10-QPeriod: Q3 FY2016

ELECTRONIC ARTS INC. Quarterly Report for Q3 Ended Dec 31, 2015

Filed February 8, 2016For Securities:EA

Summary

Electronic Arts Inc. (EA) reported its financial results for the third quarter and first nine months of fiscal year 2016, ending December 31, 2015. While the company experienced a net loss of $45 million for the quarter, this was a significant improvement compared to the net income of $142 million in the prior year's comparable quarter. This shift was primarily driven by a decrease in gross profit, partially offset by reduced operating expenses. Total net revenue for the quarter was $1.07 billion, a 5% decrease year-over-year, impacted by a substantial increase in deferred net revenue related to online-enabled games. However, when adjusting for this revenue deferral, the company saw a strong 26% increase in underlying sales. The company continues to invest in its digital transformation, with digital revenue growing, and is actively repurchasing shares under a new $1 billion program. The near-term outlook is focused on managing the upcoming maturity of its convertible senior notes.

Financial Highlights

48 data points
Beta

Revenue

$1.07B

49.0% Gross Margin

Net Income

-$45.00M

-4.2% Net Margin

EPS (Diluted)

$-0.14

Total Assets

$6.47B

Cash & Equivalents

$2.26B

Free Cash Flow

$889.00M

Financial Statements
Beta
Revenue$1.07B
Cost of Revenue$439.00M
Gross Profit$524.00M
Operating Expenses$555.00M
Operating Income-$31.00M
Interest Expense-$5.00M
Net Income-$45.00M
EPS (Basic)$-0.14
EPS (Diluted)$-0.14
Shares Outstanding (Basic)311.00M
Shares Outstanding (Diluted)311.00M

Key Highlights

  • 1Net loss of $45 million for the three months ended December 31, 2015, a significant decrease from a net income of $142 million in the prior year's quarter.
  • 2Total net revenue decreased by 5% to $1.07 billion for the three months ended December 31, 2015, compared to $1.13 billion in the prior year.
  • 3Non-GAAP Net Revenue before Revenue Deferral (a key indicator of underlying sales performance) increased by 26% year-over-year for the quarter, indicating strong sales growth excluding accounting deferrals.
  • 4Significant increase in Deferred Net Revenue (online-enabled games) to $1.84 billion as of December 31, 2015, up from $1.28 billion at March 31, 2015.
  • 5Cash and cash equivalents increased to $2.26 billion as of December 31, 2015, up from $2.07 billion at March 31, 2015.
  • 6The company repurchased approximately 1.8 million shares for $126 million during the quarter under its $1 billion stock repurchase program.
  • 7The 0.75% Convertible Senior Notes due 2016 are now convertible at the option of the holder, with significant conversions occurring and expected to continue in the upcoming quarter.

Frequently Asked Questions

The net loss of $45 million for the three months ended December 31, 2015, compared to a net income of $142 million in the prior year, was primarily due to a $201 million decrease in gross profit. This was partially offset by an $8 million decrease in operating expenses. The decrease in gross profit was significantly influenced by the cost of revenue associated with the launch of new titles like Star Wars Battlefront.

The 0.75% Convertible Senior Notes due 2016 are nearing maturity. During the quarter, the 'Sales Price Condition' was met, making the notes convertible by holders. Significant principal value of these notes has already been converted, and the company expects further conversions and settlements, involving cash and stock, in the upcoming quarter. The company also has a convertible note hedge and warrants to manage potential dilution from these conversions.

The substantial increase in 'Deferred Net Revenue (online-enabled games)' to $1.84 billion indicates that EA is recognizing revenue for online-enabled games and content over an estimated offering period, rather than immediately upon sale. This is due to U.S. GAAP requirements when the company does not have vendor-specific objective evidence of fair value for unspecified updates or ongoing services. While this reduces the immediately recognized revenue, it signals strong underlying sales and a commitment to ongoing player engagement through updates and services.

EA maintains a strong liquidity position with $2.26 billion in cash and cash equivalents and $966 million in short-term investments as of December 31, 2015. Cash generated from operations remains robust, providing sufficient funds for ongoing operations, capital expenditures, debt obligations, and shareholder returns like stock repurchases. The company also has a $500 million revolving credit facility, though it was undrawn as of the reporting date.