10-QPeriod: Q2 FY2011

ELECTRONIC ARTS INC. Quarterly Report for Q2 Ended Sep 30, 2010

Filed November 8, 2010For Securities:EA

Summary

Electronic Arts Inc. (EA) reported its financial results for the fiscal quarter and six months ended September 29, 2010. For the three-month period, net revenue decreased by 20% to $631 million compared to the prior year, primarily due to the absence of major franchise releases like Rock Band and The Sims, though this was partially offset by strong performance from Battlefield and FIFA World Cup. The company reported a net loss of $201 million for the quarter, an improvement from the $391 million net loss in the same period last year. This improvement was driven by a significant decrease in cost of goods sold, lower R&D expenses, and a gain from the sale of its Ubisoft investment. For the six-month period, net revenue saw a slight increase of 1% to $1,446 million, with net loss also improving. Management highlighted trends such as the increasing importance of wireless platforms and digital content distribution, while noting challenges like the growing used games market and concentration of sales on hit titles. The company also reported a planned restructuring with expected charges of up to $180 million in the second half of fiscal year 2011.

Financial Highlights

42 data points
Beta

Revenue

$631.00M

42.5% Gross Margin

Net Income

-$201.00M

-31.9% Net Margin

EPS (Diluted)

$-0.61

Total Assets

$4.49B

Cash & Equivalents

$1.06B

Free Cash Flow

-$134.00M

Financial Statements
Beta
Revenue$631.00M
Cost of Revenue$363.00M
Gross Profit$268.00M
Operating Expenses$520.00M
Operating Income-$252.00M
Net Income-$201.00M
EPS (Basic)$-0.61

Key Highlights

  • 1Net revenue for the three months ended September 29, 2010, decreased 20% to $631 million year-over-year, largely due to fewer major franchise releases compared to the prior year.
  • 2Net loss for the quarter improved significantly to $201 million, down from $391 million in the same period last year, benefiting from reduced cost of goods sold and gains on strategic investments.
  • 3The company sold its investment in Ubisoft for approximately $121 million, realizing a gain of $28 million, which contributed positively to the quarter's financial results.
  • 4For the six months ended September 29, 2010, net revenue increased slightly by 1% to $1,446 million, demonstrating resilience despite revenue shifts.
  • 5International sales continued to be a significant contributor, accounting for approximately 46% of total net revenue in the six-month period.
  • 6EA announced a plan to restructure licensing and development agreements, expecting to incur restructuring charges of up to $180 million in the latter half of fiscal year 2011.
  • 7The company's cash and cash equivalents decreased to $1,056 million from $1,273 million at the beginning of the fiscal year, with cash used in operating activities totaling $282 million for the six-month period.

Frequently Asked Questions

The decrease in net revenue for the three months ended September 29, 2010, was primarily driven by the absence of major franchise releases such as Rock Band, The Sims, and Fight Night, which had comparable releases in the prior year. This was partially offset by increases from the Battlefield and FIFA World Cup franchises.

The net loss improved from $391 million to $201 million primarily due to a $230 million decrease in cost of goods sold, a $39 million decrease in research and development costs, a $36 million increase in gains from strategic investments (including the sale of Ubisoft), and a $28 million decrease in acquisition-related contingent consideration.

The company sees digital content distribution and services, including sales via mobile devices and social networks, as an increasing part of its business. They are responding to advances in mobile technology by offering subscription services, online downloads, and advertising-supported free games, expecting this channel to grow significantly.

Key risks highlighted include dependence on third-party hardware systems, the need to meet product development schedules, intense competition and the 'hit-driven' nature of the industry, the uncertainty of new business models (like micro-transactions), economic downturns impacting consumer spending, and currency fluctuations due to significant international sales.