01—Abstract
Summary
Summary of the 10-K filed July 1, 1996. Cited figures are marked; the original filing is the authoritative source.
Electronic Arts' fiscal 1996 (year ended March 31, 1996) was a year of solid top-line growth but sharply lower profitability.
Net revenues rose 7.8% to $531.9 milliona from $493.3 million, driven by PC-CD and CD-based videogames (PlayStation), and international revenues grew 43% to $225.7 million, now 42% of the total. However, operating income fell 17.4% to $53.5 million (10.1% margin versus 13.1%), and net income dropped 27.3% to $40.5 million, or $0.75 per share, from $55.7 million, or $1.07. The decline reflects a sharp rise in research and development spending (up 34.8% to $99.6 million, 18.7% of revenue), higher marketing and sales costs, and the absence of the prior year's one-time $10 million Broderbund termination payment.
The filing signals a difficult transition ahead. Management expects sales of 16-bit Sega Genesis and Super NES cartridges to decline significantly in fiscal 1997, and the company intends to release even fewer titles on those platforms. Revenue from 16-bit cartridges already fell to 38%b of net revenues from 57%.
Management also warned that the transition to 32-bit CD platforms will continue to pressure near-term results and that the first fiscal quarter of 1997 could show a net loss if product release schedules slip. Several product delays (including Wing Commander IV and PlayStation titles) during fiscal 1996 illustrate this execution risk. The balance sheet remains strong.
Stockholders' equity rose to $322.3 millionc from $237.1 million, largely from a $17.5 million unrealized investment gain and $21.7 million from employee stock plans, and the company carries no debt beyond modest obligations. Cash and short-term investments were $148.0 million, and working capital was $199.7 million. Operating cash flow fell to just $6.9 million from $63.8 million, mainly because of growth in receivables, prepaid royalties, and capital spending of $56.8 million, including new headquarters and Texas development facilities.
The company paid no dividends. Investors should weigh the strong capital base and international growth against falling margins, dependence on a shrinking 16-bit market, and the risk of hit-driven product execution.
02—Key points
Key Highlights
- Net revenues increased 7.8% to $531.9 million, led by PC-CD (up 95% to $140.6 million) and CD-Videogame products (up 181% to $76.5 million).
- Net income declined 27.3% to $40.5 million ($0.75 per share), down from $55.7 million ($1.07 per share), partly due to the non-recurring $10 million Broderbund payment in fiscal 1995.
- Operating margin compressed to 10.1% from 13.1%, as R&D expense rose 34.8% to $99.6 million and marketing and sales rose 17.7% to $72.9 million.
- International net revenues grew 43% to $225.7 million, representing 42% of total revenues, with Europe up 40% and Japan up 43%.
- 16-bit Sega Genesis cartridge revenue fell to 26% of total revenue from 43%, and management expects significant further declines in fiscal 1997.
- Operating cash flow fell sharply to $6.9 million from $63.8 million, while capital expenditures rose to $56.8 million, reflecting investments in new facilities and infrastructure.
- Management warned that the first fiscal quarter of 1997 could show a net loss if product release schedules are missed, and the company has no dividend policy, retaining cash for growth.
03—Questions
Frequently Asked Questions
Why did Electronic Arts' net income fall in fiscal 1996 even though revenue grew?
Net income fell 27.3% to $40.5 million because operating expenses grew faster than revenue. R&D rose 34.8% to $99.6 million, reflecting more in-house development and higher costs for CD-based products, and marketing and sales rose 17.7%. Fiscal 1995 also benefited from a one-time $10 million Broderbund termination payment, which did not recur.
What is the outlook for the company's 16-bit business?
Management expects sales of 16-bit cartridge products, mainly Sega Genesis and Super NES, to decline significantly in fiscal 1997. The company plans even fewer 16-bit releases and no new floppy or Sega 32X titles. The shift to 32-bit CD platforms such as PC-CD, PlayStation and Saturn is central to its strategy, but management noted the 32-bit CD market could grow more slowly than expected.
How strong is the company's financial position?
The balance sheet is solid. Stockholders' equity rose to $322.3 million from $237.1 million, total assets were $424.2 million, and working capital was $199.7 million. Cash and short-term investments totaled $148.0 million. The company has no significant debt, though it carries minor obligations such as a $32.2 million lease commitment and long-term investments of $24.2 million tied to Puerto Rico tax incentives.
What risks should investors be aware of?
Key risks include dependence on hardware licensers such as Sega, Nintendo and Sony, which are also competitors and control manufacturing and supply; the hit-driven nature of products with short 3-to-12-month life cycles; product development delays, as seen with Wing Commander IV and PlayStation titles; high dependence on a few sports franchises like FIFA Soccer '96, which represented 11% of revenue; and the 3DO Company stake, whose performance could affect EA's stock price.
Why was operating cash flow so weak in fiscal 1996?
Operating cash flow fell to $6.9 million from $63.8 million. The main drivers were a $16.7 million increase in receivables, $10.6 million higher prepaid royalties, and a $12.6 million decline in accrued liabilities. Investing cash outflows were heavier, with capital expenditures of $56.8 million for buildings, land in Texas, and computer systems.
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