant 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 externalanalysis, pre-release versus post-release costs, and pricing of similar or same products and services such as software licenses and maintenance support withindata from competitors to the enterprise software industry.extent the data is available. 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 relatedservice-related performance obligations (i.e., future update rights and online hosting). Determining the Estimated Offering Period is inherently subjective and is subject to regular revision. Generally, we consider the average period of time customers are online when estimating the offering period. We also consider the estimated period of time between the date a game unit is sold to a reseller and the date the reseller sells the game unit to the customer (i.e., time in channel). Based on these two factors, we then consider the method of distribution. For example, games and extra content sold at retail would have a composite offering period equal to the online gameplay period plus time in channel as opposed to digitally-distributed software licensesgames and extra content which are delivered immediately via digital download and therefore, the offering period is estimated to be only the online gameplay period.
Additionally, we consider results from prior analyses, known and expected online gameplay trends, as well as disclosed service periods for competitors’ games in determining the Estimated Offering Period for future sales.We believe this provides a reasonable depiction of the transfer of future update rights and online hosting to our customers, as it is the best representation of the time period during which our games and extra content are played.experienced. We recognize revenue for future update rights and online hosting performance obligations ratably on a straight-line basis over this period as there is a consistent pattern of delivery for these performance obligations. ThesePrior to July 1, 2020, these performance obligations arewere generally recognized over an estimated nine-month period beginning in the month after shipment for software licensesgames and extra content sold through retail and an estimated six-month period for digitally-distributed software licensesgames and extra content beginning in the month of sale.
During the three months ended September 30, 2020, we completed our annual evaluation of the Estimated Offering Period and as a result, for sales after July 1, 2020, revenue for service-related performance obligations for games and extra content sold through retail is recognized over an estimated ten-month period beginning in the month of sale, and revenue for service-related performance obligations for digitally-distributed games and extra content is recognized over an estimated eight-month period beginning in the month of sale. During the fiscal year ended March 31, 2022, this change to our Estimated Offering Period resulted in an increase in net revenue of $331 million and net income of $252 million, and an increase of $0.88 diluted earnings per share. During the fiscal year ended March 31, 2021, this change to our Estimated Offering Period resulted in a decrease in net revenue of $333 million and net income of $280 million, and a decrease of $0.96 diluted earnings per share.
During the three months ended September 30, 2021, we completed our annual evaluation of the Estimated Offering Period. We have noted consumers are playing certain of our Online Hosted Service Games, such as PC and console free-to-play games, for longer periods of time than in prior years as players engage with services we provide that are designed to enhance and extend gameplay, and as such, have concluded that the Estimated Offering Period for such games should be lengthened. As a result, for all new sales after July 1, 2021, the revenue that we recognize for service-related performance obligations related to our PC and console free-to-play games is recognized generally over a twelve-month period. During the fiscal year ended March 31, 2022, this change to our Estimated Offering Period resulted in a decrease in net revenue of $131 million and net income of $100 million, and a decrease of $0.35 diluted earnings per share.
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 as the services are provided.
Principal Agent Considerations
We evaluate sales to end customers of our full games and related content via third-party storefronts, including digital storefronts such as Microsoft’s Xbox Store, Sony’s PlayStation Store, Apple App Store, and Google Play Store, in order to determine whether or not we are acting as the principal in the sale to the end customer, which we consider in determining if revenue should be reported gross or net of fees retained by the third-party storefront. An entity is the principal if it controls a good or service before it is transferred to the end customer. Key indicators that we evaluate in determining gross versus net treatment include but are not limited to the following:
•the underlying contract terms and conditions between the various parties to the transaction;
•which party is primarily responsible for fulfilling the promise to provide the specified good or service to the end customer;
•which party has inventory risk before the specified good or service has been transferred to the end customer; and
•which party has discretion in establishing the price for the specified good or service.
Based on an evaluation of the above indicators, except as discussed below, we have determined that generally the third party is considered the principal to end customers for the sale of our full games and related content. We therefore report revenue related to these arrangements net of the fees retained by the storefront. However, for sales arrangements via Apple App Store and Google Play Store, EA is considered the principal to the end customer and thus, we report revenue on a gross basis and mobile platform fees are reported within cost of revenue.
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 Price Protection Reserves
Sales returns and 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 game unit that they have not resold to customers. The amount of the price protection for permanent markdowns is 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 we also have a practice for allowing channel partners to return older products in the channel in exchange for a credit allowance.
When evaluating the adequacy of sales returns and price protection reserves, we analyze the following: historical credit allowances, current sell-through of our channel partners’ inventory of our products, current trends in retail and the video game industry, changes in customer demand, acceptance of our 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.
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, channel and platform 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, 2019,2022, we had two customers who accounted for approximately 3432 percent and 3329 percent of our consolidated gross receivables, respectively. At March 31, 2018,2021, we had threetwo customers who accounted for 39 percent, 21approximately 35 percent and 1034 percent of our consolidated gross receivables, respectively.
A majority of our sales are made via digital resellers, channel and platform partners. During the fiscal years 2019, 2018,2022, 2021, and 2017,2020, approximately 6577 percent, 6778 percent, and 6468 percent, respectively, of our net revenue was derived from our top ten customers and/or platform partners. Though our products and services are available to consumers through a variety of retailers, digital resellers and directly through us, the concentration of our sales in one, or a few, large customers or platform partners could lead to a short-term disruption in our sales if one or more digital resellers, channel or platform partners significantly reduced their purchases or ceased to carry our products and services, and could make us more vulnerable to collection risk if one or more of these large customers or platform partners became unable to pay for our products or declared bankruptcy.
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, 2019, 20182022, 2021, and 2017,2020, our net revenue for products and services on Sony’s PlayStation 3, 4 and 4,5, and Microsoft’s Xbox 360, One and OneSeries X consoles (combined across all foursix platforms) was 66approximately 60 percent, 7064 percent, and 7067 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 or 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 classified 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 classified 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 $46$37 million, $45$22 million, and $53$38 million reduced marketing and sales expense for the fiscal years ended March 31, 2019, 20182022, 2021, and 2017,2020, respectively. For the fiscal years ended March 31, 2019, 20182022, 2021, and 2017,2020, advertising expense, net of vendor reimbursements, totaled approximately $271$396 million, $261$222 million, and $281$195 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 gains (losses) on foreign currency transaction gains (losses)transactions of $(9)$(22) million, $18$9 million, and $(40)$11 million for the fiscal years ended March 31, 2019, 20182022, 2021, and 2017,2020, respectively, are included in interest and other income (expense), net, in our Consolidated Statements of Operations. These net gains (losses) on foreign currency transaction gains (losses)transactions are partially offset by net gains (losses) on our foreign currency forward contracts of $50$21 million, $(16)$(19) million, and $46$(4) million for the fiscal years ended March 31, 2019, 20182022, 2021, and 2017,2020, respectively. See Note 5 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 recorddo not recognize any deferred taxes related to the U.S. taxes on foreign earnings as we recognize these taxes as a valuation allowance against deferred tax assets whenperiod cost.
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, we are required toOur 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. ItHowever, there is generally difficultjudgment involved in estimating future Swiss taxable income, specifically related to concludeassumptions about expected growth rates of future Swiss taxable income, which are based primarily on third party market and industry growth data. Actual results that differ materially from those estimates could have a material impact on our valuation allowance isassessment. 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 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,permit the carry back of losseslosses. Changes in Estimated Offering Period and credits as allowed under current tax law, andactions we take in connection with acquisitions could also impact the implementationutilization 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 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 ofour Swiss deferred tax assets.asset.
The U.S. Tax Act creates new U.S. taxes on foreign earnings. An accounting policy election is available to either recognize the deferred tax impacts of the U.S. taxes on foreign earnings or to account for them as a period cost. We have elected to account for the impacts of these new taxes as a period cost.
Share Repurchases
Shares of our 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.paid-in capital. If the balance in additional paid-in-capitalpaid-in capital is exhausted, the excess is recorded as a reduction to retained earnings.
(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, 20192022 and 2018,2021, 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, 2022 | | 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 | $ | 55 | | | $ | 55 | | | $ | — | | | $ | — | | | Cash equivalents |
| Money market funds | 257 | | | 257 | | | — | | | — | | | Cash equivalents |
| Available-for-sale securities: | | | | | | | | | |
| Corporate bonds | 116 | | | — | | | 116 | | | — | | | Short-term investments |
| U.S. Treasury securities | 104 | | | 104 | | | — | | | — | | | Short-term investments and cash equivalents |
| | | | | | | | | |
| Commercial paper | 51 | | | — | | | 51 | | | — | | | Short-term investments and cash equivalents |
| Foreign government securities | 17 | | | — | | | 17 | | | — | | | Short-term investments |
| Asset-backed securities | 38 | | | — | | | 38 | | | — | | | Short-term investments |
| Certificates of deposit | 18 | | | — | | | 18 | | | — | | | Short-term investments |
| Foreign currency derivatives | 63 | | | — | | | 63 | | | — | | | Other current assets and other assets |
Deferred compensation plan assets (a) | 21 | | | 21 | | | — | | | — | | | Other assets |
| Total assets at fair value | $ | 740 | | | $ | 437 | | | $ | 303 | | | $ | — | | | |
| Liabilities | | | | | | | | | |
| Foreign currency derivatives | $ | 14 | | | $ | — | | | $ | 14 | | | $ | — | | | Accrued and other current liabilities and other liabilities |
Deferred compensation plan liabilities (a) | 22 | | | 22 | | | — | | | — | | | Other liabilities |
| Total liabilities at fair value | $ | 36 | | | $ | 22 | | | $ | 14 | | | $ | — | | | |
| | | | | | Fair Value Measurements at Reporting Date Using | | | | | | Fair Value Measurements at Reporting Date Using | | |
| | As of March 31, 2019 | | Quoted Prices in Active Markets for Identical Financial Instruments | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | | As of
March 31, 2021 | | 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 | $ | 23 |
| | $ | 23 |
| | $ | — |
| | $ | — |
| | Cash equivalents | Bank and time deposits | $ | 157 | | | $ | 157 | | | $ | — | | | $ | — | | | Cash equivalents |
| Money market funds | 2,704 |
| | 2,704 |
| | — |
| | — |
| | Cash equivalents | Money market funds | 2,100 | | | 2,100 | | | — | | | — | | | Cash equivalents |
| Available-for-sale securities: | | | | | | | | | Available-for-sale securities: | |
| Corporate bonds | 327 |
| | — |
| | 327 |
| | — |
| | Short-term investments and cash equivalents | Corporate bonds | 380 | | | — | | | 380 | | | — | | | Short-term investments and cash equivalents |
| U.S. Treasury securities | 294 |
| | 294 |
| | — |
| | — |
| | Short-term investments and cash equivalents | U.S. Treasury securities | 437 | | | 437 | | | — | | | — | | | Short-term investments and cash equivalents |
| U.S. agency securities | 57 |
| | — |
| | 57 |
| | — |
| | Short-term investments and cash equivalents | U.S. agency securities | 3 | | | — | | | 3 | | | — | | | Short-term investments |
| Commercial paper | 233 |
| | — |
| | 233 |
| | — |
| | Short-term investments and cash equivalents | Commercial paper | 142 | | | — | | | 142 | | | — | | | Short-term investments and cash equivalents |
| Foreign government securities | 58 |
| | — |
| | 58 |
| | — |
| | Short-term investments and cash equivalents | Foreign government securities | 67 | | | — | | | 67 | | | — | | | Short-term investments |
| Asset-backed securities | 55 |
| | — |
| | 55 |
| | — |
| | Short-term investments and cash equivalents | Asset-backed securities | 112 | | | — | | | 112 | | | — | | | Short-term investments |
| Certificates of deposit | 2 |
| | — |
| | 2 |
| | — |
| | Short-term investments and cash equivalents | Certificates of deposit | 41 | | | — | | | 41 | | | — | | | Short-term investments |
| Foreign currency derivatives | 33 |
| | — |
| | 33 |
| | — |
| | Other current assets and other assets | Foreign currency derivatives | 33 | | | — | | | 33 | | | — | | | Other current assets and other assets |
Deferred compensation plan assets (a) | 11 |
| | 11 |
| | — |
| | — |
| | Other assets | Deferred compensation plan assets (a) | 18 | | | 18 | | | — | | | — | | | Other assets |
| Total assets at fair value | $ | 3,797 |
| | $ | 3,032 |
| | $ | 765 |
| | $ | — |
| | Total assets at fair value | $ | 3,490 | | | $ | 2,712 | | | $ | 778 | | | $ | — | | |
| Liabilities | | | | | | | | | Liabilities | | | | | | | | |
Contingent consideration (b) | $ | 136 |
| | $ | — |
| | $ | — |
| | $ | 136 |
| | Accrued and other current liabilities | |
| Foreign currency derivatives | 16 |
| | — |
| | 16 |
| | — |
| | Accrued and other current liabilities and other liabilities | Foreign currency derivatives | $ | 40 | | | $ | — | | | $ | 40 | | | $ | — | | | Accrued and other current liabilities and other liabilities |
Deferred compensation plan liabilities (a) | 12 |
| | 12 |
| | — |
| | — |
| | Other liabilities | Deferred compensation plan liabilities (a) | 19 | | | 19 | | | — | | | — | | | Other liabilities |
| Total liabilities at fair value | $ | 164 |
| | $ | 12 |
| | $ | 16 |
| | $ | 136 |
| | Total liabilities at fair value | $ | 59 | | | $ | 19 | | | $ | 40 | | | $ | — | | |
(a)The Deferred Compensation Plan assets consist of various mutual funds. See Note 15 for additional information regarding our Deferred Compensation Plan. |
| | | | | | | | | | | |
| | | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | |
| | | | | | | | Contingent Consideration | | |
| Balance as of March 31, 2018 | | | | | | | $ | 122 |
| | |
| Additions | | | | | | | — |
| | |
Change in fair value | | | | | | | 14 |
| | |
| Balance as of March 31, 2019 | | | | | | | $ | 136 |
| | |
|
| | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using | | |
| | As of March 31, 2018 | | 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 | $ | 286 |
| | $ | 286 |
| | $ | — |
| | $ | — |
| | Cash equivalents |
| Money market funds | 1,876 |
| | 1,876 |
| | — |
| | — |
| | Cash equivalents |
| Available-for-sale securities: | | | | | | | | | |
| Corporate bonds | 624 |
| | — |
| | 624 |
| | — |
| | Short-term investments |
| U.S. Treasury securities | 210 |
| | 210 |
| | — |
| | — |
| | Short-term investments |
| U.S. agency securities | 78 |
| | — |
| | 78 |
| | — |
| | Short-term investments |
| Commercial paper | 150 |
| | — |
| | 150 |
| | — |
| | Short-term investments and cash equivalents |
| Foreign government securities | 52 |
| | — |
| | 52 |
| | — |
| | Short-term investments |
| Certificates of deposit | 2 |
| | — |
| | 2 |
| | — |
| | Cash equivalents |
| Foreign currency derivatives | 4 |
| | — |
| | 4 |
| | — |
| | Other current assets and other assets |
Deferred compensation plan assets (a) | 10 |
| | 10 |
| | — |
| | — |
| | Other assets |
| Total assets at fair value | $ | 3,292 |
| | $ | 2,382 |
| | $ | 910 |
| | $ | — |
| | |
| Liabilities | | | | | | | | | |
Contingent consideration (b) | $ | 122 |
| | $ | — |
| | $ | — |
| | $ | 122 |
| | Other liabilities |
| Foreign currency derivatives | 56 |
| | — |
| | 56 |
| | — |
| | Accrued and other current liabilities and other liabilities |
Deferred compensation plan liabilities (a) | 11 |
| | 11 |
| | — |
| |
| | Other liabilities |
| Total liabilities at fair value | $ | 189 |
| | $ | 11 |
| | $ | 56 |
| | $ | 122 |
| | |
| |
(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 represents the estimated fair value of the additional variable cash consideration payable in connection with our acquisition of Respawn Entertainment, LLC (“Respawn”) that is contingent upon the achievement of certain performance milestones. 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. At March 31, 2019, the discount rates used ranged from 2.9 percent to 3.1 percent. See Note 7 for additional information regarding the Respawn acquisition. At March 31, 2018, the discount rates used ranged from 3.3 percent to 3.6 percent. |
(4) FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
As of March 31, 20192022 and 2018,2021, our cash and cash equivalents were $4,708$2,732 million and $4,258$5,260 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, 20192022 and 20182021 (in millions): | | | | As of March 31, 2019 | | As of March 31, 2018 | | As of March 31, 2022 | | As of March 31, 2021 |
| | 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 | $ | 325 |
| | $ | — |
| | $ | (1 | ) | | $ | 324 |
| | $ | 629 |
| | $ | — |
| | $ | (5 | ) | | $ | 624 |
| Corporate bonds | $ | 117 | | | $ | — | | | $ | (1) | | | $ | 116 | | | $ | 372 | | | $ | — | | | $ | — | | | $ | 372 | |
| U.S. Treasury securities | 153 |
| | — |
| | — |
| | 153 |
| | 212 |
| | — |
| | (2 | ) | | 210 |
| U.S. Treasury securities | 103 | | | — | | | (1) | | | 102 | | | 374 | | | 1 | | | — | | | 375 | |
| U.S. agency securities | 44 |
| | — |
| | — |
| | 44 |
| | 79 |
| | — |
| | (1 | ) | | 78 |
| U.S. agency securities | — | | | — | | | — | | | — | | | 3 | | | — | | | — | | | 3 | |
| Commercial paper | 112 |
| | — |
| | — |
| | 112 |
| | 109 |
| | — |
| | — |
| | 109 |
| Commercial paper | 39 | | | — | | | — | | | 39 | | | 136 | | | — | | | — | | | 136 | |
| Foreign government securities | 50 |
| | — |
| | — |
| | 50 |
| | 53 |
| | — |
| | (1 | ) | | 52 |
| Foreign government securities | 17 | | | — | | | — | | | 17 | | | 67 | | | — | | | — | | | 67 | |
| Asset-backed securities | 53 |
| | — |
| | — |
| | 53 |
| | — |
| | — |
| | — |
| | — |
| Asset-backed securities | 38 | | | — | | | — | | | 38 | | | 112 | | | — | | | — | | | 112 | |
| Certificates of deposit | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| Certificates of deposit | 18 | | | — | | | — | | | 18 | | | 41 | | | — | | | — | | | 41 | |
| Short-term investments | $ | 738 |
| | $ | — |
| | $ | (1 | ) | | $ | 737 |
| | $ | 1,082 |
| | $ | — |
| | $ | (9 | ) | | $ | 1,073 |
| Short-term investments | $ | 332 | | | $ | — | | | $ | (2) | | | $ | 330 | | | $ | 1,105 | | | $ | 1 | | | $ | — | | | $ | 1,106 | |
The following table summarizes the amortized cost and fair value of our short-term investments, classified by stated maturity as of March 31, 20192022 and 20182021 (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2022 | | As of March 31, 2021 |
| | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value |
| Short-term investments | | | | | | | |
| Due within 1 year | $ | 250 | | | $ | 249 | | | $ | 895 | | | $ | 896 | |
| Due 1 year through 5 years | 77 | | | 76 | | | 203 | | | 203 | |
| Due after 5 years | 5 | | | 5 | | | 7 | | | 7 | |
| Short-term investments | $ | 332 | | | $ | 330 | | | $ | 1,105 | | | $ | 1,106 | |
|
| | | | | | | | | | | | | | | |
| | As of March 31, 2019 | | As of March 31, 2018 |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| Short-term investments | | | | | | | |
| Due within 1 year | $ | 449 |
| | $ | 448 |
| | $ | 521 |
| | $ | 520 |
|
| Due 1 year through 5 years | 287 |
| | 287 |
| | 561 |
| | 553 |
|
| Due after 5 years | 2 |
| | 2 |
| | — |
| | — |
|
| Short-term investments | $ | 738 |
| | $ | 737 |
| | $ | 1,082 |
| | $ | 1,073 |
|
(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, Japanese yen, 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 three 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, 2022 | | As of March 31, 2021 |
| Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| | Asset | | Liability | | | Asset | | Liability |
| | | | | | | | | | | |
| Forward contracts to purchase | $ | 375 | | | $ | 4 | | | $ | 3 | | | $ | 370 | | | $ | 14 | | | $ | 1 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Forward contracts to sell | $ | 1,829 | | | $ | 52 | | | $ | 6 | | | $ | 1,840 | | | $ | 15 | | | $ | 35 | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2019 | | As of March 31, 2018 |
| | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| | | Asset | | Liability | | | Asset | | Liability |
| Forward contracts to purchase | $ | 295 |
| | $ | — |
| | $ | 10 |
| | $ | 329 |
| | $ | 2 |
| | $ | 4 |
|
| Forward contracts to sell | $ | 1,355 |
| | $ | 31 |
| | $ | 4 |
| | $ | 1,575 |
| | $ | 1 |
| | $ | 48 |
|
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 $8 million and $36 million for the fiscal years ended March 31, 20192022, 2021 and 2017, respectively, and a loss of $5 million for the fiscal year ended March 31, 2018.
During fiscal years ended March 31, 2019, 2018 and 2017, 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 and recognized in interest and other income (expense) was a gain of $25 million and $10 million during fiscal year ended March 31, 2019 and 2018. The amount excluded from the assessment of hedge effectiveness during the fiscal year ended March 31, 2017 was immaterial.2020 are as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| 2022 | | 2021 | | 2020 |
| 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 | $ | 6,991 | | | $ | 2,186 | | | $ | 5,629 | | | $ | 1,778 | | | $ | 5,537 | | | $ | 1,559 | |
| Gains (losses) on foreign currency forward contracts designated as cash flow hedges | $ | (14) | | | $ | 12 | | | $ | (30) | | | $ | 4 | | | $ | 71 | | | $ | (9) | |
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, 2019 | | As of March 31, 2018 |
| | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| | | Asset | | Liability | | | Asset | | Liability |
| Forward contracts to purchase | $ | 449 |
| | $ | — |
| | $ | 2 |
| | $ | 210 |
| | $ | 1 |
| | $ | 1 |
|
| Forward contracts to sell | $ | 394 |
| | $ | 2 |
| | $ | — |
| | $ | 257 |
| | $ | — |
| | $ | 3 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2022 | | As of March 31, 2021 |
| Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| | Asset | | Liability | | | Asset | | Liability |
| Forward contracts to purchase | $ | 496 | | | $ | 6 | | | $ | — | | | $ | 599 | | | $ | — | | | $ | 4 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Forward contracts to sell | $ | 400 | | | $ | 1 | | | $ | 5 | | | $ | 450 | | | $ | 4 | | | $ | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
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, 2019, 20182022, 2021 and 2017,2020, was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended March 31, |
| | 2022 | | 2021 | | 2020 |
| | 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 | | $ | (48) | | | $ | (29) | | | $ | 63 | |
| Gain (losses) on foreign currency forward contracts not designated as hedging instruments | | $ | 21 | | | $ | (19) | | | $ | (4) | |
|
| | | | | | | | | | | | | |
| | Statement of Operations Classification | | Amount of Gain (Loss) Recognized in the Statement of Operations |
| | Year Ended March 31, |
| | 2019 | | 2018 | | 2017 |
| Foreign currency forward contracts not designated as hedging instruments | Interest and other income (expense), net | | $ | 25 |
| | $ | (26 | ) | | $ | 43 |
|
(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, 2019, 20182022, 2021 and 20172020 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 |
| Balances as of March 31, 2019 | $ | (1) | | | $ | 22 | | | $ | (51) | | | $ | (30) | |
| Other comprehensive income (loss) before reclassifications | (1) | | | 79 | | | (34) | | | 44 | |
| Amounts reclassified from accumulated other comprehensive income (loss) | (2) | | | (62) | | | — | | | (64) | |
| Total other comprehensive income (loss), net of tax | (3) | | | 17 | | | (34) | | | (20) | |
| Balances as of March 31, 2020 | $ | (4) | | | $ | 39 | | | $ | (85) | | | $ | (50) | |
| Other comprehensive income (loss) before reclassifications | 5 | | | (94) | | | 64 | | | (25) | |
| Amounts reclassified from accumulated other comprehensive income (loss) | (1) | | | 26 | | | — | | | 25 | |
| Total other comprehensive income (loss), net of tax | 4 | | | (68) | | | 64 | | | — | |
| Balances as of March 31, 2021 | $ | — | | | $ | (29) | | | $ | (21) | | | $ | (50) | |
| Other comprehensive income (loss) before reclassifications | (3) | | | 74 | | | (8) | | | 63 | |
| Amounts reclassified from accumulated other comprehensive income (loss) | — | | | 2 | | | — | | | 2 | |
| Total other comprehensive income (loss), net of tax | (3) | | | 76 | | | (8) | | | 65 | |
| Balances as of March 31, 2022 | $ | (3) | | | $ | 47 | | | $ | (29) | | | $ | 15 | |
|
| | | | | | | | | | | | | | | |
| | 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, 2016 | $ | 1 |
| | $ | 14 |
| | $ | (31 | ) | | $ | (16 | ) |
| Other comprehensive income (loss) before reclassifications | (3 | ) | | 54 |
| | (17 | ) | | 34 |
|
| Amounts reclassified from accumulated other comprehensive income (loss) | (1 | ) | | (36 | ) | | — |
| | (37 | ) |
| Total other comprehensive income (loss), net of tax | (4 | ) | | 18 |
| | (17 | ) | | (3 | ) |
| Balances as of March 31, 2017 | $ | (3 | ) | | $ | 32 |
| | $ | (48 | ) | | $ | (19 | ) |
| Other comprehensive income (loss) before reclassifications | (9 | ) | | (126 | ) | | 28 |
| | (107 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) | 4 |
| | 5 |
| | (10 | ) | | (1 | ) |
| Total other comprehensive income (loss), net of tax | (5 | ) | | (121 | ) | | 18 |
| | (108 | ) |
| Balances as of March 31, 2018 | $ | (8 | ) | | $ | (89 | ) | | $ | (30 | ) | | $ | (127 | ) |
| Cumulative-effect adjustment from the adoption of ASC 606 | — |
| | 22 |
| | — |
| | 22 |
|
| Cumulative-effect adjustment from the adoption of ASU 2018-02 | — |
| | 1 |
| | — |
| | 1 |
|
| Balances as of April 1, 2018 | $ | (8 | ) | | $ | (66 | ) | | $ | (30 | ) | | $ | (104 | ) |
| Other comprehensive income (loss) before reclassifications | 6 |
| | 96 |
| | (21 | ) | | 81 |
|
| Amounts reclassified from accumulated other comprehensive income (loss) | 1 |
| | (8 | ) | | — |
| | (7 | ) |
| Total other comprehensive income (loss), net of tax | 7 |
| | 88 |
| | (21 | ) | | 74 |
|
| Balances as of March 31, 2019 | $ | (1 | ) | | $ | 22 |
| | $ | (51 | ) | | $ | (30 | ) |
The effects on net income of amounts reclassified from accumulated other comprehensive income (loss) for the fiscal years ended March 31, 2019, 20182022, 2021 and 20172020 were as follows (in millions): | | | | | | | | | | | | | | | | | | | | |
| Statement of Operations Classification | | Amount Reclassified From Accumulated Other Comprehensive Income (Loss) |
| Year Ended March 31, |
| 2022 | | 2021 | | 2020 |
| (Gains) losses on available-for-sale securities: | | | | | | |
| | | | | | |
| Interest and other income (expense), net | | $ | — | | | $ | (1) | | | $ | (2) | |
| Total, net of tax | | — | | | (1) | | | (2) | |
| | | | | | |
| (Gains) losses on foreign currency forward contracts designated as cash flow hedges | | | | | | |
| Net revenue | | 14 | | | 30 | | | (71) | |
| Research and development | | (12) | | | (4) | | | 9 | |
| Total, net of tax | | 2 | | | 26 | | | (62) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Total net (gain) loss reclassified, net of tax | | $ | 2 | | | $ | 25 | | | $ | (64) | |
| | | | | | |
| | | | | | |
|
| | | | | | | | | | | | |
| Statement of Operations Classification | | Amount Reclassified From Accumulated Other Comprehensive Income (Loss) |
| Year Ended March 31, |
| 2019 | | 2018 | | 2017 |
| (Gains) losses on available-for-sale securities: | | | | | | |
| Interest and other income (expense), net | | $ | 1 |
| | $ | 4 |
| | $ | (1 | ) |
| Total, net of tax | | 1 |
| | 4 |
| | (1 | ) |
| | | | | | | |
| (Gains) losses on cash flow hedges from forward contracts: | | | | | | |
| Net revenue | | (18 | ) | | 10 |
| | (37 | ) |
| Research and development | | 10 |
| | (5 | ) | | 1 |
|
| Total, net of tax | | (8 | ) | | 5 |
| | (36 | ) |
| | | | | | | |
| (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 | | $ | (7 | ) | | $ | (1 | ) | | $ | (37 | ) |
(7) BUSINESS COMBINATIONS
GameFly Cloud GamingFiscal Year 2021 Acquisition
Codemasters Group Holdings plc
On May 3, 2018,February 18, 2021, we completed our acquisition of 100% of the equity interests of Codemasters Group Holdings plc, a public limited company registered in England and Wales (“Codemasters”), for a total purchase price of $1.2 billion, net of cash acquired. During the three months ended March 31, 2022, and within the one-year measurement period, we finalized the fair values assigned to the Codemasters assets acquired cloud gaming technologyand liabilities assumed. During fiscal year 2022, we recorded measurement period adjustments related to certain tax liabilities, which resulted in a net $29 million decrease to goodwill in the aggregate. The difference between our preliminary allocation of the purchase price to the fair value of the assets acquired and personnel fromliabilities assumed during the fourth quarter of fiscal 2021 and the final amounts were not material.
Fiscal Year 2022 Acquisitions
Glu Mobile Inc.
On April 29, 2021, we completed the acquisition of 100% of the equity interests of Glu Mobile Inc., a wholly-owned subsidiaryleading global developer and publisher of GameFly, Inc. based in Israelmobile games (“GameFly Cloud Gaming”Glu” and the “Glu acquisition”) for a total purchase price of $2.0 billion, net of cash considerationacquired of $50$332 million. The acquisition of Glu is expected to accelerate our mobile growth by creating a combined organization with ongoing live services across multiple games and genres. We also believe that the acquisition will create value by adding Glu’s expertise in casual sports and lifestyle genres to new titles based on our intellectual property. The transaction costs associated with the acquisition totaled approximately $15 million and were recognized in general and administrative expense, of which $11 million were recognized during fiscal 2022, all within the three months ended June 30, 2021.
In addition, upon the closing of the Glu acquisition, we assumed all outstanding unvested options and unvested restricted stock units relating to Glu common stock and such awards were converted into corresponding awards relating to a number of shares of our common stock using an exchange ratio equal to 0.0880, with substantially identical terms and conditions as were applicable to the corresponding Glu awards immediately prior to the closing of the acquisition, except as such terms and conditions were modified in the acquisition agreements (“Replacement Awards”). The estimated fair value of the Replacement Awards was $133 million, of which $23 million related to awards for which services were rendered prior to the Glu acquisition and represented part of the purchase consideration transferred in the Glu acquisition. The remaining $110 million is attributable to services to be rendered after the Glu acquisition and will be recognized as stock-based compensation expense over their remaining vesting periods.
The following table summarizes the final allocation of the purchase price was allocated to the fair value of the assets acquired net tangible and intangible assets based on their estimated fair values as of May 3, 2018, resulting in $43 million allocated to specific intangible assets, and $7 million allocated to goodwill thatliabilities assumed:
| | | | | |
| (In millions) | |
| Current assets | $ | 63 | |
| Property and equipment, net | 14 | |
| Other assets | 48 | |
| Intangible assets | 526 | |
| Goodwill | 1,506 | |
| Deferred tax liabilities | (38) | |
| Current liabilities | (78) | |
| Other liabilities | (39) | |
| Purchase price, net of cash acquired | $ | 2,002 | |
| |
Intangibles assets by asset category(a) | |
| Developed and core technology | $ | 232 | |
| Trade names and trademarks | 209 | |
| Registered user base and other intangibles | 12 | |
| In-process research and development | 73 | |
| Total | $ | 526 | |
(a) In-process research and development assets are considered indefinite-lived until complete. Excluding the in-process research and development assets, the weighted-average useful life of the Glu’s acquired intangible assets is currently estimated to be approximately 5.5 years. |
Goodwill consists largely of expectedworkforce and synergies and workforce. Substantially all of the $50 millionwith our existing business. The goodwill is expected to benot deductible for tax purposes. Subsequent to the acquisition, we also granted approximately $4 million in long-term equity in the form of restricted stock units to certain employees.
The results of operations attributable to the assets and personnel acquired in the GameFly Cloud Gaming acquisitionof Glu and the fair value of the assets acquired have been included in our Consolidated Financial Statements since the date of acquisition. Pro forma
Playdemic Limited
On September 20, 2021, we completed the acquisition of 100% of the equity interests of Playdemic Limited, a private limited company incorporated in England and Wales (“Playdemic” and the “Playdemic acquisition”) for a total purchase price of $1.4 billion, net of cash acquired. The Playdemic acquisition is intended to be another step in our strategy of continued leadership in sports and mobile expansion. The transaction costs associated with the acquisition totaled approximately $11 million and were recognized in general and administrative expense during the six months ended September 30, 2021.
During the three months ended March 31, 2022, we finalized the fair values assigned to the Playdemic assets acquired and liabilities assumed. The difference between the preliminary estimates recognized during the third quarter of fiscal 2022 and the final amounts were not material. The following table summarizes the final allocation of the purchase price to the fair value of the assets acquired and liabilities assumed:
| | | | | |
| (In millions) | |
| Current assets | $ | 17 | |
| Property and equipment, net | 2 | |
| Other assets | 3 | |
| Intangible assets | 438 | |
| Goodwill | 1,031 | |
| Deferred tax liabilities | (84) | |
| Current liabilities | (4) | |
| Other liabilities | (2) | |
| Purchase price, net of cash acquired | $ | 1,401 | |
| |
Intangibles assets by asset category(b) | |
| Developed and core technology | $ | 177 | |
| Trade names and trademarks | 223 | |
| Registered user base and other intangibles | 38 | |
| Total | $ | 438 | |
(b) We currently estimate the weighted-average useful life of Playdemic’s acquired intangible assets to be approximately 6.6 years. |
Goodwill consists largely of workforce and synergies with our existing business. The goodwill is not deductible for local tax purposes.
The results of operations have not been presented becauseof Playdemic and the effectfair value of the acquisition was not material toassets acquired have been included in our Consolidated Financial Statements since the date of Operations.acquisition.
Additional Acquisition Related Information
During the fiscal year ended March 31, 2019,2022, we completed one other acquisition that was not material to our Consolidated Financial Statements.
Respawn Entertainment, LLC
On December 1, 2017, we completed our acquisition of Respawn Entertainment, LLC (“Respawn”), a leading game development studio and creators of games including the critically-acclaimed Titanfall franchise. The total purchase price was $273 million, which consisted of $151 million in cash and the acquisition date fair value of contingent consideration of $122 million. The purchase price was allocated to Respawn’s net tangible and intangible assets based upon their estimated fair values as of December 1, 2017, resulting in $171 million being allocated to goodwill that consists largely of workforce and synergies with our existing business, all of which is expected to be deductible for tax purposes; $74 million being allocated to intangible assets acquired; and $28 million being allocated to net tangible assets acquired.
The payment of the contingent consideration is based on the achievement of certain performance milestones through the end of calendar year 2022 at the latest. The maximum amount of contingent consideration we may be required to pay is $140 million. The fair value of the contingent consideration was included in other liabilities on our Consolidated Balance Sheet at March 31, 2018. During the fiscal year ended March 31, 2019, we recognized $14 million of contingent consideration expense in our Consolidated Statements of Operations as a performance milestone was met and the expected outcomes for other performance
milestones became more positive. At March 31, 2019, the fair value of the contingent consideration of $136 million is included in accrued and other current liabilities. Subsequent to March 31, 2019, we paid $35 million of contingent consideration.
Subsequent to the acquisition, in the fourth quarter of fiscal year 2018, we also granted an aggregate of $167 million of restricted stock unit awards of our common stock to Respawn employees that is being recognized over a four year period as stock-based compensation expense in research and development in our Consolidated Statements of Operations.
ThePro forma results of operations of Respawn and the fair value of the assets acquired and liabilities assumed have been included in our Consolidated Financial Statements since the date of acquisition. Pro forma results of operationsacquisitions have not been presented because the effect of the acquisition wasacquisitions were not material to our Consolidated Statements of Operations.Operations individually, or in the aggregate.
During the fiscal year ended March 31, 2017, there were no acquisitions.
(8) GOODWILL AND ACQUISITION-RELATED INTANGIBLES, NET
The changes in the carrying amount of goodwill for the fiscal year ended March 31, 2019 are as follows (in millions): |
| | | | | | | | | | | | | | | |
| | 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 |
|
The changes in the carrying amount of goodwill for the fiscal year ended March 31, 20182022 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2021 | | Activity | | Effects of Foreign Currency Translation | | As of March 31, 2022 |
| Goodwill | $ | 3,236 | | | $ | 2,519 | | | $ | — | | | $ | 5,755 | |
| Accumulated impairment | (368) | | | — | | | — | | | (368) | |
| Total | $ | 2,868 | | | $ | 2,519 | | | $ | — | | | $ | 5,387 | |
|
| | | | | | | | | | | | | | | |
| | As of
March 31, 2017 | | Activity | | Effects of Foreign Currency Translation | | As of
March 31, 2018 |
| Goodwill | $ | 2,075 |
| | $ | 171 |
| | $ | 5 |
| | $ | 2,251 |
|
| Accumulated impairment | (368 | ) | | — |
| | — |
| | (368 | ) |
| Total | $ | 1,707 |
| | $ | 171 |
| | $ | 5 |
| | $ | 1,883 |
|
Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets. | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2020 | | Activity | | Effects of Foreign Currency Translation | | As of March 31, 2021 |
| Goodwill | $ | 2,253 | | | $ | 984 | | | $ | (1) | | | $ | 3,236 | |
| Accumulated impairment | (368) | | | — | | | — | | | (368) | |
| Total | $ | 1,885 | | | $ | 984 | | | $ | (1) | | | $ | 2,868 | |
Acquisition-related intangibles consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2022 | | As of March 31, 2021 |
| | Gross
Carrying
Amount | | Accumulated
Amortization and Impairments | | Acquisition-
Related
Intangibles, Net | | Gross
Carrying
Amount | | Accumulated
Amortization and Impairments | | Acquisition-
Related
Intangibles, Net |
| Finite-lived acquisition-related intangibles | | | | | | | | | | | |
| Developed and core technology | $ | 1,102 | | | $ | (643) | | | $ | 459 | | | $ | 691 | | | $ | (472) | | | $ | 219 | |
| Trade names and trademarks | 609 | | | (212) | | | 397 | | | 188 | | | (144) | | | 44 | |
| Registered user base and other intangibles | 56 | | | (30) | | | 26 | | | 5 | | | (5) | | | — | |
| Carrier contracts and related | — | | | — | | | — | | | 85 | | | (85) | | | — | |
| Total finite-lived acquisition-related intangibles | $ | 1,767 | | | $ | (885) | | | $ | 882 | | | $ | 969 | | | $ | (706) | | | $ | 263 | |
| Indefinite-lived acquisition-related intangibles | | | | | | | | | | | |
| In-process research and development | $ | 80 | | | $ | — | | | $ | 80 | | | $ | 46 | | | $ | — | | | $ | 46 | |
| Total acquisition-related intangibles, net | $ | 1,847 | | | $ | (885) | | | $ | 962 | | | $ | 1,015 | | | $ | (706) | | | $ | 309 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2019 | | As of March 31, 2018 |
| | Gross Carrying Amount | | Accumulated Amortization | | Acquisition- Related Intangibles, Net | | Gross Carrying Amount | | Accumulated Amortization | | Acquisition- Related Intangibles, Net |
| Developed and core technology | $ | 469 |
| | $ | (427 | ) | | $ | 42 |
| | $ | 417 |
| | $ | (414 | ) | | $ | 3 |
|
| Trade names and trademarks | 161 |
| | (121 | ) | | 40 |
| | 161 |
| | (107 | ) | | 54 |
|
| 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 |
| | 14 |
| | — |
| | 14 |
|
| Total | $ | 725 |
| | $ | (638 | ) | | $ | 87 |
| | $ | 682 |
| | $ | (611 | ) | | $ | 71 |
|
The fair value of acquisition-related intangible assets acquired in the GameFly Cloud Gaming acquisition during the three months ended June 30, 2018 was $43 million, all of which was allocated to developed and core technology, and has a useful life of approximately 4.0 years.
Amortization of intangibles, including impairments, for the fiscal years ended March 31, 2019, 20182022, 2021 and 20172020 are classified in the Consolidated Statements of Operations as follows (in millions): | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2022 | | 2021 | | 2020 |
| Cost of revenue | $ | 133 | | | $ | 4 | | | $ | 12 | |
| | | | | |
| Operating expenses | 183 | | | 30 | | | 22 | |
| Total | $ | 316 | | | $ | 34 | | | $ | 34 | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2019 | | 2018 | | 2017 |
| Cost of service and other | $ | 1 |
| | $ | — |
| | $ | 16 |
|
| Cost of product | 3 |
| | 2 |
| | 27 |
|
| Operating expenses | 23 |
| | 9 |
| | 6 |
|
| Total | $ | 27 |
| | $ | 11 |
| | $ | 49 |
|
ThereDuring fiscal year 2022, we recorded impairment charges of $45 million for acquisition-related intangible assets, of which $34 million was recorded within operating expenses and $11 million was recorded within cost of revenue. During fiscal year 2021 and 2020, there were no impairment charges for acquisition-related intangible assets during fiscal years 2019 and 2018. During fiscal year 2017, we determined that the carrying value of one of our acquisition-relatedassets.
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.
Finite-lived acquisition-related intangible assets are generally amortized using the straight-line method over the lesser of their estimated useful lives or the agreement terms, currently ranging from 1 to 97 years. As of March 31, 20192022 and 2018,2021, the weighted-average remaining useful life for acquisition-related intangible assets was approximately 3.25.2 and 3.5 years, and 4.3 years, respectively.
As of March 31, 2019,2022, future amortization of finite-lived acquisition-related intangibles that will be recorded in the Consolidated Statements of Operations is estimated as follows (in millions):
| | | | | |
| Fiscal Year Ending March 31, | |
| 2023 | $ | 244 | |
| 2024 | 159 | |
| 2025 | 126 | |
| 2026 | 122 | |
| 2027 | 102 | |
| Thereafter | 129 | |
| Total | $ | 882 | |
|
| | | |
| Fiscal Year Ending March 31, | |
| 2020 | $ | 30 |
|
| 2021 | 22 |
|
| 2022 | 22 |
|
| 2023 | 8 |
|
| 2024 | — |
|
| Thereafter | — |
|
| Total | $ | 82 |
|
(9) 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.
During fiscal years 20192022, 2021 and 2018,2020, we did not recognize any material losses or impairment charges on royalty-based commitments. During fiscal year 2017, we determined that the carrying value of certain of our royalty-based assets 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.
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, |
| | 2022 | | 2021 |
| Other current assets | $ | 35 | | | $ | 24 | |
| Other assets | 28 | | | 20 | |
| Royalty-related assets | $ | 63 | | | $ | 44 | |
|
| | | | | | | |
| | As of March 31, |
| | 2019 | | 2018 |
| Other current assets | $ | 53 |
| | $ | 68 |
|
| Other assets | 30 |
| | 34 |
|
| Royalty-related assets | $ | 83 |
| | $ | 102 |
|
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, |
| | 2022 | | 2021 |
| Accrued royalties | $ | 203 | | | $ | 210 | |
| Other liabilities | 3 | | | — | |
| Royalty-related liabilities | $ | 206 | | | $ | 210 | |
|
| | | | | | | |
| | As of March 31, |
| | 2019 | | 2018 |
| Accrued royalties | $ | 144 |
| | $ | 171 |
|
| Other liabilities | 51 |
| | 74 |
|
| Royalty-related liabilities | $ | 195 |
| | $ | 245 |
|
As of March 31, 2019,2022, we were committed to pay approximately $973$1,851 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 1314 for further information on our developer and licensor commitments.
(10) BALANCE SHEET DETAILS
Property and Equipment, Net
Property and equipment, net, as of March 31, 20192022 and 20182021 consisted of (in millions):
|
| | | | | | | |
| | As of March 31, |
| | 2019 | | 2018 |
| Computer, equipment and software | $ | 710 |
| | $ | 744 |
|
| Buildings | 343 |
| | 336 |
|
| Leasehold improvements | 139 |
| | 139 |
|
| Equipment, furniture and fixtures, and other | 80 |
| | 84 |
|
| Land | 66 |
| | 66 |
|
| Construction in progress | 21 |
| | 7 |
|
| | 1,359 |
| | 1,376 |
|
| Less: accumulated depreciation | (911 | ) | | (923 | ) |
| Property and equipment, net | $ | 448 |
| | $ | 453 |
|
| | | | | | | | | | | |
| | As of March 31, |
| | 2022 | | 2021 |
| Computer, equipment and software | $ | 853 | | | $ | 808 | |
| Buildings | 375 | | | 370 | |
| Leasehold improvements | 202 | | | 172 | |
| Equipment, furniture and fixtures, and other | 95 | | | 93 | |
| Land | 66 | | | 66 | |
| Construction in progress | 30 | | | 12 | |
| 1,621 | | | 1,521 | |
| Less: accumulated depreciation | (1,071) | | | (1,030) | |
| Property and equipment, net | $ | 550 | | | $ | 491 | |
Depreciation expense associated with property and equipment was $121$162 million, $120$138 million and $115$120 million for the fiscal years ended March 31, 2019, 20182022, 2021 and 2017,2020, respectively.
Accrued and Other Current Liabilities
Accrued and other current liabilities as of March 31, 20192022 and 20182021 consisted of (in millions):
|
| | | | | | | |
| | As of March 31, |
| | 2019 | | 2018 |
| Other accrued expenses | $ | 290 |
| | $ | 260 |
|
| Accrued compensation and benefits | 238 |
| | 282 |
|
| Accrued royalties | 144 |
| | 171 |
|
| Sales returns and price protection reserves | 150 |
| | — |
|
| Contingent consideration | 136 |
| | — |
|
| Deferred net revenue (other) | 94 |
| | 108 |
|
| Accrued and other current liabilities | $ | 1,052 |
| | $ | 821 |
|
| | | | | | | | | | | |
| | As of March 31, |
| | 2022 | | 2021 |
| Other accrued expenses | $ | 304 | | | $ | 351 | |
| Accrued compensation and benefits | 500 | | | 494 | |
| Accrued royalties | 203 | | | 210 | |
| Sales returns and price protection reserves | 144 | | | 115 | |
| | | |
| Deferred net revenue (other) | 156 | | | 95 | |
Operating lease liabilities (See Note 13) | 81 | | | 76 | |
| Accrued and other current liabilities | $ | 1,388 | | | $ | 1,341 | |
Deferred net revenue (other) includes the deferral of subscription revenue, licensing arrangements, advertising revenue, licensing arrangements, and other revenue for which revenue recognition criteria hashave not been met.
As a result of the adoption of the New Revenue Standard on April 1, 2018, our sales returns and price protection reserves are now classified within accrued and other liabilities (previously, these allowances were classified as a contra-asset within receivables on our Consolidated Balance Sheets).
Deferred net revenue
Deferred net revenue as of March 31, 20192022 and April 1, 2018, as adjusted,2021, consisted of (in millions): |
| | | | | | | |
| | As of
March 31, 2019 | | As of April 1, 2018 (as adjusted) |
| Deferred net revenue (online-enabled games) | $ | 1,100 |
| | $ | 949 |
|
| Deferred net revenue (other) | 94 |
| | 105 |
|
| Deferred net revenue (noncurrent) | 23 |
| | 5 |
|
| Total Deferred net revenue | $ | 1,217 |
| | $ | 1,059 |
|
| | | | | | | | | | | |
| As of March 31, |
| 2022 | | 2021 |
| Deferred net revenue (online-enabled games) | $ | 2,024 | | | $ | 1,527 | |
| Deferred net revenue (other) | 156 | | | 95 | |
| Deferred net revenue (noncurrent) | 68 | | | 14 | |
| Total deferred net revenue | $ | 2,248 | | | $ | 1,636 | |
During the fiscal yearyears ended March 31, 2019, $3,0702022 and 2021, we recognized $1,613 million and $1,010 million of revenue was recognized, of which $1,054 million wasrevenues, respectively, that were included in the deferred net revenue balance asat the beginning of April 1, 2018, as adjusted.the period.
Remaining Performance Obligations
As of March 31, 2019,2022, revenue allocated to remaining performance obligations consists of our deferred revenue balance of $1,217 million.$2,248 million and amounts to be invoiced in future periods of $45 million, of which $29 million are expected to be recognized as revenue over the next 12 months, and the remainder thereafter. These balances exclude any estimates for future variable consideration as we have elected the optional exemption to exclude sales-based royalty revenue. We expect to recognize substantially all
(11) INCOME TAXES
The components of our income before provision for (benefit from) income taxes for the fiscal years ended March 31, 2019, 20182022, 2021 and 20172020 are as follows (in millions): | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2022 | | 2021 | | 2020 |
| Domestic | $ | 204 | | | $ | 299 | | | $ | 380 | |
| Foreign | 877 | | | 718 | | | 1,128 | |
| Income before provision for (benefit from) income taxes | $ | 1,081 | | | $ | 1,017 | | | $ | 1,508 | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2019 | | 2018 | | 2017 |
| Domestic | $ | 170 |
| | $ | 440 |
| | $ | 382 |
|
| Foreign | 909 |
| | 1,009 |
| | 828 |
|
| Income before provision for income taxes | $ | 1,079 |
| | $ | 1,449 |
| | $ | 1,210 |
|
Provision for (benefit from) income taxes for the fiscal years ended March 31, 2019, 20182022, 2021 and 20172020 consisted of (in millions):
| | | | | | | | | | | | | | | | | |
| | Current | | Deferred | | Total |
| Year Ended March 31, 2022 | | | | | |
| Federal | $ | 203 | | | $ | (190) | | | $ | 13 | |
| State | 36 | | | (26) | | | 10 | |
| Foreign | 381 | | | (112) | | | 269 | |
| $ | 620 | | | $ | (328) | | | $ | 292 | |
| Year Ended March 31, 2021 | | | | | |
| Federal | $ | 251 | | | $ | (26) | | | $ | 225 | |
| State | 24 | | | (2) | | | 22 | |
| Foreign | 47 | | | (114) | | | (67) | |
| $ | 322 | | | $ | (142) | | | $ | 180 | |
| Year Ended March 31, 2020 | | | | | |
| Federal | $ | 258 | | | $ | (14) | | | $ | 244 | |
| State | 39 | | | (2) | | | 37 | |
| Foreign | 48 | | | (1,860) | | | (1,812) | |
| $ | 345 | | | $ | (1,876) | | | $ | (1,531) | |
The differences between the statutory tax rate and our effective tax rate, expressed as a percentage of income before provision for (benefit from) income taxes, for the fiscal years ended March 31, 2022, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2022 | | 2021 | | 2020 |
| Statutory federal tax expense rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State taxes, net of federal benefit | 1.9 | % | | 1.7 | % | | 1.0 | % |
| Differences between statutory rate and foreign effective tax rate | 6.8 | % | | 7.0 | % | | (8.4) | % |
| | | | | |
| | | | | |
| Excess tax benefit from equity compensation | (1.2) | % | | (2.7) | % | | (0.1) | % |
| Research and development credits | (2.8) | % | | (2.4) | % | | (1.2) | % |
| | | | | |
| Swiss Deferred Tax Asset | 2.7 | % | | (10.1) | % | | (122.1) | % |
| | | | | |
| Acquired IP intra-entity sales | (5.9) | % | | — | % | | — | % |
| The Altera opinion | — | % | | — | % | | 5.4 | % |
| Non-deductible stock-based compensation | 3.8 | % | | 3.3 | % | | 2.3 | % |
| Other | 0.7 | % | | (0.1) | % | | 0.6 | % |
| Effective tax rate | 27.0 | % | | 17.7 | % | | (101.5) | % |
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 transaction did not result in a taxable gain. Under U.S. GAAP, any profit resulting from this intercompany transaction was 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
|
| | | | | | | | | | | |
| | Current | | Deferred | | Total |
| 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 |
|
| Year Ended March 31, 2017 | | | | | |
| Federal | $ | 86 |
| | $ | 96 |
| | $ | 182 |
|
| State | 3 |
| | 9 |
| | 12 |
|
| Foreign | 51 |
| | (2 | ) | | 49 |
|
| | $ | 140 |
| | $ | 103 |
| | $ | 243 |
|
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 and 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 positions 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.
Our 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 income2021 includes a $141 million tax system by, among other things, lowering U.S. corporate incomebenefit for changes in uncertain tax rate to
21 percent, generally implementing a territorial tax system and imposing a one-time transition tax on the deemed repatriation of undistributed earnings of foreign subsidiaries (the “Transition Tax”).
We have concluded the accounting under the U.S. Tax Act within the time period set forth in SAB 118, the SEC guidance that allowed for a measurement period of up to one year after the enactment date of the U.S. Tax Act to finalize the recording of the related tax impacts, including the impacts of the Transition Tax, the remeasurement of U.S. deferred tax assets and liabilities as a result of the reduction of the U.S. corporate tax rate,positions and the accounting policy electionvaluation allowance related to U.S. taxes on foreign earnings. We recorded tax expense of $235 million related to the U.S.our Swiss Deferred Tax Act for the fiscal year ended March 31, 2018, $192 million of which relates to the Transition Tax.Asset. During the fiscal year ended March 31, 2019,2022, we made no material adjustmentsrecognized a $29 million tax charge to increase the valuation allowance on our provisional amounts recognized due to the U.S.Swiss Deferred Tax Act duringAsset.
During the fiscal year ended March 31, 2018.
Upon adoption2022, we completed the Acquired IP intra-entity sales of ASU 2016-09 atintellectual property rights to our U.S. and Swiss intellectual property owners. The transactions resulted in overall taxable gains. Under U.S. GAAP, any profit resulting from the beginningAcquired IP intra-entity sales was eliminated upon consolidation. However, the transactions resulted in a step-up of fiscal year 2018,the U.S. and 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. As a result, we reflected excessrecognized a $64 million net tax benefits of $20 million and $43 millionbenefit for the fiscal years ended March 31, 2019current and 2018, respectively, in the Consolidated Statements of Operations as a componentdeferred tax impacts of the provision for income taxes. For fiscal year ended March 31, 2017, excesssales.
Our foreign subsidiaries are generally subject to U.S. tax, benefits of $65 million was recognized in additional paid-in-capital in the Consolidated Balance Sheets.
The differences between the statutory tax expense rate and our effective tax expense rate, expressed as a percentage of income before provision for income taxes, for the fiscal years ended March 31, 2019, 2018 and 2017 were as follows:
|
| | | | | | | | |
| | Year Ended March 31, |
| | 2019 | | 2018 | | 2017 |
| Statutory federal tax expense rate | 21.0 | % | | 31.5 | % | | 35.0 | % |
| State taxes, net of federal benefit | 0.7 | % | | 0.8 | % | | 1.0 | % |
| Differences between statutory rate and foreign effective tax rate | (14.4 | )% | | (19.1 | )% | | (19.3 | )% |
| Tax reform | (0.4 | )% | | 16.2 | % | | — | % |
| Excess tax benefit | (1.9 | )% | | (3.0 | )% | | — | % |
| Research and development credits | (2.4 | )% | | (1.4 | )% | | (0.7 | )% |
| Unremitted earnings of foreign subsidiaries | — | % | | — | % | | 2.2 | % |
| Non-deductible stock-based compensation | 2.3 | % | | 2.7 | % | | 2.3 | % |
| Other | 0.7 | % | | 0.3 | % | | (0.4 | )% |
| Effective tax expense rate | 5.6 | % | | 28.0 | % | | 20.1 | % |
We generated income in lower tax jurisdictions primarily related to our European and Asia Pacific businesses that are headquartered in Switzerland.
Prior to the U.S. Tax Act,extent earnings from these subsidiaries can be repatriated without a substantial majority of undistributedmaterial tax cost, such earnings of our foreign subsidiaries were considered towill not be indefinitely reinvested. As a result of the U.S. Tax Act, substantially all previously unremitted earnings for which no U.S. deferredMarch 31, 2022, approximately $2.0 billion of our cash and cash equivalents were domiciled in foreign tax liability had been accrued have now been subject to U.S. tax. Any future earningsjurisdictions. All of our foreign subsidiaries are generallycash is available for repatriation without a material incremental U.S. tax cost.
The components of net deferred tax assets, as of March 31, 20192022 and 20182021 consisted of (in millions):
| | | | As of March 31, | | As of March 31, |
| | 2019 | | 2018 | | 2022 | | 2021 |
| Deferred tax assets: | | | | Deferred tax assets: | | | |
| Accruals, reserves and other expenses | $ | 101 |
| | $ | 81 |
| Accruals, reserves and other expenses | $ | 185 | | | $ | 158 | |
| Tax credit carryforwards | 140 |
| | 121 |
| Tax credit carryforwards | 198 | | | 161 | |
| Stock-based compensation | 33 |
| | 24 |
| Stock-based compensation | 43 | | | 43 | |
| Net operating loss & capital loss carryforwards | 22 |
| | 23 |
| |
| | Net operating loss and capital loss carryforwards | | Net operating loss and capital loss carryforwards | 349 | | | 258 | |
| Swiss intra-entity tax asset | | Swiss intra-entity tax asset | 1,782 | | | 1,781 | |
| Total | 296 |
| | 249 |
| Total | 2,557 | | | 2,401 | |
| Valuation allowance | (162 | ) | | (138 | ) | Valuation allowance | (296) | | | (230) | |
| Deferred tax assets, net of valuation allowance | 134 |
| | 111 |
| Deferred tax assets, net of valuation allowance | 2,261 | | | 2,171 | |
| Deferred tax liabilities: | | | | Deferred tax liabilities: | | | |
| Amortization and depreciation | (28 | ) | | (27 | ) | Amortization and depreciation | (13) | | | (140) | |
| Change in tax accounting method | (66 | ) | | — |
| |
| ASC 606 Revenue Recognition | | ASC 606 Revenue Recognition | — | | | (21) | |
| Other | (7 | ) | | (2 | ) | Other | (7) | | | (8) | |
| Total | (101 | ) | | (29 | ) | Total | (20) | | | (169) | |
| Deferred tax assets, net of valuation allowance and deferred tax liabilities | $ | 33 |
| | $ | 82 |
| Deferred tax assets, net of valuation allowance and deferred tax liabilities | $ | 2,241 | | | $ | 2,002 | |
As of March 31, 2019,2022, we have net operating loss carry forwards of approximately $2.5 billion of which approximately $328 million is attributable to various acquired companies. The net operating loss carry forwards include $2.1 billion related to Switzerland, $239 million related to U.S. federal, and $119 million related to California. Substantially all of these carryforwards, if not fully realized, will begin to expire in fiscal year 2027. Switzerland has a seven-year carryforward period and does not permit the carry back of losses. We also have U.S. federal credit carryforwards of $13 million and California credit carryforwards of $174 million. The California tax credit carryforwards can be carried forward indefinitely.
As of March 31, 2022, we maintained a total valuation allowance of $162$296 million primarily related to certain U.S. state deferred tax assets, Swiss deferred tax asset, 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 more likely than not to be realized, we evaluated the potential to realize the assets through the utilization of tax loss and credit carrybacks, the reversal of existing taxable temporary differences, future taxable income exclusive of the reversal of existing taxable temporary differences, and certain tax planning strategies.
As of March 31, 2019, we have state net operating loss carry forwards of approximately $598 million of which approximately $7 million is attributable to various acquired companies. These carryforwards, if not fully realized, will begin to expire in 2029. We also have California and Canada tax credit carryforwards of $132 million and $5 million, respectively. The California and Canada tax credit carryforwards can be carried forward indefinitely.
The total unrecognized tax benefits as of March 31, 2019, 20182022, 2021 and 20172020 were $417$636 million, $457$584 million and $389$983 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, 2016 | $ | 331 |
|
| Increases in unrecognized tax benefits related to prior year tax positions | 3 |
|
| Decreases in unrecognized tax benefits related to prior year tax positions | (3 | ) |
| Increases in unrecognized tax benefits related to current year tax positions | 64 |
|
| 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 | ) |
| Changes in unrecognized tax benefits due to foreign currency translation | (3 | ) |
| Balance as of March 31, 2017 | 389 |
|
| Increases in unrecognized tax benefits related to prior year tax positions | 10 |
|
| Decreases in unrecognized tax benefits related to prior year tax positions | (12 | ) |
| Increases in unrecognized tax benefits related to current year tax positions | 75 |
|
| Decreases in unrecognized tax benefits related to settlements with taxing authorities | (7 | ) |
| Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations | (2 | ) |
| Changes in unrecognized tax benefits due to foreign currency translation | 4 |
|
| Balance as of March 31, 2018 | 457 |
|
| Increases in unrecognized tax benefits related to prior year tax positions | — |
|
| Decreases in unrecognized tax benefits related to prior year tax positions | (41 | ) |
| Increases in unrecognized tax benefits related to current year tax positions | 43 |
|
| Decreases in unrecognized tax benefits related to settlements with taxing authorities | (16 | ) |
| Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations | (21 | ) |
| Changes in unrecognized tax benefits due to foreign currency translation | (5 | ) |
| Balance as of March 31, 2019 | $ | 417 |
|
| | | | | |
| Balance as of March 31, 2019 | $ | 417 | |
| Increases in unrecognized tax benefits related to prior year tax positions | 111 | |
| Decreases in unrecognized tax benefits related to prior year tax positions | (4) | |
| Increases in unrecognized tax benefits related to current year tax positions | 468 | |
| Decreases in unrecognized tax benefits related to settlements with taxing authorities | — | |
| Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations | (5) | |
| Changes in unrecognized tax benefits due to foreign currency translation | (4) | |
| Balance as of March 31, 2020 | 983 | |
| Increases in unrecognized tax benefits related to prior year tax positions | 12 | |
| Decreases in unrecognized tax benefits related to prior year tax positions | (444) | |
| Increases in unrecognized tax benefits related to current year tax positions | 55 | |
| Decreases in unrecognized tax benefits related to settlements with taxing authorities | (2) | |
| Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations | (27) | |
| Changes in unrecognized tax benefits due to foreign currency translation | 7 | |
| Balance as of March 31, 2021 | 584 | |
| Increases in unrecognized tax benefits related to prior year tax positions | 5 | |
| Decreases in unrecognized tax benefits related to prior year tax positions | (21) | |
| Increases in unrecognized tax benefits related to current year tax positions | 139 | |
| Decreases in unrecognized tax benefits related to settlements with taxing authorities | (50) | |
| Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations | (18) | |
| Changes in unrecognized tax benefits due to foreign currency translation | (3) | |
| Balance as of March 31, 2022 | $ | 636 | |
As of March 31, 2019,2022, approximately $236$371 million of the unrecognized tax benefits would affect our effective tax rate.rate, a portion of which would be 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 $17$36 million as of March 31, 20192022 and $18$34 million as of March 31, 2018.2021.
We file income tax returns in the United States, including various state and local jurisdictions. OurAs of March 31, 2022, our subsidiaries file tax returns in various foreign jurisdictions, including Switzerland, Canada, Sweden, Italy, France, Germany, Switzerland and the United Kingdom. We remain subject to income tax examination by the IRS for fiscal years after 2015.2017. In addition, as of the period ended March 31, 2022, we remain subject to income tax examination for several other jurisdictions including in Switzerland for fiscal years after 2013, Canada for fiscal years after 2014, Sweden for fiscal years after 2016, Italy for fiscal years after 2020, France for fiscal years after 2019, Germany for fiscal years after 2016, France for fiscal years after 2016,and the United Kingdom for fiscal years after 2017, Canada for fiscal years after 2010, and Switzerland for fiscal years after 2009.2020.
We are also currently under income tax examination in the United States for fiscal year 2017,years 2018 through 2020, Germany for fiscal years 20132017 through 2016,2019, and Spain for fiscal years 2014 through 2015, Sweden for fiscal years 2016 through 2017 and India for fiscal years 2009 through 2013.2018.
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 potentialaccrued.
In fiscal year 2021, the Supreme Court of the United States denied Altera’s appeal of the Altera opinion, resulting in a partial decrease of our unrecognized tax benefits. A complete resolution and settlement of uncertain tax positions involves multiple tax periods and jurisdictions, itthe matters underlying the Altera opinion is reasonably possible within the next 12 months, which would result in an additional reduction of our gross unrecognized tax benefits. However, it is uncertain whether a complete resolution and settlement of such matters would also result in resolution of all related and unrelated U.S. positions for all applicable years. Therefore, it is not possible to provide a range of potential outcomes associated with a reversal of our gross unrecognized tax benefits for Altera-related uncertain tax positions.
It is also reasonably possible that aan additional reduction of up to $10$6 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.
Subsequent to the fiscal year ended March 31, 2019, we completed an intra-entity sale
and, accordingly, created a temporary difference between the book basis and the tax basis of such intellectual property rights. As a result, this transaction will result in the recognition of a deferred tax asset, which we estimate at approximately $2.3 billion, subject to a realizability analysis. The deferred tax asset will be recognized as a one-time tax benefit in our consolidated financial statements during the three months ending June 30, 2019. This deferred tax asset will reverse over a 20-year period and is subject to a periodic realizability analysis. The deferred tax asset and the one-time tax benefit will be measured based on the Swiss tax rate expected to apply in the years the asset will be recovered. We will not recognize any deferred taxes related to the U.S. taxes on foreign earnings associated with this transfer due to our policy election to recognize these taxes as a period cost. We do not expect the transaction to impact our cash taxes or our operating cash flow in fiscal year 2020.
(12) FINANCING ARRANGEMENTS
Senior Notes
In February 2016,2021, we issued $600$750 million aggregate principal amount of 3.70%1.85% Senior Notes due March 1, 2021February 15, 2031 (the “2021“2031 Notes”) and $400$750 million aggregate principal amount of 4.80%2.95% Senior Notes due March 1, 2026February 15, 2051 (the “2026 Notes,” and together with the 2021 Notes, the “Senior“2051 Notes”). Our proceeds were $989$1,478 million, net of discount of $2$6 million and issuance costs of $9$16 million. Both the discount and issuance costs are being amortized to interest expense over the respective terms of the 20212031 Notes and the 2051 Notes using the effective interest rate method. The effective interest rate is 1.98% for the 2031 Notes and 3.04% for the 2051 Notes. Interest is payable semiannually in arrears, on February 15 and August 15 of each year.
In February 2016, we issued $400 million aggregate principal amount of 4.80% Senior Notes due March 1, 2026 (the “2026 Notes”). Our proceeds were $395 million, net of discount of $1 million and issuance costs of $4 million. Both the discount and issuance costs are being amortized to interest expense over the term of the 2026 Notes using the effective interest rate method. The effective interest rate is 3.94% for the 2021 Notes andwas 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, 2019 | | As of
March 31, 2018 | | As of March 31, 2022 | | As of March 31, 2021 |
| Senior Notes: | | | | Senior Notes: | | | |
| 3.70% Senior Notes due 2021 | $ | 600 |
| | $ | 600 |
| |
| 4.80% Senior Notes due 2026 | 400 |
| | 400 |
| 4.80% Senior Notes due 2026 | $ | 400 | | | $ | 400 | |
| 1.85% Senior Notes due 2031 | | 1.85% Senior Notes due 2031 | 750 | | | 750 | |
| 2.95% Senior Notes due 2051 | | 2.95% Senior Notes due 2051 | 750 | | | 750 | |
| Total principal amount | $ | 1,000 |
| | $ | 1,000 |
| Total principal amount | $ | 1,900 | | | $ | 1,900 | |
| Unaccreted discount | (1 | ) | | (2 | ) | Unaccreted discount | (6) | | | (7) | |
| Unamortized debt issuance costs | (5 | ) | | (6 | ) | Unamortized debt issuance costs | (16) | | | (17) | |
| Net carrying value of Senior Notes | $ | 994 |
| | $ | 992 |
| Net carrying value of Senior Notes | $ | 1,878 | | | $ | 1,876 | |
| | | | | | | | |
| Fair value of Senior Notes (Level 2) | $ | 1,039 |
| | $ | 1,038 |
| Fair value of Senior Notes (Level 2) | $ | 1,711 | | | $ | 1,873 | |
As of March 31, 2019,2022, the remaining life of the 20212026 Notes, 2031 Notes and 20262051 Notes is approximately 1.93.9 years, 8.9 years, and 6.928.9 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 20212026 Notes, 2031 Notes and the 20262051 Notes are redeemable at our option at any time prior to February 1, 2021 or December 1, 2025, November 15, 2030, and August 15, 2050, respectively, subject to a make-whole premium. Within one and three months of maturity,After such dates, we may redeem the 2021 Notes or the 2026each such series of 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 Senioreach such series of Notes may require us to repurchase all or a portion of the Seniorthese Notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. The SeniorEach such series of 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, 2022, 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, 20192022 and 2018,2021, 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 2019, 2018,2022, 2021 and 20172020 that is included in interest and other income (expense), net on our Consolidated Statements of Operations (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| 2022 | | 2021 | | 2020 |
| Amortization of debt discount | $ | (1) | | | $ | — | | | $ | — | |
| Amortization of debt issuance costs | (2) | | | (2) | | | (2) | |
| Coupon interest expense | (55) | | | (43) | | | (42) | |
| Total interest expense | $ | (58) | | | $ | (45) | | | $ | (44) | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2019 | | 2018 | | 2017 |
| Amortization of debt discount | (1 | ) | | — |
| | (2 | ) |
| Amortization of debt issuance costs | (2 | ) | | (2 | ) | | (2 | ) |
| Coupon interest expense | (41 | ) | | (42 | ) | | (42 | ) |
| Other interest expense | (1 | ) | | — |
| | (1 | ) |
| Total interest expense | $ | (45 | ) | | $ | (44 | ) | | $ | (47 | ) |
(13) LEASES
Our leases primarily consist of facility leases for our offices and development studios, data centers, and server equipment, with remaining lease terms of 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. Substantially 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 right-of-use (“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 expenses for the fiscal years ended March 31, 2022, 2021, and 2020 are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| 2022 | | 2021 | | 2020 |
| Operating lease costs | $ | 98 | | | $ | 87 | | | $ | 70 | |
| Variable lease costs | 21 | | | 21 | | | 37 | |
| Short-term lease costs | 2 | | | 2 | | | 14 | |
| Total lease expense | $ | 121 | | | $ | 110 | | | $ | 121 | |
Supplemental cash and noncash information related to our operating leases for the fiscal years ended March 31, 2022, 2021, and 2020 are as follows (in millions): | | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| 2022 | | 2021 | | 2020 |
| Cash paid for amounts included in the measurement of lease liability | $ | 97 | | | $ | 85 | | | $ | 69 | |
| ROU assets obtained in exchange for new lease obligations | $ | 150 | | | $ | 90 | | | $ | 52 | |
Weighted average remaining lease term and discount rate at March 31, 2022 and 2021 are as follows:
| | | | | | | | | | | |
| At March 31, 2022 | | At March 31, 2021 |
| Lease term | 6.8 years | | 7.2 years |
| Discount rate | 2.5 | % | | 2.7 | % |
Operating lease ROU assets and liabilities recorded on our Consolidated Balance Sheets as of March 31, 2022 and 2021 are as follows (in millions): | | | | | | | | | | | | | | | | | |
| As of March 31, | | Balance Sheet Classification |
| 2022 | | 2021 | |
| Operating lease ROU assets | $ | 314 | | | $ | 242 | | | Other assets |
| | | | |
|
| Operating lease liabilities | $ | 81 | | | $ | 76 | | | Accrued and other current liabilities |
| Noncurrent operating lease liabilities | 272 | | | 202 | | | Other liabilities |
| Total operating lease liabilities | $ | 353 | |
| $ | 278 | | |
|
Future minimum lease payments under operating leases as of March 31, 2022 were as follows (in millions):
| | | | | | | | |
| Fiscal Years Ending March 31, |
| |
| 2023 |
| $ | 86 | |
| 2024 |
| 73 | |
| 2025 |
| 56 | |
| 2026 |
| 46 | |
| 2027 |
| 31 | |
| Thereafter |
| 93 | |
| Total future lease payments |
| 385 | |
| Less imputed interest |
| (32) | |
| Total operating lease liabilities |
| $ | 353 | |
In addition to what is included in the table above, as of March 31, 2022, we have entered into three office leases and two equipment leases that have not yet commenced with aggregate future lease payments of approximately $138 million. These leases are expected to commence between fiscal year 2023 and fiscal year 2025, and will have lease terms ranging from 2 to 12 years.
(14) COMMITMENTS AND CONTINGENCIES
Lease Commitments
As of March 31, 2019, we leased certain facilities, furniture and equipment under non-cancelable operating lease agreements. We were required to pay property taxes, insurance and normal maintenance costs for certain of these facilities and any increases over the base year of these expenses on the remainder of our facilities.
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 to promote the games we publish 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 E.V. (German Soccer League) (professional soccer); Liga Nacional De Futbol Profesional (professional soccer); National Basketball Association and National Basketball Players Association (professional basketball); National Hockey League and NHL Players’ Association (professional hockey); National Football League Properties and PLAYERS Inc. (professional football); William Morris Endeavor Entertainment LLC (professional mixed martial arts); ESPN (content in EA SPORTS games); Disney Interactive (Star Wars); and Fox Digital Entertainment, Inc. (The Simpsons). 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 all of our minimum contractual obligations as of March 31, 20192022 (in millions):
| | | | | | Fiscal Year Ending March 31, | | Fiscal Years Ending March 31, |
| | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Total | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
| Unrecognized commitments | | | | | | | | | | | | | | Unrecognized commitments | | | | | | | | | | | | | |
| Developer/licensor commitments | $ | 973 |
| | $ | 214 |
| | $ | 292 |
| | $ | 240 |
| | $ | 93 |
| | $ | 75 |
| | $ | 59 |
| Developer/licensor commitments | $ | 1,851 | | | $ | 316 | | | $ | 449 | | | $ | 434 | | | $ | 357 | | | $ | 81 | | | $ | 214 | |
| Marketing commitments | 377 |
| | 94 |
| | 97 |
| | 85 |
| | 37 |
| | 37 |
| | 27 |
| Marketing commitments | 837 | | | 231 | | | 206 | | | 191 | | | 125 | | | 54 | | | 30 | |
| Operating leases | 264 |
| | 52 |
| | 54 |
| | 44 |
| | 36 |
| | 28 |
| | 50 |
| |
| Senior Notes interest | 175 |
| | 38 |
| | 41 |
| | 19 |
| | 19 |
| | 19 |
| | 39 |
| Senior Notes interest | 836 | | | 49 | | | 55 | | | 55 | | | 54 | | | 36 | | | 587 | |
| Operating lease imputed interest | | Operating lease imputed interest | 32 | | | 8 | | | 6 | | | 5 | | | 3 | | | 2 | | | 8 | |
| Operating leases not yet commenced | | Operating leases not yet commenced | 138 | | | 13 | | | 8 | | | 7 | | | 13 | | | 11 | | | 86 | |
| Other purchase obligations | 92 |
| | 40 |
| | 30 |
| | 19 |
| | 3 |
| | — |
| | — |
| Other purchase obligations | 134 | | | 64 | | | 55 | | | 10 | | | 4 | | | 1 | | | — | |
| | Total unrecognized commitments | 1,881 |
| | 438 |
| | 514 |
| | 407 |
| | 188 |
| | 159 |
| | 175 |
| Total unrecognized commitments | 3,828 | | | 681 | | | 779 | | | 702 | | | 556 | | | 185 | | | 925 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Recognized commitments | | | | | | | | | | | | | | Recognized commitments | |
| Senior Notes principal and interest | 1,003 |
| | 3 |
| | 600 |
| | — |
| | — |
| | — |
| | 400 |
| Senior Notes principal and interest | 1,906 | | | 6 | | | — | | | — | | | 400 | | | — | | | 1,500 | |
| Transition and other taxes | 90 |
| | 22 |
| | 23 |
| | 24 |
| | 3 |
| | 5 |
| | 13 |
| |
| Licensing commitments | 78 |
| | 25 |
| | 26 |
| | 27 |
| | — |
| | — |
| | — |
| |
| Operating leases | | Operating leases | 353 | | | 78 | | | 67 | | | 51 | | | 43 | | | 29 | | | 85 | |
| Transition Tax and other taxes | | Transition Tax and other taxes | 19 | | | 2 | | | 4 | | | 6 | | | 7 | | | — | | | — | |
| | Total recognized commitments | 1,171 |
| | 50 |
| | 649 |
| | 51 |
| | 3 |
| | 5 |
| | 413 |
| Total recognized commitments | 2,278 | | | 86 | | | 71 | | | 57 | | | 450 | | | 29 | | | 1,585 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Commitments | $ | 3,052 |
| | $ | 488 |
| | $ | 1,163 |
| | $ | 458 |
| | $ | 191 |
| | $ | 164 |
| | $ | 588 |
| Total Commitments | $ | 6,106 | | | $ | 767 | | | $ | 850 | | | $ | 759 | | | $ | 1,006 | | | $ | 214 | | | $ | 2,510 | |
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, 2019;2022; however, certain payment obligations may be accelerated depending on the performance of our operating results. Furthermore, up to $30 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, 2019,2022, we had a net liability for unrecognized tax benefits and an accrual for the payment of related interest totaling $209$369 million, of which we are unable to make a reasonably reliable estimate of when cash settlement with a taxing authority will occur.
In addition to what is included in the table above, as
Total rent expense for our operating leases was $100 million, $92 million and $91 million for the fiscal years ended March 31, 2019, 2018 and 2017, respectively.
Legal Proceedings
On July 29, 2010, Michael Davis, a former NFL running back, filed a putative class action inThe Netherlands Gambling Authority had asserted that 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. The parties reached a settlement in this matter in March 2019 that was not material to the Company’s financial results and on May 7, 2019, the United States District Court for the Northern District of California dismissed the case.
Governmental authorities in Belgium have sought to limit or discontinue the use of in-game mechanics involving a randomized selection of virtual items. On August 10, 2018, we were notified that the Belgian Gambling Commission made a referral to the Belgian Public Prosecutor’s Office regarding the use such mechanicsitems in the FIFA Ultimate Team service includedgame mode of our FIFA franchise contravened the Dutch Betting and Gaming Act. On March 10, 2022, the Council of State in FIFAthe Netherlands found that this randomized selection of virtual items is not a game of chance under Dutch gambling law. This is a final decision by the Council of State, which is the highest administrative court in the Netherlands, and this matter is effectively closed.
18. On February 1, 2019, we discontinued the sale of FIFA Points in Belgium after discussions with Belgian authorities. We do not expect Belgian authorities to pursue the matter further. The Company does not believe that its products and services violate applicable gambling laws and continues to engage with appropriate governmental authorities in Belgium.
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.
(14) PREFERRED STOCK
As of March 31, 2019 and 2018, we had 10 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.
(15) STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
Valuation Assumptions
We recognize compensation cost 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 estimation 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 estimate the fair value of our stock-based awards as follows:
•Restricted Stock Units and 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 estimated 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 estimated 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. An expected term is estimated 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 2019, 2018,2022, 2021, and 2017.2020.
The estimated assumptions used in the Black-Scholes valuation model to value our ESPP purchase rights were as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | ESPP Purchase Rights |
| | | | | | Year Ended March 31, |
| | | | | | 2022 | | 2021 | | 2020 |
| Risk-free interest rate | | | | | 0.1 - 1.1% | | 0.1 | % | | 1.5 - 1.9% |
| Expected volatility | | | | | 25 - 30% | | 32 - 39% | | 23 - 37% |
| Weighted-average volatility | | | | | 27% | | 36% | | 26% |
| Expected term | | | | | 6 - 12 months | | 6 - 12 months | | 6 - 12 months |
| Expected dividends | | | | | 0.6% | | 0.3 | % | | NaN |
|
| | | | | | | | | |
| | | ESPP Purchase Rights |
| | | Year Ended March 31, |
| | | 2019 | | 2018 | | 2017 |
| Risk-free interest rate | | 2.2 - 2.5% |
| | 1.1 - 2.0% |
| | 0.5 - 0.8% |
|
| Expected volatility | | 29 - 33% |
| | 28 - 30% |
| | 25 - 32% |
|
| Weighted-average volatility | | 33 | % | | 29 | % | | 27 | % |
| Expected term | | 6 - 12 months
|
| | 6 - 12 months |
| | 6 - 12 months |
|
| Expected dividends | | 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, |
| 2022 | | 2021 | | 2020 |
| Risk-free interest rate | 0.4% | | 0.2 | % | | 1.6 - 1.8% |
| Expected volatility | 24 - 76% | | 23 - 63% | | 14 - 65% |
| Weighted-average volatility | 40% | | 37% | | 29% |
| Expected dividends | NaN | | NaN | | NaN |
|
| | | | | | | | |
| | Year Ended March 31, |
| | 2019 | | 2018 | | 2017 |
| Risk-free interest rate | 2.6 | % | | 1.5 - 1.6% |
| | 0.8 | % |
| Expected volatility | 16 - 47% |
| | 17 - 46% |
| | 16 - 57% |
|
| Weighted-average volatility | 28 | % | | 28 | % | | 29 | % |
| Expected dividends | None |
| | None |
| | None |
|
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.
Approximately 15.712.5 million options or 11.08.7 million restricted stock units were available for grant under our 2019 Equity Plan as of March 31, 2019.2022.
Stock Options
Options granted under the 2019 Equity Plan and the 2000 Equity Plan generally expire ten years from the date of grant. All outstanding options under the 2019 Equity Plan and the 2000 Equity Plan are fully vested and exercisable.
The following table summarizes our stock option activity for the fiscal year ended March 31, 2019:2022:
| | | | | | | | | | | | Options
(in thousands) | | Weighted-
Average
Exercise Prices | | Weighted-
Average
Remaining
Contractual
Term (in years) | | Aggregate
Intrinsic Value
(in millions) |
| | | Options (in thousands) | | Weighted- Average Exercise Prices | | Weighted- Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in millions) | |
| Outstanding as of March 31, 2018 | | 1,615 |
| | $ | 30.28 |
| | | | | |
| Outstanding as of March 31, 2021 | | Outstanding as of March 31, 2021 | | 267 | | | $ | 35.71 | | | | | |
| Assumed via acquisition | | Assumed via acquisition | | 150 | | | 60.87 | | |
| Granted | | 5 |
| | 106.55 |
| | | Granted | | 3 | | | 138.32 | | |
| Exercised | | (245 | ) | | 30.00 |
| | | Exercised | | (92) | | | 54.43 | | |
| Forfeited, cancelled or expired | | — |
| | — |
| | | Forfeited, cancelled or expired | | (42) | | | 67.04 | | |
| Outstanding as of March 31, 2019 | | 1,375 |
| | $ | 30.63 |
| | 4.71 | | $ | 98 |
| |
| Outstanding as of March 31, 2022 | | Outstanding as of March 31, 2022 | | 286 | | | $ | 39.28 | | | 2.75 | | $ | 25 | |
| Vested and expected to vest | | 1,375 |
| | $ | 30.63 |
| | 4.71 | | $ | 98 |
| Vested and expected to vest | | 286 | | | $ | 39.28 | | | 2.75 | | $ | 25 | |
| Exercisable as of March 31, 2019 | | 1,375 |
| | $ | 30.63 |
| | 4.71 | | $ | 98 |
| |
| Exercisable as of March 31, 2022 | | Exercisable as of March 31, 2022 | | 279 | | | $ | 38.06 | | | 2.65 | | $ | 24 | |
The aggregate intrinsic value represents the total pre-tax intrinsic value based on our closing stock price as of March 31, 2019,2022, which would have been received by the option holders had all the option holders exercised their options as of that date. The total intrinsic values of stock options exercised during fiscal years 2019, 2018,2022, 2021, and 20172020 were $24$8 million, $43$76 million, and $39$22 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, 2019:
|
| | | | | | | | | | | | |
| | | 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 | | 52 |
| | 0.62 | | $ | 19.99 |
| | — | % |
| 26.25 - 26.25 | | 670 |
| | 4.59 | | 26.25 |
| | 0.3 | % |
| 33.60 - 37.12 | | 653 |
| | 5.16 | | 35.97 |
| | 0.2 | % |
| $11.53 - $37.12 | | 1,375 |
| | 4.71 | | $ | 30.63 |
| | 0.5 | % |
Potential dilution is computed by dividing the options in the related range of exercise prices by 298 million shares of common stock, which were issued and outstanding as of March 31, 2019.
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. Our restricted stock units generally vest over three35 months to four years.
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, 2019:2022:
| | | | | | | | | | | | | | |
| | Restricted
Stock Units
(in thousands) | | Weighted-
Average Grant
Date Fair Values |
| Outstanding as of March 31, 2021 | | 5,764 | | | $ | 113.25 | |
| Assumed via acquisition | | 816 | | | 120.54 | |
| Granted | | 4,598 | | | 139.66 | |
| Vested | | (3,345) | | | 114.55 | |
| Forfeited or cancelled | | (1,151) | | | 125.41 | |
| Outstanding as of March 31, 2022 | | 6,682 | | | $ | 129.57 | |
|
| | | | | | | |
| | | Restricted Stock Units (in thousands) | | Weighted- Average Grant Date Fair Values |
| Outstanding as of March 31, 2018 | | 5,948 |
| | $ | 94.57 |
|
| Granted | | 2,169 |
| | 128.76 |
|
| Vested | | (2,541 | ) | | 88.09 |
|
| Forfeited or cancelled | | (616 | ) | | 109.09 |
|
| Outstanding as of March 31, 2019 | | 4,960 |
| | $ | 111.03 |
|
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 2019, 2018,2022, 2021, and 20172020 were $128.76, $110.05$136.78, $127.27, and $76.60$93.52 respectively. The fair values of restricted stock units that vested during fiscal years 2019, 2018,2022, 2021, and 20172020 were $300$457 million,, $289 $420 million, and $320$240 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-GAAPincluding, but not limited to, management reporting milestones of net revenuebookings and free cash flowoperating income metrics, 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. Generally, the measurement periods of our performance-based restricted stock units are 3 to 4 years, with awards vesting after each annual measurement period or cliff-vesting after the completion of the total aggregate measurement period.
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.performance-based milestone. The number of shares of common stock to be issued at vesting will range from zero percent 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, 2019:2022:
| | | | | | | | | | | |
| Performance-
Based Restricted
Stock Units
(in thousands) | | Weighted-
Average Grant
Date Fair Value |
| Outstanding as of March 31, 2021 | 579 | | | $ | 110.51 | |
| Granted | 300 | | | 140.48 | |
| Vested | (266) | | | 110.51 | |
| Forfeited or cancelled | (423) | | | 117.33 | |
| Outstanding as of March 31, 2022 | 190 | | | $ | 142.60 | |
|
| | | | | | |
| | Performance-
Based Restricted
Stock Units
(in thousands) | | Weighted- Average Grant Date Fair Value |
| Outstanding as of March 31, 2018 | 796 |
| | $ | 110.51 |
|
| Granted | — |
| | — |
|
| Forfeited or cancelled | (217 | ) | | 110.51 |
|
| Outstanding as of March 31, 2019 | 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 percentto 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-100Nasdaq-100 Index for each measurement period, over either a one-year, two-year cumulative and three-year cumulative period, a two-year and four-year cumulative period or a three-year period.
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, 20192022:
|
| | | | | | | |
| | | Market-Based Restricted Stock Units (in thousands) | | Weighted- Average Grant Date Fair Value |
| Outstanding as of March 31, 2018 | | 1,342 |
| | $ | 118.35 |
|
| Granted | | 573 |
| | 185.24 |
|
| Vested | | (415 | ) | | 98.48 |
|
| Forfeited or cancelled | | (542 | ) | | 136.91 |
|
| Outstanding as of March 31, 2019 | | 958 |
| | $ | 156.49 |
|
| | | | | | | | | | | | | | |
| | Market-Based
Restricted Stock
Units
(in thousands) | | Weighted-
Average Grant
Date Fair Value |
| Outstanding as of March 31, 2021 | | 2,195 | | | $ | 134.60 | |
| Granted | | 175 | | | 170.44 | |
| Vested | | (271) | | | 123.82 | |
| Forfeited or cancelled | | (778) | | | 146.26 | |
| Outstanding as of March 31, 2022 | | 1,321 | | | $ | 134.69 | |
The weighted-average grant date fair values of market-based restricted stock units granted during fiscal years 2019, 2018,2022, 2021, and 20172020 were $185.24, $140.93,$170.44, $145.78, and $98.04,$109.04, respectively. The fair values of market-based restricted stock units that vested during fiscal years 2019, 2018,2022, 2021, and 20172020 were $54$37 million, $48$19 million, and $42$9 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, 2019, 20182022, 2021 and 2017:2020:
|
| | | | | | | | | |
| | | Shares Issued
(in millions) | | Exercise Prices for Purchase Rights | | Weighted-Average Fair Values of Purchase Rights |
| Fiscal Year 2017 | | 0.7 |
| | $54.60 - $67.56 | | $ | 17.93 |
|
| Fiscal Year 2018 | | 0.6 |
| | $67.56 - $99.82 | | $ | 21.57 |
|
| Fiscal Year 2019 | | 0.5 |
| | $89.46 - $107.51 | | $ | 31.88 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Shares Issued
(in millions) | | Exercise Prices for Purchase Rights | | Weighted-Average Fair Values of Purchase Rights |
| Fiscal Year 2020 | | 0.7 | | | $74.70 - $74.89 | | $ | 29.05 | |
| Fiscal Year 2021 | | 0.7 | | | $74.70 - $119.37 | | $ | 29.80 | |
| Fiscal Year 2022 | | 0.6 | | | $113.39 - $118.14 | | $ | 35.94 | |
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, 2019, 6.32022, 4.3 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, |
| | | 2019 | | 2018 | | 2017 |
| Cost of revenue | | $ | 4 |
| | $ | 3 |
| | $ | 3 |
|
| Research and development | | 184 |
| | 146 |
| | 109 |
|
| Marketing and sales | | 33 |
| | 32 |
| | 31 |
|
| General and administrative | | 63 |
| | 61 |
| | 53 |
|
| Stock-based compensation expense | | $ | 284 |
| | $ | 242 |
| | $ | 196 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2022 | | 2021 | | 2020 |
| Cost of revenue | | $ | 6 | | | $ | 5 | | | $ | 4 | |
| Research and development | | 356 | | | 285 | | | 229 | |
| Marketing and sales | | 54 | | | 46 | | | 37 | |
| General and administrative | | 112 | | | 99 | | | 77 | |
| Stock-based compensation expense | | $ | 528 | | | $ | 435 | | | $ | 347 | |
During the fiscal years ended March 31, 2019, 20182022, 2021, and 2017,2020, we recognized $40$68 million, $29$56 million, and $43 million, respectively, of deferred income tax benefit related to our stock-based compensation expense.
As of March 31, 2019,2022, our total unrecognized compensation cost related to stock options, restricted stock units, market-based restricted stock units, and performance-based restricted stock units was $451$688 million and is expected to be recognized over a weighted-average service period of 1.8 years. Of the $451$688 million of unrecognized compensation cost, $394$634 million relates to restricted stock
units, $45$46 million relates to market-based restricted stock units, and $12$8 million relates to performance-based restricted stock units at a 67147 percent average payout. As of March 31, 2019, 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 $11$21 million and $10$18 million as of March 31, 20192022 and 2018,2021, respectively. As of March 31, 20192022 and 2018, $122021, $22 million and $11$19 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 $43$41 million,, $31 $40 million, and $28$29 million to these plans in fiscal years 2019, 2018,2022, 2021, and 2017,2020, respectively.
Stock Repurchase Program
In May 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 and 6.5 million shares for approximately $31 million and $508 million under this program, respectively, during the fiscal years ended March 31, 2018 and 2017. We completed repurchases under the May 2015 program in April 2017.
In May 2017, a Special Committee of our Board of Directors, on behalf of the full Board of Directors, authorized a program to repurchase up to $1.2 billion of our common stock. We repurchased approximately 0.6 million and 5.0 million shares for approximately $76 million and $570 million under this program, respectively, during the fiscal years ended March 31, 2019 and 2018. This program was superseded and replaced by a new stock repurchase program approved in May 2018.
In May 2018, a Special Committee of our Board of Directors, on behalf of the full Board of Directors, authorized a program to repurchase up to $2.4 billion of our common stock. We completed repurchases under the May 2018 program in April 2020.
In November 2020, our Board of Directors authorized a program to repurchase up to $2.6 billion of our common stock. This stock repurchase program supersedes and replaces the May 2017 program, and expires on May 31, 2020.November 4, 2022. Under this program, we may purchase stock in the open market or through privately-negotiatedprivately 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 repurchased approximately 10.4 million shares for approximately $1,116 million under this program during the fiscal year ended March 31, 2019. We are actively repurchasing shares under this program.
The following table summarizes total shares repurchased during fiscal years 2019, 2018,2022, 2021, and 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | May 2018 Program | | November 2020 Program | | Total |
| (In millions) | | | | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount |
| Fiscal Year 2020 | | | | | 12.3 | | | $ | 1,207 | | | — | | | $ | — | | | 12.3 | | | $ | 1,207 | |
| Fiscal Year 2021 | | | | | 0.7 | | | $ | 78 | | | 4.9 | | | $ | 651 | | | 5.6 | | | $ | 729 | |
| Fiscal Year 2022 | | | | | — | | | $ | — | | | 9.5 | | | $ | 1,300 | | | 9.5 | | | $ | 1,300 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | May 2015 Program | | May 2017 Program | | May 2018 Program | | Total |
| (In millions) | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount |
| Fiscal Year 2017 | 6.5 |
| | $ | 508 |
| | — |
| | $ | — |
| | — |
| | $ | — |
| | 6.5 |
| | $ | 508 |
|
| 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 |
|
(16) INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net, for the fiscal years ended March 31, 2019, 20182022, 2021 and 20172020 consisted of (in millions):
| | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2022 | | 2021 | | 2020 |
| Interest expense | (58) | | | (45) | | | (44) | |
| Interest income | 4 | | | 24 | | | 100 | |
| Net gain (loss) on foreign currency transactions | (22) | | | 9 | | | 11 | |
| Net gain (loss) on foreign currency forward contracts | 21 | | | (19) | | | (4) | |
| Other income (expense), net | 7 | | | 2 | | | — | |
| Interest and other income (expense), net | $ | (48) | | | $ | (29) | | | $ | 63 | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2019 | | 2018 | | 2017 |
| Interest expense | (45 | ) | | (44 | ) | | (47 | ) |
| Interest income | 88 |
| | 50 |
| | 25 |
|
| Net gain (loss) on foreign currency transactions | (9 | ) | | 18 |
| | (40 | ) |
| Net gain (loss) on foreign currency forward contracts | 50 |
| | (16 | ) | | 46 |
|
| Other income (expense), net | (1 | ) | | 7 |
| | 2 |
|
| Interest and other income (expense), net | $ | 83 |
| | $ | 15 |
| | $ | (14 | ) |
(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) | 2022 | | 2021 | | 2020 |
| Net income | $ | 789 | | | $ | 837 | | | $ | 3,039 | |
| Shares used to compute earnings per share: | | | | | |
| Weighted-average common stock outstanding — basic | 284 | | | 289 | | | 293 | |
| Dilutive potential common shares related to stock award plans and from assumed exercise of stock options | 2 | | | 3 | | | 2 | |
| | | | | |
| | | | | |
| Weighted-average common stock outstanding — diluted | 286 | | | 292 | | | 295 | |
| Earnings per share: | | | | | |
| Basic | $ | 2.78 | | | $ | 2.90 | | | $ | 10.37 | |
| Diluted | $ | 2.76 | | | $ | 2.87 | | | $ | 10.30 | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| (In millions, except per share amounts) | 2019 | | 2018 | | 2017 |
| Net income | $ | 1,019 |
| | $ | 1,043 |
| | $ | 967 |
|
| Shares used to compute earnings per share: | | | | | |
| Weighted-average common stock outstanding — basic | 303 |
| | 308 |
| | 303 |
|
| Dilutive potential common shares related to stock award plans and from assumed exercise of stock options | 3 |
| | 4 |
| | 4 |
|
Dilutive potential common shares related to the Convertible Notes (a) | — |
| | — |
| | 1 |
|
Dilutive potential common shares related to the Warrants (a) | — |
| | — |
| | 6 |
|
| Weighted-average common stock outstanding — diluted | 306 |
| | 312 |
| | 314 |
|
| Earnings per share: | | | | | |
| Basic | $ | 3.36 |
| | $ | 3.39 |
| | $ | 3.19 |
|
| Diluted | $ | 3.33 |
| | $ | 3.34 |
| | $ | 3.08 |
|
| |
(a) | See Note 10 — Financing Arrangements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017, for additional information regarding the potential dilutive shares related to our Convertible Notes and Warrants. |
The Convertible Notes matured on July 15, 2016 and the Warrants expired on January 12, 2017.
For the fiscal year ended March 31, 2019, 2 million ofCertain restricted stock units, market-based restricted stock units and market-basedperformance-based restricted stock units were excluded from the treasury stock method computation of diluted shares as their inclusion would have had an antidilutive effect. Our performance-based restricted stock units, which are considered contingently issuableFor the fiscal year ended March 31, 2022, 1 million such shares are alsowere excluded, from the treasury stock method computation because the related performance-based milestones were not achieved as of the end ofand for the fiscal years ended March 31, 20192021 and 2018.2020, 2 million such shares were excluded.
For the fiscal years ended March 31, 2018 and 2017, an immaterial amount
(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, 2019,2022, 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, 2022, 2021 and 2020 is presented below (in millions): | | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| 2022 | | 2021 | | 2020 |
| Net revenue by timing of recognition | | | | | |
| Revenue recognized at a point in time | $ | 2,326 | | | $ | 2,006 | | | $ | 2,043 | |
| Revenue recognized over time | 4,665 | | | 3,623 | | | 3,494 | |
| Net revenue | $ | 6,991 | | | $ | 5,629 | | | $ | 5,537 | |
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 either the estimated offering period, contractual term 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, online-only software services 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, 2019, 20182022, 2021 and 20172020 is presented below (in millions): | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2022 | | 2021 | | 2020 |
| Net revenue by composition | | | | | |
| Full game downloads | $ | 1,282 | | | $ | 918 | | | $ | 811 | |
| Packaged goods | 711 | | | 695 | | | 1,076 | |
| Full game | 1,993 | | | 1,613 | | | 1,887 | |
| | | | | |
| Live services and other | 4,998 | | | 4,016 | | | 3,650 | |
| Net revenue | $ | 6,991 | | | $ | 5,629 | | | $ | 5,537 | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2019 | | 2018 | | 2017 |
| Net revenue by composition | | | | | |
| Full game downloads | $ | 680 |
| | $ | 707 |
| | $ | 659 |
|
| Live services | 2,216 |
| | 2,083 |
| | 1,589 |
|
| Mobile | 814 |
| | 660 |
| | 626 |
|
| Total Digital | 3,710 |
| | 3,450 |
| | 2,874 |
|
| | | | | | |
| Packaged goods and other | 1,240 |
| | 1,700 |
| | 1,971 |
|
| Net revenue | $ | 4,950 |
| | $ | 5,150 |
| | $ | 4,845 |
|
DigitalFull game net revenue includes full-gamefull game downloads live services, and mobile revenue.packaged goods. 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 revenue from software that is sold physically. This includes (1) net revenue from game software sold physically through traditional channels such as brick and mortar retailers, and (2) our software licensing revenue from third parties (for example, makers of console platforms, personal computers or computer accessories) who include certain of our productsfull games for sale with their products (for example, OEMOriginal Equipment Manufacturer (“OEM”) bundles). Other
Live services and other net revenue includes ourrevenue from sales of extra content for console, PC and mobile games, licensing revenue, subscriptions, advertising, and non-software licensing revenue.licensing.
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2019 | | 2018 | | 2017 |
| Platform net revenue | | | | | |
| Console | $ | 3,333 |
| | $ | 3,635 |
| | $ | 3,390 |
|
| PC / Browser | 780 |
| | 827 |
| | 773 |
|
| Mobile | 824 |
| | 672 |
| | 627 |
|
| Other | 13 |
| | 16 |
| | 55 |
|
| Net revenue | $ | 4,950 |
| | $ | 5,150 |
| | $ | 4,845 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| | 2022 | | 2021 | | 2020 |
| Platform net revenue | | | | | |
| Console | $ | 4,400 | | | $ | 3,716 | | | $ | 3,774 | |
| PC and other | 1,532 | | | 1,195 | | | 1,036 | |
| Mobile | 1,059 | | | 718 | | | 727 | |
| Net revenue | $ | 6,991 | | | $ | 5,629 | | | $ | 5,537 | |
Information about our operations in North America and internationally as of and for the fiscal years ended March 31, 2019, 20182022, 2021 and 20172020 is presented below (in millions): | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2022 | | 2021 | | 2020 |
| Net revenue from unaffiliated customers | | | | | |
| North America | $ | 3,039 | | | $ | 2,474 | | | $ | 2,270 | |
| International | 3,952 | | | 3,155 | | | 3,267 | |
| Net revenue | $ | 6,991 | | | $ | 5,629 | | | $ | 5,537 | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2019 | | 2018 | | 2017 |
| Net revenue from unaffiliated customers | | | | | |
| North America | $ | 1,906 |
| | $ | 2,090 |
| | $ | 2,119 |
|
| International | 3,044 |
| | 3,060 |
| | 2,726 |
|
| Total | $ | 4,950 |
| | $ | 5,150 |
| | $ | 4,845 |
|
| | | | As of March 31, | | As of March 31, |
| | 2019 | | 2018 | | 2022 | | 2021 |
| Long-lived assets | | | | Long-lived assets | | | |
| North America | $ | 371 |
| | $ | 376 |
| North America | $ | 446 | | | $ | 397 | |
| International | 77 |
| | 77 |
| International | 104 | | | 94 | |
| Total | $ | 448 |
| | $ | 453 |
| Total | $ | 550 | | | $ | 491 | |
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 entity includes digital revenue from consumers who reside outside of Switzerland, including consumers who reside outside of Europe. Revenue generated by our Swiss legal entity during fiscal years 2019, 2018,2022, 2021, and 20172020 represents $2,303$3,423 million, $2,272$2,731 million and $1,886$2,586 million or 4749 percent, 4449 percent and 3947 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 2019,2022, our direct sales to Sony and Microsoft represented approximately 2933 percent and 16 percent of total net revenue, respectively. In fiscal year 2018,2021, our direct sales to Sony and Microsoft represented approximately 2736 percent and 1618 percent of total net revenue, respectively. In fiscal year 2017,2020, our direct sales to Sony and Microsoft represented approximately 1932 percent and 17 percent of total net revenue, respectively.
(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | Year Ended |
| (In millions, except per share data) | June 30 | | September 30 | | December 31 | | March 31 | |
Fiscal 2019 Consolidated (a) | | | | | | | | | |
| 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 |
|
| Fiscal 2018 Consolidated | | | | | | | | | |
| Net revenue | $ | 1,449 |
| | $ | 959 |
| | $ | 1,160 |
| | $ | 1,582 |
| | $ | 5,150 |
|
| Gross profit | 1,295 |
| | 570 |
| | 659 |
| | 1,349 |
| | 3,873 |
|
| Operating income (loss) | 743 |
| | (41 | ) | | (21 | ) | | 753 |
| | 1,434 |
|
| Net income (loss) | 644 |
|
| (22 | ) |
| (186 | ) | (b)
| 607 |
| (b)
| 1,043 |
|
| Common Stock | | | | | | | | | |
| Earnings (loss) per share — Basic | $ | 2.08 |
| | $ | (0.07 | ) | | $ | (0.60 | ) | | $ | 1.98 |
| | $ | 3.39 |
|
| Earnings (loss) per share — Diluted | $ | 2.06 |
| | $ | (0.07 | ) | | $ | (0.60 | ) | | $ | 1.95 |
| | $ | 3.34 |
|
| |
(a) | On April 1, 2018, at the beginning of fiscal year 2019, we adopted the New Revenue Standard, which significantly changes 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 New Revenue Standard, see Note 1 under the heading “Recently Adopted Accounting Standards”. |
| |
(b) | During the quarters ended December 31, 2017 and March 31, 2018, we recognized tax expense of $176 million and $59 million, respectively, due to the application of the U.S. Tax Act, enacted on December 22, 2017. |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
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 March 30, 2019April 2, 2022 and March 31, 2018,April 3, 2021, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the fiscal years in the three-yearthree fiscal year period ended March 30, 2019,April 2, 2022, and the related notes and financial statement schedule (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of March 30, 2019,April 2, 2022, based on criteria established in Internal Control -– Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway 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 30, 2019April 2, 2022 and March 31, 2018,April 3, 2021, and the results of its operations and its cash flows for each of the fiscal years in the three-yearthree fiscal year period ended March 30, 2019,April 2, 2022, 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 30, 2019April 2, 2022 based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company adopted Accounting Standards Codification Topic 606, Revenue From Contracts with Customers, effective April 1, 2018, using the modified retrospective approach.
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.Reporting. Our responsibility is to express an opinion on the 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 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 regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial 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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit 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, 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 determination of the Estimated Offering Period considers the following factors:
•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
•disclosed service periods for competitors’ games.
The Company reported net revenue of $6,991 million for the year-ended April 2, 2022 and deferred net revenue of $2,248 million as of April 2, 2022.
We identified the assessment of the Estimated Offering Period as a critical audit matter. A high degree of audit effort and subjective and complex auditor judgment was required to evaluate the sufficiency of audit evidence obtained over the Estimated Offering Period, including whether historical experience and other qualitative factors, such as those described above, are indicative of the time period during which the Company’s games and extra content are played by its customers.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s process to determine the Estimated Offering Period, including controls over the factors noted above and the Company’s review of the Estimated Offering Period concluded for use in recognizing revenue. We evaluated the model the Company used to develop the Estimated Offering Period against the accounting requirements and for potential management bias. 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 these computations against the periods used by the Company in its Estimated Offering Period model. We obtained disclosed service periods for competitors’ games and compared them against the data used by the Company. We compared known and expected online gameplay trends used in the determination of the Estimated Offering Period to historical Company information and publicly available industry information. We performed a sensitivity analysis over the Company’s Estimated Offering Period to assess the impact of potential changes in the Estimated Offering Period on revenue. We assessed the sufficiency of evidence obtained related to the Estimated Offering Period by evaluating the results of the procedures performed.
Fair Value of Acquired Intangible Assets
As discussed in Note 7 to the consolidated financial statements, during the year ended April 2, 2022, the Company consummated the acquisition of Playdemic Limited (Playdemic) for a total consideration of $1,401 million, net of cash acquired. The acquisition-date fair value of the Playdemic intangibles was $438 million including $177 million for developed and core technology and $223 million for trade names and trademarks.
We identified the evaluation of acquisition-date fair value of developed and core technology and trade names and trademarks acquired in the acquisition of Playdemic as a critical audit matter. We performed sensitivity analyses to determine the key assumptions used to value the intangible assets acquired, individually and in the aggregate, which required challenging auditor judgment. Subjective auditor judgment was required to evaluate (1) the forecasted revenue assumption, due to limited
observable market information, and (2) the discount rates used in the models to determine the fair value of these intangible assets.
The following are the primary procedures we performed to address this critical matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s acquisition-date valuation process, including controls related to the development of the key assumptions identified. We evaluated the forecasted revenue by comparing these amounts to Playdemic’s historical revenue and revenue recognized subsequent to the acquisition. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the Company’s discount rates by evaluating the relationship of Playdemic’s weighted average cost of capital, internal rate of return, and weighted-average return on assets, and by comparing certain data used to publicly available third-party market data for comparable entities.
/s/ KPMG LLP
We have served as the Company’s auditor since 1987.
Santa Clara, California
May 23, 201925, 2022
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 believeshas concluded that, as of the end of our most recently completed fiscal year, our internal control over financial reporting was effective.effective and provided a reasonable level of assurance.
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 84.Page 90. 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, 20192022 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
Item 9B: Other Information
None.
Item 9C: Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not Applicable.
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 20192022 Proxy under the headingheadings “Proxy Highlights”, “Board of Directors &and Corporate Governance.”Governance” and, as applicable, “Delinquent Section 16(a) Reports.
Item 11: Executive Compensation
The information required by Item 11 is incorporated herein by reference to the information to be included in the 20192022 Proxy under the headings “Director Compensation”, “Executive Compensation and Stock Ownership Guidelines” and “Compensation Discussion and Analysis” and “Executive Compensation” and the subheadings “Compensation Committee Report on Executive Compensation”Matters” 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 20192022 Proxy under the headingheadings “Executive Compensation Tables” and “Security Ownership of Certain Beneficial Owners and Management” and the subheading “Equity Compensation Plan Information.Management.”
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 20192022 Proxy under the subheadingsheadings “Director Independence,”Independence”, “Related PersonPersons Transaction Policy”, and, “Certain Relationships and Relatedas applicable, “Related Person Transactions.”
Item 14: Principal AccountingAccountant Fees and Services
The information required by Item 14 is incorporated herein by reference to the information to be included in Proposal 3 of the 20192022 Proxy and under the subheadings “Fees of Independent Auditors” and “Pre-approval Procedures.heading “Audit Matters.”
PART IV
Item 15: Exhibits and Financial Statements
| |
(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 88 of this report.Schedules: The Financial Statement Schedules have been omitted because they are not applicable or are not required or are not present in material amounts or the information required to be set forth herein is included in the Consolidated Financial Statements or Notes thereto. 3. Exhibits: The exhibits listed in the accompanying index to exhibits on Page 8996 are filed or incorporated by reference as part of this report.
ELECTRONIC ARTS INC. AND SUBSIDIARIESItem 16: Form 10-K Summary
SCHEDULE IINone.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended March 31, 2019, 2018 and 2017
(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 | | Deductions | | Balance at End of Period |
| Year Ended March 31, 2019 | $ | 165 |
| | — |
| | (158 | ) | (a) | — |
| | $ | 7 |
|
| Year Ended March 31, 2018 | $ | 145 |
| | 288 |
| | 35 |
| (b) | (303 | ) | (c) | $ | 165 |
|
| Year Ended March 31, 2017 | $ | 159 |
| | 298 |
| | (8 | ) | (b) | (304 | ) | (c) | $ | 145 |
|
| |
(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. See Note 1 under the heading “Recently Adopted Accounting Standards”, for additional information on the adoption impact. |
(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.
20192022 FORM 10-K ANNUAL REPORT
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| | Incorporated by Reference | | Filed
Herewith |
| Number | | Exhibit Title | | Form | | File No. | | Filing Date | |
| | | | 8-K | | 000-17948 | | 6/23/2021 | | |
| | | | | | | | | | |
| | | | Incorporated by Reference | | Filed
Herewith
|
Number | | Exhibit Title | | Form | | File No. | | Filing Date | |
| | | | 10-Q8-K | | 000-17948 | | 11/3/20048/13/2021 | | |
| | | | | | | | | | |
| | | | 8-K/A8-K | | 000-17948 | | 5/27/20168/9/2019 | | |
| | | | | | |
| | | | 10-Q | | 000-17948 | | 2/6/2018 | | |
| | | | | | | | | | |
| | | | | | | | | | X |
| | | | | | | | | | |
| | | | 8-K | | 000-17948 | | 2/24/2016 | | |
| | | | | | | | | | |
| | | | 8-K | | 000-17948 | | 2/24/2016 | | |
| | | | | | |
| | | | 8-K | | 000-17948 | | 2/11/2021 | | |
| | | | | | | | | | |
| | | | 10-K | | 000-17948 | | 6/4/2004 | | |
| | | | | | |
| | | | 8-K | | 000-17948 | | 5/18/201825/2021 | | |
| | | | | | |
| | | | 10-Q | | 000-17948 | | 8/6/2007 | | |
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| | | | 8-K | | 000-17948 | | 5/18/201811/19/2021 | | |
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| | | | 10-K | | 000-17948 | | 5/22/2009 | | |
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| | | | 8-K | | 000-17948 | | 5/18/2018 | | |
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| | 8-K | | 000-17948 | | 8/3/2018 | | |
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| | | | 8-K | | 000-17948 | | 5/20/2019 | | |
| | | | | | |
| | | | 8-K10-K | | 000-17948 | | 5/22/201720/2020 | | |
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| | | | 8-K | | 000-17948 | | 5/18/201825/2021 | | |
| | | | | | | | | | |
| | | | | | | | | | X |
| | | | | | | | | | |
| | | | 8-K | | 000-17948 | | 5/20/11/12/2019 | | |
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| | | | 8-K | | 000-17948 | | 6/7/2017 | | |
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| | 10-Q | | 000-17948 | | 11/7/2017 | | |
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| | | | 8-K | | 000-17948 | | 8/1/2016 | | |
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| | | | 8-K10-Q | | 000-17948 | | 2/8/1/20162022 | | |
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| | | | 8-K | | 000-17948 | | 8/9/2019 | | |
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| | | | 8-K | | 000-17948 | | 9/17/2013 | | |
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| | | | 8-K | | 000-17948 | | 7/31/2012 | | |
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| | | | Incorporated by Reference8-K | | Filed
Herewith
000-17948 | | 1/31/2022 | | |
Number | | Exhibit Title | | Form | | File No. | | Filing Date | | |
| | | | 10-Q | | 000-17948 | | 8/5/2014 | | |
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| | Incorporated by Reference | | Filed
Herewith |
| Number | | Exhibit Title | | Form | | File No. | | Filing Date | |
| | | | 10-Q | | 000-17948 | | 11/4/2014 | | |
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| | | | 10-Q | | 000-17948 | | 11/8/2016 | | |
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| | | | 10-K | | 000-17948 | | 5/21/2014 | | |
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| | | | 10-Q | | 000-17948 | | 11/10/2020 | | |
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| | | | 10-Q | | 000-17948 | | 8/8/2018 | | |
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| | | | 10-Q | | 000-17948 | | 11/10/2020 | | |
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| | | | 8-K | | 000-17948 | | 3/20/20158/29/2019 | | |
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| | | | | | | | | | X |
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| | | | | | | | | | X |
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| | | | | | | | | | X |
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| | | | | | | | | | X |
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| Additional exhibits furnished with this report: | | | | | | | | |
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| | | | | | | | | | X |
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| | | | | | | | | | X |
| | | | | | | |
101.INS† | | Inline XBRL Instance Document | | | | | | | | X |
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101.SCH† | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | X |
| | | | | | | | | | |
101.CAL† | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | X |
| | | | | | |
101.DEF† | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | X |
| | | | | | |
101.LAB† | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | X |
| | | | | | | | | |
101.PRE† | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | X |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
* | |
| | Incorporated by Reference | | Filed
Herewith |
| Number | | Exhibit Title | | Form | | File No. | | Filing Date | |
| 104 | | The Cover Page Interactive Data File, formatted in Inline XBRL (included in Exhibit 101) | | | | | | | | |
| | | | | |
| * | 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, 2019 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.treatment. |
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 23, 201925, 2022 |
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 23rd25th of May, 2019.2022. |
| | | | | | | | |
| Name | | Title |
| | |
| /s/ Andrew Wilson | | Chief Executive Officer |
| Andrew Wilson | | |
| | |
Name/s/ Chris Suh | | TitleExecutive Vice President and |
| Chris Suh | | Chief Financial Officer |
| | |
| | |
| /s/ Eric Kelly | | Vice President and |
| Eric Kelly | | Chief Accounting Officer |
| | |
| | |
| Directors: | | |
| /s/ Andrew Wilson | | Chair of the Board |
| Andrew Wilson | | |
| | |
/s/ Andrew WilsonKofi A. Bruce | | Chief Executive OfficerDirector |
Andrew WilsonKofi A. Bruce | | |
| | |
/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. HoagRachel A. Gonzalez | | Director |
Jay C. HoagRachel A. Gonzalez | | |
| | |
| /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 | | |