What drove the swing from a net loss to net income in fiscal 2002?

Revenue growth of $402 million, led by PlayStation 2 and the launches of Xbox, GameCube and Game Boy Advance, lifted gross profit by about $247 million. Gross margin improved because the new platforms carry lower cost of goods sold as a percentage of revenue. Operating expenses rose only about $81 million, even though marketing spending increased 30%, and the company also absorbed a $20.3 million restructuring charge.

Is EA.com a meaningful profit contributor, and what does the Class B tracking stock represent?

Not yet. EA.com recorded a GAAP operating loss of $151.0 million in fiscal 2002, and its net loss attributable to Class B holders was $22.7 million after the retained-interest allocation. The company says EA.com has been funded solely by Electronic Arts and that the segment may never achieve profitability. Class B stock is intended to track EA.com's performance, but its holders own only about 15% of that business, with Electronic Arts retaining roughly 85%.

What are the main risks to revenue growth heading into fiscal 2003?

Management expects sales of PlayStation and N64 products to decline significantly, and it expects PC revenue to be flat or lower because of The Sims' maturity. Growth in PlayStation 2 is expected to continue but at a slower rate. Advertising growth will not match fiscal 2002's pace. Platform licensors such as Sony and Nintendo are also competitors and control manufacturing, which can delay releases. The filing also notes that product development schedules are frequently unreliable and that the Square EA joint venture may be terminated effective March 31, 2003.

How strong is the balance sheet and what commitments does the company carry?

Total assets were $1.70 billion against total liabilities of $453 million, and stockholders' equity was $1.24 billion. Working capital was $699.6 million. The company has about $278 million of contractual obligations and commercial commitments, including $95.5 million of minimum guarantees, $58.97 million of marketing commitments, $22.5 million owed to AOL, and $76.2 million of lease payments. The company repurchased 280,000 Class A shares for about $11.9 million in fiscal 2002 and does not pay cash dividends.

EA 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed June 28, 2002. Cited figures are marked; the original filing is the authoritative source.

Electronic Arts' fiscal 2002 (year ended March 31, 2002) marked a turnaround year, with net revenues rising 30.4% to $1.72 billion^a from $1.32 billion and net income swinging to $101.5 million from a net loss of $11.1 million in fiscal 2001.

Growth was driven by the current-generation console transition: PlayStation 2 revenue rose 86% to $483 million^b, and the Xbox, Nintendo GameCube, and Game Boy Advance launched during the year contributed meaningfully. Gross margin improved to 53.2% from 50.7%, and operating income was $135.4 million versus an operating loss of $30.3 million, though GAAP results were burdened by a $20.3 million EA.com restructuring and impairment charge and $25.4 million of intangible amortization. Operating cash flow strengthened to $285 million, and cash, equivalents and short-term investments reached $797 million with no debt disclosed on the balance sheet.

The quality of earnings warrants scrutiny. EA.com, the online segment, lost $151.0 million^c at the operating level, and the company's own pro forma figures show EA Core carrying the business while EA.com remains unprofitable and dependent on funding from Electronic Arts. Management also acknowledges that PlayStation and N64 sales are declining sharply, that PC revenue is expected to be flat or lower in fiscal 2003, and that Wal-Mart accounted for 14% of revenue.

Customer concentration in receivables (one customer at 13% of gross receivables) and the Kmart bankruptcy add collection risk. Investors should also note the dual-class structure, with Class B tracking stock reflecting EA.com, and the large contractual commitments of about $278 million^d, including AOL and minimum guarantees.

Overall, the filing presents a company with strong core franchises (EA Sports, Harry Potter, James Bond) and a healthy balance sheet, but whose near-term earnings depend on successful next-generation console cycles and on whether EA.com can reach profitability. Fiscal 2003 guidance points to higher R&D spending and lower legacy-platform sales, which investors should weigh against the favorable fiscal 2002 results.

02—Key points

Key Highlights

Net revenues grew 30.4% to $1,724.7 million; international revenues rose 28.8% to $631.4 million (37% of total).
Net income of $101.5 million versus a net loss of $11.1 million in fiscal 2001; diluted Class A EPS of $0.71 versus $(0.08).
Operating income of $135.4 million versus an operating loss of $30.3 million, after a $20.3 million EA.com restructuring and asset impairment charge.
PlayStation 2 revenue rose 86% to $482.9 million (28% of net revenues); Xbox, GameCube and Game Boy Advance together added about $212 million of new revenue.
EA.com lost $151.0 million at the operating level, while EA Core generated $286.5 million in operating income; the company is pursuing EA.com streamlining after cutting about 270 jobs.
Cash, cash equivalents and short-term investments rose to $796.9 million; operating cash flow was $285.0 million and no funded debt is shown on the balance sheet.
Concentration risk: Wal-Mart represented 14% of total net revenues, and one customer accounted for 13% of gross receivables; Kmart filed for bankruptcy in January 2002.

03—Questions

Frequently Asked Questions

What drove the swing from a net loss to net income in fiscal 2002?
Revenue growth of $402 million, led by PlayStation 2 and the launches of Xbox, GameCube and Game Boy Advance, lifted gross profit by about $247 million. Gross margin improved because the new platforms carry lower cost of goods sold as a percentage of revenue. Operating expenses rose only about $81 million, even though marketing spending increased 30%, and the company also absorbed a $20.3 million restructuring charge.
Is EA.com a meaningful profit contributor, and what does the Class B tracking stock represent?
Not yet. EA.com recorded a GAAP operating loss of $151.0 million in fiscal 2002, and its net loss attributable to Class B holders was $22.7 million after the retained-interest allocation. The company says EA.com has been funded solely by Electronic Arts and that the segment may never achieve profitability. Class B stock is intended to track EA.com's performance, but its holders own only about 15% of that business, with Electronic Arts retaining roughly 85%.
What are the main risks to revenue growth heading into fiscal 2003?
Management expects sales of PlayStation and N64 products to decline significantly, and it expects PC revenue to be flat or lower because of The Sims' maturity. Growth in PlayStation 2 is expected to continue but at a slower rate. Advertising growth will not match fiscal 2002's pace. Platform licensors such as Sony and Nintendo are also competitors and control manufacturing, which can delay releases. The filing also notes that product development schedules are frequently unreliable and that the Square EA joint venture may be terminated effective March 31, 2003.
How strong is the balance sheet and what commitments does the company carry?
Total assets were $1.70 billion against total liabilities of $453 million, and stockholders' equity was $1.24 billion. Working capital was $699.6 million. The company has about $278 million of contractual obligations and commercial commitments, including $95.5 million of minimum guarantees, $58.97 million of marketing commitments, $22.5 million owed to AOL, and $76.2 million of lease payments. The company repurchased 280,000 Class A shares for about $11.9 million in fiscal 2002 and does not pay cash dividends.

04—Continue

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