10-QPeriod: Q2 FY2013

ELECTRONIC ARTS INC. Quarterly Report for Q2 Ended Sep 30, 2012

Filed November 6, 2012For Securities:EA

Summary

Electronic Arts Inc. (EA) reported its third-quarter results for the period ending September 29, 2012. The company experienced a net loss of $381 million for the quarter, an increase from the $340 million net loss in the same period last year, leading to a diluted loss per share of $1.21 compared to $1.03 in the prior year. Total net revenue remained relatively flat at $711 million, a slight decrease of 1% year-over-year, primarily impacted by revenue deferral accounting for online-enabled content. However, excluding this deferral, net revenue would have shown a modest increase. The company's shift towards digital content and services continues, with service and other revenue showing significant growth, up 87% year-over-year, driven by titles like Star Wars: The Old Republic and FIFA Ultimate Team. This growth in digital services, which typically have higher margins, is a key strategic focus for EA. Despite the overall net loss, the company maintained a healthy cash position and initiated a new share repurchase program, indicating confidence in its financial stability and future prospects.

Financial Highlights

48 data points
Beta

Revenue

$711.00M

37.4% Gross Margin

Net Income

-$381.00M

-53.6% Net Margin

EPS (Diluted)

$-1.21

Total Assets

$5.19B

Cash & Equivalents

$871.00M

Free Cash Flow

-$28.00M

Financial Statements
Beta
Revenue$711.00M
Cost of Revenue$445.00M
Gross Profit$266.00M
Operating Expenses$630.00M
Operating Income-$364.00M
Interest Expense$7.00M
Net Income-$381.00M
EPS (Basic)$-1.21
EPS (Diluted)$-1.21
Shares Outstanding (Basic)316.00M

Key Highlights

  • 1Net loss for the quarter increased to $381 million from $340 million in the prior year, resulting in a diluted loss per share of $1.21.
  • 2Total net revenue was largely flat at $711 million, a 1% decrease compared to the prior year, largely due to revenue deferral accounting for online-enabled content.
  • 3Service and other revenue saw significant growth of 87%, reaching $230 million, indicating a successful shift towards digital services and content.
  • 4Operating expenses remained high, with research and development at $314 million and marketing and sales at $212 million for the quarter.
  • 5The company ended the quarter with $871 million in cash and cash equivalents, demonstrating continued liquidity.
  • 6EA continued its share repurchase program, buying back approximately 8.4 million shares for $108 million in the quarter.
  • 7The company reported significant future commitments, including $1.168 billion in unrecognized developer/licensor commitments and $633 million in principal for Convertible Senior Notes due 2016.

Frequently Asked Questions

The increase in net loss was primarily due to a $53 million increase in income tax expense, partly offset by a $55 million tax benefit recorded in the prior year related to the PopCap acquisition. Additionally, there was a decrease in gross profit mainly due to increased revenue deferral for online-enabled goods and digital content, partially offset by higher margins from digital products. Personnel-related costs also saw a slight increase.

Electronic Arts is actively transitioning towards digital content and services. This is evidenced by the significant growth in 'Service and other revenue,' which includes revenue from online games, subscriptions, micro-transactions, and advertising. The company is focusing on leveraging its intellectual properties across multiple platforms, including mobile devices and social networks, and investing in its Origin platform for direct-to-consumer digital distribution.

The company believes its current cash, cash equivalents, short-term investments, and cash generated from operations, along with its available financing facilities, will be sufficient to meet its operating requirements for at least the next 12 months. They also noted a new $500 million share repurchase program authorized in July 2012, suggesting confidence in their financial position. However, they also highlighted significant future contractual obligations, including substantial unrecognized developer/licensor commitments and the principal on convertible senior notes.

Revenue deferral, primarily related to online-enabled packaged goods and digital content sold with future services or content, significantly impacts reported revenue. For the three months ended September 30, 2012, the change in deferred net revenue reduced reported net revenue by $880 million. Without this deferral, net revenue would have increased by approximately $46 million, or 4%.