10-QPeriod: Q2 FY2019

ELECTRONIC ARTS INC. Quarterly Report for Q2 Ended Sep 30, 2018

Filed November 6, 2018For Securities:EA

Summary

Electronic Arts Inc. (EA) reported strong financial results for the fiscal second quarter ended September 30, 2018, driven by a significant year-over-year increase in total net revenue and gross margin. This growth was largely attributed to the successful adoption of the new revenue recognition standard (ASC 606), which accelerated revenue recognition, and strong performance in live services and digital net revenue. Despite a decrease in cash and cash equivalents compared to the prior fiscal year-end, the company maintained a healthy liquidity position with substantial cash, cash equivalents, and short-term investments. EA also continued its capital return program through significant stock repurchases. Management expressed confidence in the company's ability to meet its financial obligations and pursue growth opportunities. Investors should note the impact of the new revenue standard on year-over-year comparisons and the ongoing strategic focus on digital and live services.

Financial Highlights

48 data points
Beta

Revenue

$1.29B

67.5% Gross Margin

Net Income

$255.00M

19.8% Net Margin

EPS (Diluted)

$0.83

Total Assets

$8.45B

Cash & Equivalents

$3.89B

Free Cash Flow

-$126.00M

Financial Statements
Beta
Revenue$1.29B
Cost of Revenue$418.00M
Gross Profit$868.00M
Operating Expenses$610.00M
Operating Income$258.00M
Interest Expense$11.00M
Net Income$255.00M
EPS (Basic)$0.84
EPS (Diluted)$0.83
Shares Outstanding (Basic)305.00M
Shares Outstanding (Diluted)307.00M

Key Highlights

  • 1Total net revenue increased by 34% year-over-year to $1.286 billion, significantly boosted by the adoption of ASC 606.
  • 2Gross margin expanded to 67.5%, an increase of 8.1 percentage points year-over-year, also benefiting from ASC 606.
  • 3Digital net revenue grew 13% year-over-year to $780 million, indicating a continued shift towards digital sales.
  • 4Net income was $255 million, with diluted EPS of $0.83, a substantial improvement from a net loss in the prior year's quarter.
  • 5The company repurchased approximately 2.3 million shares for $299 million in the quarter under its new $2.4 billion stock repurchase program.
  • 6Total cash, cash equivalents, and short-term investments stood at $4.545 billion, reflecting a solid liquidity position.
  • 7The company adopted the new revenue recognition standard (ASC 606) effective April 1, 2018, which had a material impact on revenue recognition timing and presentation.

Frequently Asked Questions

The primary driver for the significant increase in revenue and gross margin was the adoption of the new revenue recognition standard (ASC 606) effective April 1, 2018. This standard accelerated the recognition of revenue for certain transactions, leading to a substantial positive impact on reported figures for the current period compared to prior periods reported under the old standard.

The adoption of ASC 606 significantly impacted the Condensed Consolidated Balance Sheets and Statements of Operations. It led to an increase in retained earnings by $590 million upon adoption and changed how revenue is recognized, particularly for bundled arrangements and mobile platform fees. This resulted in a substantial increase in reported net revenue, gross profit, and net income for the current quarter compared to what would have been reported under the old revenue standard.

Electronic Arts views its digital business and live services as crucial growth areas. Digital net revenue has been steadily increasing, and live services, including Ultimate Team modes, contributed significantly to overall revenue. The company expects this trend to continue and plans to further invest in and monetize digital products and services.

EA maintains a strong liquidity position with substantial cash and short-term investments. The company is actively returning capital to shareholders through its stock repurchase program, having repurchased $299 million worth of shares in the reported quarter under a new $2.4 billion authorization. The company also stated that its cash reserves, combined with operational cash flow and financing facilities, are expected to be sufficient for its operating needs, capital expenditures, debt obligations, and potential acquisitions or strategic investments.