10-QPeriod: Q3 FY2009

ELECTRONIC ARTS INC. Quarterly Report for Q3 Ended Dec 31, 2008

Filed February 4, 2009For Securities:EA

Summary

Electronic Arts Inc. (EA) reported a net loss of $641 million for the three months ended December 31, 2008, a significant increase from a net loss of $33 million in the prior year's comparable period. This widened loss was primarily driven by a substantial $368 million goodwill impairment charge related to its EA Mobile reporting unit and a $244 million discrete tax charge due to an increased valuation allowance on deferred tax assets. Net revenue for the quarter saw a modest increase of 10% to $1.654 billion, largely attributed to strong performance from titles like Rock Band 2. The company also announced a significant restructuring plan to reduce its workforce by 11% and close 12 locations, aiming for annual operating expense savings of $125 million starting in fiscal year 2010. The company is navigating a challenging economic environment, with reduced consumer spending impacting retailer inventory orders. Management expressed caution about future sales despite a growing installed base for next-generation consoles. The company's financial condition remains solid, with $2.261 billion in cash, cash equivalents, and investments as of December 31, 2008, though this represents a decrease from the prior fiscal year-end. EA is focused on investing in online products and services and managing costs through restructuring initiatives.

Financial Highlights

19 data points
Beta

Revenue

$1.65B

44.1% Gross Margin

Net Income

-$641.00M

-38.8% Net Margin

Cash & Equivalents

$1.38B

Free Cash Flow

$212.00M

Financial Statements
Beta
Revenue$1.65B
Cost of Revenue$925.00M
Gross Profit$729.00M
Operating Expenses$1.03B
Operating Income-$304.00M
Net Income-$641.00M

Key Highlights

  • 1Reported a significant net loss of $641 million for the quarter ended December 31, 2008, largely due to a $368 million goodwill impairment charge and a $244 million tax valuation allowance increase.
  • 2Net revenue increased by 10% to $1.654 billion for the quarter, with Rock Band 2 being a key driver.
  • 3Announced a restructuring plan involving an 11% workforce reduction (approximately 1,100 employees) and closure of 12 locations, expecting $125 million in annual cost savings.
  • 4Experienced a substantial decrease in cash, cash equivalents, and investments, falling to $2.261 billion from $3.016 billion at the prior fiscal year-end.
  • 5Acknowledged cautious outlook due to the challenging economic environment and its impact on consumer spending and retailer orders.
  • 6Introduced a new accounting policy for deferred net revenue for online-enabled games, impacting revenue recognition and potentially creating volatility in gross profit percentages.

Frequently Asked Questions

The primary drivers for the substantial increase in net loss were a $368 million goodwill impairment charge related to the EA Mobile reporting unit and a $244 million discrete tax charge stemming from an increased valuation allowance for U.S. deferred tax assets. These non-operational items significantly impacted the quarter's bottom line.

EA has announced a fiscal 2009 restructuring plan that includes reducing its worldwide workforce by approximately 11% (around 1,100 employees) and closing 12 studio and publishing locations. The company expects this plan to generate annual operating expense savings of approximately $125 million by fiscal year 2010.

Starting in fiscal year 2008, EA began recognizing revenue from certain online-enabled software products on a deferred basis over an estimated six-month online service period, due to the lack of vendor-specific objective evidence (VSOE) for the online service. This deferral can create volatility in reported gross profit percentages because the cost of goods sold is recognized upon product delivery.

As of December 31, 2008, EA's total cash, cash equivalents, and investments stood at $2.261 billion, a decrease of $755 million from $3.016 billion at March 31, 2008. The company used $203 million in operating activities during the nine months ended December 31, 2008, compared to generating $53 million in the same period of the prior year, primarily due to increased personnel, external development, and marketing costs.