01—Abstract
Summary
Summary of the 10-K filed June 29, 1999. Cited figures are marked; the original filing is the authoritative source.
Electronic Arts reported fiscal 1999 (year ended March 31, 1999) net revenues of $1.22 billiona, up 34.4% from $908.9 million, and net income of $72.9 million, essentially flat versus $72.6 million in fiscal 1998.
Diluted EPS was $1.15b versus $1.19. The flat bottom line masks strong underlying growth: excluding one-time charges, net income rose to $110.4 million, up 53%. The principal drag was a $44.1 million charge for acquired in-process technology, mostly tied to the September 1998 Westwood Studios acquisition ($122.7 million in cash), plus $5.9 million of new intangibles amortization.
Operating income rose 26.2% to $105.3 millionc, though operating margin slipped to 8.6% from 9.2%. Growth was driven by the PlayStation and Nintendo 64 installed bases. PlayStation sales reached $519.8 million (43% of revenue) and N64 sales rose to $152.3 million from $56.7 million.
Affiliated Label distribution grew to $248.1 milliond, helped by the Square EA joint venture. Management, however, expects PlayStation growth rates to moderate, does not expect significant N64 growth in fiscal 2000, and has no Saturn or 16-bit titles planned. International revenue was 42% of the total.
Wal-Mart accounted for 12% of revenue, and the company carries material platform-licensor dependence (Sony and Nintendo control manufacturing and are also competitors). Balance sheet and cash flow remain healthy. Operating cash flow was $150.8 million, and stockholders' equity grew to $662.9 million.
Cash, cash equivalents and short-term investments fell to $312.8 million from $374.6 million, reflecting roughly $116 million in capital expenditures (largely new Redwood City, Canadian and Austin facilities and land purchases) and the Westwood acquisition. Management believes existing liquidity is sufficient for the next twelve months. Investors should weigh the strong top-line momentum and cash generation against margin pressure, concentration on Sony and Nintendo platforms, the high cost of hit-driven titles, and the risk of product development delays.
02—Key points
Key Highlights
- Net revenues rose 34.4% to $1,221.9 million, driven by PlayStation, N64 and Affiliated Label growth.
- Reported net income was flat at $72.9 million (diluted EPS $1.15 vs. $1.19), but excluding one-time acquisition charges, net income rose 53% to $110.4 million.
- A $44.1 million charge for acquired in-process technology, mainly from the $122.7 million Westwood Studios acquisition, depressed reported earnings.
- PlayStation was 43% of revenue ($519.8 million); N64 revenue more than doubled to $152.3 million, though growth is not expected to continue in fiscal 2000.
- Operating cash flow was $150.8 million, up from $79.0 million, while cash and short-term investments declined to $312.8 million after heavy capital spending.
- Concentration risks include dependence on Sony and Nintendo as platform licensors (who are also competitors) and Wal-Mart at 12% of revenue.
- The company paid no cash dividends and repurchased 222,500 shares for about $9.0 million under a new buyback program.
03—Questions
Frequently Asked Questions
Why was reported net income flat despite revenue growing 34%?
Fiscal 1999 included a $44.1 million charge for acquired in-process technology, largely from the Westwood Studios acquisition, and $5.9 million of amortization of acquired intangibles. Those items reduced after-tax earnings by roughly $37.5 million. Excluding one-time items, net income rose to $110.4 million from $72.3 million, a 53% increase. Operating expenses also grew faster than gross profit in some areas, including research and development (up 38%).
How dependent is EA on Sony and Nintendo?
Very dependent. PlayStation products generated 43% of fiscal 1999 net revenue and N64 products generated 12%, so together they made up over half of revenue. Sony and Nintendo also manufacture the cartridges and CDs EA sells, and control approval of EA's products. The filing notes they are also EA's chief competitors and that EA has limited control over supply timing. EA has not yet negotiated publishing agreements for Sony's PlayStation II, Sega's Dreamcast, or Nintendo's next-generation system.
What are the main risks to future growth?
Management highlights several risks: PlayStation growth is expected to slow as that console market matures; N64 revenue growth is not expected in fiscal 2000; Saturn and 16-bit revenue are expected to be insignificant; and product development schedules are often unreliable, as shown by SimCity 3000 and Tiberian Sun delays. The company also faces intense competition for talent from Internet companies, regulatory risk for online content, and foreign currency exposure, since 42% of revenue is international.
Is the company financially strong enough to fund its growth?
Yes, based on the filing. Operating cash flow was $150.8 million, stockholders' equity rose to $662.9 million, and total assets reached $901.9 million. Cash, equivalents and short-term investments totaled $312.8 million, down from $374.6 million, largely because of $115.8 million in capital expenditures and the $122.7 million Westwood purchase. Management says these resources are sufficient for the next twelve months and the foreseeable future. The company has no debt disclosed in the filing beyond operating leases, which total about $51.7 million in future minimum payments.
Does EA pay dividends, and what is it doing with its share capital?
EA does not pay cash dividends and does not expect to in the foreseeable future, so returns to shareholders depend on share price appreciation. The company's stock traded between $33.88 and $56.00 during fiscal 1999. In February 1999 the board authorized repurchases of up to two million shares, and 222,500 shares were bought back for about $9.0 million by March 31, 1999. Shares are also issued through stock option and employee purchase plans, which generated $30.6 million in cash during the year.
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