Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2017September 30, 2018
OR
 
¨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)
Delaware94-2838567
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
209 Redwood Shores Parkway
Redwood City, California
94065
(Address of principal executive offices)(Zip Code)
(650) 628-1500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  þ    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  þ    NO  ¨
Indicate by check mark 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.
Large accelerated filerþAccelerated filer                   ¨
Non-accelerated filer¨Smaller reporting company ¨
Emerging growth company    
¨

(Do not check if a smaller reporting company)
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. ¨  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  þ
As of FebruaryNovember 2, 2018, there were 306,727,995302,128,696 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

ELECTRONIC ARTS INC.
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2017SEPTEMBER 30, 2018
Table of Contents
 
  Page
Part I - FINANCIAL INFORMATION
 
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
 
 
Condensed Consolidated Balance Sheets as of December 31, 2017September 30, 2018 and March 31, 20172018
3
 
Condensed Consolidated Statements of Operations for the Three and NineSix Months Ended December 31,September 30, 2018 and 2017 and 2016
4
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and NineSix Months Ended December 31,September 30, 2018 and 2017 and 2016
5
 
Condensed Consolidated Statements of Cash Flows for the NineSix Months Ended December 31,September 30, 2018 and 2017 and 2016
6
 
Notes to Condensed Consolidated Financial Statements
7
 
Report of Independent Registered Public Accounting Firm
2937
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
3038
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
4958
Item 4.
Controls and Procedures
5160
   
Part II - OTHER INFORMATION
 
Item 1.
Legal Proceedings
5261
Item 1A.
Risk Factors
5261
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
6171
Item 3.
Defaults Upon Senior Securities
6171
Item 4.
Mine Safety Disclosures
6171
Item 6.
Exhibits
6171
Exhibit Index
6272
Signature
6272

PART I – FINANCIAL INFORMATION

Item 1.Condensed Consolidated Financial Statements (Unaudited)
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS 
(Unaudited)
(In millions, except par value data)
December 31, 2017 
March 31, 2017 (a)
September 30, 2018 
March 31, 2018 (a)
ASSETS      
Current assets:      
Cash and cash equivalents$2,566
 $2,565
$2,881
 $4,258
Short-term investments2,318
 1,967
1,664
 1,073
Receivables, net of allowances of $231 and $145, respectively886
 359
Receivables, net of allowances of $10 and $165, respectively966
 385
Other current assets196
 308
292
 288
Total current assets5,966
 5,199
5,803
 6,004
Property and equipment, net447
 434
440
 453
Goodwill1,879
 1,707
1,894
 1,883
Acquisition-related intangibles, net81
 8
100
 71
Deferred income taxes, net159
 286
112
 84
Other assets110
 84
101
 89
TOTAL ASSETS$8,642
 $7,718
$8,450
 $8,584
      
LIABILITIES AND STOCKHOLDERS’ EQUITY      
Current liabilities:      
Accounts payable$91
 $87
$168
 $48
Accrued and other current liabilities1,070
 789
907
 821
Deferred net revenue (online-enabled games)1,946
 1,539
574
 1,622
Total current liabilities3,107
 2,415
1,649
 2,491
Senior notes, net992
 990
993
 992
Income tax obligations194
 104
273
 250
Deferred income taxes, net2
 1
1
 1
Other liabilities261
 148
217
 255
Total liabilities4,556
 3,658
3,133
 3,989
Commitments and contingencies (See Note 12)
 
Commitments and contingencies (See Note 13)
 
Stockholders’ equity:      
Common stock, $0.01 par value. 1,000 shares authorized; 307 and 308 shares issued and outstanding, respectively3
 3
Common stock, $0.01 par value. 1,000 shares authorized; 304 and 306 shares issued and outstanding, respectively3
 3
Additional paid-in capital723
 1,049
134
 657
Retained earnings3,455
 3,027
5,199
 4,062
Accumulated other comprehensive loss(95) (19)(19) (127)
Total stockholders’ equity4,086
 4,060
5,317
 4,595
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$8,642
 $7,718
$8,450
 $8,584
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
(a) Derived from audited Consolidated Financial Statements.

ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)Three Months Ended
December 31,		 Nine Months Ended
December 31,		Three Months Ended
September 30,		 Six Months Ended
September 30,
(In millions, except per share data)2017
2016 2017 20162018
2017 2018 2017
Net revenue:              
Product$547
 $649
 $1,829
 $1,753
$623
 $454
 $825
 $1,282
Service and other613
 500
 1,739
 1,565
663
 505
 1,598
 1,126
Total net revenue1,160
 1,149
 3,568
 3,318
1,286
 959
 2,423
 2,408
Cost of revenue:              
Product352
 389
 716
 796
222
 300
 290
 364
Service and other149
 127
 328
 300
196
 89
 343
 179
Total cost of revenue501
 516
 1,044
 1,096
418
 389
 633
 543
Gross profit659
 633
 2,524
 2,222
868
 570
 1,790
 1,865
Operating expenses:              
Research and development329
 285
 985
 870
339
 331
 701
 656
Marketing and sales230
 240
 511
 511
146
 160
 286
 281
General and administrative120
 110
 343
 329
117
 118
 231
 223
Acquisition-related contingent consideration2
 —
 2
 —
Amortization of intangibles1
 2
 4
 5
6
 2
 12
 3
Total operating expenses680
 637
 1,843
 1,715
610
 611
 1,232
 1,163
Operating income (loss)(21) (4) 681
 507
258
 (41) 558
 702
Interest and other income (expense), net5
 (2) 14
 (13)18
 3
 37
 9
Income (loss) before provision for (benefit from) income taxes(16) (6) 695
 494
276
 (38) 595
 711
Provision for (benefit from) income taxes170
 (5) 259
 93
21
 (16) 47
 89
Net income (loss)$(186) $(1) $436
 $401
$255
 $(22) $548
 $622
Earnings (loss) per share:              
Basic$(0.60) $ (0.00)
 $1.41
 $1.33
$0.84
 $(0.07) $1.80
 $2.01
Diluted$(0.60) $ (0.00)
 $1.40
 $1.28
$0.83
 $(0.07) $1.77
 $1.99
Number of shares used in computation:              
Basic308
 303
 309
 302
305
 309
 305
 309
Diluted308
 303
 312
 314
307
 309
 309
 313
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).


ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)Three Months Ended
December 31,		 Nine Months Ended
December 31,		Three Months Ended
September 30,		 Six Months Ended
September 30,
(In millions)2017 2016 2017 20162018 2017 2018 2017
Net income (loss)$(186) $(1) $436
 $401
$255
 $(22) $548
 $622
Other comprehensive income (loss), net of tax:              
Net losses on available-for-sale securities(4) (5) (4) (5)
Net gains on available-for-sale securities1
 —
 1
 —
Net gains (losses) on derivative instruments(6) 31
 (96) 48
3
 (34) 96
 (90)
Foreign currency translation adjustments(12) (17) 24
 (28)3
 32
 (12) 36
Total other comprehensive income (loss), net of tax(22) 9
 (76) 15
7
 (2) 85
 (54)
Total comprehensive income (loss)$(208) $8
 $360
 $416
$262
 $(24) $633
 $568

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)Nine Months Ended
December 31,		Six Months Ended
September 30,
(In millions)2017 20162018 2017
OPERATING ACTIVITIES      
Net income$436
 $401
$548
 $622
Adjustments to reconcile net income to net cash provided by operating activities:   
Adjustments to reconcile net income to net cash provided by (used in) operating activities:   
Depreciation, amortization and accretion97
 140
74
 63
Stock-based compensation173
 144
136
 110
Change in assets and liabilities:      
Receivables, net(527) (367)(422) (454)
Other assets79
 40
20
 66
Accounts payable16
 (6)132
 104
Accrued and other liabilities265
 276
(25) 100
Deferred income taxes, net130
 —
(94) 40
Deferred net revenue (online-enabled games)408
 513
(375) (423)
Net cash provided by operating activities1,077
 1,141
Net cash provided by (used in) operating activities(6) 228
INVESTING ACTIVITIES      
Capital expenditures(87) (94)(63) (63)
Proceeds from maturities and sales of short-term investments1,656
 968
446
 1,050
Purchase of short-term investments(2,012) (1,372)(1,029) (1,395)
Acquisition, net of cash acquired(150) —
(58) —
Net cash used in investing activities(593) (498)(704) (408)
FINANCING ACTIVITIES      
Payment of convertible notes—
 (163)
Proceeds from issuance of common stock57
 33
36
 57
Cash paid to taxing authorities for shares withheld from employees(112) (112)(96) (105)
Repurchase and retirement of common stock(453) (383)(599) (303)
Net cash used in financing activities(508) (625)(659) (351)
Effect of foreign exchange on cash and cash equivalents25
 (28)(8) 33
Increase (decrease) in cash and cash equivalents1
 (10)
Decrease in cash and cash equivalents(1,377) (498)
Beginning cash and cash equivalents2,565
 2,493
4,258
 2,565
Ending cash and cash equivalents$2,566
 $2,483
$2,881
 $2,067
Supplemental cash flow information:      
Cash paid during the period for income taxes, net$46
 $51
$78
 $28
Cash paid during the period for interest21
 23
21
 21
Non-cash investing activities:   
Change in accrued capital expenditures$(13) $(16)

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
We are a global leader in digital interactive entertainment.entertainment, with a mission to inspire the world to play. We develop, market, publish and deliverdistribute games, content and online services that can be played by consumers on a variety of platforms which includeincluding game consoles, PCs, mobile phones and tablets. In our games and services, we use established brands that we either wholly own (such as Battlefield, Mass Effect, Need for Speed, The Sims, and Plants v. Zombies)Zombies and Titanfall) or license from others (such as FIFA, Madden NFL and Star Wars). We alsodevelop and publish games and distribute games developed by third parties.services across diverse genres such as sports, first-person shooter, action, role-playing and simulation.
Our fiscal year is reported on a 52- or 53-week period that ends on the Saturday nearest March 31. Our results of operations for the fiscal year ending March 31, 20182019 contains 52 weeks and ends on March 31, 2018.30, 2019. Our results of operations for the fiscal year ended March 31, 20172018 contained 52 weeks and ended on April 1, 2017.March 31, 2018. Our results of operations for the three months ended December 31,September 30, 2018 and 2017 and 2016 contained 13 weeks each and ended on DecemberSeptember 29, 2018 and September 30, 2017, and December 31, 2016, respectively. Our results of operations for the ninesix months ended December 31,September 30, 2018 and 2017 and 2016 contained 3926 weeks each and ended on DecemberSeptember 29, 2018 and September 30, 2017, and December 31, 2016, respectively. For simplicity of disclosure, all fiscal periods are referred to as ending on a calendar month end.
The Condensed Consolidated Financial Statements are unaudited and reflect all adjustments (consisting only of normal recurring accruals unless otherwise indicated) that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The preparation of these Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the amounts reported in these Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates. The results of operations for the current interim periods are not necessarily indicative of results to be expected for the current year or any other period.
These Condensed Consolidated Financial Statements should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 20172018, as filed with the United States Securities and Exchange Commission (“SEC”) on May 24, 201723, 2018.
Reclassifications
Certain prior year amounts were reclassified to conform to current year presentation.
Recently Adopted Accounting Standards
We adopted Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, at the beginning of fiscal year 2018. We reflectedexcess tax benefits of $40 million for the nine months ended December 31, 2017 in the Condensed Consolidated Statement of Income as a component of the provision for income taxes, whereas for the three and nine months ended December 31, 2016 they were recognized in additional paid-in-capital in the Condensed Consolidated Balance Sheets. The impact was immaterial for the three months ended December 31, 2017.

The pronouncement also resulted in two changes to our cash flow presentation, which we applied retrospectively for comparability. Excess tax benefits are now presented as operating activities rather than financing activities, and cash payments to tax authorities in connection with shares withheld to meet statutory tax withholding requirements are now presented as a financing activity instead of an operating activity. The net increase to our reported net cash provided by operating activities and corresponding increase to cash used in financing activities resulting from the adoption of ASU 2016-09 for the nine months ended December 31, 2017 and 2016 are as follows:
 Nine months ended December 31,
(In millions):2017 2016
Excess tax benefits from stock-based compensation$40
 $53
Cash paid to taxing authorities for shares withheld from employees112
 112
Increase to net cash provided by operating activities and net cash used in financing activities$152
 $165

Impact of Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09,the Accounting Standards Codification (“ASC”) Topic 606, Revenue fromFrom Contracts with Customers (Topic 606), (the “New Revenue Standard” or “ASC 606”), which will replace existing guidance under U.S. GAAP,replaced ASC Topic 605, Revenue Recognition (the “Old Revenue Standard” or “ASC 605”), including industry-specific requirements, and will provideprovided companies with a single principles-based revenue recognition model for recognizing revenue from contracts with customers. The core principle of the New Revenue Standard is that a company should recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. In addition, the FASB has issued several amendments to the New Revenue Standard, including principal versus agent considerations, clarifications on identification of performance obligations, and accounting for licenses of intellectual property. The amendments are intended to address implementation issues that were raised by stakeholders and provide additional practical expedients to reduce the cost and complexity of adoption.
The New Revenue Standard is effective for us beginning in the first quarter of fiscal year 2019 and permits the use of either the full retrospective or modified retrospective transition methods. We anticipate adoptingadopted the New Revenue Standard on April 1, 2018, the beginning of fiscal year 2019, using the modified retrospective method, which recognizes the cumulative effect of initially applyingmethod. 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 adjustmentincrease to retained earnings of $590 million, net of tax, and included the impact from the following adjustments to our Condensed Consolidated Balance Sheet at the adoption date. We have reached conclusions on several key accounting assessments related toApril 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, net84
 (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 and have identified certain impacts to our Condensed Consolidated Financial Statements.were:

The New Revenue Standard will have a significant impact on our Condensed Consolidated Financial Statements and related disclosures as it relates to the accounting for substantially all of our transactions withas multiple elements or “bundled” arrangements. For example, for sales of online-enabled games, as currently reportedarrangements. Under prior software revenue recognition accounting standards, because we dodid 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 thus, revenue fromtherefore, the entire sales price isof most transactions that had multiple performance obligations was recognized ratably over the estimated offering period. However, underperiod we expected to provide the future updates and/or online hosting performance obligations (the “Estimated Offering Period”). Under the New Revenue Standard, thethis VSOE requirement for undelivered elements iswas eliminated allowingand was replaced with a requirement for us to essentially “break-apart”determine our online-enabled gamesbest 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 the various promised goods or services identified as separate performance obligations.obligations separately.

For example, for thean individual sale of an online-enableda game with both online and offline functionality, we usuallytypically have multiplethree distinct performance obligations such asobligations; (1) the software license; (2) a right to receive future update rights,updates; and an(3) online service.hosting. The software license performance obligation represents the initial game that is delivered digitally or via physical disc.disc at the time of sale and typically provides access to offline core game content. The future update rights performance obligation may includeincludes updates on a when-and-if-available basis such as software patches or updates, maintenance, and/or additional free content to be delivered in the future. And lastly, theThe online servicehosting performance obligation consists of providing the customer with a service ofhosted connection for online activities (e.g., online playability). Under current software revenue recognition rules,playability.

Since we recognize as revenuedo not sell the entire salesperformance obligations on a stand-alone basis, we consider market conditions and other observable inputs to estimate the stand-alone selling price over the estimated offering period. However,for each performance obligation. For games with services under the New Revenue Standard, we currently estimate that a significant portiongenerally 75 percent of the sales price will beis 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 portion will be25 percent is allocated to the future update rights and the online servicehosting performance obligations and recognized ratably over the estimated offering period. As a result, we expect a significant portion ofEstimated Offering Period. For sales prior to April 1, 2018, our annualdeferred revenue and thereby annual profit, will shift from the first and fourth fiscal quarters to the second and third fiscal quarters which is historically when a significant portion of our annual bookings and software deliveries have been made. Further, we expect the net cumulative effect adjustmentbalances decreased by $740 million upon adoption to result in a pre-tax increase to retained earnings in the range of $600 million to $800 million. The range is based on our actual results through the third quarter of fiscal 2018 and our forecast of sales activity during the fourth quarter of fiscal 2018. These initial estimates will continue to be refined as we approach the adoption of the New Revenue Standard.Standard because the software license performance obligation had been delivered in the prior fiscal year.
In addition,
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 revenue balances. Mobile platform fees for the three and six months ended September 30, 2018 were $44 million and $93 million, respectively, and accordingly increased both portions

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 services will be classifiedhosting performance obligations are presented as service revenue under the New Revenue Standard (currently,(previously, revenue associated with future update rights arewere generally presented as product revenue). Therefore, upon adoption, an increased portionfor the three and six months ended September 30, 2018, approximately $102 million and $288 million, respectively, of our sales from online-enabled games will berevenue for future update rights are now presented as service revenue than is currently reported today. Also, upon adoption ofunder the New Revenue Standard a substantial majority ofas compared to product revenue under the Old Revenue Standard.

Sales returns and price protection reserves. Upon adoption, our sales returns and price protection reserves will be classified asare now presented within accrued and other liabilities (currently,(previously, these allowances are classifiedwere presented as contra-assets within receivables on our Condensed Consolidated Balance Sheets). We reclassified $158 million of sales returns and price protection reserves on April 1, 2018.

We expect to further refine our estimateThe adoption of the impact toNew Revenue Standard impacted our consolidated financial statements duringCondensed Consolidated Balance Sheet as of September 30, 2018 and our Condensed Consolidated Statement of Operations for the fourth quarterthree and six months ended September 30, 2018 as follows:
 
As of
September 30, 2018
BALANCE SHEETS
(In millions)
Under New Revenue Standard Under Old Revenue Standard $ Change
Assets     
Receivables, net$966
 $858
 $108
Other current assets292
 288
 4
Deferred income taxes, net112
 151
 (39)
Other assets101
 89
 12
      
Liabilities     
Accrued and other current liabilities     
Sales return and price protection reserves$108
 $—
 $108
Deferred net revenue (other)113
 157
 (44)
Deferred net revenue (online-enabled games)574
 1,120
 (546)
Other liabilities217
 218
 (1)
      
Stockholders’ Equity     
Retained earnings$5,199
 $4,625
 $574
Accumulated other comprehensive loss(19) (13) (6)



 Three Months Ended
September 30, 2018
(In millions, except per share data)Under New Revenue Standard Under Old Revenue Standard $ Change % Change
Net revenue:       
Product$623
 $437
 $186
 43 %
Service and other663
 517
 146
 28 %
Total net revenue1,286
 954
 332
 35 %
Cost of revenue:       
Product222
 280
 (58) (21)%
Service and other196
 94
 102
 109 %
Total cost of revenue418
 374
 44
 12 %
Gross profit868
 580
 288
 50 %
Operating expenses:       
Total operating expenses610
 610
 —
 — %
Operating income (loss)258
 (30) 288
 (960)%
Interest and other income (expense), net18
 18
 —
 — %
Income (loss) before provision for income taxes276
 (12) 288
 (2,400)%
Provision for income taxes21
 7
 14
 200 %
Net income (loss)$255
 $(19) $274
 (1,442)%
Earnings (loss) per share:       
Basic$0.84
 $(0.06) $0.90
 (1,500)%
Diluted$0.83
 $(0.06) $0.89
 (1,483)%

 Six Months Ended
September 30, 2018
(In millions, except per share data)Under New Revenue Standard Under Old Revenue Standard $ Change % Change
Net revenue:       
Product$825
 $1,153
 $(328) (28)%
Service and other1,598
 1,217
 381
 31 %
Total net revenue2,423
 2,370
 53
 2 %
Cost of revenue:       
Product290
 358
 (68) (19)%
Service and other343
 182
 161
 88 %
Total cost of revenue633
 540
 93
 17 %
Gross profit1,790
 1,830
 (40) (2)%
Operating expenses:       
Total operating expenses1,232
 1,232
 —
 — %
Operating income558
 598
 (40) (7)%
Interest and other income (expense), net37
 37
 —
 — %
Income before provision for income taxes595
 635
 (40) (6)%
Provision for income taxes47
 71
 (24) (34)%
Net income$548
 $564
 $(16) (3)%
Earnings per share:       
Basic$1.80
 $1.85
 $(0.05) (3)%
Diluted$1.77
 $1.83
 $(0.06) (3)%

The adoption of the New Revenue Standard accelerated the revenue recognition of prior period game sales into retained earnings, which will result in a one-time increase in cash taxes paid on our Condensed Consolidated Statement of Cash Flows for the fiscal year 2018. We will continueending March 31, 2019.

Refer to monitor additional changes, modifications, clarifications or interpretations by the SEC, which may impact current expectations. It is possible that during the fourth quarterfollowing sections of fiscal year 2018, we could identify items that result in additional material changes to our Condensed Consolidated Financial Statements.Statements for the additional disclosures required by the New Revenue Standard:

In January 2016,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 FASB issued ASU 2016-01, Financial Instruments (Topic 825-10), which requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. The ASU also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The requirements will be effective for us beginning in the first quarter of fiscal year 2019. We do not expect the adoption to haveended March 31, 2018.
See Note 10 — Balance Sheet Details, for a material impactdiscussion on our Condensed Consolidated Financial Statements.contract liabilities (“deferred net revenue”) and our remaining performance obligations. We had an immaterial amount of contract assets as of April 1, 2018 and September 30, 2018.

In March 2016, the FASB issued ASU 2016-04,See Note 16 — Liabilities – Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products. The amendments in the ASU are designed to provide guidance and eliminate diversity in the accounting for derecognition of prepaid stored-value product liabilities. Typically, a prepaid stored-value product liability is to be derecognized when it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. This is when the likelihood of the product holder exercising its remaining rights becomes remote. This estimate shall be updated at the end of each period. The amendments in this ASU are effective for us beginning in the first quarter of fiscal year 2019. Early adoption is permitted. We do not expect the adoption to have a material impact on our Condensed 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. This update is effective for us beginning in the first quarter of fiscal year 2019. Early adoption is permitted, provided that all of the amendments are adopted in the same period. We do not expect the adoption to have a material impact on our Condensed 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)Segment Information, 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 statementfor our disaggregations of cash flows. This update is effective for us beginning in the first quarter of fiscal year 2019. Early adoption is permitted. We do not expect the adoption to have a material impact on our Condensed Consolidated Financial Statements.revenue.
Other Recently Issued Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this standard to increase transparency and comparability among organizations by recognizing leaseright-of-use assets and lease 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 entities 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 anticipate adopting this standard using this optional transition method beginning in the first quarter of fiscal year 2020, when the updated guidance is effective for us.us, and accordingly, we will not adjust prior periods for the effects of the new lease standard. We are currently evaluating the impact of this new standard on our Condensed Consolidated Financial Statements, but expect it to have a significant impact to our consolidated balance sheet as a result of establishing right-of-use assets and related disclosures.lease liabilities for our operating leases.

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 also amends the presentation and disclosure requirements and changes how companies assess effectiveness. This update is effective for us beginning in the first quarter of fiscal year 2020. Early adoption is permitted. We are currently evaluating the timing of adoption and impact of this new standard on our Condensed Consolidated Financial Statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses(Topic (Topic 326). The standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for us beginning in the first quarter of fiscal year 2021. Early adoption is permitted beginning in the first quarter of fiscal year 2020. We are currently evaluating the timing of adoption and impact of this new standard on our Condensed Consolidated Financial Statements and related disclosures.

In January 2017,August 2018, the FASB issued ASU 2017-04,2018-13, Intangibles—Goodwill and OtherFair Value Measurement (Topic 350). The standard simplifies(Topic 820): Disclosure Framework—Changes to the goodwill impairment test.Disclosure Requirements for Fair Value Measurement. This update removes Step 2 ofchanges the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value however,measurement disclosure requirements. It summarizes the loss recognized should not exceedkey provisions including the total amount of goodwill allocated to that reporting unit.new, eliminated, and modified disclosure requirements. This update is effective for us beginning in the first quarter of fiscal year 2021. Early adoption is permitted for any impairment tests performed after January 1, 2017.permitted. We anticipate early adopting ASU 2017-04 duringare currently evaluating the fourth quartertiming of fiscal year 2018. We do not expect the adoption to have a materialand impact of this new standard on our Condensed Consolidated Financial Statements.Statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). This update requires a customer in a cloud computing service arrangement to follow the internal-use software
guidance in order to determine which implementation costs to defer and recognize as an asset. This update is effective for us beginning in the first quarter of fiscal year 2021. Early adoption is permitted. We are currently evaluating the timing of adoption and impact of this new standard on our Condensed Consolidated Financial Statements and related disclosures.


(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

As discussed in Note 1 — Description of Business and Basis of Presentation, we adopted the New Revenue Standard on April 1, 2018. Other than adoption of this New Revenue Standard, there were no significant changes to our accounting policies during the six months ended September 30, 2018. Refer to Note 1 — Description of Business and Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the year ended March 31, 2018 for a summary of our other significant accounting policies.
Revenue Recognition
We derive revenue principally from sales of our games, and related extra-content and services that can be played by customers on a variety of platforms which include game consoles, PCs, mobile phones and tablets. 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 and EA Access, that generally offers access to a selection of full games, in-game content, online services and other benefits typically for a recurring monthly or annual fee; and

licensing 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.

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”).

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 portion of the transaction price allocated to the software license, revenue is recognized when control of the license has been transferred to the customer. For the portion of the transaction price allocated to the future update rights and the online hosting, revenue is recognized as the services are provided.


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 to our customers to enhance their gameplay 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.

Subscriptions

Revenue from subscriptions is recognized over the subscription term as the service is provided.

Licensing Revenues
In certain countries, we utilize third-party licensees to distribute and host our games 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.


(2)Allocating the transaction price. Allocating the transaction price requires that we determine an estimate of the relative stand-alone selling price for each distinct performance obligation. Determining the relative stand-alone selling price is inherently subjective, especially in situations where we do not sell the performance obligation on a stand-alone basis (which occurs in the majority of our transactions). In those situations, we determine the relative stand-alone selling price based on various observable inputs using all information that is reasonably available. Examples of observable inputs and information include: historical internal pricing data, cost plus margin analyses, third-party external pricing of similar or same products and services such as software licenses and maintenance support within the enterprise software industry. The results of our analysis resulted in a specific percentage of the transaction price being allocated to each performance obligation.

Determining the Estimated Offering Period. The offering period is the period in which we offer to provide the future update rights and/or online hosting for the game and related extra content sold. Because the offering period is not an explicitly defined period, we must make an estimate of the offering period for the service related performance obligations (i.e., future update rights and online hosting). Determining the Estimated Offering Period is inherently subjective and is subject to regular revision. Generally, we consider the average period of time customers are online when estimating the offering period. We also consider the estimated period of time between the date a game unit is sold to a reseller and the date the reseller sells the game unit to the customer (i.e., time in channel). Based on these two factors, we then consider the method of distribution. For example, games sold at retail would have a composite offering period equal to the online gameplay period plus time in channel as opposed to digitally-distributed software licenses which are delivered immediately via digital download and therefore, the offering period is estimated to be only the online gameplay period.

Additionally, we consider results from prior analyses, known and expected online gameplay trends, as well as disclosed service periods for competitors’ games in determining the Estimated Offering Period for future sales.We believe this provides a reasonable depiction of the transfer of future update rights and online hosting to our customers, as it is the best representation of the time period during which our games are played. We recognize revenue for future update rights and online hosting performance obligations ratably on a straight-line basis over this period as there is a consistent pattern of delivery for these performance obligations. These performance obligations are generally recognized over an estimated nine-month period beginning in the month after shipment for software licenses sold through retail and an estimated six-month period for digitally-distributed software licenses.

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.

(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 December 31, 2017September 30, 2018 and March 31, 20172018, 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 
  
  Fair Value Measurements at Reporting Date Using 
  
  
Quoted Prices in
Active Markets 
for Identical
Financial
Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
    
Quoted Prices in
Active Markets 
for Identical
Financial
Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
  
As of
December 31,
2017		 (Level 1) (Level 2) (Level 3) Balance Sheet ClassificationAs of
September 30, 2018		 (Level 1) (Level 2) (Level 3) Balance Sheet Classification
Assets                
Bank and time deposits$299
 $299
 $—
 $—
 Cash equivalents$24
 $24
 $—
 $—
 Cash equivalents
Money market funds563
 563
 —
 —
 Cash equivalents1,138
 1,138
 —
 —
 Cash equivalents
Available-for-sale securities:                
Corporate bonds1,258
 —
 1,258
 —
 Short-term investments and cash equivalents762
 

 762
 —
 Short-term investments and cash equivalents
U.S. Treasury securities446
 446
 —
 —
 Short-term investments281
 281
 —
 —
 Short-term investments and cash equivalents
U.S. agency securities118
 —
 118
 —
 Short-term investments and cash equivalents73
 —
 73
 —
 Short-term investments
Commercial paper341
 —
 341
 —
 Short-term investments and cash equivalents392
 —
 392
 —
 Short-term investments and cash equivalents
Foreign government securities100
 —
 100
 —
 Short-term investments and cash equivalents79
 —
 79
 —
 Short-term investments
Asset-backed securities134
 —
 134
 —
 Short-term investments121
 —
 121
 —
 Short-term investments
Certificates of deposit22
 —
 22
 —
 Short-term investments21
 —
 21
 —
 Short-term investments
Foreign currency derivatives8
 —
 8
 —
 Other current assets and other assets49
 —
 49
 —
 Other current assets and other assets
Deferred compensation plan assets (a)
10
 10
 —
 —
 Other assets12
 12
 —
 —
 Other assets
Total assets at fair value$3,299
 $1,318
 $1,981
 $—
 $2,952
 $1,455
 $1,497
 $—
 
Liabilities                
Contingent consideration (b)
$122
 $—
 $—
 $122
 Other liabilities$124
 $—
 $—
 $124
 
Accrued and other current liabilities and other liabilities

Foreign currency derivatives41
 —
 41
 —
 Accrued and other current liabilities and other liabilities10
 —
 10
 —
 Accrued and other current liabilities and other liabilities
Deferred compensation plan liabilities (a)
11
 11
 —
 —
 Other liabilities12
 12
 —
 —
 Other liabilities
Total liabilities at fair value$174
 $11
 $41
 $122
 $146
 $12
 $10
 $124
 

   
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
  
       
Contingent
Consideration
  
Balance as of March 31, 2017      $—
  
Additions      122
  
Balance as of December 31, 2017      $122
  
   
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
  
       
Contingent
Consideration
  
Balance as of March 31, 2018      $122
  
Additions      —
  
Change in fair value (c)
      2
  
Balance as of September 30, 2018      $124
  

 
  Fair Value Measurements at Reporting Date Using 
  
  Fair Value Measurements at Reporting Date Using 
  
  
Quoted Prices in
Active Markets 
for Identical
Financial
Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
    
Quoted Prices in
Active Markets 
for Identical
Financial
Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
  
As of
March 31,
2017		 (Level 1) (Level 2) (Level 3) Balance Sheet ClassificationAs of March 31, 2018 (Level 1) (Level 2) (Level 3) Balance Sheet Classification
Assets                
Bank and time deposits$233
 $233
 $—
 $—
 Cash equivalents$286
 $286
 $—
 $—
 Cash equivalents
Money market funds405
 405
 —
 —
 Cash equivalents1,876
 1,876
 —
 —
 Cash equivalents
Available-for-sale securities:                
Corporate bonds963
 —
 963
 —
 Short-term investments and cash equivalents624
 —
 624
 —
 Short-term investments
U.S. Treasury securities460
 460
 —
 —
 Short-term investments and cash equivalents210
 210
 —
 —
 Short-term investments
U.S. agency securities172
 —
 172
 —
 Short-term investments and cash equivalents78
 —
 78
 —
 Short-term investments
Commercial paper270
 —
 270
 —
 Short-term investments and cash equivalents150
 —
 150
 —
 Short-term investments and cash equivalents
Foreign government securities113
 —
 113
 —
 Short-term investments52
 —
 52
 —
 Short-term investments
Asset-backed securities135
 —
 135
 —
 Short-term investments
Certificates of Deposit2
 —
 2
 —
 Cash equivalents
Foreign currency derivatives19
 —
 19
 —
 Other current assets and other assets4
 —
 4
 —
 Other current assets and other assets
Deferred compensation plan assets (a)
8
 8
 —
 —
 Other assets10
 10
 —
 —
 Other assets
Total assets at fair value$2,778
 $1,106
 $1,672
 $—
 $3,292
 $2,382
 $910
 $—
 
Liabilities                
Contingent consideration (b)
$122
 $—
 $—
 $122
 Other liabilities
Foreign currency derivatives$8
 $—
 $8
 $—
 Accrued and other current liabilities and other liabilities56
 —
 56
 —
 Accrued and other current liabilities and other liabilities
Deferred compensation plan liabilities (a)
9
 9
 —
 —
 Other liabilities11
 11
 —
 —
 Other liabilities
Total liabilities at fair value$17
 $9
 $8
 $—
 $189
 $11
 $56
 $122
 

(a)
The Deferred Compensation Plan assets consist of various mutual funds. See Note 1314 in our Annual Report on Form 10-K for the fiscal year ended March 31, 20172018, 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 the 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. TheAt September 30, 2018, the discount rates used ranged from 2.73.3 percent to 3.7 percent. At March 31, 2018, the discount rates used ranged from 3.3 percent to 3.6 percent. See Note 6 in our Annual Report on Form 10-K for the fiscal year ended March 31, 2018, for additional information regarding the Respawn acquisition.

(c)The change in fair value is reported as acquisition-related contingent consideration in our Condensed Consolidated Statements of Operations.


(3)(4) FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
As of December 31, 2017September 30, 2018 and March 31, 2017,2018, our cash and cash equivalents were $2,566$2,881 million and $2,565$4,258 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 December 31, 2017September 30, 2018 and March 31, 20172018 (in millions): 
As of December 31, 2017 As of March 31, 2017As of September 30, 2018 As of March 31, 2018
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$1,212
 $—
 $(3) $1,209
 $944
 $—
 $(1) $943
$739
 $—
 $(3) $736
 $629
 $—
 $(5) $624
U.S. Treasury securities448
 —
 (2) 446
 414
 —
 (1) 413
279
 —
 (2) 277
 212
 —
 (2) 210
U.S. agency securities117
 —
 (2) 115
 152
 —
 (1) 151
74
 —
 (1) 73
 79
 —
 (1) 78
Commercial paper294
 —
 —
 294
 212
 —
 —
 212
357
 —
 —
 357
 109
 —
 —
 109
Foreign government securities

98
 —
 —
 98
 113
 —
 —
 113
80
 —
 (1) 79
 53
 —
 (1) 52
Asset-backed securities135
 —
 (1) 134
 135
 —
 —
 135
121
 —
 —
 121
 —
 —
 —
 —
Certificates of deposit22
 —
 —
 22
 —
 —
 —
 —
21
 —
 —
 21
 —
 —
 —
 —
Short-term investments$2,326
 $—
 $(8) $2,318
 $1,970
 $—
 $(3) $1,967
$1,671
 $—
 $(7) $1,664
 $1,082
 $—
 $(9) $1,073
The following table summarizes the amortized cost and fair value of our short-term investments, classified by stated maturity as of December 31, 2017September 30, 2018 and March 31, 20172018 (in millions): 
As of December 31, 2017 As of March 31, 2017As of September 30, 2018 As of March 31, 2018
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Short-term investments              
Due within 1 year$1,598
 $1,596
 $1,237
 $1,236
$1,218
 $1,216
 $521
 $520
Due 1 year through 5 years725
 719
 721
 719
451
 446
 561
 553
Due after 5 years3
 3
 12
 12
2
 2
 —
 —
Short-term investments$2,326
 $2,318
 $1,970
 $1,967
$1,671
 $1,664
 $1,082
 $1,073

(4)(5) DERIVATIVE FINANCIAL INSTRUMENTS
The assets 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 Condensed Consolidated Balance Sheets. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on the use of the derivative instrument and whether it is designated and qualifies for hedge accounting.
We transact business in various foreign currencies and have significant international sales and expenses denominated in foreign currencies, subjecting us to foreign currency risk. We purchase foreign currency forward contracts, generally with maturities of 18 months or less, to reduce the volatility of cash flows primarily related to forecasted revenue and expenses denominated in certain foreign currencies. Our cash flow risks are primarily related to fluctuations in the Euro, British pound sterling, Canadian dollar, Swedish krona, Australian dollar, Chinese yuan and South Korean won. 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 Condensed 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 Condensed 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 Condensed 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 interest and other income (expense), net, in our Condensed 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 December 31, 2017 As of March 31, 2017As of September 30, 2018 As of March 31, 2018
Notional Amount Fair Value Notional Amount Fair ValueNotional Amount Fair Value Notional Amount Fair Value
 Asset Liability Asset Liability Asset Liability Asset Liability
Forward contracts to purchase$209
 $5
 $1
 $185
 $—
 $5
$236
 $1
 $7
 $329
 $2
 $4
Forward contracts to sell$985
 $1
 $33
 $840
 $19
 $3
$1,453
 $48
 $—
 $1,575
 $1
 $48
The net impact of the effective portion of gains and losses from our cash flow hedging activities in our Condensed Consolidated Statements of Operations was a loss of $8$1 million and a gain of $5 million for the three months ended December 31,September 30, 2018 and 2017, and a gain of $8 million for the three months ended December 31, 2016.respectively.
The net impact of the effective portion of gains and losses from our cash flow hedging activities in our Condensed Consolidated Statements of Operations was a gainloss of $14$16 million for the nine months ended December 31, 2017 and a gain of $18$22 million for the ninesix months ended December 31, 2016.

The amount excluded from the assessment of hedge effectiveness during the three months ended December 31,September 30, 2018 and 2017, and 2016 and recognized in interest and other income (expense), net, was immaterial.respectively.
The amount excluded from the assessment of hedge effectiveness was a gain of $7 million forduring the ninethree months ended December 31, 2017September 30, 2018 and recognized in interest and other income (expense), net. The amount excluded from the assessment of hedge effectiveness was immaterial for the ninethree months ended December 31, 2016.September 30, 2017.
The amount excluded from the assessment of hedge effectiveness was a gain of $14 million and $5 million during the six months ended September 30, 2018 and 2017, respectively, and recognized in interest and other income (expense), net.
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 Condensed 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 Condensed 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 Condensed 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 December 31, 2017 As of March 31, 2017As of September 30, 2018 As of March 31, 2018
Notional Amount Fair Value Notional Amount Fair ValueNotional Amount Fair Value Notional Amount Fair Value
 Asset Liability Asset Liability Asset Liability Asset Liability
Forward contracts to purchase$354
 $1
 $—
 $87
 $—
 $—
$233
 $—
 $—
 $210
 $1
 $1
Forward contracts to sell$785
 $1
 $7
 $166
 $—
 $—
$565
 $—
 $3
 $257
 $—
 $3
The effect of foreign currency forward contracts not designated as hedging instruments in our Condensed Consolidated Statements of Operations for the three and ninesix months ended December 31,September 30, 2018 and 2017 and 2016, was as follows (in millions):
 Statement of Operations Classification Amount of Gain (Loss) Recognized in the Statement of Operations
 Three Months Ended
December 31,		 Nine Months Ended
December 31,
 2017 2016 2017 2016
Foreign currency forward contracts not designated as hedging instrumentsInterest and other income (expense), net $(4) $49
 $(13) $50
 Statement of Operations Classification Amount of Gain (Loss) Recognized in the Statement of Operations
 Three Months Ended
September 30,		 Six Months Ended
September 30,
 2018 2017 2018 2017
Foreign currency forward contracts not designated as hedging instrumentsInterest and other income (expense), net $(5) $(3) $4
 $(9)


(5)(6) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The changes in accumulated other comprehensive income (loss) by component, net of tax, for the three months ended December 31,September 30, 2018 and 2017 and 2016 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 TotalUnrealized Net Gains (Losses) on Available-for-Sale Securities Unrealized Net Gains (Losses) on Derivative Instruments Foreign Currency Translation Adjustments Total
Balances as of September 30, 2017$(3) $(58) $(12) $(73)
Balances as of June 30, 2018$(8) $27
 $(45) $(26)
Other comprehensive income (loss) before reclassifications(4) (14) (12) (30)1
 2
 3
 6
Amounts reclassified from accumulated other comprehensive income (loss)—
 8
 —
 8
—
 1
 —
 1
Total other comprehensive income (loss), net of tax

(4) (6) (12) (22)1
 3
 3
 7
Balance as of December 31, 2017$(7) $(64) $(24) $(95)
Balances as of September 30, 2018$(7) $30
 $(42) $(19)
Unrealized Net Gains (Losses) on Available-for-Sale Securities Unrealized Net Gains (Losses) on Derivative Instruments Foreign Currency Translation Adjustments TotalUnrealized Net Gains (Losses) on Available-for-Sale Securities Unrealized Net Gains (Losses) on Derivative Instruments Foreign Currency Translation Adjustments Total
Balances as of September 30, 2016$1
 $31
 $(42) $(10)
Balances as of June 30, 2017$(3) $(24) $(44) $(71)
Other comprehensive income (loss) before reclassifications(5) 39
 (17) 17
—
 (29) 32
 3
Amounts reclassified from accumulated other comprehensive income (loss)—
 (8) —
 (8)—
 (5) —
 (5)
Total other comprehensive income (loss), net of tax

(5) 31
 (17) 9
—
 (34) 32
 (2)
Balance as of December 31, 2016$(4) $62
 $(59) $(1)
Balances as of September 30, 2017$(3) $(58) $(12) $(73)

The changes in accumulated other comprehensive income (loss) by component, net of tax, for the ninesix months ended December 31,September 30, 2018 and 2017 and 2016 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 TotalUnrealized 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, 2017$(3) $32
 $(48) $(19)
Balances as of March 31, 2018$(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(4) (82) 34
 (52)1
 80
 (12) 69
Amounts reclassified from accumulated other comprehensive income (loss)—
 (14) (10) (24)—
 16
 —
 16
Total other comprehensive income (loss), net of tax

(4) (96) 24
 (76)1
 96
 (12) 85
Balance as of December 31, 2017$(7) $(64) $(24) $(95)
Balances as of September 30, 2018$(7) $30
 $(42) $(19)

Unrealized Net Gains (Losses) on Available-for-Sale Securities Unrealized Net Gains (Losses) on Derivative Instruments Foreign Currency Translation Adjustments TotalUnrealized 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) $(16)
Balances as of March 31, 2017$(3) $32
 $(48) $(19)
Other comprehensive income (loss) before reclassifications(4) 66
 (28) 34
—
 (68) 46
 (22)
Amounts reclassified from accumulated other comprehensive income (loss)(1) (18) —
 (19)—
 (22) (10) (32)
Total other comprehensive income (loss), net of tax

(5) 48
 (28) 15
—
 (90) 36
 (54)
Balance as of December 31, 2016$(4) $62
 $(59) $(1)
Balances as of September 30, 2017$(3) $(58) $(12) $(73)

The effects on net income of amounts reclassified from accumulated other comprehensive income (loss) for the three and six months ended September 30, 2018 were as follows (in millions):
 
Amount Reclassified From Accumulated Other Comprehensive Income (Loss)
Statement of Operations Classification
Three Months Ended
September 30, 2018
Six Months Ended
September 30, 2018
(Gains) losses on cash flow hedges from forward contracts    
Net revenue
$(2)
$12
Research and development
3

4
Total net (gain) loss reclassified, net of tax $1
 $16

The effects on net income of amounts reclassified from accumulated other comprehensive income (loss) for the three and ninesix months ended December 31,September 30, 2017 were as follows (in millions):
 
Amount Reclassified From Accumulated Other Comprehensive Income (Loss)
Statement of Operations Classification
Three Months Ended
December 31, 2017
Nine Months Ended
December 31, 2017
(Gains) losses on cash flow hedges from forward contracts    
Net revenue
$9

$(13)
Research and development
(1)
(1)
Total, net of tax $8
 $(14)
     
(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 $8
 $(24)

The effects on net income of amounts reclassified from accumulated other comprehensive income (loss) for the three and nine months ended December 31, 2016 were as follows (in millions):
 Amount Reclassified From Accumulated Other Comprehensive Income (Loss)
Amount Reclassified From Accumulated Other Comprehensive Income (Loss)
Statement of Operations Classification Three Months Ended
December 31, 2016		 Nine Months Ended
December 31, 2016
Three Months Ended
September 30, 2017
Six Months Ended
September 30, 2017
(Gains) losses on available-for-sale securities    
Interest and other income (expense), net $—
 $(1)
Total, net of tax $—
 $(1)
    
(Gains) losses on cash flow hedges from forward contracts        
Net revenue $(9) $(18)
$(3)
$(22)
Research and development 1
 —

(2)
—
Total, net of tax $(8) $(18) $(5) $(22)
        
(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 $(8) $(19) $(5) $(32)

(6)(7)  BUSINESS COMBINATIONS
Respawn Entertainment, LLC
GameFly Cloud Gaming

On December 1, 2017,May 3, 2018, we completed our acquisitionacquired cloud gaming technology assets and personnel from a wholly-owned subsidiary of Respawn Entertainment, LLCGameFly, Inc. based in Israel (“Respawn”GameFly Cloud Gaming”), a leading game development studio and creators of games including the critically-acclaimed Titanfall franchise. The for total purchase price was $273 million, which consisted of $151 million in cash and the acquisition date fair value of contingent consideration of $122$50 million. The purchase price was preliminarily allocated to Respawn’sthe acquired net tangible and intangible assets based uponon their estimated fair values as of December 1, 2017,May 3, 2018, resulting in $167$43 million being preliminarilyallocated to intangible assets, and $7 million allocated to goodwill that consists largely of expected synergies and workforce, and synergies with our existing business,substantially all of which is expected to be deductible for tax purposes. $78 million was preliminarily allocated to intangible assets acquired; and $28 million was preliminarily allocated to net tangible assets acquired. The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date and are considered preliminary pending finalization of the valuation analyses pertaining to assets acquired and liabilities assumed, valuation of the contingent consideration as well as the calculation of any deferred tax assets and liabilities. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
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 is included in other liabilities on our Condensed Consolidated Balance Sheet. As

of December 31, 2017, there were no significant changes in the range of expected outcomes for the contingent consideration from the acquisition date.
Subsequent to the acquisition, we also granted an aggregate of $167approximately $4 million in long-term equity in the form of restricted stock unit awards of our common stockunits to Respawn employees that will be recognized over a four year period as stock-based compensation expense. The fair value of these equity awards was based on the quoted market price of our common stock on the date of grant.certain employees.
The results of operations of Respawnattributable to the assets and personnel acquired in the preliminaryGameFly Cloud Gaming acquisition and the fair value of the assets acquired and liabilities assumed have been included in our Condensed Consolidated Financial Statements since the date of acquisition. Pro forma results of operations have not been presented because the effect of the acquisition was not material to our Condensed Consolidated Statements of Operations.


During the three and nine months ended December 31, 2016,September 30, 2018, we completed one acquisition that was not material to our Condensed Consolidated Financial Statements.

During three and six months ended September 30, 2017, there were no acquisitions.

(7)(8) GOODWILL AND ACQUISITION-RELATED INTANGIBLES, NET
The changes in the carrying amount of goodwill for the ninesix months ended December 31, 2017September 30, 2018 are as follows (in millions):
As of
March 31, 2017		 Activity Effects of Foreign Currency Translation As of
December 31, 2017		As of
March 31, 2018		 Activity Effects of Foreign Currency Translation As of
September 30, 2018
Goodwill$2,075
 $167
 $5
 $2,247
$2,251
 $14
 $(3) $2,262
Accumulated impairment(368) —
 —
 (368)(368) —
 —
 (368)
Total$1,707
 $167
 $5
 $1,879
$1,883
 $14
 $(3) $1,894
Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets.
During the three months ended December 31, 2017, we estimated, on a preliminary basis, goodwill acquired in our acquisition of Respawn. The Company expects to finalize the valuation of the Respawn acquisition as soon as practicable, but not later than one year from the acquisition date. Once completed, there may be material adjustments to our goodwill amounts.
Acquisition-related intangibles consisted of the following (in millions):
As of December 31, 2017 As of March 31, 2017As of September 30, 2018 As of March 31, 2018
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Acquisition-
Related
Intangibles, Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Acquisition-
Related
Intangibles, Net
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Acquisition-
Related
Intangibles, Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Acquisition-
Related
Intangibles, Net
Developed and core technology$419
 $(412) $7
 $412
 $(412) $—
$460
 $(420) $40
 $417
 $(414) $3
Trade names and trademarks153
 (103) 50
 106
 (98) 8
161
 (115) 46
 161
 (107) 54
Registered user base and other intangibles5
 (5) —
 5
 (5) —
5
 (5) —
 5
 (5) —
Carrier contracts and related85
 (85) —
 85
 (85) —
85
 (85) —
 85
 (85) —
In-process research and development24
 —
 24
 —
 —
 —
14
 —
 14
 14
 —
 14
Total$686
 $(605) $81
 $608
 $(600) $8
$725
 $(625) $100
 $682
 $(611) $71
During the three months ended December 31, 2017, we estimated, on a preliminary basis, theThe fair value of acquisition-related intangible assets of $78acquired in the GameFly Cloud Gaming acquisition during the three months ended June 30, 2018 was $43 million, in connection with the Respawn acquisition,all of which $47 million was allocated to trade names and trademarks, $24 million are allocated to in-process research and development, and $7 million was allocated to developed and core technology. Excluding the in-process researchtechnology, and development assets, the weighted-averagehas a useful life of the Respawn acquired intangible assets was approximately 7.14.0 years.

Amortization of intangibles for the three and ninesix months ended December 31,September 30, 2018 and 2017 and 2016 are classified in the Condensed Consolidated Statement of Operations as follows (in millions):
Three Months Ended
December 31,		 Nine Months Ended
December 31,		Three Months Ended
September 30,		 Six Months Ended
September 30,
2017 2016 2017 20162018 2017 2018 2017
Cost of service and other$—
 $—
 $—
 $16
Cost of product1
 18
 1
 27
Cost of service and other revenue$—
 $—
 $—
 $—
Cost of product revenue1
 —
 2
 —
Operating expenses1
 2
 4
 5
6
 2
 12
 3
Total$2
 $20
 $5
 $48
$7
 $2
 $14
 $3
Acquisition-related intangible assets are amortized using the straight-line method over the lesser of their estimated useful lives or the agreement terms, ranging from 1 to 149 years. As of December 31, 2017September 30, 2018 and March 31, 2017,2018, the weighted-average remaining useful life for acquisition-related intangible assets was approximately 6.73.9 years and 1.44.3 years, respectively.

As of December 31, 2017September 30, 2018, future amortization of finite-lived acquisition-related intangibles that will be recorded in the Condensed Consolidated Statement of Operations is estimated as follows (in millions): 
Fiscal Year Ending March 31,  
2018 (remaining three months)$5
201913
2019 (remaining six months)$12
20206
22
20216
22
20226
22
20236
8
Thereafter15
—
Total$57
$86

(8)(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.
Royalty-based obligations with content licensors and distribution affiliates are either paid in advance and capitalized as prepaid royalties or are accrued as incurred and subsequently paid. These royalty-based obligations are generally expensed to cost of revenue at the greater of the contractual rate or an effective royalty rate based on the total projected net revenue for contracts with guaranteed minimums. Prepayments made to thinly capitalized independent software developers and co-publishing affiliates are generally made in connection with the development of a particular product, and therefore, we are generally subject to development risk prior to the release of the product. Accordingly, payments that are due prior to completion of a product are generally expensed to research and development over the development period as the services are incurred. Payments due after completion of the product (primarily royalty-based in nature) are generally expensed as cost of revenue.

Our contracts with some licensors include minimum guaranteed royalty payments, which are initially recorded as an asset and as a liability at the contractual amount when no performance remains with the licensor. When performance remains with the licensor, we record guarantee payments as an asset when actually paid and as a liability when incurred, rather than recording the asset and liability upon execution of the contract.
Each quarter, we also evaluate the expected future realization of our royalty-based assets, as well as any unrecognized minimum commitments not yet paid to determine amounts we deem unlikely to be realized through product and service sales. Any impairments or losses determined before the launch of a product are generally charged to research and development expense. Impairments or losses determined post-launch are charged to cost of revenue. We evaluate long-lived royalty-based assets for impairment using undiscounted cash flows when impairment indicators exist. If an impairment exists, then the assets are written down to fair value. Unrecognized minimum royalty-based commitments are accounted for as executory contracts, and therefore, any losses on these commitments are recognized when the underlying intellectual property is abandoned (i.e., cease use) or the contractual rights to use the intellectual property are terminated.

During the three and ninesix months ended December 31,September 30, 2018 and 2017, we did not recognize any material losses or impairment charges on royalty-based commitments.

During the three and nine months ended December 31, 2016, we determined that the carrying value of one of our royalty-based assets and previously unrecognized minimum royalty-based commitments, were not recoverable. We recognized an impairment charge of $12 million on the asset and a loss of $10 million on the previously unrecognized minimum royalty-based commitment. Of the total $22 million loss, $10 million was included in cost of service revenue and $12 million was included in research and development expenses in our Condensed Consolidated Statements of Operations.

respectively.
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
December 31, 2017		 As of
March 31, 2017		As of
September 30, 2018		 As of
March 31, 2018
Other current assets$20
 $79
$59
 $68
Other assets34
 39
32
 34
Royalty-related assets$54
 $118
$91
 $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
December 31, 2017		 As of
March 31, 2017		As of
September 30, 2018		 As of
March 31, 2018
Accrued royalties$260
 $165
$155
 $171
Other liabilities80
 97
63
 74
Royalty-related liabilities$340
 $262
$218
 $245
As of December 31, 2017,September 30, 2018, we were committed to pay approximately $987$790 million to content licensors, independent software developers, and co-publishing and/or distribution affiliates, but performance remained with the counterparty (i.e., delivery of the product or content or other factors) and such commitments were therefore not recorded in our Condensed Consolidated Financial Statements. See Note 1213 for further information on our developer and licensor commitments.


(9)(10) BALANCE SHEET DETAILS
Property and Equipment, Net
Property and equipment, net, as of December 31, 2017September 30, 2018 and March 31, 20172018 consisted of (in millions): 
As of
December 31, 2017		 As of
March 31, 2017		As of
September 30, 2018		 As of
March 31, 2018
Computer, equipment and software$724
 $723
$742
 $744
Buildings336
 316
342
 336
Leasehold improvements137
 126
135
 139
Equipment, furniture and fixtures, and other81
 82
82
 84
Land66
 61
66
 66
Construction in progress7
 7
9
 7
1,351
 1,315
1,376
 1,376
Less: accumulated depreciation(904) (881)(936) (923)
Property and equipment, net$447
 $434
$440
 $453
During the three and ninesix months ended December 31,September 30, 2018 depreciation expense associated with property and equipment was $30 million and $60 million, respectively.
During the three and six months ended September 30, 2017 depreciation expense associated with property and equipment was $30 million and $89 million, respectively.

During the three and nine months ended December 31, 2016, depreciation expense associated with property and equipment was $29 million and $86$59 million, respectively.
Accrued and Other Current Liabilities
Accrued and other current liabilities as of December 31, 2017September 30, 2018 and March 31, 20172018 consisted of (in millions): 
As of
December 31, 2017		 As of
March 31, 2017		As of
September 30, 2018		 As of
March 31, 2018
Other accrued expenses$346
 $210
$359
 $260
Accrued compensation and benefits249
 267
172
 282
Accrued royalties260
 165
155
 171
Sales return and price protection reserves108
 —
Deferred net revenue (other)215
 147
113
 108
Accrued and other current liabilities$1,070
 $789
$907
 $821
Deferred net revenue (other) includes the deferral of subscription revenue, advertising revenue, licensing arrangements, and other revenue for which revenue recognition criteria has not been met.
Deferred NetAs a result of the adoption of the New Revenue (Online-Enabled Games)Standard, as of September 30, 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 Condensed Consolidated Balance Sheets).
Deferred net revenue (online-enabled games) was $1,946 million and $1,539 million as of December 31, 2017 and March 31, 2017, respectively.
Deferred net revenue (online-enabled games) generally includesas of September 30, 2018 and April 1, 2018, as adjusted, consisted of (in millions):
 As of
September 30, 2018		 As of April 1, 2018 (as adjusted)
Deferred net revenue (online-enabled games)$574
 $949
Deferred net revenue (other)113
 105
Deferred net revenue (noncurrent)12
 5
Total Deferred net revenue$699
 $1,059


Total deferred net revenue decreased by $360 million, from April 1, 2018, as adjusted, to September 30, 2018. The change was driven by $1,128 million of revenue that was deferred. This was offset by the unrecognizedportion of the net bookings that was deferred and recognized, totaling $1,488 million. Of the $1,488 million, $1,019 million relates to revenue from bundled sales of online-enabled games for which we do not have VSOE for the obligation to provide unspecified updates. We recognize revenue from the sale of online-enabled games for which we do not have vendor-specific objective evidence of fair value (“VSOE”) for the unspecified updates on a straight-line basis, generally over an estimated nine-month period beginningrecognized in the month after shipmentsix months ended September 30, 2018 that was included in the deferred revenue balance as of April 1, 2018, as adjusted.
Remaining Performance Obligations
As of September 30, 2018, revenue allocated to remaining performance obligations consists of our deferred revenue balance of $699 million. These balances exclude any estimates for physical games sold through retail and an estimated six-month period for digitally-distributed games. However,future variable consideration as we expensehave elected the costoptional exemption to exclude sales-based royalty revenue. We expect to recognize substantially all of these balances as revenue related to these transactions generally duringover the period in which the product is delivered (rather than on a deferred basis).next 12 months. 

(10)(11) INCOME TAXES
The provision for income taxes for the three and ninesix months ended December 31, 2017September 30, 2018 is based on our projected annual effective tax rate for fiscal year 2018,2019, adjusted for specific items that are required to be recognized in the period in which they are incurred.
Our effective tax rate and resulting provision for income taxes for the three and ninesix months ended December 31, 2017September 30, 2018 was significantly7.6 percent and 7.9 percent, respectively, as compared to 42.1 percent and 12.5 percent, respectively, for the same period in fiscal year 2018. The effective tax rate for the three and six months ended September 30, 2018 was impacted by the lower U.S. statutory tax rate as a result of the U.S. Tax Cuts and Jobs Act enacted on December 22, 2017 (the “U.S. Tax Act”), enacted on December 22, 2017. and earnings realized in countries that have lower statutory tax rates, partially offset by less excess tax benefits from stock-based compensation recognized in the current period as compared to the same period in fiscal year 2018.
When compared to the statutory rate of 21.0 percent, the effective tax rate for the three and six months ended September 30, 2018 was lower due to earnings realized in countries that have lower statutory tax rates and the recognition of excess tax benefits from stock-based compensation. Excluding excess tax benefits, our effective tax rate would have been 9.8 percent and 10.6 percent, respectively, for the three and six months ended September 30, 2018.
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 rates to 21.0 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”).
Our effective
We recorded a provisional tax rate for the three and nine months ended December 31, 2017 was negative 1,062.5 percent and positive 37.3 percent, respectively, as comparedexpense of $235 million related to 83.3 percent and 18.8 percent, respectively for the same periods in fiscal year 2017. The effective tax rate for the three and nine months ended December 31, 2017 was negatively impacted by the provisional income tax effects of the U.S. Tax Act offset by earnings realized in countries that have lower statutory tax ratesfor the fiscal year ended March 31, 2018, $192 million of which relates to the Transition Tax. During the three and the recognitionsix months ended September 30, 2018, we made no material adjustments to these provisional amounts. The final calculation of excess tax benefits from stock-based compensation. Without the provisional tax charge oftaxes attributable to the U.S. Tax Act our effective tax rate for the three and nine months ended December 31, 2017 would have been 37.5 percent and 11.9 percent, respectively.
We have a March 31 fiscal year-end; therefore, the lower corporate tax rate enacted by the U.S. Tax Act will be phased in, resulting in a U.S. statutory federal rate of 31.6 percent for our fiscal year ending March 31, 2018, and 21.0 percent for subsequent fiscal years. When compared to the statutory rate of 31.6 percent, the effective tax rate for the three and nine months ended December 31, 2017 was higher primarily due to the income tax impacts of the U.S. Tax Act, offset by earnings realized in countries that have lower statutory tax rates and the recognition of excess tax benefits from stock-based compensation. We anticipate that the impact of excess tax benefits and tax deficiencies may result in significant fluctuations to our effective tax rate in the future. Excluding excess tax benefits, our effective tax rate would have been negative 1,075.0 percent and positive 43.6 percent, respectively, for the three and nine months ended December 31, 2017.
We recorded a provision for income taxes of $170 million and $259 million for the three and nine months ended December 31, 2017, respectively, including $176 million which is a reasonable estimate of the impacts of the U.S. Tax Act. We recorded a reasonable estimate of $151 million related to the Transition Tax. The final calculations of the Transition Tax may differ from our estimates, potentially materially, due to, among other things, changes in interpretations of the U.S. Tax Act, our further analysis of the U.S. Tax Act, or any updates or changes to estimates that we have utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and assertions.

In addition, we provisionally recorded a tax charge related to the remeasurement of U.S. deferred tax assets and liabilities as a result of the reduction of the U.S. corporate tax rate and a tax benefit related to the deferred tax impacts of global intangible income. The impact of these, as well as certain other charges and benefits, were not material individually, or in the aggregate, and are provisional for the same reasons as stated above.impacts.
Reasonable estimates of the impacts of the U.S. Tax Act are provided in accordance with SAB 118, the SEC guidance that allows 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. We expect to complete the accounting under the U.S. Tax Act as soon as practicable, but in no event later than one year from the enactment date of the U.S. Tax Act.

The U.S. Tax Act creates new U.S. taxes on foreign earnings. Our provision for income taxes for the three and six months ended September 30, 2018 provisionally does not reflect any deferred tax impacts of the U.S. taxes on foreign earnings. Because of the complexity of the rules regarding the new tax on foreign earnings, we are continuing to evaluate this accounting policy election.
We file income tax returns and are subject to income tax examinations in various jurisdictions with respect to fiscal years after 2008. The timing and potential resolution of income tax examinations is highly uncertain. While we continue to measure our uncertain tax positions, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued. It is reasonably possible that a reduction of up to $45$16 million of unrecognized tax benefits may occur within the next 12 months, a portion of which would 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, including the Altera opinion.


(11)(12) FINANCING ARRANGEMENTS
Senior Notes
In February 2016, we issued $600 million aggregate principal amount of 3.70% Senior Notes due March 1, 2021 (the “2021 Notes”) and $400 million aggregate principal amount of 4.80% Senior Notes due March 1, 2026 (the “2026 Notes,” and together with the 2021 Notes, the “Senior Notes”). Our proceeds were $989 million, net of discount of $2 million and issuance costs of $9 million. Both the discount and issuance costs are being amortized to interest expense over the respective terms of the 2021 Notes and the 2026 Notes using the effective interest rate method. The effective interest rate is 3.94% for the 2021 Notes and 4.97% for the 2026 Notes. Interest is payable semiannually in arrears, on March 1 and September 1 of each year.
The carrying and fair values of the Senior Notes are as follows (in millions): 
As of
December 31, 2017		 As of
March 31, 2017		As of
September 30, 2018		 As of
March 31, 2018
Senior Notes:      
3.70% Senior Notes due 2021$600
 $600
$600
 $600
4.80% Senior Notes due 2026400
 400
400
 400
Total principal amount$1,000
 $1,000
$1,000
 $1,000
Unaccreted discount(2) (2)(1) (2)
Unamortized debt issuance costs(6) (8)(6) (6)
Net carrying value of Senior Notes$992
 $990
$993
 $992
      
Fair value of Senior Notes (Level 2)$1,059
 $1,054
$1,024
 $1,038

As of December 31, 2017,September 30, 2018, the remaining life of the 2021 Notes and 2026 Notes is approximately 3.22.4 years and 8.27.4 years, respectively.

The Senior Notes are senior unsecured obligations and rank equally with all our other existing and future unsubordinated obligations and any indebtedness that we may incur from time to time under our Credit Facility.

The 2021 Notes and the 2026 Notes are redeemable at our option at any time prior to February 1, 2021 or December 1, 2025, respectively, subject to a make-whole premium. Within one and three months of maturity, we may redeem the 2021 Notes or the 2026 Notes, respectively, at a redemption price equal to 100% of the aggregate principal amount plus accrued and unpaid interest. In addition, upon the occurrence of a change of control repurchase event, the holders of the Senior Notes may require us to repurchase all or a portion of the Senior Notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. The Senior Notes also include covenants that limit our ability to incur liens on assets and to enter into sale and leaseback transactions, subject to certain allowances.
Credit Facility
In March 2015, 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. The Credit Facility contains an option to arrange with existing lenders and/or new lenders to provide up to an aggregate of $250 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. 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.

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, 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 level of total liquidity.


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 full and an increase in the applicable interest rate.

As of December 31, 2017,September 30, 2018, no amounts were outstanding under the Credit Facility. $2 million of debt issuance costs that were paid in connection with obtaining this credit facility are being amortized to interest expense over the 5-year term of the Credit Facility.   
Interest Expense
The following table summarizes our interest expense recognized for the three and ninesix months ended December 31,September 30, 2018 and 2017 and 2016 that is included in interest and other income (expense), net on our Condensed Consolidated Statements of Operations (in millions): 
Three Months Ended
December 31,		 Nine Months Ended
December 31,		Three Months Ended
September 30,		 Six Months Ended
September 30,
2017 2016 2017 20162018 2017 2018 2017
Amortization of debt discount$—
 $—
 $—
 $(2)
Amortization of debt issuance costs—
 (1) (1) (2)$—
 $—
 (1) (1)
Coupon interest expense(10) (10) (31) (31)(11) (11) (21) (21)
Other interest expense—
 (1) —
 (1)
Total interest expense$(10) $(12) $(32) $(36)$(11) $(11) $(22) $(22)


(12)(13) COMMITMENTS AND CONTINGENCIES
Lease Commitments
As of December 31, 2017September 30, 2018, 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 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); Dr. Ing. h.c. F. Porsche AG, Ferrari S.p.A. and Automobili Lamborghini S.p.A (Need For Speed and Real Racing games); National Basketball 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 our minimum contractual obligations as of December 31, 2017September 30, 2018 (in millions): 
  Fiscal Years Ending March 31,  Fiscal Years Ending March 31,
  2018              2019            
  (Remaining              (Remaining            
Total three mos.) 2019 2020 2021 2022 2023 ThereafterTotal six mos.) 2020 2021 2022 2023 2024 Thereafter
Unrecognized commitments                              
Developer/licensor commitments$987
 $26
 $224
 $229
 $205
 $222
 $80
 $1
$790
 $64
 $229
 $257
 $196
 $43
 $1
 $—
Marketing commitments355
 9
 86
 83
 77
 73
 27
 —
303
 28
 89
 85
 75
 26
 —
 —
Operating leases249
 8
 43
 39
 39
 32
 25
 63
219
 18
 41
 40
 33
 26
 19
 42
Senior Notes interest227
 7
 41
 41
 41
 20
 19
 58
196
 18
 41
 41
 19
 20
 19
 38
Other purchase obligations109
 9
 30
 27
 14
 9
 6
 14
90
 15
 32
 15
 9
 6
 3
 10
Total unrecognized commitments1,927
 59
 424
 419
 376
 356
 157
 136
1,598
 143
 432
 438
 332
 121
 42
 90
                              
Recognized commitments                              
Senior Notes principal and interest1,013
 13
 —
 —
 600
 —
 —
 400
1,003
 3
 —
 600
 —
 —
 —
 400
Licensing obligations107
 6
 23
 25
 26
 27
 —
 —
Transition Tax25
 1
 —
 —
 —
 3
 5
 16
Licensing and lease obligations90
 12
 25
 26
 27
 —
 —
 —
Total recognized commitments1,120
 19
 23
 25
 626
 27
 —
 400
1,118
 16
 25
 626
 27
 3
 5
 416
                              
Total commitments$3,047
 $78
 $447
 $444
 $1,002
 $383
 $157
 $536
$2,716
 $159
 $457
 $1,064
 $359
 $124
 $47
 $506
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 Condensed Consolidated Financial Statements.
In addition, the amounts in the table above are presented based on the dates the amounts are contractually due as of December 31, 2017September 30, 2018; however, certain payment obligations may be accelerated depending on the performance of our operating results. Furthermore, up to $32$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 December 31, 2017,September 30, 2018, we had a liability for unrecognized tax benefits and an accrual for the payment of related interest totaling $98$248 million, of which we are unable to make a reasonably reliable estimate of when cash settlement with a taxing authority will occur. Furthermore, we had a $104 million income tax payable recorded during the three months ended December 31, 2017 related to the provisional Transition Tax, which we expect to pay in installments over the next 8 years. Of the $104 million, $8 million is included in accrued and other current liabilities and the remaining $96 million is included in income tax obligations on our Condensed Consolidated Balance Sheet.
In addition to what is included in the table above, as of December 31, 2017,September 30, 2018, we may be required to pay up to $140 million of cash consideration in connection with the December 1, 2017 acquisition of Respawn acquisition based on the achievement of certain performance milestones through the end of calendar year 2022 at the latest.2022. As of December 31, 2017,September 30, 2018, we have recorded $122$124 million of contingent consideration on our Condensed Consolidated Balance Sheet representing the estimated fair value.

Subsequent to September 30, 2018, we entered into various service and lease agreements with third parties which contingently commits us to pay an additional approximately $137 million at various dates through fiscal year 2025.
Legal Proceedings
On July 29, 2010, Michael Davis, a former NFL running back, filed a putative class action in the United States District Court for the Northern District of California against the Company, alleging that certain past versions of Madden NFL included the images of certain retired NFL players without their permission. In March 2012, the trial court denied the Company’s request to dismiss the complaint on First Amendment grounds. In January 2015, that trial court decision was affirmed by the Ninth Circuit Court of Appeals and the case was remanded back to the United States District Court for the Northern District of California. In August 2018, the United States District Court for the Northern District of California wheredenied the caseplaintiffs’ motion for class certification, which the plaintiffs have appealed.
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 service included in FIFA 18. The Public Prosecutor is pending.investigating the referral and has not yet determined whether to initiate proceedings against the Company, certain subsidiaries of the Company, and/or certain executive officers of the Company. The Company does not believe that its products and services violate applicable gambling laws, and is engaged in discussions 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 Condensed Consolidated Financial Statements.

(13)(14)  STOCK-BASED COMPENSATION
Valuation Assumptions
We estimate the fair value of stock-based awards on the date of grant. We recognize compensation costscost for stock-based awards to employees based on the awards’ estimated grant-date fair value using a straight-line approach over the service period for which such awards are expected to vest. We account for forfeitures as they occur.

The determinationestimation of the fair value of market-based restricted stock units, stock options and ESPP purchase rights is affected by assumptions regarding subjective and complex variables. Generally, our assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes. We determineestimate the fair value of our stock-based awards as follows:

Restricted Stock 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 determinedestimated using a Monte-Carlo simulation model. Key assumptions for the Monte-Carlo simulation model are the risk-free interest rate, expected volatility, expected dividends and correlation coefficient.

Stock Options and Employee Stock Purchase Plan. The fair value of stock options and stock purchase rights granted pursuant to our equity incentive plans and our 2000 Employee Stock Purchase Plan, as amended (“ESPP”), respectively, is determinedestimated using the Black-Scholes valuation model based on the multiple-award valuation method. Key assumptions of the Black-Scholes valuation model are the risk-free interest rate, expected volatility, expected term and expected dividends. The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant for the expected term of the option. Expected volatility is based on a combination of historical stock price volatility and implied volatility of publicly-traded options on our common stock. ExpectedAn expected term is determinedestimated based on historical exercise behavior, post-vesting termination patterns, options outstanding and future expected exercise behavior.

There were an insignificant number of stock options granted during the three and ninesix months ended December 31, 2017September 30, 2018 and 2016.2017.
The estimated assumptions used in the Black-Scholes valuation model to value our ESPP purchase rights were as follows:
 ESPP Purchase RightsESPP Purchase Rights
 Three Months Ended
December 31,		Three Months Ended
September 30,
 2017 20162018 2017
Risk-free interest rate 1.13 - 1.24%
 0.5 - 0.6%
2.2 - 2.5%
 1.1 - 1.2%
Expected volatility 28% 29 - 32%
29% 28%
Weighted-average volatility 28% 31%29% 28%
Expected term 6 - 12 months

 6 - 12 months
6 - 12 months

 6 - 12 months
Expected dividends None
 None
None
 None

There were no market-based restricted stock units granted during the three months ended December 31, 2017September 30, 2018 and 2016.2017.

Stock-Based Compensation Expense
Employee stock-based compensation expense recognized during the three and nine months ended December 31, 2016 was calculated based on awards ultimately expected to vest and was reduced for estimated forfeitures. We adopted ASU 2016-09 at the beginning of fiscal year 2018 and elected to account for forfeitures as they occur. The adoption resulted in a cumulative-effect adjustment of $8 million, net of tax, decrease to retained earnings.

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 Condensed Consolidated Statements of Operations (in millions):
Three Months Ended
December 31,		 Nine Months Ended
December 31,		Three Months Ended
September 30,		 Six Months Ended
September 30,
2017 2016 2017 20162018 2017 2018 2017
Cost of revenue$—
 $—
 $2
 $2
$1
 $1
 $2
 $2
Research and development38
 27
 102
 81
39
 36
 86
 64
Marketing and sales8
 8
 24
 23
9
 9
 16
 16
General and administrative17
 13
 45
 38
17
 16
 32
 28
Stock-based compensation expense$63
 $48
 $173
 $144
$66
 $62
 $136
 $110

During the three months ended December 31, 2017,September 30, 2018, we recognized a $4$9 million deferred income tax benefit related to our stock-based compensation expense. During the three months ended December 31, 2016,September 30, 2017, we recognized a $10$12 million deferred income tax benefit related to our stock-based compensation expense.

During the ninesix months ended December 31, 2017,September 30, 2018, we recognized a $26$17 million deferred income tax benefit related to our stock-based compensation expense. During the ninesix months ended December 31, 2016,September 30, 2017, we recognized a $28$22 million deferred income tax benefit related to our stock-based compensation expense.
As of December 31, 2017,September 30, 2018, our total unrecognized compensation cost related to restricted stock units, market-based restricted stock units, performance-based restricted stock units and stock options was $556$578 million and is expected to be recognized over a weighted-average service period of 2.32.2 years. Of the $556$578 million of unrecognized compensation cost, $459$493 million relates to restricted stock units, $58$64 million relates to market-based restricted stock units, and $39$21 million relates to performance-based restricted stock units at 103100 percent average vesting target.

Stock Options
The following table summarizes our stock option activity for the ninesix months ended December 31, 2017:September 30, 2018: 
  
Options
(in thousands)
 
Weighted-
Average
Exercise Prices
 
Weighted-
Average
Remaining
Contractual
Term  (in years)
 
Aggregate
Intrinsic Value
(in millions)
Outstanding as of March 31, 2017 2,377
 $33.35
    
Granted 3
 108.88
    
Exercised (746) 40.58
    
Forfeited, cancelled or expired (2) 45.15
    
Outstanding as of December 31, 2017 1,632
 $30.20
 5.67 $122
Vested and expected to vest 1,632
 $30.20
 5.67 $122
Exercisable as of December 31, 2017 1,612
 $30.24
 5.66 $121
  
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
    
Granted 2
 123.80
    
Exercised (184) 31.48
    
Outstanding as of September 30, 2018 1,433
 $30.28
 5.10 $129
Vested and expected to vest 1,433
 $30.28
 5.10 $129
Exercisable as of September 30, 2018 1,433
 $30.28
 5.10 $129
The aggregate intrinsic value represents the total pre-tax intrinsic value based on our closing stock price as of December 31, 2017,September 30, 2018, which would have been received by the option holders had all the option holders exercised their options as of that date. We issue new common stock from our authorized shares upon the exercise of stock options.

Restricted Stock Units
The following table summarizes our restricted stock unit activity for the ninesix months ended December 31, 2017:September 30, 2018: 
 
Restricted
Stock Rights
(in thousands)
 
Weighted-
Average Grant
Date Fair Values
 
Restricted
Stock Rights
(in thousands)
 
Weighted-
Average Grant
Date Fair Values
Outstanding as of March 31, 2017 5,153
 $65.03
Outstanding as of March 31, 2018 5,948
 $94.57
Granted 3,661
 109.33
 1,626
 140.68
Vested (2,370) 111.14
 (1,757) 81.71
Forfeited or cancelled (330) 77.44
 (359) 108.16
Outstanding as of December 31, 2017 6,114
 $73.01
Outstanding as of September 30, 2018 5,458
 $111.55
Performance-Based Restricted Stock Units
Our performance-based restricted stock units cliff vest after a four-year performance period contingent upon the achievement of pre-determined performance-based milestones based on our non-GAAP net revenue and free cash flow as well as service conditions. If these performance-based milestones are not met but service conditions are met, the performance-based restricted stock units will not vest, in which case any compensation expense we have recognized to date will be reversed. Each quarter, we update our assessment of the probability that the specifiednon-GAAP net revenue and free cash flow performance criteriamilestones will be achieved. We amortize the fair values of performance-based restricted stock units over the requisite service period. The performance-based restricted stock units contain threshold, target and maximum milestones for each of non-GAAP net revenue and free cash flow.
The number of shares of common stock to be issued at vesting will range from zero percent to 200 percent of the target number of performance-based restricted stock units attributable to each performance-based milestone.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 ninesix months ended December 31, 2017:September 30, 2018: 
Performance-
Based Restricted
Stock Units
(in thousands)		 
Weighted-
Average Grant
Date Fair Value
Performance-
Based Restricted
Stock Units
(in thousands)		 
Weighted-
Average Grant
Date Fair Value
Outstanding as of March 31, 2017—
 $—
Outstanding as of March 31, 2018796
 $110.51
Granted796
 110.51
—
 —
Forfeited or cancelled—
 —
(217) 110.51
Outstanding as of December 31, 2017796
 $110.51
Outstanding as of September 30, 2018579
 $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 percent to 200 percent of the target number of market-based restricted stock units based on our total stockholder return (“TSR”) relative to the performance of companies in the NASDAQ-100 Index for each measurement period, generally over either a one-year, two-year cumulative and three-year cumulative period, or over a two-year and four-year cumulative 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 ninesix months ended December 31, 2017:September 30, 2018: 
 
Market-Based
Restricted  Stock
Units
(in thousands)
 
Weighted-
Average  Grant
Date Fair Value
 
Market-Based
Restricted  Stock
Units
(in thousands)
 
Weighted-
Average  Grant
Date Fair Value
Outstanding as of March 31, 2017 1,282
 $87.37
Outstanding as of March 31, 2018 1,342
 $118.35
Granted 706
 140.93
 573
 185.24
Vested (430) 76.27
 (415) 98.48
Forfeited or cancelled (216) 91.88
 (525) 135.76
Outstanding as of December 31, 2017 1,342
 $118.35
Outstanding as of September 30, 2018 975
 $156.76
Stock Repurchase Program
In May 2015, our Board of Directors authorized a program to repurchase up to $1 billion of our common stock. We repurchased approximately 0.3 million shares for approximately $31 million under this program during the three months ended June 30, 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 shares for approximately $76 million under this program during the three months ended June 30, 2018. During the three and six months ended September 30, 2017, we repurchased approximately 1.3 million and 2.4 million shares for approximately $153 million and $272 million, respectively, under this program. 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. This stock repurchase program supersedes and replaces the May 2017
program, and expires on May 31, 2019.2020. 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. During the three and ninesix months ended December 31, 2017,September 30, 2018, we repurchased approximately 1.42.3 million and 3.84.0 million shares for approximately $150$299 million and $422$523 million, respectively, under this program. We are actively repurchasing shares under this program.

The following table summarizes total shares repurchased during the three and ninesix months ended December 31, 2017September 30, 2018 and 2016:2017:
 May 2015 Program May 2017 ProgramTotal
(in millions)Shares Amount Shares AmountShares Amount
Three months ended December 31, 2017—
 $—
 1.4 $150
1.4 $150
Nine months ended December 31, 20170.3
 $31
 3.8
 $422
4.1 $453
Three months ended December 31, 20161.5
 $127
 —
 $—
1.5 $127
Nine months ended December 31, 20165.0
 $383
 —
 $—
5.0 $383
 May 2015 Program May 2017 Program May 2018 Program Total
(in millions)Shares Amount Shares Amount Shares Amount Shares Amount
Three months ended September 30, 2018—
 $—
 —
 $—
 2.3 $299
 2.3 $299
Six months ended September 30, 2018—
 $—
 0.6
 $76
 4.0
 $523
 4.6 $599
Three months ended September 30, 2017—
 $—
 1.3
 $153
 —
 $—
 1.3 $153
Six months ended September 30, 20170.3
 $31
 2.4
 $272
 —
 $—
 2.7 $303


(14)(15) EARNINGS (LOSS) 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, ESPP purchase rights, warrants, and other convertible securities using the treasury stock method.
Three Months Ended December 31, Nine Months Ended December 31,Three Months Ended
September 30,		 Six Months Ended
September 30,
(In millions, except per share amounts)2017 2016 2017 20162018 2017 2018 2017
Net income (loss)$(186) $(1) $436
 $401
$255
 $(22) $548
 $622
Shares used to compute earnings (loss) per share:              
Weighted-average common stock outstanding — basic308
 303
 309
 302
305
 309
 305
 309
Dilutive potential common shares related to stock award plans and from assumed exercise of stock options—
 —
 3
 3
2
 —
 4
 4
Dilutive potential common shares related to the Convertible Notes (a)
—
 —
 —
 1
Dilutive potential common shares related to the Warrants (a)
—
 —
 —
 8
Weighted-average common stock outstanding — diluted308
 303
 312
 314
307
 309
 309
 313
Earnings (loss) per share:              
Basic$(0.60) $ (0.00)
 $1.41
 $1.33
$0.84
 $(0.07) $1.80
 $2.01
Diluted$(0.60) $ (0.00)
 $1.40
 $1.28
$0.83
 $(0.07) $1.77
 $1.99

As a result of our net loss forFor the three months ended December 31, 2017, we have excluded all potentially dilutive common shares from the diluted loss per share calculation as their inclusion would have had an antidilutive effect. Had we reported net income for this period, an additional 3 million shares of common stock related to our outstanding equity-based instruments would have been included in the number of shares used to calculate Diluted EPS for the threeSeptember 30, 2018 and six months ended December 31, 2017.

As a result of our net loss for the three months ended December 31, 2016, we have excluded all potentially dilutive common shares from the diluted loss per share calculation as their inclusion would have had an antidilutive effect. Had we reported net income for this period, an additional 3 million shares of common stock related to our outstanding equity-based instrumentsSeptember 30, 2018 and an additional 7 million shares related to the Warrants would have been included in the number of shares used to calculate Diluted EPS for the three months ended December 31, 2016.

For the nine months ended December 31, 2017, and 2016, an immaterial amount of restricted stock units and market-based restricted stock units were excluded from the treasury stock method computation of diluted shares as their inclusion would have had an antidilutive effect. Our performance-based restricted stock units, which are considered contingently issuable shares, are also excluded from the treasury stock method computation because the related performance-based milestones were not achieved as of the end of the reporting period.

(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.
As a result of our net loss for the three months ended September 30, 2017, we have excluded all potentially dilutive common
shares from the diluted loss per share calculation as their inclusion would have had an antidilutive effect. Had we reported net
income for this period, an additional 3 million shares of common stock related to our outstanding equity-based instruments
would have been included in the number of shares used to calculate Diluted EPS for the three months ended September 30,
2017.







(16) SEGMENT 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 September 30, 2018, we have only one reportable segment, which represents our only operating segment.

Information about our total net revenue by composition and by platform for the three and six months ended September 30, 2018 and 2017 is presented below (in millions):
 Three Months Ended
September 30,		 Six Months Ended
September 30,
 2018 2017 2018 2017
Net revenue by composition       
Full game downloads$148
 $123
 $264
 $332
Live services412
 408
 1,022
 909
Mobile220
 158
 451
 327
Total Digital780
 689
 1,737
 1,568
        
Packaged goods and other506
 270
 686
 840
Net revenue$1,286
 $959
 $2,423
 $2,408

Digital net revenue includes full-game downloads, live services, and mobile revenue. Full game downloads includes revenue from digital sales of full games on console and PC. Live services includes revenue from sales of extra content for console, PC, browser games, game software licensed to our third-party publishing partners who distribute our games digitally, subscriptions, and advertising. Mobile includes revenue from the sale of full games and extra content on mobile phones and tablets.

Packaged goods net revenue includes 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 products for sale with their products (“OEM bundles”). Other revenue includes our non-software licensing revenue.
 Three Months Ended
September 30,		 Six Months Ended
September 30,
 2018 2017 2018 2017
Platform net revenue       
Console$917
 $595
 $1,622
 $1,629
PC / Browser149
 196
 346
 436
Mobile220
 162
 453
 333
Other—
 6
 2
 10
Net revenue$1,286
 $959
 $2,423
 $2,408

Net revenue from unaffiliated customers in North America and internationally for the three and six months ended September 30, 2018 and 2017 is presented below (in millions): 
 Three Months Ended
September 30,		 Six Months Ended
September 30,		 
 2018 2017 2018 2017 
Net revenue from unaffiliated customers        
North America$475
 $427
 $917
 $1,038
 
International811
 532
 1,506
 1,370
 
Net revenue$1,286
 $959
 $2,423
 $2,408
 




Report of Independent Registered Public Accounting Firm


TheTo the Stockholders and Board of Directors and Stockholders
Electronic Arts, Inc.:
Results of Review of Interim Financial Information
We have reviewed the condensed consolidated balance sheet of Electronic Arts, Inc. and subsidiaries (the Company) as of December 31, 2017, andSeptember 29, 2018, the related condensed consolidated statements of operations and comprehensive income (loss) for the three‑monththree-month and nine-monthsix-month periods ended December 31,September 29, 2018 and September 30, 2017, and December 31, 2016, and the related condensed consolidated statements of cash flows for the nine-monthsix-month periods ended December 31,September 29, 2018 and September 30, 2017, and December 31, 2016. These condensedthe related notes (collectively, the consolidated interim financial statementsinformation). Based on our reviews, we are not aware of any material modifications that should be made to the responsibility of the Company’s management.consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We conducted our reviewshave previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the consolidated balance sheet of the Company as of March 31, 2018, and the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated May 23, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the 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 reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States),PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Electronic Arts Inc. and subsidiaries as of April 1, 2017, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated May 24, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of April 1, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.(Signed) KPMG LLP
Santa Clara, California
November 6, 2018

/s/   KPMG LLP

Santa Clara, California
February 6, 2018

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, made in this Quarterly Report are forward looking. Examples of forward-looking statements include statements related to industry prospects, our future economic performance including anticipated revenues and expenditures, results of operations or financial position, and other financial items, our business plans and objectives, including our intended product releases, and may include certain assumptions that underlie the forward-looking statements. We use words such as “anticipate,” “believe,” “expect,” “intend,” “estimate”, “plan”, “predict”, “seek”, “goal”, “will”, “may”, “likely”, “should”, “could” (and the negative of any of these terms), “future” and similar expressions to help identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our business, projections of markets relevant to our business, uncertain events and assumptions and other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements consist of, among other things, statements related to industry prospects, our future financial performance, and our business plans and objectives, and may include certain assumptions that underlie the forward-looking statements. These forward-looking statements are subject to business and economic risknot guarantees of future performance and reflect management’s current expectations, and involve subjects that are inherently uncertain and difficult to predict.expectations. Our actual results could differ materially from those discussed in the forward-looking statements. We will not necessarily update information if any forward-looking statement later turns outFactors that might cause or contribute to be inaccurate. Risks and uncertainties that may affect our future resultssuch differences include but are not limited to, those discussed in Part II, Item 1A of this reportQuarterly Report under the heading “Risk Factors” in, Part II, Item 1A, as well as in other documents we have filed with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the fiscal year ended March 31, 20172018. We assume no obligation to revise or update any forward-looking statement for any reason, except as filed with the Securities and Exchange Commission (“SEC”) on May 24, 2017 and in other documents we have filed with the SEC.required by law.

OVERVIEW
The following overview is a high-level discussion of our operating results, as well as some of the trends and drivers that affect our business. Management believes that an understanding of these trends and drivers provides important context for our results for the three and nine months ended December 31, 2017,September 30, 2018, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Form 10-Q, including in the remainder of “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”),” “Risk Factors,” and the Condensed Consolidated Financial Statements and related Notes. Additional information can be found in the “Business” section of our Annual Report on Form 10-K for the fiscal year ended March 31, 20172018 as filed with the SEC on May 24, 201723, 2018 and in other documents we have filed with the SEC.
About Electronic Arts
We are a global leader in digital interactive entertainment.entertainment, with a mission to inspire the world to play. We develop, market, publish and deliver games content and online services that can be played by consumers on a variety of platforms, which includeincluding game consoles, PCs, mobile phones and tablets. In our games and services, we use established brands that we either wholly own (such as Battlefield, Mass Effect, Need for Speed, The Sims and Plants v. Zombies), or license from others (such as FIFA, Madden NFL and Star Wars). We alsodevelop and publish games and distribute games developed by third parties.services across diverse genres such as sports, first-person shooter, action, role-playing and simulation. We believe that the breadth and depth of our portfolio gives us the opportunity to engage an increasing number of players across more platforms and geographies and through more business models.
Financial Results
We adopted the New Revenue Standard on April 1, 2018, the beginning of fiscal year 2019, using the modified retrospective method. The comparative information for periods prior to April 1, 2018 has not been restated. For comparability, Note 1 — Description of Business and Basis of Presentation in Part I, Item 1 of this Form 10-Q includes our pro-forma financial results under the Old Revenue Standard for the three and six months ended September 30, 2018.

Our key financial results for our fiscal quarter ended December 31, 2017September 30, 2018 were as follows:

Total net revenue was $1,160$1,286 million, up 134 percent year-over-year. On a constant currency basis, we estimate thatUnder the Old Revenue Standard, total net revenue would have been $1,165$954 million, updown 1 percent year over year.year-over-year.
Digital net revenue was $780 million, up 1413 percent year-over-year.
International net revenue was $708 million, up 20 percent year-over-year. On a constant currency basis, we estimate that international Under the Old Revenue Standard, digital net revenue would have been $713$699 million, up 211 percent year over year.year-over-year.
Gross margin was 56.867.5 percent, up 1.78.1 percentage points year-over-year. Under the Old Revenue Standard, gross margin would have been 60.8 percent, up 1.4 percentage points year-over-year.
Operating expenses were $680$610 million, up 7down less than 1 percent year-over-year. On a constant currency basis, we estimate that operating expenses
Net income was $255 million with diluted earnings per share of $0.83. Under the Old Revenue Standard, net loss would have been $669 million, up 5 percent year over year.
Net loss was $186$19 million with diluted loss per share of $0.60. $176 million of the net loss, or approximately $0.57 per share resulted from the application of the U.S. Tax Act.$0.06.
Total cash, cash equivalents and short-term investments were $4,884$4,545 million.

From time to time, we make comparisons of current periods to prior periods with reference to constant currency. Constant currency comparisons are based on translating local currency amounts inFor the current period at actual foreign exchange rates from the prior comparable period. We evaluate our financial performance on a constant currency basis in order to facilitate period-to-period comparisons without regard to the impact of changingfiscal quarter ended September 30, 2018, foreign currency exchange rates.

rates did not have a material impact on our net revenue and operating expenses.

Trends in Our Business

Digital BusinessBusiness.. Players increasingly purchase our games digitallyas digital downloads, as opposed to purchasing physical discs, and engage with the live services associated withwe provide on an ongoing basis. Our live services provide additional depth and engagement opportunities for our portfolioplayers and include microtransactions, extra content, subscriptions, and esports. Our net revenue attributable to live services comprised 40 percent of games. For example,our total net revenue during fiscal year 2018 and we expect that live services net revenue will continue to be material to our business. Our most popular live service is the Ultimate Team mode incorporated into iterationsassociated with our sports franchises. Ultimate Team allows players to collect and trade current and former professional players in order to build and compete as a personalized team. Net revenue from Ultimate Team represented approximately 21 percent of our total net revenue during fiscal year 2018, a substantial portion of which was derived from FIFA Madden NFL and NHL franchises and live services available digitally for our Star Wars, Battlefield and The Sims franchises have extended the life of those games by engaging players for longer periods of time.Ultimate Team. Our digital transformation is also creating opportunities in platforms, contentbusiness models and modalities of play.the way in which players engage with our games and services. For example, we have leveraged brands and assets from franchises typically associated with consoles and traditional PC gaming, such as FIFA, Madden NFL, The Sims, SimCity and Star Wars, to create mobile and PC free-to-download games that are monetized through a business model in which we sell incremental content and/or features in discrete transactions.live services associated with the game. We also provide our EA Access, service on Xbox OneOrigin Access and Origin Access service on PCPremier subscription services, which offer players access to a selection of EAfull games, in-game content, online services and other benefits, typically for a monthly or annual fee.

We significantly increased our digital net revenue from $2,409 million in fiscal year 2016 to $2,874 million in fiscal year 2017 and $3,450 million during fiscal year 2018. We expect this portion of our business to continue to grow through fiscal year 2019 and beyond as we continue to focus on developing and monetizing products and services that can be delivered digitally.

Technological Infrastructure. As our digital business has grown, our games and services increasingly depend on the reliability, availability 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 digital transformation also gives us the opportunityindustry 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.

Player Network. We have made, and expect to continue to make, investments that strengthen our player network.network, which connects our players to each other and to the games they love. We are investingadopting consistent, cross-company methodologies to better understand our players’ needs and will continue to invest in a technology foundation to enablethat enables us to build personalized player relationships that can last for years instead of days or weeks by connecting our players to us and to each other. This connection allows us to market and deliver content and services for popular franchises like FIFA, Battlefield and Star Wars to our players more efficiently. That same foundation also enables new player-centric ways to discover and try new games and experiences, such as our subscription-based EA Access, Origin Access and Origin Access Premier services.

We significantly increased our digital net revenue from $2,199 million in fiscal year 2015 to $2,409 million in fiscal year 2016 and $2,874 million during fiscal year 2017. We expect this portion of our business to continue to grow through fiscal year 2018 and beyond as we continue to focus on developing and monetizing products and services that can be delivered digitally.

Foreign Currency Exchange Rates. International sales are a fundamental part of our business, and the strengthening of the U.S. dollar (particularly relative to the Euro, British pound sterling, Australian dollar, Chinese yuan and South Korean won) has a negative impact on our reported international net revenue, but a positive impact on our reported international operating expenses (particularly the Swedish krona and Canadian dollar) because these amounts are translated at lower rates as compared to periods in which the U.S. dollar is weaker. Volatility in exchange rates remains elevated as compared to historical standards, and macroeconomic factors such as events related to the United Kingdom’s vote to leave the European Union inject uncertainty. While we use foreign currency hedging contracts to mitigate some foreign currency exchange risk, these activities are limited in the protection that they provide us and can themselves result in losses.

Mobile and PC Free-to-Download Games. The global adoption of mobile devices and a business model for those devices that allows consumers to try new games with no up-front cost and pay for additional content or in-game items, has led to significant growth in the mobile gaming industry. We expect this growth to continue during our 2018 fiscal year. Likewise, the wide consumer acceptance of free-to-download, microtransaction-based PC games played over the Internet has broadened our consumer base. We expect revenue generated from mobile and PC free-to-download games to remain an important part of our business.  

Concentration of Sales Among the Most Popular GamesGames.. In all major segments of our industry, we see a large portion of games sales concentrated on the most popular titles. Similarly, a significant portion of our revenue historically has been derived from games based on a few popular franchises, several of which we have released on an annual or bi-annual basis. The increased importance to our business of revenue attributable to our live services, has accelerated this trend. For example,In particular, we derivehave historically derived a materialsignificant portion of our net revenue from our largest and most popular game, FIFA, the Ultimate Team game modeannualized version of which is availableconsistently one of the best-selling games in the marketplace.

Mobile and PC Free-to-Download 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 the live service associated with the game, has led to significant growth in the mobile gaming industry. We expect this growth to continue during our annualized FIFA, Madden NFL2019 fiscal year. Likewise, the wide consumer acceptance of free-to-download, live service-based PC games played over the Internet has broadened our consumer base. We expect revenue generated from mobile and NHL games.PC free-to-download games to remain an important part of our business.  

Recurring Revenue Sources.Our business model includes revenue that we deem recurring in nature, such as revenue from our annualized titles (such as FIFA and Madden NFL) and associated live services, subscriptions and our ongoing mobile business and subscription programs.business. We have been able to forecast revenue from these areas of our business with greater relative confidence than for new offerings.games, services and business models. As we continue to leverage the digital transformation in our industry and incorporate new

content models and modalities of play into our games, our goal is to continue to look for opportunities to expand the recurring portion of our business.

Net Bookings. In order to improve transparency into our business, we disclose an operating performance metric, net bookings. Net bookings is defined as the net amount of products and services sold digitally or sold-in physically in the period. Net bookings is calculated by adding total net revenue to the change in deferred net revenue for online-enabled games.games, and, for periods after the fourth quarter of fiscal 2018, mobile platform fees.


The following is a calculation of our total net bookings for the periods presented:
Three Months Ended
December 31,		 Nine Months Ended
December 31,		Three Months Ended
September 30,		 Six Months Ended
September 30,
(In millions)

2017 2016 2017 20162018 2017 2018 2017
Total net revenue$1,160
 $1,149
 $3,568
 $3,318
$1,286
 $959
 $2,423
 $2,408
Change in deferred net revenue (online-enabled games)811
 921
 357
 532
(20) 220
 (359) (454)
Mobile platform fees$(44) —
 $(93) —
Net bookings$1,971
 $2,070
 $3,925
 $3,850
$1,222
 $1,179
 $1,971
 $1,954

Net bookings were $1,971$1,222 million for the three months ended December 31, 2017,September 30, 2018 driven by sales related to FIFA Ultimate Team, Star Wars Battlefront II, 19, Madden NFL 19, and The Sims 4. Net bookings decreased $99increased $43 million or 54 percent as compared to the three months ended December 31, 2016September 30, 2017 due primarily to lower sales ofthe FIFA franchiseand The Sims 4 on a year-over-year basis,partially offset by a decrease in Star Wars Battlefront II, which launched during thethree months ended December 31, 2017, as compared to Battlefield 1, which launched during the three months ended December 31, 2016, partially offset by an increase in net bookings associated with our live services business.September 30, 2018. Digital net bookings were $1,230$637 million for the three months ended December 31, 2017,September 30, 2018, an increase of $135$58 million or 1210 percent as compared to three months ended December 31, 2016.September 30, 2017, driven by sales of FIFA 19, FIFA Ultimate Team and Madden Ultimate Team. The increase in digital net bookings was primarily driven by live services which grew $221 million or 39 percent year-over-year, primarily due to our Ultimate Team game mode and The Sims 4;and our mobile business which grew $9 million or 5 percent year-over-year, primarily due to FIFA Mobile. These increases were offset by a decrease of $95 million or 27 percent in our full game PC and console downloads, which grew $38 million or 32 percent year-over-year, primarily due tolower the timing of recognition of net bookings associated withfrom Star Wars Battlefront IIFIFA 19, the earlier launch of Madden NFL 19 as compared to Battlefield 1Madden NFL 18, and the ongoing shift to digital download of our games, and live services which launched duringgrew $18 million or 6 percent year-over-year, primarily due to the three months ended December 31, 2016.FIFA and Madden franchises and The Sims 4, offset by the effects of the transition from FIFA Online 3 to FIFA Online 4 in Asia.

Recent Developments
Stock Repurchase Program. In May 2017,2018, 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$2.4 billion of our common stock. This stock repurchase program supersedes and replaces the May 2017 program, and expires on May 31, 2019.2020. 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. During the three and ninesix months ended December 31, 2017,September 30, 2018, we repurchased approximately 1.42.3 million and 3.84.0 million shares for approximately $150$299 million and $422$523 million, respectively, under this program. We are actively repurchasing shares under this program.

Acquisition of Respawn LLC. On December 1, 2017 we completed the acquisition of Respawn. Respawn is a leading game development studio and creators of games including the critically-acclaimed Titanfall franchise. In connection with the acquisition, we paid $151 million in cash. In addition, we granted long-term equity awards in the form of restricted stock units to employees with a grant date fair value of $167 million. Furthermore, we may be required to pay variable cash consideration that is contingent upon the achievement of certain performance milestones relating to the development of future titles, through the end of calendar 2022. The additional consideration is limited to a maximum of $140 million.

U.S. Tax Act. On December 22, 2017, the U.S. Tax Act was enacted which significantly revises the U.S. corporate income tax system by, among other things, lowering the U.S. corporate income tax rate, generally implementing a territorial tax system, and imposing the Transition Tax. We recorded a provisional $176 million tax charge during the three months ended December 31, 2017 as a result of the application of the U.S. Tax Act; $151 million of which relates to the Transition Tax.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these Condensed 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. 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, 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.

Revenue Recognition Sales Returns and Allowances, and Bad Debt Reserves
We derive revenue principally from sales of interactive softwareour games, and related contentextra-content and services that can be played by customers on a variety of platforms which include game consoles, PCs, mobile phones and tablets. WeOur 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 and EA Access, that generally offers access to a selection of full games, in-game content, online services and other benefits typically for a recurring monthly or annual fee; and

licensing 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 FASB Accounting Standards Codification (“ASC”) 605,ASC 606, Revenue Recognition and ASC 985-605, Software: Revenue Recognitionfrom Contracts with Customers.

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”).

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 portion of the transaction price allocated to the software license, revenue is recognized when control of the license has been transferred to the customer. For the portion of the transaction price allocated to the future update rights and the online hosting, revenue is recognized as the services are provided.

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 to our customers to enhance their gameplay 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.


Subscriptions

Revenue from subscriptions is recognized over the subscription term as the service is provided.

Licensing Revenues
In certain countries, we utilize third-party licensees to distribute and host our games 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.revenue. Our product revenue includes revenue associated withallocated to the sale of software games or related product content or updates, whether delivered digitally (e.g., full-game downloads, extra-content) or via a physical disc (e.g., packaged goods), and licensing of game software to third-parties.license performance obligation. Product revenue also includes revenue from mobile full game downloads that do not require our hosting support (e.g., premium mobile games) in orderthe licensing of software to utilize the game or related content (i.e. can be played with or without an Internet connection), and sales of tangible products such as hardware, peripherals, or collectors’ items.third-parties.

Service and other revenue.revenue. Our service revenue includes revenue recognizedallocated to the future update rights and the online hosting performance obligations. This also includes revenue allocated to the future update rights from time-based subscriptions, games, content or updatesthe licensing of software to third-parties, software that requiresoffers an online-only service such as our hosting support in order to utilize theUltimate Team game or related content (i.e., can only be played with an Internet connection). This includes (1) entitlements to content that are accessed through hosting services (e.g., microtransactions for Internet-based, social network and free-to-download mobile games), (2) massively multi-player online (“MMO”) games (both software gamemode, and subscription sales), (3) subscriptions for our Battlefield Premium, EA and Origin Access, and Pogo-branded online game services, and (4) allocated service revenue from sales of software games with a service of online activities (e.g., online playability). Our other revenue includes advertising and non-software licensing revenue.services.

With respect to the allocated service revenue from sales of software games withSignificant Judgments around Revenue Arrangements

Identifying performance obligations. Performance obligations promised in a service of online activities (“online services”) mentioned above, our allocation of proceeds between product and service revenue for presentation purposes iscontract are identified based on management’s best estimate of the selling price of the onlinegoods and services with the residual value allocatedthat will be transferred to product revenue. Our estimate of the selling price of the online services are comprised of several factors including, but not limited to, prior selling prices for the online services, prices charged separately by other third-party vendors for similar service offerings, and a cost-plus-margin approach. We review the estimated selling price of the online services on a regular basis and use this methodology consistently to allocate revenue between product and service for software game sales with online services.

We evaluate and recognize revenue when all four of the following criteria are met:

Evidence of an arrangement. Evidence of an agreement with the customer that reflectsare both capable of being distinct, (i.e., the terms and conditions to delivercustomer can benefit from the related productsgoods 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 be present.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.

Fixed or determinable fee. If a portion ofDetermining the arrangement fee is not fixed or determinable, we recognize revenue as the amount becomes fixed or determinable.transaction price.

Collection is deemed probable. Collection is deemed probable if we expect the customer to be able to pay amounts under the arrangement as those amounts become due. If we determine that collection is not probable as the amounts become due, we generally conclude that collection becomes probable upon cash collection.

Delivery. For packaged goods, delivery is considered to occur when a product is shipped and the risk of loss and rewards of ownership have transferred to the customer. For digital downloads, delivery is considered to occur when the software is made available to the customer for download. For services and other, delivery is generally considered to occur as the service is delivered, whichThe transaction price is determined based on the underlying service obligation. If thereconsideration 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 significant uncertaintyestimated at the time of acceptance, revenue isthe 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 once acceptance is reasonably assured.as the sales occur.

Online-Enabled Games

TheAllocating the transaction price. Allocating the transaction price requires that we determine an estimate of the relative stand-alone selling price for each distinct performance obligation. Determining the relative stand-alone selling price is inherently subjective, especially in situations where we do not sell the performance obligation on a stand-alone basis (which occurs in the majority of our transactions). In those situations, we determine the relative stand-alone selling price based on various observable inputs using all information that is reasonably available. Examples of observable inputs and information include: historical internal pricing data, cost plus margin analyses, third-party external pricing of similar or same products and services such as software gameslicenses and related content have online connectivity wherebymaintenance support within the enterprise software industry. The results of our analysis resulted in a consumer may be ablespecific percentage of the transaction price being allocated to download unspecified content or updates on a when-and-if-available basis (“unspecified updates”) for use with the original game software. In addition, we may also offer a service of online activities (e.g., online playability) without a separate fee. U.S. GAAP requires us to account for the consumer’s right to receive unspecified updates or the service of online activities for no additional fee as a “bundled” sale, or multiple-element arrangement.each performance obligation.

We have an established historical pattern of providing unspecified updates (e.g.,Determining the Estimated Offering Period. player roster updatesThe offering period is the period in which we offer to Madden NFL 18) to online-enabled gamesprovide the future update rights and/or online hosting for the game and related extra content at no additional charge to the consumer. Because we do not have vendor-specific objective evidence of fair value (“VSOE”) for these unspecified updates, we are required by current U.S. GAAP to recognize as

revenue the entire sales price of these online-enabled games and related content over the period we expect to offer the unspecified updates to the consumer (“estimated offering period”).

Estimated Offering Period

sold. Because the offering period is not an explicitly defined period, we must make an estimate of the offering period.period for the service related performance obligations (i.e., future update rights and online hosting). Determining the estimated offering periodEstimated Offering Period is inherently subjective and is subject to regular revision based on historical online usage. For example, in determining the estimated offering period for unspecified updates associated with our online-enabled games,revision. Generally, we consider the average period of time consumerscustomers are online as online connectivity is required. On an annual basis, we review consumers’ online gameplay of all online-enabled games that have been released 12 to 24 months prior towhen estimating the evaluation date. For example, if our evaluation date is April 1, 2017, we evaluate all online-enabled games released between April 1, 2015 and March 31, 2016. Based on this population of games, for all players that register the game online within the first six months of release of the game to the general public, we compute the weighted-average number of days for each online-enabled game, based on when a player initially registers the game online to when that player last plays the game online.offering period. We then compute the weighted-average number of days for all online-enabled games by multiplying the weighted-average number of days for each online-enabled game by its relative percentage of total units sold from these online-enabled games (i.e., a game with more units sold will have a higher weighting to the overall computation than a game with fewer units sold). Under a similar computation, we also consider the estimated period of time between the date a game unit is sold to a reseller and the date the reseller sells the game unit to an end consumer (thei.e.

customer (i.e., time in channel). Based on these two calculationsfactors, we then consider the method of distribution. For example,, physical software games sold at retail would have a composite offering period equal to the online gameplay period plus time in channel as opposed to digitally distributeddigitally-distributed software gameslicenses which are delivered immediately via digital download and thus have no concept of channel. therefore, the offering period is estimated to be only the online gameplay period.

Additionally, we consider results from prior analyses, known and expected online gameplay trends, as well as disclosed service periods for competitors’ games in determining the estimated offering periodEstimated Offering Period for future sales.

While we consistently applyWe believe this methodology, inherent assumptions used in this methodology includeprovides a reasonable depiction of the transfer of future update rights and online hosting to our customers, as it is the best representation of the time period during which online-enabledour games to sample, whether to use only units that have registered online, whether to weight the number of days for each game, whether to weight the days based on the units sold of each game, determining the period of time between the date of sale to reseller and the date of sale to the consumer and assessing online gameplay trends.

are played. We recognize revenue from the sale of online-enabled games for which we do not have VSOE for the unspecified updatesfuture update rights and online hosting performance obligations ratably on a straight-line basis over this period as there is a consistent pattern of delivery for these performance obligations. These performance obligations are generally recognized over an estimated nine-month period beginning in the month after shipment for physical gamessoftware licenses sold through retail and an estimated six-month period for digitally-distributed games.software licenses.

Deferred Net Revenue (online-enabled games)

Because the majority of our sales transactions include future update rights and online hosting performance obligations, which are subject to a deferralrecognition period of generally six to nine months, our deferred net revenue (online-enabled games) balance is material. This balance increases from period to period by the revenue being deferred for current sales with these service obligations and is reduced by the recognition of revenue from prior sales that were deferred (i.e.,deferred. Generally, revenue is recognized as the “net change” in the deferred balance). However, given the seasonal sales nature of our business, the net change in the deferred balance may be material from period to period. For example, because our sales have historically been highest in the fiscal third quarter, the deferred net revenue (online-enabled games) balance generally increases significantly in the third fiscal quarter. Similarly, because sales have historically been lowest in the first fiscal quarter, the deferred net revenue (online-enabled games) balance generally decreases significantly in the first fiscal quarter of a fiscal year.
Other Multiple-Element Arrangements
In some of our multiple-element arrangements, we sell non-software products with software and/or software-related offerings. These non-software productsservices are generally music soundtracks, peripherals or ancillary collectors’ items, such as figurines and comic books. Revenue for these arrangements is allocated to each separate unit of accounting for each deliverable using the relative selling prices of each deliverable in the arrangement based on the selling price hierarchy described below. If the arrangement contains more than one software deliverable, the arrangement consideration is allocated to the software deliverables as a group and then allocated to each software deliverable.provided.

We determine the selling price for a non-software product deliverable based on the following selling price hierarchy: VSOE (i.e., the price we charge when the non-software product is sold separately) if available, third-party evidence (“TPE”) of fair value (i.e., the price charged by others for similar non-software products) if VSOE is not available, or our best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. Determining the BESP is a subjective process that is based on multiple factors including, but not limited to, recent selling prices and related discounts, market conditions, customer classes,

sales channels and other factors. Provided the other three revenue recognition criteria other than delivery have been met, we recognize revenue upon delivery to the customer as we have no further obligations.

We must make assumptions and judgments in order to (1) determine whether and when each element is delivered, (2) determine whether VSOE exists for each undelivered element, and (3) allocate the total price among the various elements, as applicable. Changes to any of these assumptions and judgments, or changes to the elements in the arrangement, could cause a material increase or decrease in the amount of revenue that we report in a particular period.
Principal Agent Considerations

We evaluate sales to end customers of our interactive softwarefull games extra-content, and services from our subscription offeringsrelated content via third partythird-party storefronts, including digital channel storefronts such as Microsoft’s Xbox Store, Sony’s PlayStation Store, Apple App Store, and Google Play Store, in order to determine whether or not we are acting as the primary obligorprincipal in the sale to the end consumer,customer, which we consider in determining if revenue should be reported gross or net of fees retained by the third-party storefront. An entity is the principal if it controls a good or service before it is transferred to the end customer. Key indicators that we evaluate in determining gross versus net treatment include but are not limited to the following:

Thethe underlying contract terms and conditions between the various parties to the transaction;
which party is primarily responsible for delivery/fulfillment offulfilling the productpromise to provide the specified good or service to the end consumercustomer;
Thewhich party responsible forhas inventory risk before the billing, collection of fees and refundsspecified good or service has been transferred to the end consumercustomer; and
The storefront and Terms of Sale that governwhich party has discretion in establishing the end consumer’s purchase ofprice for the productspecified good or serviceservice.
The party that sets the pricing with the end consumer and has credit risk
Based on an evaluation of the above indicators, except as discussed below, we have determined that generally the third party is considered the primary obligorprincipal to end consumerscustomers for the sale of our interactive software games.full games and related content. We therefore report revenue related to these arrangements net of the fees retained by the storefront. However, for sales arrangements via Apple App Store and Google Play Store, EA is considered the principal to the end customer and thus, we report revenue on a gross basis and mobile platform fees are reported within cost of revenue.

Payment Terms

Substantially all of our transactions have payment terms, whether customary or on an extended basis, of less than one year; therefore, we generally do not adjust the transaction price for the effects of any potential financing components that may exist.

Sales and Value-Added Taxes

Revenue is recorded net of taxes assessed by governmental authorities that are imposed at the time of the specific revenue-producing transaction between us and our customer, such as sales and value-added taxes.


Sales Returns and Allowances and Bad DebtPrice 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 productgame unit that they have not resold to end consumers.customers. The amount of the price protection for permanent markdowns is generally the difference between the old wholesale price and the new reduced wholesale price. Credits are also given for short-term promotions that temporarily reduce the wholesale price. In certain countries for our PC and console packaged goods software products, we also have a practice offor allowing channel partners to return older software products in the channel in exchange for a credit allowance. As a general practice, we do not give cash refunds.

When evaluating the adequacy of sales returns and price protection allowances,reserves, we analyze the following: historical credit allowances, current sell-through of our channel partners’ inventory of our software products, current trends in retail and the video game industry, changes in customer demand, acceptance of our software products, and other related factors. In addition, we monitor the volume of sales to our channel partners and their inventories, as substantial overstocking in the distribution channel could result in high returns or higher price protection in subsequent periods.

In the future, actual returns and price protections may materially exceed our estimates as unsold software products in the distribution channels are exposed to rapid changes in consumercustomer preferences, market conditions or technological obsolescence due to new platforms, product updates or competing software products. While we believe we can make reliable estimates regarding these matters, these estimates are inherently subjective. Accordingly, if our estimates change, our returns and price protection allowancesreserves would change and would impact the transaction price and thus, the total net revenue accounts receivable and deferred net revenuerelated balance sheet accounts that we report.

We determine our allowance for doubtful accounts by evaluating the following: customer creditworthiness, current economic trends, historical experience, age of current accounts receivable balances, and changes in financial condition or payment terms of our customers. Significant management judgment is required to estimate our allowance for doubtful accounts in any accounting period. The amount and timing of our bad debt expense and cash collection could change significantly as a result of a change in any of the evaluation factors mentioned above.
Fair Value Estimates
Business Combinations. We must estimate the fair value of assets acquired, liabilities 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. Determining the fair 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 expected future cash flows over the period in which the obligation is expected 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. Such estimates are inherently difficult and subjective and can have a material impact on our Condensed Consolidated Financial Statements.

Royalties and Licenses

Our royalty expenses consist of payments to (1) content licensors, (2) independent software developers, and (3) co-publishing and distribution affiliates. License royalties consist of payments made to celebrities, professional sports organizations, movie studios and other organizations for our use of their trademarks, copyrights, personal publicity rights, content and/or other intellectual property. Royalty payments to independent software developers are payments for the development of intellectual property related to our games. Co-publishing and distribution royalties are payments made to third parties for the delivery of products.

Royalty-based obligations with content licensors and distribution affiliates are either paid in advance and capitalized as prepaid royalties or are accrued as incurred and subsequently paid. These royalty-based obligations are generally expensed to cost of revenue generally at the greater of the contractual rate or an effective royalty rate based on the total projected net revenue for contracts with guaranteed minimums. Significant judgment is required to estimate the effective royalty rate for a particular contract. Because the computation of effective royalty rates requires us to project future revenue, it is inherently subjective as our future revenue projections must anticipate a number of factors, including (1) the total number of titles subject to the contract, (2) the timing of the release of these titles, (3) the number of software units and amount of extra content that we expect to sell, which can be impacted by a number of variables, including product quality, number of platforms we release on, the timing of the title’s release and competition, and (4) future pricing. Determining the effective royalty rate for our titles is particularly challenging due to the inherent difficulty in predicting the popularity of entertainment products. Furthermore, if we

conclude that we are unable to make a reasonably reliable forecast of projected net revenue, we recognize royalty expense at the greater of contract rate or on a straight-line basis over the term of the contract. Accordingly, if our future revenue projections change, our effective royalty rates would change, which could impact the amount and timing of royalty expense we recognize.

Prepayments made to thinly capitalized independent software developers and co-publishing affiliates are generally made in connection with the development of a particular product, and therefore, we are generally subject to development risk prior to the release of the product. Accordingly, payments that are due prior to completion of a product are generally expensed to research and development over the development period as the services are incurred. Payments due after completion of the product (primarily royalty-based in nature) are generally expensed as cost of revenue.

Our contracts with some licensors include minimum guaranteed royalty payments, which are initially recorded as an asset and as a liability at the contractual amount when no performance remains with the licensor. When performance remains with the licensor, we record guarantee payments as an asset when actually paid and as a liability when incurred, rather than recording the asset and liability upon execution of the contract.

Each quarter, we also evaluate the expected future realization of our royalty-based assets, as well as any unrecognized minimum commitments not yet paid to determine amounts we deem unlikely to be realized through product and service sales. Any impairments or losses determined before the launch of a product are generally charged to research and development expense. Impairments or losses determined post-launch are charged to cost of revenue. We evaluate long-lived royalty-based assets for impairment using undiscounted cash flows when impairment indicators exist. If impairment exists, then the assets are written down to fair value. Unrecognized minimum royalty-based commitments are accounted for as executory contracts, and therefore, any losses on these commitments are recognized when the underlying intellectual property is abandoned (i.e.(i.e., cease use) or the contractual rights to use the intellectual property are terminated.
Income Taxes

We recognize deferred tax assets and liabilities for both (1) the expected impact of differences between the financial statement amount and the tax basis of assets and liabilities and (2) the expected future tax benefit to be derived from tax losses and tax

credit carryforwards. We record a valuation allowance against deferred tax assets when it is considered more likely than not that all or a portion of our deferred tax assets will not be realized. In making this determination, we are required to give significant weight to evidence that can be objectively verified.

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; this evaluation involves assumptions about future activity.
In
We recorded a provisional tax expense of $235 million related to the fourth quarter of fiscal year 2016, we realized significant U.S. pre-tax incomeTax Act for both the fourth quarter and the fiscal year ended March 31, 2016. As a result, we released2018, $192 million of which relates to the valuation allowance against all of the U.S. federal deferred tax assets and a portion of the U.S. state deferred tax assets during the fourth quarter of fiscal year 2016. We continue to maintain a valuation allowance related to specific U.S. state deferred tax assets and foreign capital loss carryovers, due to uncertainty about the future realization of these assets.

Our effective tax rate and resulting provision for income taxes forTransition Tax. During the three and ninesix months ended December 31, 2017 was significantly impacted by the U.S. Tax Act, enacted on December 22, 2017. The U.S. Tax Act significantly revises the U.S. corporate income tax system by, among other things, lowering the U.S. corporate income tax rates, generally implementing a territorial tax system and imposing the Transition Tax.

September 30, 2018, we made no material adjustments to these provisional amounts. The final calculationscalculation of tax expenses and tax benefits resulting fromtaxes attributable to the U.S. Tax Act may differ from our estimates, potentially materially, due to, among other things, changes in interpretations of the U.S. Tax Act, our further analysis of the U.S. Tax Act, or any updates or changes to estimates that we have utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and assertions.impacts.

Reasonable estimates of the impacts of the U.S. Tax Act are provided in accordance with SAB 118, the SEC guidance that allows 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. We expect to complete the accounting under the U.S. Tax Act as soon as practicable, but in no event later than one year from the enactment date of the U.S. Tax Act.

The U.S. Tax Act creates new U.S. taxes on foreign earnings. Our provision for income taxes for the three and six months ended September 30, 2018 provisionally does not reflect any deferred tax impacts of the U.S. taxes on foreign earnings. Because of the complexity of the rules regarding the new tax on foreign earnings, we are continuing to evaluate this accounting policy election.

Prior to the U.S. Tax Act, a substantial majority of undistributed earnings of our foreign subsidiaries were considered to be indefinitely reinvested. The U.S. Tax Act included a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and as a result, substantially all previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax.

As part of the process of preparing our Condensed 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
The information under the subheading “Impact of“Other Recently Issued Accounting Standards” in Note 1 - — Description of Business and Basis of Presentation to the Condensed Consolidated Financial Statements in this Form 10-Q is incorporated by reference into this Item 2.

RESULTS OF OPERATIONS
Our fiscal year is reported on a 52- or 53-week period that ends on the Saturday nearest March 31. Our results of operations for the fiscal year ending March 31, 20182019 contains 52 weeks and ends on March 31, 2018.30, 2019. Our results of operations for the fiscal year ended March 31, 20172018 contained 52 weeks and ended on April 1, 2017.March 31, 2018. Our results of operations for the three months ended December 31,September 30, 2018 and 2017 and 2016 contained 13 weeks each and ended on DecemberSeptember 29, 2018 and September 30, 2017, and December 31, 2016, respectively. Our results of operations for the nine months ended December 31, 2017 and 2016 contained 39 each and ended on December 30, 2017 and December 31, 2016, respectively. For simplicity of disclosure, all fiscal periods are referred to as ending on a calendar month end.

Net Revenue
Net revenue consists of sales generated from (1) videofull games sold as digital downloads or as packaged goods and designed for play on game consoles and PCs, (2) videofull games for mobile phones and tablets, (3) separate software products and extra-content and online gamelive services associated with these products,games, such as extra-content (4) subscriptions that generally offer access to a selection of full games, in-game content, online services and other benefits, and (5) licensing our game softwaregames to third parties (5) allowing other companies to manufacturedistribute and sell our products in conjunction with other products, and (6) advertisements on our online web pages and inhost our games. We recognize revenue from the sale of online-enabled games for which we do not have VSOE for the unspecified updates on a straight-line basis, generally over an estimated six-month period for digitally-delivered games and content and an estimated nine-month period beginning in the month after shipment for physical games sold through retail.

We provide two different measures of our Net Revenue.Revenue: (1) Net Revenue by Product revenue and Service and other revenue, and (2) Net Revenue by Type,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 TypeComposition (Digital, and Packaged goods and other) than by Net Revenue by Product revenue and Service and other revenue.

Net Revenue Quarterly Analysis

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 three and six months ended September 30, 2017 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 I, Item 1 of this Form 10-Q in the Notes to Condensed Consolidated Financial Statements in Note 1 under the heading “Recently Adopted Accounting Standards”.

Net Revenue

ForNet revenue from our operations for the three months ended December 31, 2017September 30, 2018, net revenue was $1,160 decreased $5 million, and increased $11 million, or 1 percent, as compared to the three months ended December 31, 2016.September 30, 2017. This increasedecrease was driven by a $217$214 million increasedecrease in revenue primarily from the FIFABattlefield franchise and Mass Effect: Andromeda. This increasedecrease was partially offset by a $206$209 million decreaseincrease in revenue primarily from the BattlefieldStar Wars, The Sims and TitanfallFIFA franchises.

Net Revenue by Product Revenue and Service and Other Revenue

Our Net Revenue by Product revenue and Service and other revenue for the three months ended December 31,September 30, 2018 and 2017 and 2016 was as follows (in millions):
Three Months Ended September 30,
Three Months Ended December 31,      Changes due to:
2017 2016 $ Change % Change2018 2017 Total Change ASC 606 Adoption Mobile Platform Fees under ASC 606 Operational
Net revenue:                  
Product$547
 $649
 $(102) (16)%$623
 $454
 $169
 $186
 $—
 $(17)
Service and other613
 500
 113
 23 %663
 505
 158
 102 44 12
Total net revenue$1,160
 $1,149
 $11
 1 %$1,286
 $959
 $327
 $288
 $44
 $(5)

Product Revenue

ForProduct net revenue from our operations for the three months ended December 31, 2017, Product net revenue was $547 million, primarily driven by FIFA 18, Madden NFL 18, and The Sims 4.September 30, 2018 Product net revenue decreased $102$17 million,, or 16 percent, as compared to the three months ended December 31, 2016.September 30, 2017. This decrease was driven by a $218$194 million decrease primarily from the Battlefield franchiseI and Titanfall 2Mass Effect: Andromeda. This decrease was partially offset by a $116$177 million increase primarily from Mass Effect: Andromeda,Star Wars Battlefront II, The Sims 4and the FIFA franchise.Need for Speed Payback.

Service and Other Revenue

For the three months ended December 31, 2017, Service and other net revenue was $613 million, primarily driven by FIFA Ultimate Team, Star Wars: Galaxy of Heroes and Battlefield 1 Premium. Service and other net revenuefrom our operations for the three months ended December 31, 2017September 30, 2018 increased $113$12 million,, or 23 percent, as compared to the three months ended December 31, 2016.September 30, 2017. This increase was driven by a $147$57 million increase primarily from FIFA Ultimate Team and Battlefield 1 PremiumMadden Ultimate Team. This increase was partially offset by a $34$45 million decrease primarily from theStar Wars: The Old Republic, Mass Effect: Andromeda, SimCity Mobile, Plants vs. Zombies franchise.Zombies: Garden Warfare 2

and Need for Speed 2015.
Supplemental Net Revenue by TypeComposition
As we continue to evolve our business and more of our products are delivered to consumers digitally, we place a greatersignificant emphasis and focus on assessing our business performance through a review of net revenue by type.composition.


Our net revenue by typecomposition for the three months ended December 31,September 30, 2018 and 2017 and 2016 was as follows (in millions):
Three Months Ended December 31,Three Months Ended September 30,
2017 2016 $ Change % Change      Changes due to:
       2018 2017 Total Change ASC 606 Adoption Mobile Platform Fees under ASC 606 Operational
Net revenue:           
Full game downloads$143
 $169
 $(26) (15)%$148
 $123
 $25
 $32
 $—
 $(7)
Live services (a)
476
 369
 107
 29 %
Live services412
 408
 4
 (22) —
 26
Mobile161
 147
 14
 10 %220
 158
 62
 27
 44
 (9)
Total Digital$780
 $685
 $95
 14 %$780
 $689
 $91
 $37
 $44
 $10
                  
Packaged goods and other$380
 $464
 $(84) (18)%$506
 $270
 $236
 $251
 $—
 $(15)
Net revenue$1,160
 $1,149
 $11
 1 %
Total net revenue$1,286
 $959
 $327
 $288
 $44
 $(5)
(a)Live services net revenue is comprised of net revenue previously presented as “Extra content” and “Subscription, advertising, and other” through the fourth quarter of fiscal 2017.

Digital Net Revenue

Digital net revenue includes full gamefull-game downloads, live services, and mobile revenue. Digital netFull game downloads includes revenue from digital sales of full games on console and PC. Live services includes revenue from sales of extra content for console, PC, browser games, game software distributed through our direct-to-consumer PC platform Origin, distributed wirelessly through mobile carriers, or licensed to our third-party publishing partners who distribute our games digitally.digitally, subscriptions, and advertising. Mobile includes revenue from the sale of full games and extra content on mobile phones and tablets.

For the three months ended December 31, 2017, digitalDigital net revenue was $780 million primarily driven by FIFA Ultimate Team, Madden Ultimate Team, and FIFA Online 3 in Asia. Digital net revenuefrom our operations for the three months ended December 31, 2017September 30, 2018 increased $95$10 million, or 14 percent, as compared to the three months ended December 31, 2016.September 30, 2017. This increase is due to (1)a $107$26 million or 29 percent increase in live services net revenue primarily driven by our Ultimate Team game mode, and Battlefield 1 Premium and (2)offset by a $14$9 million or 10 percent increasedecrease in mobile net revenue primarily driven by Star Wars: Galaxy of HeroesFIFA Online 3 in Asiaand FIFA Mobile. These increases were offset by a $26$7 million or 15 percent decrease in full-game download net revenue primarily driven by Battlefield 1.Mass Effect: Andromeda.

Packaged Goods and Other Net Revenue

Packaged goods and other net revenue includes revenue from software that is distributed physically. This includes (1) net revenue from game software distributed physically through traditional channels such as brick and mortar retailers, and (2) our software licensing revenue from third parties (for example, makers of console platforms, personal computers or computer accessories) who include certain of our products for sale with their products (“OEM bundles”). Other revenue includes our non-software licensing revenue.

For the three months ended December 31, 2017, packaged goods and other net revenue was $380 million, primarily driven by FIFA 18, Madden NFL 18, and Mass Effect: Andromeda. Packaged goods and other net revenue from our operations for the three months ended December 31, 2017September 30, 2018 decreased $84$15 million, or 18 percent, as compared to the three months ended December 31, 2016.September 30, 2017. This decrease was driven by a $162$131 million decrease in net revenue primarily from the Battlefield 1and Titanfall franchises. This decrease wasMass Effect: Andromeda, partially offset by a $78$116 million increase primarily from Star Wars Battlefront II and the Mass Effect and FIFA franchises.Need for Speed franchise.

Net Revenue Year-to-Date Analysis

Net Revenue

ForNet revenue from our operations for the ninesix months ended December 31, 2017, net revenue was $3,568September 30, 2018 decreased $38 million, and increased $250 million, or 8 percent, as compared to the ninesix months ended December 31, 2016.September 30, 2017. This increasedecrease was driven by a $769$601 million decrease in revenue primarily from the Battlefield franchise and Mass Effect: Andromeda. This decrease was partially offset by a $563 million increase in revenue primarily from the Star Wars, FIFA and Battlefield franchises, and Mass Effect: Andromeda. This increase was partially offset by a $519 million decrease in revenue primarily from the Star Wars and Need for SpeedThe Sims franchises.


Net Revenue by Product Revenue and Service and Other Revenue

Our Net Revenue by Product revenue and Service and other revenue for the ninesix months ended December 31,September 30, 2018 and 2017 and 2016 was as follows (in millions):
Six Months Ended September 30,
Nine Months Ended December 31,      Changes due to:
2017 2016 $ Change % Change2018 2017 Total Change ASC 606 Adoption Mobile Platform Fees under ASC 606 Operational
Net revenue:                  
Product$1,829
 $1,753
 $76
 4%$825
 $1,282
 $(457) $(328) $—
 $(129)
Service and other1,739
 1,565
 174
 11%1,598
 1,126
 472
 288
 93
 91
Total net revenue$3,568
 $3,318
 $250
 8%$2,423
 $2,408
 $15
 $(40) $93
 $(38)

Product Revenue

For the nine months ended December 31, 2017, Product net revenue was $1,829from our operations for the six months ended September 30, 2018 decreased $129 million, primarily driven by Battlefield 1, FIFA 17, and FIFA 18. Product net revenue increased $76 million, or 4 percent, as compared to the ninesix months ended December 31, 2016.September 30, 2017. This increasedecrease was driven by a $482$570 million decrease primarily from Battlefield I and Mass Effect: Andromeda. This decrease was partially offset by a $441 million increase primarily from Battlefield 1 and Mass Effect: Andromeda. This increase was partially offset by a $406 million decrease primarily from Star Wars Battlefront II, Need for Speed Payback and UFC 2The Sims 4.

Service and Other Revenue

For the nine months ended December 31, 2017, Service and other net revenue was $1,739 million, primarily driven by FIFA Ultimate Team, Star Wars: Galaxy of Heroes and Battlefield 1 Premium. Service and other net revenuefrom our operations for the ninesix months ended December 31, 2017September 30, 2018 increased $174$91 million or 11 percent, as compared to the ninesix months ended December 31, 2016.September 30, 2017. This increase was driven by a $338$185 million increase primarily from FIFA Ultimate Team and Battlefield 1 PremiumMadden Ultimate Team. This increase was partially offset by a $164$94 million decrease primarily from Mass Effect: Andromeda, SimCity Mobile, Star Wars: The Old Republic, Plants vs. Zombies: Garden Warfare 2 and Need for Speed 2015.(2015)and the Plants vs. Zombies franchise.

Supplemental Net Revenue by TypeComposition
Our net revenue by typecomposition for the ninesix months ended December 31,September 30, 2018 and 2017 and 2016 was as follows (in millions):
Nine Months Ended December 31,Six Months Ended September 30,
2017 2016 $ Change % Change      Changes due to:
       2018 2017 Total Change ASC 606 Adoption Mobile Platform Fees under ASC 606 Operational
Net revenue:           
Full game downloads$475
 $400
 $75
 19 %$264
 $332
 $(68) $(28) $—
 $(40)
Live services (a)
1,385
 1,079
 306
 28 %
Live services1,022
 909
 113
 5
 —
 108
Mobile488
 461
 27
 6 %451
 327
 124
 37
 93
 (6)
Total Digital$2,348
 $1,940
 $408
 21 %$1,737
 $1,568
 $169
 $14
 $93
 $62
                  
Packaged goods and other$1,220
 $1,378
 $(158) (11)%$686
 $840
 $(154) $(54) $—
 $(100)
Net revenue$3,568
 $3,318
 $250
 8 %
Total net revenue$2,423
 $2,408
 $15
 $(40) $93
 $(38)
(a)Live services net revenue is comprised of net revenue previously presented as “Extra content” and “Subscription, advertising, and other” through the fourth quarter of fiscal 2017.

Digital Net Revenue

For the nine months ended December 31, 2017, digital net revenue was $2,348 million primarily driven by FIFA Ultimate Team, Battlefield 1, and FIFA Online 3 in Asia. Digital net revenue from our operations for the ninesix months ended December 31, 2017September 30, 2018 increased $408$62 million, or 21 percent, as compared to the ninesix months ended December 31, 2016.September 30, 2017. This increase is due to (1) a $75$108 million or 19 percent increase in full-game download net revenue primarily driven by Mass Effect: Andromeda and Battlefield 1, (2)a $306 million or 28 percent increase in live services net revenue primarily driven by our Ultimate Team game mode, and Battlefield 1 Premium, and (3)offset by a $27$40 million or 6 percent increasedecrease in mobile netfull-game download revenue primarily driven by Star Wars: Galaxy of HeroesBattlefield 1 anda $6 million decrease in mobile revenue primarily driven by the transition from FIFA Mobile.Online 3 to FIFA Online 4 in Asia.


Packaged Goods and Other Net Revenue

For the nine months ended December 31, 2017, packagedPackaged goods and other net revenue was $1,220from our operations for the six months ended September 30, 2018 decreased $100 million, primarilyas compared to the six months ended September 30, 2017. This decrease was driven by FIFA 17,a $368 million decrease primarily from Battlefield 1 and FIFA 18Mass Effect: Andromeda. Packaged goods and other net revenue for the nine months ended December 31, 2017 decreased $158 million, or 11 percent, as compared to the nine months ended December 31, 2016. This decrease was driven by a $465 million decrease in net revenue primarily from the Star Wars and Need for Speed franchises. This decrease was partially offset by a $307$268 million increase primarily from Star Wars Battlefront II and the Battlefield and Mass Effect franchises.Need for Speed franchise.

Cost of Revenue Quarterly Analysis    

Cost of revenue for the three months ended December 31,September 30, 2018 and 2017 and 2016 was as follows (in millions):
Three Months Ended September 30,
      Changes due to:
December 31, 2017 
% of
Related
 Net Revenue
 December 31, 2016 
% of
Related
 Net Revenue
 % Change 
Change as a
% of Related
Net Revenue
2018 2017 Total Change ASC 606 Adoption Mobile Platform Fees under ASC 606 Operational
Cost of revenue:                      
Product$352
 64.4% $389
 59.9% (9.5)% 4.5 %$222
 $300
 (78) $(58) $—
 $(20)
Service and other149
 24.3% 127
 25.4% 17.3 % (1.1)%196
 89
 107
 58 44 5
Total cost of revenue$501
 43.2% $516
 44.9% (2.9)% (1.7)%$418
 $389
 $29
 $—
 $44
 $(15)

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 $37$20 million or 9.5 percent during the three months ended December 31, 2017,September 30, 2018, as compared to the three months ended December 31, 2016.September 30, 2017. This decrease was primarily due to a decrease in inventory costs associated with Battlefield 1 and Titanfall 2 which were launched during thethree months ended December 31, 2016, and a decrease in intangible amortization. These decreases were partially offset by an increase in the royalty costs associated with our product launches during the Madden franchisethree months ended December 31, 2017, as compared to the three months ended December 31, 2016..

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) platform processing fees from operating our website-based games on third party platforms, and (5) credit card fees and (6) mobile platform fees associated with our service revenue.mobile revenue (for transactions in which we are acting as the principal in the sale to the end customer).

CostOperationally, cost of service and other revenue increased by $22 million, or 17.3 percent duringremained relatively consistent in the three months ended December 31, 2017September 30, 2018, as compared to the three months ended December 31, 2016. This increase was primarily due to an increase in royalty costs associated with higher sales from FIFA Ultimate Team and Madden Ultimate Team.September 30, 2017.

Total Cost of Revenue as a Percentage of Total Net Revenue
During the three months ended December 31, 2017, total cost of revenue as a percentage of total net revenue decreased by $15 million, or 1.7 percent as compared to the three months ended December 31, 2016. This decrease was primarily due to a decrease in inventory and warehouse operations costs as a result of the closure of our Switzerland distribution business in fiscal year 2017, and an increase in the proportion of our digital net revenues to packaged goods and other net revenues, which generally have higher costs than our digital products and services.

Cost of Revenue Year-to-Date Analysis    

Cost of revenue for the ninesix months ended December 31,September 30, 2018 and 2017 and 2016 was as follows (in millions):
Six Months Ended September 30,
      Changes due to:
December 31, 2017 
% of
Related
 Net Revenue
 December 31, 2016 
% of
Related
 Net Revenue
 % Change 
Change as a
% of Related
Net Revenue
2018 2017 Total Change ASC 606 Adoption Mobile Platform Fees under ASC 606 Operational
Cost of revenue:                      
Product$716
 39.1% $796
 45.4% (10.1)% (6.3)%$290
 $364
 $(74) $(68) $—
 $(6)
Service and other328
 18.9% 300
 19.2% 9.3 % (0.3)%343
 179
 164
 68
 93
 3
Total cost of revenue$1,044
 29.3% $1,096
 33.0% (4.7)% (3.7)%$633
 $543
 $90
 $—
 $93
 $(3)

Cost of Product Revenue

Cost of product revenue from operations decreased by $80$6 million or 10.1 percent during the ninesix months ended December 31, 2017,September 30, 2018, as compared to the ninesix months ended December 31, 2016.September 30, 2017. This decrease was primarily due to a decrease in inventory and royalty costs associated with Battlefield 1 and Titanfall 2 which were launched during thenine months ended December 31, 2016, a decrease in inventory and warehouse operations costs as a result of the closure of our Switzerland distribution business in fiscal year 2017, and a $26 million decrease in intangible amortization. These decreases were partiallyMadden franchise, offset by an increase in the royalty costs associated with our product launches during the nine months ended December 31, 2017, as compared to the nine months ended December 31, 2016.A Way Out.

Cost of Service and Other Revenue

CostOperationally, cost of service and other revenue increased by $28 million, or 9.3 percent duringremained relatively consistent in the ninesix months ended December 31, 2017,September 30, 2018, as compared to the ninesix months ended December 31, 2016. This increase was primarily due to an increase in royalty costs associated with higher sales from FIFA Ultimate Team and Madden Ultimate Team, offset by a $16 million decrease in intangible amortization.September 30, 2017.

Total Cost of Revenue as a Percentage of Total Net Revenue
During the nine months ended December 31, 2017, total cost of revenue as a percentage of total net revenue decreased by $52 million, or 3.7 percent as compared to the nine months ended December 31, 2016. This decrease was primarily due to a decrease in inventory and warehouse operations costs as a result of the closure of our Switzerland distribution business in fiscal year 2017, and an increase in the proportion of our digital net revenues to packaged goods and other net revenues, which generally have a higher costs than our digital products and services.
Research and Development
Research and development expenses consist of expenses incurred by our production studios for personnel-related costs, related overhead costs, contracted services, depreciation and any impairment of prepaid royalties for pre-launch products. Research and development expenses for our online products include expenses incurred by our studios consisting of direct development and related overhead costs in connection with the development and production of our online games. Research and development expenses also include expenses associated with our digital platform, software licenses and maintenance, and management overhead.
Research and development expenses for the three and ninesix months ended December 31,September 30, 2018 and 2017 and 2016 were as follows (in millions): 
December 31,
2017		 
% of Net
Revenue
 December 31,
2016		 
% of Net
Revenue
 $ Change % ChangeSeptember 30,
2018		 
% of Net
Revenue
 September 30,
2017		 
% of Net
Revenue
 $ Change % Change
Three months ended$329
 28% $285
 25% $44
 15%$339
 26% $331
 35% $8
 2%
Nine months ended$985
 28% $870
 26% $115
 13%
Six months ended$701
 29% $656
 27% $45
 7%

Research and development expenses increased by $448 million, or 152 percent, during the three months ended December 31, 2017September 30, 2018, as compared to the three months ended December 31, 2016.September 30, 2017. This $44$8 million increase was primarily due to (1) a $30$13 million increase in personnel-related costs primarily resulting fromdriven by an increase in headcount in connection with the Respawn acquisition and workforce investments, (2) an $11continued investment in our studios during the third quarter of fiscal year 2018, and a $5 million increase in stock-based compensation, and (3) a $7 million increase in facilities-relatedfacility-related costs. These increases were partially offset by a $12$15 million decrease in development advances primarily dueresulting from the extinguishment of development advances payable to a loss on a royalty-based commitment and impairment on a royalty-based asset during the three-months ended December 31, 2016.Respawn.

Research and development expenses increased by $115$45 million, or 137 percent, during the ninesix months ended December 31, 2017,September 30, 2018, as compared to the ninesix months ended December 31, 2016.September 30, 2017. This $115$45 million increase was primarily due to a (1) a $59$44 million increase in personnel-related costs primarily resulting fromdriven by an increase in headcount in connection with the Respawn acquisition and workforce investments,continued investment in our studios, (2) a $21$22 million increase in stock-based compensation in connection with the Respawn acquisition, and (3) a $14$9 million increase in facilities-related costs, and (4)facility-related costs. These increases were partially offset by a $12$35 million decrease in development advances primarily dueresulting from the extinguishment of development advances payable to a loss on a royalty-based commitment and impairment on a royalty-based asset during the three-months ended December 31, 2016.Respawn.


Marketing and Sales

Marketing and sales expenses consist of personnel-related costs, related overhead costs, advertising, marketing and promotional expenses, net of qualified advertising cost reimbursements from third parties.

Marketing and sales expenses for the three and ninesix months ended December 31,September 30, 2018 and 2017 and 2016 were as follows (in millions): 
December 31,
2017		 
% of Net
Revenue
 December 31,
2016		 
% of Net
Revenue
 $ Change % ChangeSeptember 30,
2018		 
% of Net
Revenue
 September 30,
2017		 
% of Net
Revenue
 $ Change % Change
Three months ended$230
 20% $240
 21% $(10) (4)%$146
 11% $160
 17% $(14) (9)%
Nine months ended$511
 14% $511
 15% $—
 — %
Six months ended$286
 12% $281
 12% $5
 2 %

Marketing and sales expenses decreased by $10$14 million, or 49 percent, during the three months ended December 31, 2017,September 30, 2018, as compared to the three months ended December 31, 2016.September 30, 2017. This $10$14 million decrease was primarily due to a $10$12 million decrease in advertising and promotional spending.spending on the FIFA and Madden franchises.

Marketing and sales expenses remained relatively consistent during the ninesix months ended December 31, 2017,September 30, 2018, as compared to the ninesix months ended December 31, 2016.September 30, 2017.
    
General and Administrative
General and administrative expenses consist of personnel and related expenses of executive and administrative staff, corporate functions such as finance, legal, human resources, and information technology, related overhead costs, fees for professional services such as legal and accounting, and allowances for doubtful accounts.
General and administrative expenses for the three and ninesix months ended December 31,September 30, 2018 and 2017 and 2016 were as follows (in millions): 
December 31,
2017		 
% of Net
Revenue
 December 31,
2016		 
% of Net
Revenue
 $ Change % ChangeSeptember 30,
2018		 
% of Net
Revenue
 September 30,
2017		 
% of Net
Revenue
 $ Change % Change
Three months ended$120
 10% $110
 10% $10
 9%$117
 9% $118
 12% $(1) (1)%
Nine months ended$343
 10% $329
 10% $14
 4%
Six months ended$231
 10% $223
 9% $8
 4 %
General and administrative expenses remained relatively consistent during the three months ended September 30, 2018, as compared to the three months ended September 30, 2017.
General and administrative expenses increased by $10$8 million, or 94 percent, during the threesix months ended December 31, 2017,September 30, 2018, as compared to the threesix months ended December 31, 2016.September 30, 2017. This $10$8 million increase was primarily due to (1) a $6 million increase in contracted services primarily due to higher legal expenses, (2) a $5 million increase in personnel-related costs primarily resulting from an increase in headcount, and (3) a $4 million increase in stock-based compensation. These increases were partially offset by a $9 million decrease in facility-related costs.
General and administrative expenses increased by $14 million, or 4 percent, during the nine months ended December 31, 2017, as compared to the nine months ended December 31, 2016. This $14 million increase was primarily due to (1) a $10 million increase in contracted services primarily due to higher legal expenses, (2) a $7 million increase in personnel-related costs primarily resulting from an increase in headcount and (3) a $7$4 million increase in stock-based compensation. These increases


Interest and Other Income (Expense), Net
Interest and other income (expense), net consists of interest income (expense), foreign currency transaction gains (losses) and net gains (losses) on foreign currency forward contracts.

Interest and other income (expense), net, for the three and six months ended September 30, 2018 and 2017 were as follows (in millions): 
 September 30,
2018		 
% of Net
Revenue
 September 30,
2017		 
% of Net
Revenue
 $ Change % Change
Three months ended$18
 1% $3
 0.3% 15
 500%
Six months ended$37
 2% $9
 0.4% 28
 311%
Interest and other income (expense), net, increased by $15 million, or 500 percent, during the three months ended September 30, 2018, as compared to the three months ended September 30, 2017. This $15 million increase was primarily due to an $8 million increase in interest income and an $8 million increase in gains on foreign currency.
Interest and other income (expense), net, increased by $28 million, or 311 percent, during the six months ended September 30, 2018, as compared to the six months ended September 30, 2017. This $28 million increase was primarily due to a $21 million increase in foreign currency gains on forward contracts and a $19 million increase in interest income, partially offset by a $10 million decreaseforeign currency translation gain as a result of the closure of our Switzerland distribution business in facility-related costs.the six months ended September 30, 2017 with no comparable activity in the six months ended September 30, 2018.




Income Taxes
Provision for income taxes for the three and ninesix months ended December 31,September 30, 2018 and 2017 and 2016 were as follows (in millions):
December 31, 2017 Effective Tax Rate December 31, 2016 Effective Tax RateSeptember 30, 2018 Effective Tax Rate September 30, 2017 Effective Tax Rate
Three Months Ended$170
 (1,062.5)% $(5) 83.3%$21
 7.6% $(16) 42.1%
Nine Months Ended$259
 37.3 % $93
 18.8%
Six Months Ended$47
 7.9% $89
 12.5%
The provision for income taxes for the three and ninesix months ended December 31, 2017September 30, 2018 is based on our projected annual effective tax rate for fiscal year 2018,2019, adjusted for specific items that are required to be recognized in the period in which they are incurred. incur.
Our effective tax rate and resulting provision for income taxes for the three and ninesix months ended December 31, 2017September 30, 2018 was 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 revises the U.S. corporate income tax system by, among other things, lowering the U.S. corporate income tax rates, generally implementing a territorial tax system and imposing the Transition Tax.
Our effective tax rate for the three and ninesix months ended December 31, 2017September 30, 2018 was negative 1,062.57.6 percent and positive 37.37.9 percent, respectively, as compared to 83.342.1 percent and 18.812.5 percent, respectively, for the same periodsperiod in fiscal year 2017.2018. The effective tax rate for the three and ninesix months ended December 31, 2017September 30, 2018 was negatively impacted by the provisional incomelower U.S. statutory tax effectsrate as a result of the U.S. Tax Act and earnings realized in countries that have lower statutory tax rates, partially offset by less excess tax benefits from stock-based compensation recognized in the current period as compared to the same period in fiscal year 2018.
When compared to the statutory rate of 21.0 percent, the effective tax rate for the three and six months ended September 30, 2018 was lower due to earnings realized in countries that have lower statutory tax rates and the recognition of excess tax benefits from stock-based compensation. Without the provisional tax charge of the U.S. Tax Act, our effective tax rate for the three and nine months ended December 31, 2017 would have been 37.5 percent and 11.9 percent, respectively.
We have a March 31 fiscal year-end; therefore, the lower corporate tax rate enacted by the U.S. Tax Act will be phased in, resulting in a U.S. statutory federal rate of 31.6 percent for our fiscal year ending March 31, 2018, and 21.0 percent for subsequent fiscal years. When compared to the statutory rate of 31.6 percent, the effective tax rate for the three and nine months ended December 31, 2017 was higher primarily due to the income tax impacts of the U.S. Tax Act, offset by earnings realized in countries that have lower statutory tax rates and the recognition of excess tax benefits from stock-based compensation. We anticipate that the impact of excess tax benefits and tax deficiencies may result in significant fluctuations to our effective tax rate in the future. Excluding excess tax benefits, our effective tax rate would have been negative 1,075.09.8 percent and positive 43.610.6 percent, respectively, for the three and ninesix months ended December 31, 2017.September 30, 2018.
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 rates 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.

We recorded a provision for income taxesprovisional tax expense of $170 million and $259 million for the three and nine months ended December 31, 2017, respectively, including $176 million which is a reasonable estimate of the impacts of the U.S. Tax Act. We recorded a reasonable estimate of $151$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 three months ended September 30, 2018, we made no material adjustments to these provisional amounts. The final calculation of taxes attributable to the TransitionU.S. Tax Act may differ from our estimates, potentially materially, due to, among other things, changes in interpretations of the U.S. Tax Act, our further analysis of the U.S. Tax Act, or any updates or changes to estimates that we have utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and assertions.
In addition, we provisionally recorded a tax charge related to the remeasurement of U.S. deferred tax assets and liabilities as a result of the reduction of the U.S. corporate tax rate and a tax benefit related to the deferred tax impacts of global intangible income. The impact of these, as well as certain other charges and benefits, were not material individually, or in the aggregate, and are provisional for the same reasons as stated above.impacts.
Reasonable estimates of the impacts of the U.S. Tax Act are provided in accordance with SAB 118, the SEC guidance that allows 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. We expect to complete the accounting under the U.S. Tax Act as soon as practicable, but in no event later than one year from the enactment date of the U.S. Tax Act.
We file
The U.S. Tax Act creates new U.S. taxes on foreign earnings. Our provision for income taxes for the three and six months ended September 30, 2018 provisionally does not reflect any deferred tax returns and are subject to income tax examinations in various jurisdictions with respect to fiscal years after 2008. The timing and potential resolution of income tax examinations is highly uncertain. While we continue to measure our uncertain tax positions, the amounts ultimately paid, if any, upon resolutionimpacts of the issues raised byU.S. taxes on foreign earnings. Because of the taxing authorities may differ materially fromcomplexity of the amounts accrued. It is reasonably possible that a reduction of uprules regarding the new tax on foreign earnings, we are continuing to $45 million of unrecognized tax benefits may occur within the next 12 months, a portion of which would impact our effective tax rate. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements.evaluate this accounting policy election.



LIQUIDITY AND CAPITAL RESOURCES
 
(In millions)As of
December 31, 2017		 As of
March 31, 2017		 

Increase/(Decrease)
As of
September 30, 2018		 As of
March 31, 2018		 

Increase/(Decrease)
Cash and cash equivalents$2,566
 $2,565
 $1
$2,881
 $4,258
 $(1,377)
Short-term investments2,318
 1,967
 351
1,664
 1,073
 591
Total$4,884
 $4,532
 $352
$4,545
 $5,331
 $(786)
Percentage of total assets57% 59%  54% 62%  
Nine Months Ended December 31,  Six Months Ended September 30,  
(In millions)2017 2016 Change2018 2017 Change
Net cash provided by operating activities$1,077
 $1,141
 $(64)
Net cash provided by (used in) operating activities$(6) $228
 $(234)
Net cash used in investing activities(593) (498) (95)(704) (408) (296)
Net cash used in financing activities(508) (625) 117
(659) (351) (308)
Effect of foreign exchange on cash and cash equivalents25
 (28) 53
(8) 33
 (41)
Net increase in cash and cash equivalents$1
 $(10) $11
Net decrease in cash and cash equivalents$(1,377) $(498) $(879)
Changes in Cash Flow
Operating Activities. Net cash provided byused in operating activities decreasedincreased by $64$234 million during the ninesix months ended December 31, 2017September 30, 2018 as compared to the ninesix months ended December 31, 2016.September 30, 2017. The decreaseincrease is primarily driven by a $160 million decrease in accounts receivables collections due to the timing of customercash receipts and game launches during the three months ended December 31, 2017 as compared to the three months ended December 31, 2016. This decrease was partially offset by a $46 million increase in operating cash flows as a result of sales related to the FIFA, Star Wars, and Need for Speed franchises and a $39 million increase in other assets primarily due to higher prepaid royalties duringdigital net bookings that will be collected in the nine months ended December 31, 2017, as compared tothird quarter of fiscal year 2019, the nine months ended December 31, 2016.timing of royalty payments, an increase in personnel-related costs and an increase in cash paid for taxes, offset by interest income and hedging activities.
Investing Activities. Net cash used in investing activities increased by $95$296 million during the ninesix months ended December 31, 2017September 30, 2018 as compared to the ninesix months ended December 31, 2016September 30, 2017 primarily driven by a $640$604 million increase in the purchase of short-term investments, and the payment of $150 million in connection with the acquisition of Respawn. This increase is partially offset by a $688 million increasedecrease in proceeds from the sales and maturities of short-term investments.investments and the payment of $58 million in connection with mergers and acquisitions activity. This increase was partially offset by a $366 million decrease in the purchase of short-term investments during the six months ended September 30, 2018 as compared to the six months ended September 30, 2017.
Financing Activities. Net cash used in financing activities decreasedincreased by $117$308 million during the ninesix months ended December 31, 2017September 30, 2018 as compared to the ninesix months ended December 31, 2016September 30, 2017 primarily due to a repayment of $163$296 million increase in the repurchase and retirement of our formerly outstanding convertible notes during the nine months ended December 31, 2016common stock and a $24$21 million increasedecrease in proceeds from the exercise of stock options and the purchase of ESPP during the ninesix months ended December 31, 2017September 30, 2018 as compared to the ninesix months ended December 31, 2016. This decrease was partially offset by a $70 million increase in the repurchase and retirement of common stock during the nine months ended December 31, 2017 as compared to the nine months ended December 31, 2016.
Cash Flow Reclassifications. The adoption of ASU 2016-09 at the beginning of fiscal year 2018 resulted in two changes to our cash flow presentation. First, excess tax benefits are now presented as operating activities rather than as financing activities. Second, cash payments to taxing authorities in connection with shares withheld to meet statutory tax withholding requirements are now presented as a financing activity rather than as an operating activity. Both of these changes had the effect of increasing our cash provided by operating activities and increasing our cash used in financing activities for the nine months ended December 31, 2017 and 2016. We recast our cash flow presentation for the nine months ended December 31, 2016 to reflect the adoption of ASU 2016-09. For more information, see Note 1 - Description of Business and Basis of Presentation to the Condensed Consolidated Financial Statements in this Form 10-Q as it relates to ASU 2016-09.September 30, 2017.
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 December 31, 2017,September 30, 2018, our short-term investments had gross unrealized losses of $8$7 million, or less than 1 percent of the total in short-term investments, and gross unrealized gains of less than $1 million, or less than 1 percent of the total in short-term investments. From time to time, we may liquidate some or all of our short-term investments to fund operational needs or other activities, such as capital expenditures, business acquisitions or stock repurchase programs.

Depending on which short-term investments we liquidate to fund these activities, we could recognize a portion, or all, of the gross unrealized gains or losses.Senior Notes

Senior Notes
In February 2016, we issued $600 million aggregate principal amount of the 2021 Notes and $400 million aggregate principal amount of the 2026 Notes. We used the net proceeds of $989 million for general corporate purposes, including the payment of our formerly outstanding convertible notes and the repurchaserepurchases of our common stock, including under the $500 million stock repurchase program approved in February 2016 and completed in March 2016.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 11 -12 — Financing Arrangements to the Condensed Consolidated Financial Statements in this Form 10-Q as it relates to our Senior Notes, which is incorporated by reference into this Item 2.

Credit Facility
In March 2015, we entered into a $500 million senior unsecured revolving credit facility with a syndicate of banks. As of December 31, 2017,September 30, 2018, no amounts were outstanding under the credit facility.
See Note 11 - 12 — Financing Arrangements to the Condensed Consolidated Financial Statements in this Form 10-Q as it relates to the above items, which is incorporated by reference into this Item 2.
Financial Condition
We believe that our cash, cash equivalents, short-term investments, cash generated from operations and available financing facilities will be sufficient to meet our operating requirements for at least the next 12 months, including working capital requirements, capital expenditures, debt repayment obligations, and potentially, future acquisitions, stock repurchases, or strategic investments. We may choose at any time to raise additional capital to repay debt, strengthen our financial position, facilitate expansion, repurchase our stock, pursue strategic acquisitions and investments, and/or to take advantage of business opportunities as they arise. There can be no assurance, however, that 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.
AsIn May 2018, a Special Committee of December 31, 2017, approximately $3.1our Board of Directors, on behalf of the full Board of Directors, authorized a program to
repurchase up to $2.4 billion of our cash, cash equivalents,common stock. This stock repurchase program supersedes and short-term investments were domiciledreplaces the May 2017
program, and expires on May 31, 2020. Under this program, we may purchase stock in foreign tax jurisdictions. As a resultthe 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 U.S. Tax Act, which generally implementedstock 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 territorial tax system,
specific number of shares under this program and it may be modified, suspended or discontinued at any time. During the three and six months ended September 30, 2018, we repurchased approximately 2.3 million and 4.0 million shares for approximately $299 million and $523 million, respectively, under this program.

In May 2017, a substantial portionSpecial 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 shares for approximately $76 million under this amount is availableprogram during the three months ended June 30, 2018. During the three and six months ended September 30, 2017, we repurchased approximately 1.3 million and 2.4 million shares for repatriation.approximately $153 million and $272 million, respectively, under this program. This program was superseded and replaced by a new stock repurchase program approved in May 2018.

In May 2015, our Board of Directors authorized a program to repurchase up to $1 billion of our common stock. We repurchased approximately 0.3 million shares for approximately $31 million under this program during the three months ended June 30, 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. This stock repurchase program expires on May 31, 2019. Under this program, we may purchase stock in the open market or through privately-negotiated transactions in accordance with applicable securities laws, including pursuant to pre-arranged stock trading plans. The timing and actual amount of the stock repurchases will depend on several factors including price, capital availability, regulatory requirements, alternative investment opportunities and other market conditions. We are not obligated to repurchase a specific number of shares under this program and it may be modified, suspended or discontinued at any time. During the three and nine months ended December 31, 2017, we repurchased approximately 1.4 million and 3.8 million shares for approximately $150 million and $422 million, respectively, under this program. We are actively repurchasing shares under this program.
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, 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 II, Item 1A of this report.
Contractual Obligations and Commercial Commitments
Note 12 - 13 — Commitments and Contingencies to the Condensed Consolidated Financial Statements in this Form 10-Q as it relates to our contractual obligations and commercial commitments, which is incorporated by reference into this Item 2.


OFF-BALANCE SHEET COMMITMENTS
As of December 31, 2017September 30, 2018, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues and expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.




Item 3:     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, Chinese yuan and South Korean won) has a negative impact on our reported international net revenue, but a positive impact on our reported international operating expenses (particularly the Swedish krona and Canadian dollar) because these amounts are translated at lower rates as compared to periods in which the U.S. dollar is weaker. While we use foreign currency hedging contracts to mitigate some foreign currency exchange risk, these activities are limited in the protection that they provide us and can themselves result in losses.
Cash Flow Hedging Activities. We hedge a portion of our foreign currency risk related to forecasted foreign-currency-denominated sales and expense transactions by purchasing foreign currency forward contracts that generally have maturities of 18 months or less. These transactions are designated and qualify as cash flow hedges. Our hedging programs are designed to reduce, but do not entirely eliminate, the impact of currency exchange rate movements in net revenue and research and development expenses.
Balance Sheet Hedging Activities. We use foreign currency forward contracts to mitigate foreign currency exchange risk associated with foreign-currency-denominated monetary assets and liabilities, primarily intercompany receivables and payables. The 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 December 31, 2017,September 30, 2018, 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 $122$162 million or $244$324 million, respectively. As of December 31, 2017,September 30, 2018, a hypothetical adverse foreign currency exchange rate movement of 10 percent or 20 percent would have resulted in potential losses on our foreign currency forward contracts used in balance sheet hedging of $99$80 million or $197$159 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 such manner and actual results may differ materially. See Note 4 - 5 — Derivative Financial Instruments to the Condensed Consolidated Financial Statements in this Form 10-Q as it relates to our derivative financial instruments, which is incorporated by reference into this Item 3.
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 December 31, 2017,September 30, 2018, our short-term investments were classified as available-for-sale securities and, consequently, were recorded at fair value with unrealized gains or losses resulting from changes in fair value reported as a separate component of accumulated other comprehensive income (loss), net of tax, in stockholders’ equity.

Notwithstanding our efforts to manage interest rate risks, there can be no assurance that we will be adequately protected against risks associated with interest rate fluctuations. Fluctuations in interest rates could have a significant impact on the fair value of our investment portfolio. The following table presents the hypothetical changes in the fair value of our short-term investment portfolio as of December 31, 2017,September 30, 2018, arising from potential changes in interest rates. The modeling technique estimates the change in fair value from immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (“BPS”), 100 BPS, and 150 BPS.
(In millions)
Valuation of Securities Given
an Interest Rate Decrease
of X Basis Points
 
Fair Value
as of
December 31, 2017
 
Valuation of Securities Given
an Interest Rate Increase of
X Basis Points
Valuation of Securities Given
an Interest Rate Decrease
of X Basis Points
 
Fair Value
as of
September 30, 2018
 
Valuation of Securities Given
an Interest Rate Increase of
X Basis Points
(150 BPS) (100 BPS) (50 BPS) 50 BPS 100 BPS 150 BPS(150 BPS) (100 BPS) (50 BPS) 50 BPS 100 BPS 150 BPS
Corporate bonds$1,221
 $1,217
 $1,212
 $1,209
 $1,204
 $1,200
 $1,196
$744
 $741
 $738
 $736
 $731
 $728
 $725
U.S. Treasury securities453
 451
 449
 446
 444
 442
 439
280
 279
 278
 277
 276
 275
 274
U.S. agency securities118
 117
 117
 115
 116
 115
 114
74
 74
 73
 73
 72
 72
 72
Commercial paper295
 295
 294
 294
 293
 293
 293
359
 359
 358
 357
 357
 356
 355
Foreign government securities99
 99
 98
 98
 97
 96
 96
81
 80
 80
 79
 79
 79
 78
Asset-backed securities136
 135
 135
 134
 134
 133
 133
122
 122
 121
 121
 121
 120
 120
Certificates of deposit22
 22
 22
 22
 22
 22
 22
22
 21
 21
 21
 21
 21
 21
Total short-term investments$2,344

$2,336

$2,327

$2,318

$2,310

$2,301

$2,293
$1,682

$1,676

$1,669

$1,664

$1,657

$1,651

$1,645


Item 4.Controls and Procedures
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.
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 December 31, 2017September 30, 2018 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
Limitations on effectiveness of disclosure controls
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.



PART II – OTHER INFORMATION
Item 1.Legal Proceedings
The information under the subheading “Legal Proceedings” in Note 12 - 13 — Commitments and Contingencies to the Condensed Consolidated Financial Statements in this Form 10-Q is incorporated by reference into this Part II.
Item 1A.Risk Factors

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 free-to-download)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 with the potential to become hits. High-quality titles, even if highly-reviewed, may not turn into hit products. Many hit products within our industry are iterations of prior hit products with large established consumer bases and significant brand recognition, which makes competing in certain product categories challenging. In addition, hit products or services of our competitors 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 games 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 game or service quality, 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 as liveportfolio. Live services that are either poorly-received or provided in connection with underperforming games may generate lower than expected sales.

Our business is dependent on the success and availability of platforms developed by third parties, as well as Any lapse, delay or failure in our ability to develop commercially successful productsprovide 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, for these platforms.

The success ofand cause harm to our businessreputation and brand. Our most popular live service is driven in part by the commercial success and adequate supply of third party platforms for which we developUltimate Team mode associated with our products and servicessports franchises. Any events or through which our products and services are distributed. Our success also depends oncircumstances that negatively impact our ability to accurately predict which platforms will be successful in the marketplace, our ability to develop commercially successful products and servicesreliably provide content or sustain engagement for these platforms and our ability to effectively manage the transition from one generation of platforms to the next. We must make product development decisions and commit significant resources well in advance of anticipated platform release dates and may incur significant expense to adjust our product portfolio and development efforts in response to changing consumer platform preferences. Additionally, we may enter into certain exclusive licensing arrangements that affect our ability to deliver or market products or services on certain platforms. A platform for which we are developing products and services may not succeed as expected or new platforms may take market share and interactive entertainment consumers away from platforms for which we have devoted significant resources. If consumer demand for the platforms for which 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, andUltimate Team, particularly FIFA Ultimate Team, would negatively impact our financial performance will be harmed. Alternatively,results to 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.disproportionate extent.

Technology changes rapidly in our business and if we may fail to anticipate or successfully implement new technologies or adopt new business strategies, technologies or methods, the quality, timeliness and competitiveness of our products and services may suffer.methods.

Rapid technology changes in our industry require us to anticipate, sometimes years in advance, which technologies we must develop, implement and take advantage of in order to make our products and services competitive in the market. We have invested, and in the future may invest, in new business strategies, technologies, products, and services. For example, we are investing in the infrastructure for our EA Player Network which we expect will allow us to market and deliver content and services for our franchises more efficiently as well as enable new player-centric ways to discover and try new experiences. Such endeavors may involve significant risks and uncertainties, and no assurance can be given that the technology we choose to adopt and the products and services that we pursue will be successful. If we do not successfully implement these new technologies, 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 develop products, and services or new ways to engage with our games that become popular with

consumers, which could adversely affect our financial results. It may take significant time and resources to shift our focus to such technologies, putting us at a competitive disadvantage.

Our development process usually starts with particular platforms and distribution methods in mind, and a range of technical development and feature goals that we hope to be able to achieve. We may not be able to achieve these goals, or our competition may be able to achieve them more quickly and effectively than we can. In either case, our products and services may be technologically inferior to those of our competitors, less appealing to consumers, or both. If we cannot achieve our technology goals within the original development schedule for our products and services, then we may delay their release until these goals can be achieved, which may delay or reduce revenue and increase our development expenses. Alternatively, we may increase the resources employed in research and development in an attempt to accelerate our development of new technologies, either to preserve our product or service launch schedule or to keep up with our competition, which would increase our development expenses.

We may experience security breaches and cyber threats.

We continually face cyber risksOur industry is prone to, and threatsour 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 partythird-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. Such cyber risks and threats may be difficult to detect. Both our partners and we have implementedexpended, 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 that may be used to obtain unauthorizedexploit, disable, damage, disrupt or gain access or disable, degrade, exploit or sabotageto our networks, our products and services, supporting technological infrastructure, intellectual property and systemsother assets change frequently, continue to evolve in sophistication and volume, and often are not detected.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.adequate against all eventualities. In addition, 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 as well asand services and significant legal and financial exposure.costs. This could harm our business, reputation and reputation,brand, disrupt our relationships with partners and customers and diminish our competitive position.

Successful exploitation of our systems can have other negative effects upon the products, services and user experience we offer.  In particular, theThe 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 kinds of activitiesabuses and exploits, and the steps that we take to address these issuesabuses and exploits may result in a loss of anticipated revenue, increased costs to protect against or remediate these issues, interfere with players’ enjoyment of a balanced game environment and cause reputational harm.harm to our reputation and brand.

Our business 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, and credit card information gameplay details and banking information. Although we takeexpend, 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 disclosure and misuse and/or the uninformed disclosure, our security controls,measures, policies and practicescontrols may not be able to prevent thesuccessful against all eventualities. The improper or unauthorized access,

acquisition or misuse and/or uninformed disclosure of such information. For example, third parties may fraudulently induce employees or customers into disclosing identification orconsumer and other sensitive information which may, in turn, be used to access our information technology systems. The unauthorized access, acquisition or disclosure of this information, or a perception that we do not adequately secure consumer and otherthis 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 reputationbrand, 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/orand us, negatively impact our ability to offer our products and services.services, and could result in legal liability, costly remedial measures, governmental and regulatory investigations, harm our profitability, reputation and brand, and cause our financial results to be materially affected.

We are subject to payment card association rules and obligations pursuant to contracts with payment card processors. Under these rules and obligations, if information is compromised, we could be liable to payment card issuers for the cost of associated expenses and penalties. In addition, if we fail to follow payment card industry security standards, even if no consumer information is compromised, we could incur significant fines or experience a significant increase in payment card transaction costs.

Data privacy, data protection, localization, security and consumer-protection laws are evolving, and the interpretation and application of these laws in the United States, Europe and elsewhere often are uncertain, contradictory and changing. For example, recent developments in Europe have created compliance uncertainty and increased the complexity of certain transfers of information from Europe to the United States. In addition, the European General Data Protection Regulation (GDPR), effective as of May 2018 applies to us because we receive and process the personal data of European Union residents. 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, or require us to change our practices in a manner adverse to our business.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 and/or degradations ofin our online services.services, products and/or technological infrastructure.

We are investing and expect to continue to invest in technology, hardware and software to support the online functionality of our portfolio of products and services. In addition, we rely on technological infrastructure provided by third party business partners.  Launching and operating games and services with online features, developing related technologies and implementing online business initiatives is expensive and complex. Implementation of these technologies and execution of these initiatives could result in operational failures and other issues impacting the technical stability of our products and services. In addition, having access to the necessary infrastructure to support the online functionalityThe 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 technological infrastructure required to reliably deliver these games and services is vital toexpensive and complex. The reliable delivery and stability of our growth and success. Our products and services could be adversely impacted by outages, disruptions, failures and/or degradations in our network and related infrastructure, as well as in the online platforms or services of key business partners who offer or support 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. In addition, we occasionally migrate data among data centers and to third-party hosted environments and perform upgrades and maintenance on our systems.

If we 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 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 technology, hardware and software to support our business, but it is possible that we may fail to scale effectively and grow our 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 player perceptions about and responses to our brands, products, services and/or business practices may damage our business, and thewe may incur costs incurred in addressing player concerns may increase our operating expenses.to address concerns.

Player expectationsExpectations 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. These negative player reactions may not be foreseeable or within our control to manage effectively,reasons, including perceptions about gameplay fun, fairness, negative player reactions to game content, components andfeatures 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 the past,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 the playerour community even if

those decisions negatively impacted our operating results in the short term. We expect to continue to take actions to address concerns as appropriate, including actions that may result in additional expenditures and the loss of revenue. Negative player sentiment about gameplay fairness, our business practices, business models or game content also can lead to investigations or increased scrutiny from regulatory agenciesgovernmental 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 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 platform preferences. Additionally, we may enter into certain exclusive licensing arrangements that affect our ability to deliver or market products or services on certain platforms. A platform for which we are developing products and services may not succeed as expected or new platforms may take market share and interactive entertainment consumers away from platforms for which we have devoted significant resources. If consumer demand for the platforms for which 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 subject to a number of foreign and domestic laws and regulations that affect companies conducting business on the Internet. In addition, laws and regulations relating to user privacy, data collection, retention, consumer protection, content, advertising, localization, and information security, among others, have been adopted or are being considered for adoption by many jurisdictions and countries throughout the world. 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 could be subject to new laws or regulations or evolving interpretations of existing laws and regulations. For example, the growth and development of electronic commerce, virtual items and virtual currency has prompted calls for laws and 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 of current laws that impact these business models, 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 customers. 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 consistently meet our product development schedules or key events, sports seasons and/or movies that we tieare tied to our product release schedulesschedule 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 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.

OurHistorically our business ishas been highly seasonal with the highest percentage of our sales occurring in the quarter ending in December. While our sales generally followwe expect this seasonal trend to continue in fiscal year 2019, there can beis no assurance that this trendit will continue.be so. If we miss key selling periods for products or services for any reason, including product delays or product cancellations or delayed introduction of a new platform for which we have developed products and services or through which we distribute our products and services, our sales likely will suffer significantly. Additionally, macroeconomic conditions or the occurrence of unforeseen events that negatively impact retailerconsumer or consumerretailer buying patterns, particularly during the quarter ending in December, likely will harm our financial performance disproportionately.

Our financial results are subjectmarketing and advertising efforts may fail to currency fluctuations.resonate with consumers.

International salesOur products and services are marketed worldwide through a fundamental partdiverse spectrum of our business. For our fiscal year ended March 31, 2017, international net revenue comprised 56 percent of our total net revenue,advertising and we expect our international business to continue to account for a significantpromotional programs, such as online and mobile advertising, television advertising, retail merchandising, marketing through websites, event sponsorship and direct communications with consumers including via email. Furthermore, an increasing portion of our total net revenue. As a resultmarketing activity is taking place on social media platforms that are outside of our international sales,direct control. Our ability to sell our products and alsoservices is dependent in part upon the denominationsuccess of these programs, and changes to consumer preferences, marketing regulations, technology changes or service disruptions may negatively impact our foreign investmentsability to reach our customers. Moreover, if the marketing for our products and services fails to resonate with our cashcustomers, 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 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.results could be harmed.

We may not attract 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. 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 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 titles (e.g., FIFA and Madden NFL), and associated services, subscriptions and our ongoing mobile businesses. While we have been able to forecast the revenue from these areas of our business with greater certaintyrelative confidence than for new offerings,games, services and business models, we cannot provide assurances that consumersconsumer demand will purchase these games and services on a consistent basis.remain consistent. Furthermore, we may cease to offer games and services that we previously had deemed to be recurring in nature. Consumer purchases of our games and servicesdemand 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 licensed sports games may be adversely impacted by circumstances outside our control impacting the sports leagues and organizations. Any decline or fluctuation in the recurring portion of our business may have a negative impact on our financial and operating results.

We could fail to successfully adopt new business models.

From time to time we seek to establish and implement new business models. Forecasting the success of any new business model is inherently uncertain and depends on a number of factors both within and outside of our control. Our actual revenue and profit for these businesses may be significantly greater or less than our forecasts. Additionally,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, products and services offered by our competitors, reliability of our infrastructure, pricing, the actual or perceived security of our 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, for example with 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 and players’ associations and our Star Wars products include rights licensed from Disney. Competition for these licenses and rights is intense. If we are unable to maintain these licenses and rights or obtain additional licenses or rights with significant commercial value, our ability to develop and successful and engaging games and services may be adversely affected and our revenue, profitability and cash flows may decline significantly. Competition for these licenses also may increase the amounts that we must pay to licensors and developers, through higher minimum guarantees or royalty rates, which could significantly increase our costs and reduce our profitability.

External game developers may not meet product development schedules or otherwise honor their obligations.

We may contract with external game developers to develop our games or to publish or distribute their games. While we maintain contractual protections, we have less control over the product development schedules of games developed by external developers, and we depend on their ability to meet product development schedules. In addition, we may have disputes with external developers over game content, launch timing, achievement of certain milestones, the game development timeline, marketing campaigns or other matters. If we have disputes with external developers or they cannot meet product development schedules, acquire certain approvals or are otherwise unable or unwilling to honor their obligations to us, we may delay or cancel previously announced games, alter our launch schedule or experience increased costs and expenses, which could result in a delay or significant shortfall in anticipated revenue, harm our profitability and reputation, and cause our financial results to be materially affected.

The products or services we release may contain defects.

Our products and services are extremely complex software programs, and are difficult to develop and distribute. We have quality controls in place to detect defects in our products and services before they are released. Nonetheless, these quality controls are subject to human error, overriding, and reasonable resource or technical constraints. Therefore, these quality controls and preventative measures may not be effective in detecting all defects in our products and services before they have been released into the marketplace. In such an event, we could be required to, or may find it necessary to, offer a refund for the product or service, suspend the availability or sale of the product or service or expend significant resources to cure the defect, each of which could significantly harm our business and operating results.

Our business is subject to regulation, and changes in applicable regulations may negatively impact our business.

We are subject to a number of foreign and domestic laws and regulations that affect companies conducting businessrely on the Internet. In addition, laws and regulations relating to user privacy, data collection, retention, electronic commerce, virtual items and currency, consumer protection, content, advertising, localization, and information security have been adopted or are being considered for adoption by many jurisdictions and countries throughout the world. 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. Furthermore, 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.

We are subject to laws in certain foreign countries, and adhere to industry standards in the United States, that mandate rating requirements or set other restrictions on the advertisement or distribution of interactive entertainment software based on content. In addition, certain foreign countries allow government censorship of interactive entertainment software products. Adoption of ratings systems censorship or restrictions on distribution of interactive entertainment software based on content could harm our business by limiting the products we are able to offer to our customers. 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.

In addition, we may include modes in our games that allow players to compete against each other and we may manage player competitions based on our products and services. Although we structure and operate these skill-based competitions with applicable laws in mind, our skill based competitions in the future could become subject to evolving rules and regulations and expose us to significant liability, penalties and reputational harm.


Our marketing and advertising efforts may fail to resonate with our customers.

Our products and services are marketed worldwide through a diverse spectrum of advertising and promotional programs such as online and mobile advertising, television advertising, retail merchandising, marketing through websites, event sponsorship and direct communications with our consumers including via email. Furthermore, an increasing portion of our marketing activity is taking place on social media platforms 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, marketing regulations, technology changes or service disruptions may negatively impact our ability to reach our customers. Moreover, if the marketing for our products and services 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.

A significant portion of our sales are made to a relatively small number ofcustomers, and these sales may be disrupted.

We derive a significant percentage of our net revenue through sales to our top customers. The concentration of a significant percentage of our sales through a few large customers could lead to a short-term disruption to our business if certain of these customers significantly reduced their purchases or ceased to offer our products and services. We also could be more vulnerable to collection risk if one or more of these large customers experienced a deterioration of their business or declared bankruptcy. Additionally, receivables from our customers generally increase in our December fiscal quarter as sales of our products and services generally increase in anticipation of the holiday season. Having a significant portion of our net revenue concentrated in sales through a few customers could reduce our negotiating leverage with them. If one or more of our key customers experience deterioration in their business, or become unable to obtain sufficient financing to maintain their operations, our business could be harmed.

Our channelplatform partners who have significant influence over the products and services that we offer on their platforms.systems.

OurA 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 channelplatform 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 and

or distributed to customers. For our digital products and services delivered via digital channels such as Sony’s PlayStation Store, Microsoft’s Xbox Store, Apple’s App Storemaintained by, among others, Sony, Microsoft, Nintendo, Apple and Google, Play, each respective channelplatform 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 channelplatform 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 channelsplatform 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 channelplatform 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 channelplatform 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 channelplatform partners control the information technology systems through which online sales of our products and service channels are captured. If our channelplatform partners establish terms that restrict our offerings through their channels,platforms, significantly impact the financial terms on which these products or services are offered to our customers, or their information technology systems fail or cause an unanticipated delay in reporting, our business and/or financial results could be materially affected.

Our business is subject to risks generally associated with the entertainment industry.

Our business is subject to risks that are generally associated with the entertainment industry, many of which are beyond our control. These risks could negatively impact our operating results and include: the popularity, price and timing of our games, economic conditions that adversely affect discretionary consumer spending, 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, operating results, or financial condition.

Acquisitions, investments, divestitures and other strategic transactions could result inoperating difficulties and other negativeconsequences.

We may make acquisitions or enter into other strategic transactions including (1) acquisitions of companies, businesses, intellectual properties, and other assets, (2) minority investments in strategic partners, and (3) investments in new interactive entertainment businesses as part of our long-term business strategy. These transactions involve significant challenges and risks including that the transaction does not advance our business strategy, that we do not realize a satisfactory return on our investment, that we acquire liabilities, diversion of management’s attention from our other businesses, the incurrence of debt, contingent liabilities or amortization expenses, write-offs of goodwill, intangibles, or acquired in-process technology, or other increased cash and non-cash expenses. In addition, we may not integrate these businesses successfully, including experiencing difficulty in the integration of business systems and technologies, the integration and retention of new employees, or in the maintenance of key business and customer relationships. These events could harm our operating results or financial condition. We also may divest or sell assets or a business and we may have difficulty selling such assets or business on acceptable terms in a timely manner. This could result in a delay in the achievement of our strategic objectives, cause us to incur additional expense, or the sale of such assets or business at a price or on terms that are less favorable than we anticipated.

Our products and brands are subject to the threat of piracy, unauthorized copying and other forms of intellectual property infringement.

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 as the 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. 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.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 or interruption in our ability to conduct critical business functions. Our corporate headquarters in Redwood City, CA and our studiostudios 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.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, 2018, international net revenue comprised 59 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; and

Limiting our flexibility in planning for, or reacting to, changes in our business and our industry.industry; and

Increasing our vulnerability to adverse changes in general economic and industry conditions.

The agreements governing our indebtedness impose restrictions on us and require us to maintain compliance with specified covenants. In particular, the revolving credit facility 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 or exposure to additional tax liabilities 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, reorganization of our business and operating structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the elections we make, changes in applicable tax laws or interpretations of existing tax laws, or changes in the valuation allowance for deferred tax assets, 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 certain proposed regulations related to U.S. taxes on foreign earnings, could result in material changes to our consolidated financial statements.

The U.S. Tax Cuts and Jobs Act, enacted on December 22, 2017, represents a significant overhaul to the U.S. federal tax code. This tax legislation lowers the U.S. statutory tax rate, but also includes a number of provisions that could significantly and adversely impact our U.S. federal income tax position in a reporting period, including the limitation or elimination of certain deductions or credits, and ongoing tax requirements related toU.S. taxes on foreign earnings. During the three months ended December 31, 2017, we recorded a provision for income taxes of $176 million which is a reasonable estimate of the impact of the U.S. Tax Act. The final calculation of tax expense resulting from the U.S. Tax

Act may differ from our estimates, potentially materially, due to, among other things, changes in interpretations of the U.S. Tax Act, our analysis of the U.S. Tax Act, or any updates or changes to estimates that we have utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and assertions.materially. In addition, any further changes to tax laws applicable to corporate multinationals in the countries in which we do business could adversely affect our effective tax rates, cause us to change the way in which we structure our business or result in other costs to us.costs.

We are also 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. 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 in financial accounting standards.

Our reported financial results are impacted by the accounting standards promulgated by the SEC and national accounting standards bodies and the methods, estimates, and judgments that we use in applying our accounting policies. These methods, estimates, and judgments are subject to risks, uncertainties, assumptions and changes that could adversely affect our reported financial position and financial results. In addition, changes to applicable financial accounting standards could adversely affectimpact our reported financial position and financial results. For example, recently issued accounting standards are expected to materially changeASC 606, which we adopted at the beginning of fiscal year 2019, had a material impact on the way in which we recognize revenue and account for leases upon adoption.consequently, our diluted earnings per share. ASC 606 also required us to change how we present mobile platform fees. For more information on ASC 606 and other accounting standards, see Part I, Item 1 of this Form 10-Q in the Notes to the Condensed Consolidated Financial Statements in Note 1 - — Description of Business and Basis of Presentation under the subheading “Impact of Recently Issued“Recently Adopted 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 factors specific to us (including those discussed in the risk factors above, as well as others not currently known to us or that we currently do not believe are material), to changes in securities analysts’ earnings estimates or ratings, to our results or future financial guidance falling below our expectations and analysts’ and investors’ expectations, to factors affecting the entertainment, computer, software, Internet, media or electronics industries, to our ability to successfully integrate any acquisitions we may make, or to national or international economic conditions. 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 2.Unregistered Sales of Equity Securities and Use of Proceeds
Stock Purchase Programs
In May 2015, our Board of Directors authorized a program to repurchase up to $1 billion of our common stock. We repurchased approximately 0.3 million shares for approximately $31 million under this program during the three months ended June 30, 2017. We completed repurchases under the May 2015 program in April 2017.
In May 2017,2018, a Special Committee of our Board of Directors, on behalf of the full Board of Directors, authorized a program to
repurchase up to $1.2$2.4 billion of our common stock. This stock repurchase program supersedes and replaces the May 2017
program, and expires on May 31, 2019.2020. 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. During the three and ninesix months ended December 31, 2017,September 30, 2018, we repurchased approximately 1.42.3 million and 3.84.0 million shares for approximately $150$299 million and $422$523 million, respectively, under this program. We are actively repurchasing shares under this program.
The following table summarizes the number of shares repurchased during the three months ended December 31, 2017:September 30, 2018:
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)
October 1 - October 28, 2017 409,732
 $116.42
 409,732
 $880
October 29 - November 25, 2017 244,871
 $112.41
 244,871
 $853
November 26 - December 30, 2017 704,303
 $106.33
 704,303
 $778
  1,358,906
 $110.47
 1,358,906
  
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)
July 1, 2018 - July 28, 2018 605,297
 $145.08
 605,297
 $2,089
July 29, 2018 - August 25, 2018 739,502
 $129.55
 739,502
 $1,993
August 26, 2018 - September 29, 2018 989,512
 $116.69
 989,512
 $1,877
  2,334,311
 $128.13
 2,334,311
  


Item 3.Defaults Upon Senior Securities
None.

Item 4.Mine Safety Disclosures
Not applicable.

Item 6.Exhibits
The exhibits listed in the accompanying index to exhibits on Page 6272 are filed or incorporated by reference as part of this report.


ELECTRONIC ARTS INC.
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2017SEPTEMBER 30, 2018
EXHIBIT INDEX

    Incorporated by Reference  
Number Exhibit Title  Form  File No.  Filing Date  
Filed
Herewith
4.01
Specimen Common Stock Certificate
X
15.1
 
Awareness Letter of KPMG LLP, Independent Registered Public Accounting Firm
       X
           
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
           X
           
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
           X
           
Additional exhibits furnished with this report:            
           
32.1
 
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
           X
           
32.2
 
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
           X
           
101.INS†
 XBRL Instance Document           X
           
101.SCH†
 XBRL Taxonomy Extension Schema Document           X
           
101.CAL†
 XBRL Taxonomy Extension Calculation Linkbase Document           X
           
101.DEF†
 XBRL Taxonomy Extension Definition Linkbase Document           X
           
101.LAB†
 XBRL Taxonomy Extension Label Linkbase Document           X
           
101.PRE†
 XBRL Taxonomy Extension Presentation Linkbase Document           X
 
*Management contract or compensatory plan or arrangement

**Portions of this exhibit have been redacted pursuant to a confidential treatment request filed with the SEC.

†
Attached as Exhibit 101 to this Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2017September 30, 2018 are the following formatted in eXtensible Business Reporting Language (“XBRL”): (1) Condensed Consolidated Balance Sheets, (2) Condensed Consolidated Statements of Operations, (3) Condensed Consolidated Statements of Comprehensive Income, (Loss), (4) Condensed Consolidated Statements of Cash Flows, and (5) Notes to Condensed Consolidated Financial Statements.


SIGNATURE
Pursuant to the requirements 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.
  (Registrant)
  
  /s/ Blake Jorgensen
DATED: Blake Jorgensen
FebruaryNovember 6, 2018 Executive Vice President,Chief Operating Officer and
  Chief Financial Officer

6373