10-QPeriod: Q3 FY2011

ELECTRONIC ARTS INC. Quarterly Report for Q3 Ended Dec 31, 2010

Filed February 7, 2011For Securities:EA

Summary

Electronic Arts Inc. (EA) reported financial results for the third quarter and first nine months of its fiscal year ending December 31, 2010. For the third quarter, net revenue was $1,053 million, a decrease of $190 million compared to the prior year's quarter, primarily due to lower distribution revenue and changes in deferred revenue. The company reported a net loss of $322 million, a significant increase from the $82 million net loss in the same period last year, driven by lower revenue, increased restructuring charges, higher income tax provision, and increased marketing expenses. For the first nine months, cash generated from operating activities improved to $67 million compared to a cash used of $101 million in the prior year, attributed to cost reduction initiatives and lower marketing spend. Despite a challenging economic environment impacting consumer spending and retailer inventory management, EA highlighted the performance of key titles like FIFA 11, Madden 11, and Medal of Honor. The company is navigating industry trends such as the evolution of console life cycles, growth in wireless platforms, and the shift towards digital content distribution. A notable event during the quarter was the sale of EA's investment in Ubisoft, which yielded a gain of $28 million. The company also incurred significant restructuring charges of $151 million related to amendments of licensing and developer agreements and other related costs.

Financial Highlights

43 data points
Beta

Revenue

$1.05B

44.3% Gross Margin

Net Income

-$322.00M

-30.6% Net Margin

EPS (Diluted)

$-0.97

Total Assets

$4.73B

Cash & Equivalents

$1.35B

Free Cash Flow

$349.00M

Financial Statements
Beta
Revenue$1.05B
Cost of Revenue$586.00M
Gross Profit$467.00M
Operating Expenses$770.00M
Operating Income-$303.00M
Net Income-$322.00M
EPS (Basic)$-0.97

Key Highlights

  • 1Net revenue for the third quarter decreased by 15% year-over-year to $1,053 million.
  • 2Net loss widened significantly to $322 million for the third quarter, compared to $82 million in the prior year.
  • 3Cash flow from operations improved substantially to $67 million for the first nine months, from a negative $101 million in the prior year.
  • 4The company recorded $151 million in restructuring and other charges related to its Fiscal 2011 restructuring plan.
  • 5Key titles driving revenue in the quarter included FIFA 11, Madden 11, and Medal of Honor.
  • 6EA completed the sale of its investment in Ubisoft, realizing a gain of $28 million.

Frequently Asked Questions

The net loss increased primarily due to a $190 million decrease in net revenue, a $54 million increase in restructuring and other charges, a $47 million increase in the income tax provision, and a $45 million increase in marketing and advertising expenses. These were partially offset by a decrease of $68 million in the cost of goods sold.

Cash generated from operating activities improved significantly, totaling $67 million for the nine months ended December 31, 2010, compared to using $101 million of cash for the same period in the prior year. This improvement was primarily attributed to cost reduction initiatives, including decreases in external development and contracted services, as well as lower marketing and advertising spend due to a reduced number of titles released.

Revenue Deferral relates to sales of online-enabled packaged goods and digital content where the company cannot immediately recognize revenue due to obligations like providing future online services or incremental digital content. This deferral reduces the reported net revenue in the current period. The report indicates that without these changes in deferred net revenue, reported net revenue would have increased by approximately $64 million for the three months ended December 31, 2010, compared to the prior year.

EA announced and initiated a Fiscal 2011 restructuring plan focused on optimizing licensing and developer agreements to improve long-term profitability for its packaged goods business. This involved amending agreements and, to a lesser extent, workforce reductions and facility closures. Charges incurred for this restructuring through December 31, 2010, amounted to $151 million, primarily related to licensing agreement amendments, intangible asset impairments, developer agreements, and employee expenses.