10-QPeriod: Q3 FY2019

ELECTRONIC ARTS INC. Quarterly Report for Q3 Ended Dec 31, 2018

Filed February 6, 2019For Securities:EA

Summary

Electronic Arts Inc. (EA) reported solid financial results for the third quarter and first nine months of fiscal year 2019, ending December 31, 2018. A significant driver of this performance was the adoption of the new revenue recognition standard (ASC 606), which, while complex, resulted in a notable increase in reported net revenue and net income compared to the old standard. The company demonstrated strong revenue growth, particularly in digital net revenue and live services, indicating a successful shift towards its digital transformation strategy. Total net revenue for the quarter reached $1.289 billion, up 11% year-over-year, driven by robust performance in franchises like FIFA and The Sims. The company maintained strong profitability with net income of $262 million. EA continued its aggressive share repurchase program, demonstrating a commitment to returning capital to shareholders. Looking ahead, the company is well-positioned with a strong cash position and a clear focus on its digital and live services strategy.

Financial Highlights

47 data points
Beta

Revenue

$1.29B

68.0% Gross Margin

Net Income

$262.00M

20.3% Net Margin

EPS (Diluted)

$0.86

Total Assets

$8.86B

Cash & Equivalents

$3.89B

Free Cash Flow

$954.00M

Financial Statements
Beta
Revenue$1.29B
Cost of Revenue$413.00M
Gross Profit$876.00M
Operating Expenses$634.00M
Operating Income$242.00M
Interest Expense$11.00M
Net Income$262.00M
EPS (Basic)$0.87
EPS (Diluted)$0.86
Shares Outstanding (Basic)302.00M
Shares Outstanding (Diluted)304.00M

Key Highlights

  • 1Total net revenue for the three months ended December 31, 2018, was $1.289 billion, an increase of 11% year-over-year.
  • 2Net income for the quarter was $262 million, with diluted earnings per share of $0.86.
  • 3Digital net revenue showed significant growth, increasing by 16% year-over-year to $908 million for the quarter.
  • 4The adoption of ASC 606 (New Revenue Standard) significantly impacted reported figures, boosting net revenue and net income compared to pro-forma results under the old standard.
  • 5The company continued to execute its share repurchase program, buying back $292 million worth of stock in the third quarter.
  • 6Cash and cash equivalents, along with short-term investments, totaled $5.161 billion as of December 31, 2018, indicating strong liquidity.
  • 7Live services revenue remains a critical component of EA's business, contributing a substantial portion of overall revenue.

Frequently Asked Questions

The adoption of ASC 606 on April 1, 2018, significantly impacted EA's reported financial results. For the three months ended December 31, 2018, total net revenue was reported at $1.289 billion under the new standard, compared to a pro-forma $1.082 billion under the old standard. Similarly, net income was $262 million, versus a pro-forma $119 million. This standard accelerates revenue recognition for certain performance obligations, leading to higher reported revenues and profits in the current period compared to prior accounting methods.

Net bookings is a key operating metric for EA that represents the net amount of products and services sold digitally or sold-in physically during a period. It is calculated by adding total net revenue to the change in deferred net revenue for online-enabled games (and, more recently, mobile platform fees). For the three months ended December 31, 2018, net bookings were $1.609 billion. While total net revenue increased year-over-year, net bookings decreased due to a decrease in deferred net revenue compared to the prior year.

EA maintains a strong liquidity position, with cash and cash equivalents and short-term investments totaling $5.161 billion as of December 31, 2018. The company generated $948 million in net cash from operating activities during the first nine months of fiscal year 2019. Management believes these resources, along with available financing facilities, are sufficient to meet operating requirements for at least the next 12 months. EA also actively repurchases its common stock and has a significant share repurchase program authorized.

EA's strategy is heavily focused on digital distribution and live services. Digital net revenue, which includes full game downloads, live services, and mobile revenue, grew 16% year-over-year to $908 million in the third quarter. Live services, such as microtransactions and subscriptions, are increasingly important, representing a significant portion of total revenue. This shift indicates a move towards more predictable, recurring revenue streams, which is a positive trend for the company.