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Electronic Arts Annual Report, Year Ended Mar 31, 2006

Filing Date
Filed June 12, 2006
Period End
March 31, 2006
Security
EA
In the record · 2016–202610-K1210-Q328-K135

EA filed 12 annual reports (10-K), 32 quarterly reports (10-Q) and 135 current reports (8-K) between 2016 and 2026.

  1. FY2017 annual report10-K · May ’17May ’17
  2. Leadership change8-K · Nov ’19Nov ’19
  3. Leadership change8-K · Nov ’21Nov ’21
  4. Material agreement8-K · Sep ’25Sep ’25

01—Abstract

Summary

Summary of the 10-K filed June 12, 2006. Cited figures are marked; the original filing is the authoritative source.

Electronic Arts reported fiscal 2006 (year ended April 1, 2006, a 53-week year) with net revenue of $2.951 billiona, down 6% from $3.129 billion, and net income of $236 million, down 53% from $504 million.

Diluted EPS fell to $0.75b from $1.59. The decline reflects the industry's transition from current-generation consoles (PlayStation 2, Xbox, GameCube) to next-generation platforms (Xbox 360, PS3, Nintendo Wii). Revenue from PS2, Xbox and GameCube fell sharply, while growth in handheld (PSP, Nintendo DS) and the Xbox 360 only partially offset the drop.

Gross margin compressed to 60% from 62%, driven by higher license royalties on football titles, and R&D rose 20% to $758 millionc as the company invested in next-generation development. Management guided to further pressure in fiscal 2007. It expects current-generation revenue to keep declining, average selling prices to fall, and operating expenses to rise, including the first-time expensing of stock-based compensation under SFAS 123R.

The company also expects net income to decline. Strategic moves include the JAMDAT Mobile acquisition ($684 milliond, February 2006) to build the EA Mobile cellular business, and the planned full merger of DICE. Cash flow from operations fell to $596 million, and the company repurchased $709 million of stock under a completed $750 million program.

Cash, equivalents and short-term investments totaled $2.27 billion at year-end, and the company holds no debt beyond operating-lease financing. For investors, the central issues are the depth of the console-cycle transition, margin pressure from licensing costs and next-generation development spending, and the fiscal 2007 earnings headwind from SFAS 123R. Concentration risk is also notable: Wal-Mart accounted for about 13% of revenue, and platform licensors such as Sony, Microsoft and Nintendo are also major competitors.

02—Key points

Key Highlights

  1. Net revenue fell 6% to $2.951 billion, with North America down 5% and international down 7%, led by weakness in Europe.
  2. Net income declined 53% to $236 million and diluted EPS fell to $0.75 from $1.59, as R&D rose 20% to $758 million for next-generation development.
  3. Current-generation console sales declined sharply: PlayStation 2 down 15%, Xbox down 22%, GameCube down 36%, while handheld revenue rose 217% to $374 million and the Xbox 360 contributed $140 million.
  4. Gross margin fell to 60.0% from 61.8%, driven by higher royalty rates on new football licenses and lower average prices on current-generation titles.
  5. Management expects fiscal 2007 to bring further declines in current-generation revenue, higher operating expenses, and lower net income, partly due to SFAS 123R stock-based compensation expense.
  6. The JAMDAT acquisition for $684 million in February 2006 expands the company's cellular handset business, which is expected to grow significantly in fiscal 2007.
  7. The company returned capital by repurchasing $709 million of stock and completed its $750 million buyback program in September 2005, while ending the year with $2.27 billion in cash and short-term investments.

03—Questions

Frequently Asked Questions

  1. Why did Electronic Arts' revenue and profits decline in fiscal 2006?

    The decline is mainly due to the console transition cycle. Sales of titles for the PlayStation 2, Xbox and GameCube fell as consumers waited for next-generation consoles, and the new platforms did not fully offset those losses. Operating expenses also rose sharply, particularly R&D for next-generation titles, which pushed operating income down to $325 million from $669 million.

  2. What are the main risks to EA's financial performance going forward?

    Key risks include dependence on platform licensors such as Sony, Microsoft and Nintendo, who also compete with EA and set royalty terms; the cyclical nature of console sales; falling average selling prices for current-generation titles; rising license and development costs; and customer concentration, with Wal-Mart at about 13% of revenue. Litigation and piracy are also disclosed risks.

  3. How will the adoption of SFAS 123R affect EA's earnings?

    Beginning in fiscal 2007, EA must expense stock-based compensation at fair value, including employee option grants and stock purchase plan discounts. Management states this will significantly lower reported net income and adds to the expected earnings decline in fiscal 2007. The exact magnitude depends on grant levels, share price and volatility.

  4. Is EA's balance sheet strong enough to fund its strategy?

    Yes, according to the filing. EA had $2.27 billion in cash, cash equivalents and short-term investments and no funded debt. Management expects operating cash flow, existing liquidity and marketable securities to cover operating needs for at least the next twelve months. Its $2.0 billion shelf registration gives additional flexibility. Operating cash flow did decline to $596 million from $634 million.

04—Continue

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