10-QPeriod: Q2 FY2010

ELECTRONIC ARTS INC. Quarterly Report for Q2 Ended Sep 30, 2009

Filed November 10, 2009For Securities:EA

Summary

Electronic Arts Inc. (EA) reported a net loss of $391 million for the three months ended September 29, 2009, compared to a net loss of $310 million in the prior year period. This wider loss was primarily driven by a $106 million decrease in net revenue, a $54 million reduction in tax benefits, and a $36 million increase in the cost of goods sold. Despite the reported net loss, the company noted that without changes in deferred net revenue related to online-enabled games, reported net revenue would have increased by $21 million. The company is implementing a restructuring plan (Fiscal 2010 Restructuring) that involves reducing its workforce by approximately 1,300 employees, consolidating facilities, and eliminating certain titles to focus on higher-margin opportunities. This plan is expected to incur charges between $130 million and $150 million. EA also launched an employee stock option exchange program aimed at reducing dilution and managing equity compensation costs. Financially, EA ended the quarter with $1.04 billion in cash and cash equivalents, though cash used in operating activities for the six months was $322 million.

Financial Highlights

42 data points
Beta

Revenue

$788.00M

24.7% Gross Margin

Net Income

-$391.00M

-49.6% Net Margin

Total Assets

$5.00B

Cash & Equivalents

$1.04B

Free Cash Flow

$6.00M

Financial Statements
Beta
Revenue$788.00M
Cost of Revenue$593.00M
Gross Profit$195.00M
Operating Expenses$612.00M
Operating Income-$417.00M
Net Income-$391.00M

Key Highlights

  • 1Net loss widened to $391 million for the quarter ended September 29, 2009, from $310 million in the prior year, primarily due to decreased revenue and increased cost of goods sold.
  • 2Total net revenue decreased by 12% to $788 million for the quarter, significantly impacted by a $127 million unfavorable change in deferred net revenue for online-enabled products.
  • 3The company is undertaking a significant restructuring plan (Fiscal 2010 Restructuring) aimed at workforce reduction (approx. 1,300 employees) and product portfolio streamlining, with estimated costs of $130-$150 million.
  • 4International sales represented 39% of net revenue for the quarter, with Europe being the largest international market, though both North America and Europe saw revenue declines.
  • 5Cash used in operating activities for the six months ended September 30, 2009, was $322 million, an improvement from $415 million in the prior year period.
  • 6EA reported $1.04 billion in cash and cash equivalents as of September 30, 2009, indicating sufficient liquidity for immediate operational needs.
  • 7The company experienced impairment charges on marketable equity securities of $8 million for the quarter and $24 million for the six months.

Frequently Asked Questions

EA's accounting for online-enabled packaged goods and digital content results in significant revenue deferrals. For the three months ended September 30, 2009, deferred net revenue reduced reported revenue by $359 million. This deferral practice, changing from prior periods, significantly impacts reported revenue figures, and the company notes that 'without these changes in deferred net revenue, reported net revenue increased by approximately $21 million'.

The Fiscal 2010 Restructuring plan is designed to narrow EA's product portfolio to focus on higher-margin opportunities. It involves reducing the workforce by approximately 1,300 employees, consolidating facilities, and eliminating certain titles. The company anticipates incurring total costs between $130 million and $150 million, with $80-$90 million in future cash expenditures, primarily for severance, facility closures, and asset impairments.

As of September 30, 2009, EA held $1.04 billion in cash and cash equivalents. While the company used $322 million in cash for operating activities in the first six months of the fiscal year (an improvement from the prior year), it also invested significantly in short-term investments ($405 million) and capital expenditures, including the purchase of its headquarters facility for $233 million. The company believes its liquidity is sufficient for the next twelve months but may seek additional capital.

International sales constitute a significant portion of EA's revenue (43% for the six months ended September 30, 2009). The strengthening of the U.S. dollar, particularly against the Euro and British pound sterling, had an unfavorable impact of approximately $39 million on net revenue for the six months ended September 30, 2009. The company uses hedging strategies, but these do not eliminate all currency risk, and further strengthening of the dollar could continue to negatively impact results.