10-QPeriod: Q3 FY2008

ELECTRONIC ARTS INC. Quarterly Report for Q3 Ended Dec 31, 2007

Filed February 5, 2008For Securities:EA

Summary

Electronic Arts Inc. (EA) reported a net loss of $33 million, or $0.10 per diluted share, for the third quarter of fiscal year 2008, a reversal from the $160 million net income ($0.50 per diluted share) reported in the same period last year. This decline was primarily driven by a $231 million reduction in reported net revenue due to new accounting standards for online-enabled packaged goods and digital content, which requires revenue to be recognized over a six-month period rather than at the point of sale. Additionally, restructuring charges increased significantly to $78 million, largely attributable to the company's fiscal 2008 reorganization plan impacting facilities and employee-related costs. Despite the quarterly loss, the company reported an increase in cash and cash equivalents by $507 million, ending the period with $1.88 billion. The balance sheet also shows growth in total assets to $6.45 billion, with total current assets rising to $4.90 billion. The company's acquisition of VG Holding Corp. in January 2008 for approximately $780 million in cash and equity adds significant studios (BioWare and Pandemic) and intellectual property to its portfolio, though the full financial impact of this transaction will be realized in future periods.

Key Highlights

  • 1Reported a net loss of $33 million for the three months ended December 31, 2007, compared to a net income of $160 million in the prior year period.
  • 2Net revenue for the quarter decreased by $231 million due to new revenue recognition accounting for online-enabled packaged goods and digital content.
  • 3Restructuring charges surged to $78 million, primarily related to the fiscal 2008 reorganization plan.
  • 4Cash and cash equivalents increased by $507 million, ending the quarter at $1.88 billion.
  • 5Total assets grew to $6.45 billion, with total current assets at $4.90 billion.
  • 6Completed the acquisition of VG Holding Corp. (BioWare and Pandemic Studios) in January 2008 for approximately $780 million.

Frequently Asked Questions

The net loss was primarily due to a significant change in revenue recognition for online-enabled packaged goods and digital content, which now requires revenue to be deferred and recognized over a six-month period instead of upfront. This change reduced reported net revenue by $231 million for the quarter. Additionally, the company incurred substantial restructuring charges of $78 million related to its ongoing reorganization efforts.

The new policy, adopted for online-enabled packaged goods and digital content, defers revenue recognition over an estimated six-month period, rather than recognizing it upon sale. This resulted in a $231 million decrease in reported net revenue for the current quarter and a corresponding increase in deferred net revenue on the balance sheet, impacting gross profit margins as costs are recognized earlier than the related revenue.

The acquisition, completed in January 2008 for approximately $780 million, is strategic as it brings two highly regarded game development studios, BioWare and Pandemic, under EA's umbrella. This acquisition is expected to expand EA's portfolio of action, adventure, and role-playing games and enhance its intellectual property assets.

EA ended the quarter with a strong cash position, with $1.88 billion in cash and cash equivalents, an increase of $507 million from the prior quarter. The balance sheet shows total liabilities of $2.14 billion against total equity of $4.30 billion, indicating a healthy equity base. The company stated its belief that existing cash reserves are sufficient to meet operating requirements for at least the next twelve months.