Electronic Arts Reports Q3 FY13 Financial Results

About Electronic Arts

Electronic Arts (NASDAQ:EA) is a global leader in digital interactive entertainment. The Company’s game franchises are offered as both packaged goods products and online services delivered through Internet-connected consoles, personal computers, mobile phones and tablets. EA has more than 250 million registered players and operates in 75 countries. In fiscal year 2012, EA posted GAAP net revenue of $4.1 billion. Headquartered in Redwood City, California, EA is recognized for critically acclaimed, high-quality blockbuster franchises such as The Sims™, Madden NFL, FIFA Soccer, Need for Speed™, Battlefield™, and Mass Effect™. More information about EA is available at http://info.ea.com.

EA SPORTS, Origin, Dead Space, The Sims and Need for Speed are trademarks of Electronic Arts Inc. Mass Effect is a trademark of EA International (Studio and Publishing) Ltd. Battlefield 3 and Battlefield are trademarks of EA Digital Illusions CE AB. Crysis is a trademark of GmbH. The Simpsons TM & © 2012 Twentieth Century Fox Film Corporation. All Rights Reserved . John Madden, NFL and FIFA are the property of their respective owners and used with permission. All other trademarks are the property of their respective owners.

ELECTRONIC ARTS INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
(in millions, except per share data)
		Three Months Ended December 31,								Nine Months Ended December 31,
		2012				2011				2012				2011
Net revenue
Product		$	703			$	884			$	1,886			$	2,370
Service and other		219				177				702				405
Total net revenue		922				1,061				2,588				2,775
Cost of revenue
Product		363				477				866				1,088
Service and other		66				75				213				136
Total cost of revenue		429				552				1,079				1,224
Gross profit		493				509				1,509				1,551
Operating expenses:
Marketing and sales		214				269				571				631
General and administrative		68				98				253				260
Research and development		286				325				890				928
Acquisition-related contingent consideration		(45		)		(11		)		(65		)		8
Amortization of intangibles		7				11				21				37
Restructuring and other		2				—				27				17
Total operating expenses		532				692				1,697				1,881
Operating loss		(39		)		(183		)		(188		)		(330		)
Gain on strategic investments		14				—				14				—
Interest and other income (expense), net		(8		)		(10		)		(17		)		(13		)
Loss before provision for (benefit from) income taxes		(33		)		(193		)		(191		)		(343		)
Provision for (benefit from) income taxes		12				12				34				(19		)
Net loss		$	(45	)		$	(205	)		$	(225	)		$	(324	)
Loss per share
Basic and Diluted		$	(0.15	)		$	(0.62	)		$	(0.72	)		$	(0.98	)
Number of shares used in computation
Basic and Diluted		304				332				313				331

Non-GAAP Results (in millions, except per share data)

The following tables reconcile the Company’s net loss and loss per share as presented in its Unaudited Condensed Consolidated Statements of Operations and prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) to its non-GAAP net income and non-GAAP earnings per share.

		Three Months Ended December 31,								Nine Months Ended December 31,
		2012				2011				2012				2011
Net loss		$	(45	)		$	(205	)		$	(225	)		$	(324	)
Acquisition-related expenses		(15		)		14				8				70
Amortization of debt discount		5				5				15				9
Change in deferred net revenue (packaged goods and digital content)		260				590				165				434
Gain on strategic investments		(14		)		—				(14		)		—
Restructuring and other		2				—				27				17
Stock-based compensation		39				48				122				129
Income tax adjustments		(56		)		(118		)		(3		)		(107		)
Non-GAAP net income		$	176			$	334			$	95			$	228
Non-GAAP earnings per share
Basic		$	0.58			$	1.01			$	0.30			$	0.69
Diluted		$	0.57			$	0.99			$	0.30			$	0.67
Number of shares used in Non-GAAP computation
Basic		304				332				313				331
Diluted		308				338				315				338

ELECTRONIC ARTS INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(in millions)
		December 31, 2012				March 31, 2012 (a)
ASSETS
Current assets:
Cash and cash equivalents		$	1,158			$	1,293
Short-term investments		275				437
Marketable equity securities		59				119
Receivables, net of allowances of $284 and $252, respectively		382				366
Inventories		59				59
Deferred income taxes, net		67				67
Other current assets		229				268
Total current assets		2,229				2,609
Property and equipment, net		550				568
Goodwill		1,724				1,718
Acquisition-related intangibles, net		304				369
Deferred income taxes, net		47				42
Other assets		185				185
TOTAL ASSETS		$	5,039			$	5,491
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	93			$	215
Accrued and other current liabilities		840				857
Deferred net revenue (packaged goods and digital content)		1,213				1,048
Total current liabilities		2,146				2,120
0.75% convertible senior notes due 2016, net		554				539
Income tax obligations		211				189
Deferred income taxes, net		2				8
Other liabilities		168				177
Total liabilities		3,081				3,033
Common stock		3				3
Paid-in capital		2,138				2,359
Accumulated deficit		(302		)		(77		)
Accumulated other comprehensive income		119				173
Total stockholders’ equity		1,958				2,458
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	5,039			$	5,491

(a)

Derived from audited consolidated financial statements.

ELECTRONIC ARTS INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(in millions)
		Three Months Ended December 31,								Nine Months Ended December 31,
		2012				2011				2012				2011
OPERATING ACTIVITIES
Net loss		$	(45	)		$	(205	)		$	(225	)		$	(324	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Acquisition-related contingent consideration		(45		)		(11		)		(65		)		8
Depreciation, amortization and accretion, net		66				54				178				148
Net gains on investments and sale of property and equipment		(12		)		—				(12		)		(12		)
Non-cash restructuring charges		—				(3		)		7				(3		)
Stock-based compensation		39				48				122				129
Change in assets and liabilities:
Receivables, net		256				39				(18		)		(176		)
Inventories		13				22				—				11
Other assets		14				(18		)		14				(81		)
Accounts payable		(124		)		(93		)		(115		)		(150		)
Accrued and other liabilities		(56		)		48				53				50
Deferred income taxes, net		(3		)		4				(13		)		(44		)
Deferred net revenue (packaged goods and digital content)		260				590				165				434
Net cash provided by (used in) operating activities		363				475				91				(10		)
INVESTING ACTIVITIES
Capital expenditures		(25		)		(44		)		(81		)		(128		)
Proceeds from sale of property and equipment		—				—				—				26
Proceeds from sale of marketable equity securities		25				—				25				—
Proceeds from maturities and sales of short-term investments		124				144				404				463
Purchase of short-term investments		(47		)		(195		)		(244		)		(374		)
Acquisition-related restricted cash		—				—				25				—
Acquisition of subsidiaries, net of cash acquired		—				(19		)		(10		)		(676		)
Net cash provided by (used in) investing activities		77				(114		)		119				(689		)
FINANCING ACTIVITIES
Payment of debt issuance costs		—				—				(2		)		—
Proceeds from borrowings on convertible senior notes, net of issuance costs		—				—				—				617
Proceeds from issuance of warrants		—				—				—				65
Purchase of convertible note hedge		—				—				—				(107		)
Proceeds from issuance of common stock		1				4				19				39
Excess tax benefit from stock-based compensation		—				1				—				4
Repurchase and retirement of common stock		(157		)		(41		)		(336		)		(230		)
Acquisition-related contingent consideration payment		(2		)		—				(28		)		—
Net cash provided by (used in) financing activities		(158		)		(36		)		(347		)		388
Effect of foreign exchange on cash and cash equivalents		5				(13		)		2				(26		)
Increase (decrease) in cash and cash equivalents		287				312				(135		)		(337		)
Beginning cash and cash equivalents		871				930				1,293				1,579
Ending cash and cash equivalents		$	1,158			$	1,242			$	1,158			$	1,242

ELECTRONIC ARTS INC. AND SUBSIDIARIES
Unaudited Supplemental Financial Information and Business Metrics
(in millions, except per share data and headcount)
		Q3				Q4				Q1				Q2				Q3				YOY %
		FY12				FY12				FY13				FY13				FY13				Change
QUARTERLY RECONCILIATION OF RESULTS
Net Revenue
GAAP net revenue		$	1,061			$	1,368			$	955			$	711			$	922			(13	%)
Change in deferred net revenue (packaged goods and digital content)		590				(391		)		(464		)		369				260
Non-GAAP net revenue		$	1,651			$	977			$	491			$	1,080			$	1,182			(28	%)
Gross Profit
GAAP gross profit		$	509			$	994			$	750			$	266			$	493			(3	%)
Acquisition-related expenses		14				27				15				14				23
Change in deferred net revenue (packaged goods and digital content)		590				(391		)		(464		)		369				260
Stock-based compensation		—				1				1				—				—
Non-GAAP gross profit		$	1,113			$	631			$	302			$	649			$	776			(30	%)
GAAP gross profit % (as a % of GAAP net revenue)		48%				73%				79%				37%				53%
Non-GAAP gross profit % (as a % of non-GAAP net revenue)		67%				65%				62%				60%				66%
Operating Income (Loss)
GAAP operating income (loss)		$	(183	)		$	365			$	215			$	(364	)		$	(39	)		79	%
Acquisition-related expenses		14				36				2				21				(15		)
Certain non-recurring litigation expenses		—				27				—				—				—
Change in deferred net revenue (packaged goods and digital content)		590				(391		)		(464		)		369				260
Restructuring and other		—				(1		)		27				(2		)		2
Stock-based compensation		48				41				39				44				39
Non-GAAP operating income (loss)		$	469			$	77			$	(181	)		$	68			$	247			(47	%)
GAAP operating income (loss) % (as a % of GAAP net revenue)		(17%)				27%				23%				(51%)				(4%)
Non-GAAP operating income (loss) % (as a % of non-GAAP net revenue)		28%				8%				(37%)				6%				21%
Net Income (Loss)
GAAP net income (loss)		$	(205	)		$	400			$	201			$	(381	)		$	(45	)		78	%
Acquisition-related expenses		14				36				2				21				(15		)
Amortization of debt discount		5				5				5				5				5
Certain non-recurring litigation expenses		—				27				—				—				—
Change in deferred net revenue (packaged goods and digital content)		590				(391		)		(464		)		369				260
Gain on strategic investments		—				—				—				—				(14		)
Restructuring and other		—				(1		)		27				(2		)		2
Stock-based compensation		48				41				39				44				39
Income tax adjustments		(118		)		(61		)		60				(7		)		(56		)
Non-GAAP net income (loss)		$	334			$	56			$	(130	)		$	49			$	176			(47	%)
GAAP net income (loss) % (as a % of GAAP net revenue)		(19%)				29%				21%				(54%)				(5%)
Non-GAAP net income (loss) % (as a % of non-GAAP net revenue)		20%				6%				(26%)				5%				15%
Diluted Earnings (Loss) Per Share
GAAP earnings (loss) per share		$	(0.62	)		$	1.20			$	0.63			$	(1.21	)		$	(0.15	)		76	%
Non-GAAP earnings (loss) per share		$	0.99			$	0.17			$	(0.41	)		$	0.15			$	0.57			(42	%)
Number of diluted shares used in computation
GAAP		332				332				320				316				304
Non-GAAP		338				332				317				318				308

ELECTRONIC ARTS INC. AND SUBSIDIARIES
Unaudited Supplemental Financial Information and Business Metrics
(in millions, except per share data and headcount)
		Q3			Q4			Q1			Q2			Q3			YOY %
		FY12			FY12			FY13			FY13			FY13			Change
QUARTERLY NET REVENUE PRESENTATIONS - GAAP AND NON-GAAP
Geography Net Revenue
North America		500			653			450			329			409			(18	%)
Europe		505			627			435			332			464			(8	%)
Asia		56			88			70			50			49			(13	%)
Total GAAP Net Revenue		1,061			1,368			955			711			922			(13	%)
North America		310			(188	)		(265	)		179			80
Europe		235			(187	)		(174	)		171			166
Asia		45			(16	)		(25	)		19			14
Change In Deferred Net Revenue (Packaged Goods and Digital Content)		590			(391	)		(464	)		369			260
North America		810			465			185			508			489			(40	%)
Europe		740			440			261			503			630			(15	%)
Asia		101			72			45			69			63			(38	%)
Total Non-GAAP Net Revenue		1,651			977			491			1,080			1,182			(28	%)
North America		47%			48%			47%			46%			44%
Europe		48%			46%			46%			47%			51%
Asia		5%			6%			7%			7%			5%
Total GAAP Net Revenue %		100%			100%			100%			100%			100%
North America		49%			48%			38%			47%			42%
Europe		45%			45%			53%			47%			53%
Asia		6%			7%			9%			6%			5%
Total Non-GAAP Net Revenue %		100%			100%			100%			100%			100%
Net Revenue Composition
Publishing and Other		738			926			592			365			568			(23	%)
Wireless, Internet-derived, and Advertising (Digital)		274			419			342			324			321			17	%
Distribution		49			23			21			22			33			(33	%)
Total GAAP Net Revenue		1,061			1,368			955			711			922			(13	%)
Publishing and Other		487			(397	)		(446	)		379			174
Wireless, Internet-derived, and Advertising (Digital)		103			6			(18	)		(10	)		86
Change In Deferred Net Revenue (Packaged Goods and Digital Content)		590			(391	)		(464	)		369			260
Publishing and Other		1,225			529			146			744			742			(39	%)
Wireless, Internet-derived, and Advertising (Digital)		377			425			324			314			407			8	%
Distribution		49			23			21			22			33			(33	%)
Total Non-GAAP Net Revenue		1,651			977			491			1,080			1,182			(28	%)
Publishing and Other		69%			68%			62%			51%			62%
Wireless, Internet-derived, and Advertising (Digital)		26%			30%			36%			46%			35%
Distribution		5%			2%			2%			3%			3%
Total GAAP Net Revenue %		100%			100%			100%			100%			100%
Publishing and Other		74%			54%			30%			69%			63%
Wireless, Internet-derived, and Advertising (Digital)		23%			44%			66%			29%			34%
Distribution		3%			2%			4%			2%			3%
Total Non-GAAP Net Revenue %		100%			100%			100%			100%			100%

ELECTRONIC ARTS INC. AND SUBSIDIARIES
Unaudited Supplemental Financial Information and Business Metrics
(in millions, except per share data and headcount)
		Q3			Q4			Q1			Q2			Q3			YOY %
		FY12			FY12			FY13			FY13			FY13			Change
QUARTERLY NET REVENUE PRESENTATIONS - GAAP AND NON-GAAP
Platform Net Revenue
Xbox 360		331			454			292			204			277			(16	%)
PLAYSTATION 3		314			432			267			150			289			(8	%)
Wii		49			20			8			17			20			(59	%)
PlayStation 2		7			3			2			6			3			(57	%)
Total Consoles		701			909			569			377			589			(16	%)
Mobile		70			87			69			75			86			23	%
PlayStation Handhelds		14			6			10			14			15			7	%
Nintendo Handhelds		15			5			9			8			9			(40	%)
Total Mobile and Handhelds		99			98			88			97			110			11	%
PC		214			334			276			214			186			(13	%)
Other		47			27			22			23			37			(21	%)
Total GAAP Net Revenue		1,061			1,368			955			711			922			(13	%)
Xbox 360		174			(128	)		(186	)		144			72
PLAYSTATION 3		179			(210	)		(183	)		222			95
Wii		3			(7	)		(5	)		—			—
PlayStation 2		—			—			(1	)		1			—
Mobile		13			(3	)		9			13			13
PlayStation Handhelds		(2	)		10			(4	)		7			11
Nintendo Handhelds		9			(5	)		(4	)		(2	)		13
PC		214			(48	)		(90	)		(16	)		56
Change in Deferred Net Revenue (Packaged Goods and Digital Content)		590			(391	)		(464	)		369			260
Xbox 360		505			326			106			348			349			(31	%)
PLAYSTATION 3		493			222			84			372			384			(22	%)
Wii		52			13			3			17			20			(62	%)
PlayStation 2		7			3			1			7			3			(57	%)
Total Consoles		1,057			564			194			744			756			(28	%)
Mobile		83			84			78			88			99			19	%
PlayStation Handhelds		12			16			6			21			26			117	%
Nintendo Handhelds		24			—			5			6			22			(8	%)
Total Mobile and Handhelds		119			100			89			115			147			24	%
PC		428			286			186			198			242			(43	%)
Other		47			27			22			23			37			(21	%)
Total Non-GAAP Net Revenue		1,651			977			491			1,080			1,182			(28	%)
Xbox 360		31%			33%			31%			29%			30%
PLAYSTATION 3		29%			32%			28%			21%			32%
Wii		5%			1%			1%			2%			2%
PlayStation 2		1%			—			—			1%			—
Total Consoles		66%			66%			60%			53%			64%
Mobile		7%			6%			7%			11%			9%
PlayStation Handhelds		1%			1%			1%			2%			2%
Nintendo Handhelds		1%			—			1%			1%			1%
Total Mobile and Handhelds		9%			7%			9%			14%			12%
PC		20%			25%			29%			30%			20%
Other		5%			2%			2%			3%			4%
Total GAAP Net Revenue %		100%			100%			100%			100%			100%
Xbox 360		31%			34%			22%			32%			30%
PLAYSTATION 3		30%			23%			17%			34%			32%
Wii		3%			1%			1%			2%			2%
PlayStation 2		—			—			—			1%			—
Total Consoles		64%			58%			40%			69%			64%
Mobile		5%			8%			16%			8%			8%
PlayStation Handhelds		1%			2%			1%			2%			2%
Nintendo Handhelds		1%			—			1%			1%			2%
Total Mobile and Handhelds		7%			10%			18%			11%			12%
PC		26%			29%			38%			18%			21%
Other		3%			3%			4%			2%			3%
Total Non-GAAP Net Revenue %		100%			100%			100%			100%			100%

ELECTRONIC ARTS INC. AND SUBSIDIARIES
Unaudited Supplemental Financial Information and Business Metrics
(in millions, except per share data and headcount)
		Q3			Q4			Q1			Q2			Q3			YOY %
		FY12			FY12			FY13			FY13			FY13			Change
CASH FLOW DATA
Operating cash flow		475			287			(244	)		(28	)		363			(24	%)
Operating cash flow - TTM		243			277			307			490			378			56	%
Capital expenditures		44			44			31			25			25			(43	%)
Capital expenditures - TTM		149			172			171			144			125			(16	%)
BALANCE SHEET DATA
Cash and cash equivalents		1,242			1,293			919			871			1,158			(7	%)
Short-term investments		406			437			444			351			275			(32	%)
Marketable equity securities		143			119			76			93			59			(59	%)
Receivables, net		526			366			111			643			382			(27	%)
Inventories		69			59			60			71			59			(14	%)
Deferred net revenue (packaged goods and digital content)
End of the quarter		1,439			1,048			584			953			1,213
Less: Beginning of the quarter		849			1,439			1,048			584			953
Change in deferred net revenue (packaged goods and digital content)		590			(391	)		(464	)		369			260
STOCK-BASED COMPENSATION
Cost of goods sold		—			1			1			—			—
Marketing and sales		7			8			7			8			7
General and administrative		11			7			9			9			7
Research and development		30			25			22			27			25
Total Stock-Based Compensation		48			41			39			44			39
EMPLOYEES		9,043			9,158			9,225			9,224			9,370			4	%

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