ELECTRONIC ARTS INC. OVERVIEW
The following overview is a high-level discussion of our operating results, as well as some of the trends and drivers that affect our business. Management believes that an understanding of these trends and drivers provides important context for our results for the fiscal year endedMarch 31, 2022 , as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Form 10-K, including in the "Business" section and the "Risk Factors" above, the remainder of "Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")" or the Consolidated Financial Statements and related Notes.
About
Electronic Arts is a global leader in digital interactive entertainment. We develop, market, publish and deliver games, content and services that can be experienced on game consoles, PCs, mobile phones and tablets. At our core is a portfolio of intellectual property from which we create innovative games and content that enable us to build on-going and meaningful relationships with a community of players, creators and viewers. Our portfolio includes brands that we either wholly own (such as Apex Legends, Battlefield, and The Sims) or license from others (such as Madden, Star Wars, and the 300+ licenses within our global football ecosystem). Through our live services offerings, we offer our players high-quality experiences designed to provide value to players, and extend and enhance gameplay. These live services include extra content, subscription offerings and other revenue generated in addition to the sale of our base games and free-to-play games. In addition, we are focused on reaching more players whenever and wherever they want to play. We believe that we can add value to our network by making it easier for players to connect to a world of play by offering choice of business model, distribution channel and device.
Financial Results
Our key financial results for our fiscal year ended
•Total net revenue was$6,991 million , up 24 percent year-over-year. On a constant currency basis, we estimate total net revenue would have been$6,883 million , up 22 percent year-over-year. •Live services and other net revenue was$4,998 million , up 24 percent year-over-year. •Gross margin was 73.4 percent, remained constant year-over-year. •Operating expenses were$4,003 million , up 30 percent year-over-year. On a constant currency basis, we estimate that operating expenses would have been$3,970 million , up 29 percent year-over-year. •Operating income was$1,129 million , up 8 percent year-over-year. •Net income was$789 million , down 6 percent year-over-year. •Diluted earnings per share was$2.76 , down 4 percent year-over-year. •Operating cash flow was$1,899 million , down 2 percent year-over-year. •Total cash, cash equivalents and short-term investments were$3,062 million . •We repurchased approximately 9.5 million shares of our common stock for approximately$1,300 million . •We paid cash dividends of$193 million during the fiscal year endedMarch 31, 2022 . •OnMay 9, 2022 , we declared a quarterly cash dividend of$0.19 per share of our common stock, payableJune 22, 2022 to shareholders of record as of the close of business onJune 8, 2022 . From time to time, we make comparisons of current periods to prior periods with reference to constant currency. Constant currency comparisons are based on translating local currency amounts in the current period at actual foreign exchange rates from the prior comparable period, net of the impact of hedging activities. We evaluate our financial performance on a constant currency basis in order to facilitate period-to-period comparisons without regard to the impact of changing foreign currency exchange rates.
Trends in Our Business
COVID-19 Impact. We continue to monitor the impact of the COVID-19 pandemic to
our people and our business. Since the initial outbreak, we have focused on
actions to support our people, our players, and communities around the world
that have been affected by the COVID-19 pandemic. The well-being of our people
is our top priority as conditions continue to fluctuate around the world. We are
re-opening our office locations and resuming business travel as it is
appropriate to do so, consistent with the health and safety of our employees and
in compliance with any local legal restrictions or requirements. During the
pandemic, longer-term trends that benefit our business accelerated. Live
services and other net revenue has increased and we have also experienced a
significant increase in the percentage of our games purchased digitally over the
past two fiscal years.
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Table of Contents These trends may not be indicative of results for future periods, particularly if the trend towards digital adoption decelerates, or as a result of global macroeconomic effects related or unrelated to the COVID-19 pandemic. See the section titled "Risk Factors" in Part I, Item 1A of this Annual Report for further discussion of the possible impact of the COVID-19 pandemic to our workforce and business. Live Services Business. We offer our players high-quality experiences designed to provide value to players and to extend and enhance gameplay. These live services include extra content, subscription offerings and other revenue generated in addition to the sale of our base games and free-to-play games. Our net revenue attributable to live services and other was$4,998 million ,$4,016 million and$3,650 million for fiscal years 2022, 2021 and 2020, respectively, and we expect that live services net revenue will continue to be material to our business. Within live services and other, net revenue attributable to extra content was$3,910 million ,$3,068 million and$2,826 million for fiscal years 2022, 2021 and 2020, respectively. Extra content net revenue has increased as more players engage with our games and services, and purchase additional content designed to provide value to players and extend and enhance gameplay. Our most popular live services are the extra content purchased for the Ultimate Team mode associated with our sports franchises and extra content purchased for our Apex Legends franchise. Ultimate Team allows players to collect current and former professional players in order to build and compete as a personalized team. Live services net revenue generated from extra content purchased within the Ultimate Team mode associated with our sports franchises, a substantial portion of which was derived from FIFA Ultimate Team, and for our Apex Legends franchise, is material to our business. Digital Delivery of Games. In our industry, players increasingly purchase games digitally as opposed to purchasing physical discs. While this trend, as applied to our business, may not be linear because of product mix during a fiscal year, consumer buying patterns and other factors, over time we expect players to purchase an increasingly higher proportion of our games digitally; therefore we expect net revenue attributable to digital full game downloads to increase over time and net revenue attributable to sales of packaged goods to decrease. Our net revenue attributable to digital full game downloads was$1,282 million ,$918 million and$811 million during fiscal years 2022, 2021 and 2020, respectively; while our net revenue attributable to packaged goods sales decreased from$1,076 million in fiscal year 2020 to$695 million in fiscal year 2021 and$711 million in fiscal year 2022. In addition, as measured based on total units sold on Microsoft's Xbox One and Xbox Series X and Sony's PlayStation 4 and 5 rather than by net revenue, we estimate that 65 percent, 62 percent, and 49 percent of our total units sold during fiscal years 2022, 2021 and 2020 were sold digitally. Digital full game units are based on sales information provided by Microsoft and Sony; packaged goods units sold through are estimated by obtaining data from significant retail partners inNorth America ,Europe andAsia , and applying internal sales estimates with respect to retail partners from which we do not obtain data. We believe that these percentages are reasonable estimates of the proportion of our games that are digitally downloaded in relation to our total number of units sold for the applicable period of measurement. Increases in consumer adoption of digital purchase of games combined with increases in our live services revenue generally results in expansion of our gross margin, as costs associated with selling a game digitally is generally less than selling the same game through traditional retail and distribution channels.Increased Competition . Competition in our business is intense. Our competitors range from established interactive entertainment companies to emerging start-ups. In addition, the gaming, technology/internet, and entertainment industries have converged in recent years and larger, well-funded technology companies have strengthened their interactive entertainment capabilities resulting in more direct competition with us. For example, companies such as Amazon.com, Inc., Alphabet Inc., Meta Platforms, Inc., Microsoft Corporation, and Netflix, Inc. have increased investment and resources dedicated to interactive entertainment capabilities. We expect them to continue to pursue and strengthen these businesses. Their greater financial or other resources may provide larger budgets to develop and market tools, technologies, products and services that gain consumer success and shift player time and engagement away from our products and services. In addition, our leading position within the interactive entertainment industry makes us a prime target for recruiting our executives, as well as key creative and technical talent, resulting in retention challenges and increased cost to retain and incentivize our key people. Recently, our industry has undergone a period of increased consolidation which increases competitive pressure on us as interactive entertainment companies grow through acquisition - such as Take Two Interactive's recent acquisition of Zynga - or as larger, well-funded technology companies strengthen their interactive entertainment capabilities - such as Microsoft's recently announced definitive agreement to acquire Activision Blizzard. 26
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Free-to-Play Games. The global adoption of mobile devices and a business model
for those devices that allows consumers to try new games with no up-front cost,
and that are monetized through a live service associated with the game,
particularly extra content sales, has led to significant sales growth in the
mobile gaming industry. Similarly, sales of extra content are the primary driver
of our mobile business. We are investing resources in our mobile business,
seeking to maximize our mobile live services, innovate on mobile with our
franchises, and through mergers and acquisitions activity have brought new
mobile franchises and live services, as well as the teams and technologies
responsible for them, to our mobile portfolio and organization. We expect these
factors to drive growth in mobile net revenue in fiscal 2023. Likewise, the
consumer acceptance of free-to-play, live service-based, online PC and console
games has broadened our consumer base and has begun to expand into the console
market. For example, within our business, we offer Apex Legends as a
free-to-play, live service-based PC and console game. We expect extra content
revenue generated from mobile, PC and console free-to-play games to continue to
be an important part of our business.
Concentration of Sales Among the Most Popular Games. In all major segments of
our industry, we see a large portion of games sales concentrated on the most
popular titles. Similarly, a significant portion of our revenue historically has
been derived from games based on a few popular franchises, several of which we
have released on an annual or bi-annual basis. In particular, we have
historically derived a significant portion of our net revenue from our global
football franchise, the annualized version of which is consistently one of the
best-selling games in the marketplace. We have invested in over 300 individual
partnerships and licenses to create our global football ecosystem and starting
in fiscal year 2024, our global football franchise will transition to a new EA
SPORTS FC brand. Our vision for the future of interactive football with EA
SPORTS FC is to create the largest football club in the world, and we believe
this is the right opportunity for us so that we can continue delivering
innovation and growing to connect more fans on a global scale for years to come.
Re-occurring Revenue Sources. Our business model includes revenue that we deem
re-occurring in nature, such as revenue from our annualized sports franchises
(e.g., global football, Madden NFL), our console, PC and mobile catalog titles
(i.e., titles that did not launch in the current fiscal year), and our live
services. We have been able to forecast revenue from these areas of our business
with greater relative confidence than for new games, services and business
models. As we continue to incorporate new business models and modalities of play
into our games, our goal is to continue to look for opportunities to expand the
re-occurring portion of our business.
Net Bookings. In order to improve transparency into our business, we disclose an
operating performance metric, net bookings. Net bookings is defined as the net
amount of products and services sold digitally or sold-in physically in the
period. Net bookings is calculated by adding total net revenue to the change in
deferred net revenue for online-enabled games.
The following is a calculation of our total net bookings for the periods
presented:
Year Ended March 31,
(In millions) 2022 2021
Total net revenue $ 6,991 $ 5,629
Change in deferred net revenue (online-enabled games) 524 561
Net bookings $ 7,515 $ 6,190
Net bookings were $7,515 million for fiscal year 2022 primarily driven by sales
related to our FIFA franchise, Apex Legends, Madden NFL 22, and The Sims 4. Net
bookings increased $1,325 million or 21 percent as compared to fiscal year 2021
primarily due to increased year-over-year sales for Apex Legends and the FIFA
franchise, and new games added to our portfolio through acquisitions activity,
including F1 2021 and several mobile titles, partially offset by the Star Wars
franchise and The Sims 4. Live services and other net bookings were $5,370
million for fiscal year 2022, and increased $778 million or 17 percent as
compared to fiscal year 2021. The increase in live services and other net
bookings was due primarily to an increase in sales of extra content for Apex
Legends, sales of extra content for new games added to our mobile portfolio
through acquisitions activity, and sales of extra content for FIFA Ultimate
Team. Full game net bookings were $2,145 million for fiscal year 2022, and
increased $547 million or 34 percent as compared to fiscal year 2021 primarily
due to Battlefield 2042, the FIFA franchise, and F1 2021, partially offset by
the Star Wars franchise and UFC 4.
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Table of Contents Mergers and Acquisitions Acquisition of Glu Mobile. OnApril 29, 2021 , we completed the acquisition of 100% of the equity interests of Glu Mobile Inc., a leading global developer and publisher of mobile games for a total purchase price of$2.0 billion , net of cash acquired of$332 million . The acquisition of Glu is expected to accelerate our mobile growth by creating a combined organization with ongoing live services across multiple games and genres. We also believe that the acquisition will create value by adding Glu's expertise in casual sports and lifestyle genres to new titles based on our intellectual property. Glu was integrated into the Company for financial reporting purposes during the first fiscal quarter of fiscal year 2022. Acquisition ofPlaydemic . OnSeptember 20, 2021 , we completed the acquisition of 100% of the equity interests ofPlaydemic Limited , a private limited company incorporated inEngland andWales for a total purchase price of$1.4 billion , net of cash acquired. The acquisition ofPlaydemic is intended to be another step in our strategy of continued leadership in sports and mobile expansion.Playdemic was integrated into the Company for financial reporting purposes during the second quarter of fiscal year 2022.
For more information about our acquisitions, see Part II, Item 8 of this Form 10-K in the Notes to the Consolidated Financial Statements in Note 7 - Business Combinations .
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted inthe United States ("U.S. GAAP"). The preparation of these Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, and revenue and expenses during the reporting periods. The policies discussed below are considered by management to be critical because they are not only important to the portrayal of our financial condition and results of operations, but also because application and interpretation of these policies requires both management judgment and estimates of matters that are inherently uncertain and unknown, including uncertainty in the current economic environment due to the COVID-19 pandemic. As a result, actual results may differ materially from our estimates.
Revenue Recognition
We derive revenue principally from sales of our games, and related extra content
and services that can be experienced on game consoles, PCs, mobile phones and
tablets. Our product and service offerings include, but are not limited to, the
following:
•full games with both online and offline functionality ("Games with Services"),
which generally includes (1) the initial game delivered digitally or via
physical disc at the time of sale and typically provide access to offline core
game content ("software license"); (2) updates on a when-and-if-available basis,
such as software patches or updates, and/or additional free content to be
delivered in the future ("future update rights"); and (3) a hosted connection
for online playability ("online hosting");
•full games with online-only functionality which require an Internet connection to access all gameplay and functionality ("Online-Hosted Service Games");
•extra content related to Games with Services and Online-Hosted Service Games which provides access to additional in-game content;
•subscriptions, such as EA Play and EA Play Pro, that generally offer access to a selection of full games, in-game content, online services and other benefits typically for a recurring monthly or annual fee; and
•licensing to third parties to distribute and host our games and content.
We evaluate and recognize revenue by:
•identifying the contract(s) with the customer;
•identifying the performance obligations in the contract;
•determining the transaction price;
•allocating the transaction price to performance obligations in the contract; and
•recognizing revenue as each performance obligation is satisfied through the transfer of a promised good or service to a customer (i.e., "transfer of control").
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Certain of our full game and/or extra content are sold to resellers with a
contingency that the full game and/or extra content cannot be resold prior to a
specific date ("Street Date Contingency"). We recognize revenue for transactions
that have a Street Date Contingency when the Street Date Contingency is removed
and the full game and/or extra content can be resold by the reseller. For
digital full game and/or extra content downloads sold to customers, we recognize
revenue when the full game and/or extra content is made available for download
to the customer.
Online-Enabled Games
Games with Services. Our sales of Games with Services are evaluated to determine
whether the software license, future update rights and the online hosting are
distinct and separable. Sales of Games with Services are generally determined to
have three distinct performance obligations: software license, future update
rights, and the online hosting.
Since we do not sell the performance obligations on a stand-alone basis, we
consider market conditions and other observable inputs to estimate the
stand-alone selling price for each performance obligation. For Games with
Services, generally 75 percent of the sales price is allocated to the software
license performance obligation and recognized at a point in time when control of
the license has been transferred to the customer. The remaining 25 percent is
allocated to the future update rights and the online hosting performance
obligations and recognized ratably as the service is provided (over the
Estimated Offering Period).
Online-Hosted Service Games. Sales of our Online-Hosted Service Games are determined to have one distinct performance obligation: the online hosting. We recognize revenue from these arrangements as the service is provided.
Extra Content. Revenue received from sales of downloadable content are derived primarily from the sale of virtual currencies and digital in-game content that are designed to extend and enhance players' game experience. Sales of extra content are accounted for in a manner consistent with the treatment for our Games with Services and Online-Hosted Service Games as discussed above, depending upon whether or not the extra content has offline functionality. That is, if the extra content has offline functionality, then the extra content is accounted for similarly to Games with Services (generally determined to have three distinct performance obligations: software license, future update rights, and the online hosting). If the extra content does not have offline functionality, then the extra content is determined to have one distinct performance obligation: the online-hosted service offering.
Subscriptions
Sales of our subscriptions are deemed to be one performance obligation and we recognize revenue from these arrangements ratably over the subscription term as the performance obligation is satisfied.
Licensing Revenue
We utilize third-party licensees to distribute and host our games and content in accordance with license agreements, for which the licensees typically pay us a fixed minimum guarantee and/or sales-based royalties. These arrangements typically include multiple performance obligations, such as a time-based license of software and future update rights. We recognize as revenue a portion of the minimum guarantee when we transfer control of the license of software (generally upon commercial launch) and the remaining portion ratably over the contractual term in which we provide the licensee with future update rights. Any sales-based royalties are generally recognized as the related sales occur by the licensee.
Significant Judgments around Revenue Arrangements
Identifying performance obligations. Performance obligations promised in a
contract are identified based on the goods and services that will be transferred
to the customer that are both capable of being distinct, (i.e., the customer can
benefit from the goods or services either on its own or together with other
resources that are readily available), and are distinct in the context of the
contract (i.e., it is separately identifiable from other goods or services in
the contract). To the extent a contract includes multiple promises, we must
apply judgment to determine whether those promises are separate and distinct
performance obligations. If these criteria are not met, the promises are
accounted for as a combined performance obligation.
Determining the transaction price. The transaction price is determined based on
the consideration that we will be entitled to receive in exchange for
transferring our goods and services to the customer. Determining the transaction
price often requires judgment, based on an assessment of contractual terms and
business practices. It further includes review of variable consideration such as
discounts, sales returns, price protection, and rebates, which is estimated at
the time of the transaction. In addition, the transaction price does not include
an estimate of the variable consideration related to sales-based royalties.
Sales-based royalties are recognized as the sales occur.
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Table of Contents Allocating the transaction price. Allocating the transaction price requires that we determine an estimate of the relative stand-alone selling price for each distinct performance obligation. Determining the relative stand-alone selling price is inherently subjective, especially in situations where we do not sell the performance obligation on a stand-alone basis (which occurs in the majority of our transactions). In those situations, we determine the relative stand-alone selling price based on various observable inputs using all information that is reasonably available. Examples of observable inputs and information include: historical internal pricing data, cost plus margin analysis, pre-release versus post-release costs, and pricing data from competitors to the extent the data is available. The results of our analysis resulted in a specific percentage of the transaction price being allocated to each performance obligation. Determining the Estimated Offering Period. The offering period is the period in which we offer to provide the future update rights and/or online hosting for the game and related extra content sold. Because the offering period is not an explicitly defined period, we must make an estimate of the offering period for the service-related performance obligations (i.e., future update rights and online hosting). Determining the Estimated Offering Period is inherently subjective and is subject to regular revision. Generally, we consider the average period of time customers are online when estimating the offering period. We also consider the estimated period of time between the date a game unit is sold to a reseller and the date the reseller sells the game unit to the customer (i.e., time in channel). Based on these two factors, we then consider the method of distribution. For example, games and extra content sold at retail would have a composite offering period equal to the online gameplay period plus time in channel as opposed to digitally-distributed games and extra content which are delivered immediately via digital download and therefore, the offering period is estimated to be only the online gameplay period. Additionally, we consider results from prior analyses, known and expected online gameplay trends, as well as disclosed service periods for competitors' games in determining the Estimated Offering Period for future sales. We believe this provides a reasonable depiction of the transfer of future update rights and online hosting to our customers, as it is the best representation of the time period during which our games and extra content are experienced. We recognize revenue for future update rights and online hosting performance obligations ratably on a straight-line basis over this period as there is a consistent pattern of delivery for these performance obligations. Prior toJuly 1, 2020 , these performance obligations were generally recognized over an estimated nine-month period beginning in the month after shipment for games and extra content sold through retail and an estimated six-month period for digitally-distributed games and extra content beginning in the month of sale. During the three months endedSeptember 30, 2020 , we completed our annual evaluation of the Estimated Offering Period and as a result, for sales afterJuly 1, 2020 , revenue for service-related performance obligations for games and extra content sold through retail are recognized over an estimated ten-month period beginning in the month of sale, and revenue for service-related performance obligations for digitally-distributed games and extra content is recognized over an estimated eight-month period beginning in the month of sale. The fiscal year 2021 change in Estimated Offering period did not impact the amount of net bookings or the operating cash flows that we report. During the fiscal year endedMarch 31, 2022 , this change to our Estimated Offering Period resulted in an increase in net revenue of$331 million and net income of$252 million , and an increase of$0.88 diluted earnings per share. During the fiscal year endedMarch 31, 2021 , this change to our Estimated Offering Period resulted in a decrease in net revenue of$333 million and net income of$280 million , and a decrease of$0.96 diluted earnings per share. During the three months endedSeptember 30, 2021 , we completed our annual evaluation of the Estimated Offering Period. We have noted consumers are playing certain of our Online Hosted Service Games, such as PC and console free-to-play games, for longer periods of time than in prior years as players engage with services we provide that are designed to enhance and extend gameplay, and as such, have concluded that the Estimated Offering Period for such games should be lengthened. As a result, for all new sales afterJuly 1, 2021 , the revenue that we recognize for service-related performance obligations related to our PC and console free-to-play games is recognized generally over a twelve-month period. This change in Estimated Offering Period did not impact the amount of net bookings or the operating cash flows that we report. During the fiscal year endedMarch 31, 2022 , this change to our Estimated Offering Period resulted in a decrease in net revenue of$131 million and net income of$100 million , and a decrease of$0.35 diluted earnings per share.
Principal Agent Considerations
We evaluate sales to end customers of our full games and related content via third-party storefronts, including digital storefronts such asMicrosoft's Xbox Store ,Sony's PlayStation Store ,Apple App Store , andGoogle Play Store , in order to determine whether or not we are acting as the principal in the sale to the end customer, which we consider in determining if revenue should be reported gross or net of fees retained by the third-party storefront. An entity is the principal if it controls a good or service before it is transferred to the end customer. Key indicators that we evaluate in determining gross versus net treatment include but are not limited to the following: 30
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•the underlying contract terms and conditions between the various parties to the transaction;
•which party is primarily responsible for fulfilling the promise to provide the specified good or service to the end customer;
•which party has inventory risk before the specified good or service has been transferred to the end customer; and
•which party has discretion in establishing the price for the specified good or service.
Based on an evaluation of the above indicators, except as discussed below, we have determined that generally the third party is considered the principal to end customers for the sale of our full games and related content. We therefore report revenue related to these arrangements net of the fees retained by the storefront. However, for sales arrangements viaApple App Store andGoogle Play Store , EA is considered the principal to the end customer and thus, we report revenue on a gross basis and mobile platform fees are reported within cost of revenue. Fair Value Estimates Business Combinations. We must estimate the fair value of assets acquired, liabilities assumed, and acquired in-process technology in a business combination. Our assessment of the estimated fair value of each of these can have a material effect on our reported results as intangible assets are amortized over various estimated useful lives. Furthermore, the estimated fair value assigned to an acquired asset or liability has a direct impact on the amount we recognize as goodwill, which is an asset that is not amortized. Accounting for business combinations requires us to make significant estimates and assumptions with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience, market conditions, and information obtained from the management of the acquired companies and are inherently uncertain and unpredictable. Examples of critical estimates used in valuing certain of the intangible assets and in determining the useful lives for the assets we have acquired or may acquire in the future include, but are not limited to:
•future expected revenues and cash flows;
•expected use of the acquired assets;
•the acquired company's trade name and trademarks, as well as assumptions about the period of time the acquired trade name and trademarks will continue to be used in our portfolio;
•expected costs to develop in-process research and development into commercially viable products and estimated cash flows from the projects when completed;
•discount rates used to determine the present value of estimated future cash flows, which are typically derived from a weighted-average cost of capital analysis and adjusted to reflect inherent risks.
Such estimates are inherently difficult and subjective and can have a material impact on our Consolidated Financial Statements. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates, or actual results.
Income Taxes
We recognize deferred tax assets and liabilities for both (1) the expected impact of differences between the financial statement amount and the tax basis of assets and liabilities and (2) the expected future tax benefit to be derived from tax losses and tax credit carryforwards. We do not recognize any deferred taxes related to theU.S. taxes on foreign earnings as we recognize these taxes as a period cost. We record a valuation allowance against deferred tax assets when it is considered more likely than not that all or a portion of our deferred tax assets will not be realized. In making this determination, we are required to give significant weight to evidence that can be objectively verified. It is generally difficult to conclude that a valuation allowance is not needed when there is significant negative evidence, such as cumulative losses in recent years. Forecasts of future taxable income are considered to be less objective than past results. Therefore, cumulative losses weigh heavily in the overall assessment. In addition to considering forecasts of future taxable income, we are also required to evaluate and quantify other possible sources of taxable income in order to assess the realization of our deferred tax assets, namely the reversal of existing deferred tax liabilities, the carryback of losses and credits as allowed under current tax law, and the implementation of tax planning 31
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Table of Contents strategies. Evaluating and quantifying these amounts involves significant judgments. Each source of income must be evaluated based on all positive and negative evidence and this evaluation may involve assumptions about future activity. Certain taxable temporary differences that are not expected to reverse during the carry forward periods permitted by tax law cannot be considered as a source of future taxable income that may be available to realize the benefit of deferred tax assets. Every quarter, we perform a realizability analysis to evaluate whether it is more likely than not that all or a portion of our deferred tax assets will not be realized. Our Swiss deferred tax asset realizability analysis relies upon future Swiss taxable income as the primary source of taxable income but considers all available sources of Swiss income based on the positive and negative evidence. We give more weight to evidence that can be objectively verified. However, there is judgment involved in estimating future Swiss taxable income, specifically related to assumptions about expected growth rates of future Swiss taxable income, which are based primarily on third party market and industry growth data. Actual results that differ materially from those estimates could have a material impact on our valuation allowance assessment. Although objectively verifiable, Swiss interest rates have an impact on the valuation allowance and are based on published Swiss guidance. Any significant changes to such interest rates could result in a material impact to the valuation allowance.Switzerland has a seven-year carryforward period and does not permit the carry back of losses. Changes in Estimated Offering Period and actions we take in connection with acquisitions could also impact the utilization of our Swiss deferred tax asset. As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each jurisdiction in which we operate prior to the completion and filing of tax returns for such periods. This process requires estimating both our geographic mix of income and our uncertain tax positions in each jurisdiction where we operate. These estimates require us to make judgments about the likely application of the tax law to our situation, as well as with respect to other matters, such as anticipating the positions that we will take on tax returns prior to our preparing the returns and the outcomes of disputes with tax authorities. The ultimate resolution of these issues may take extended periods of time due to examinations by tax authorities and statutes of limitations. In addition, changes in our business, including acquisitions, changes in our international corporate structure, changes in the geographic location of business functions or assets, changes in the geographic mix and amount of income, as well as changes in our agreements with tax authorities, valuation allowances, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in the estimated and actual level of annual pre-tax income can affect the overall effective tax rate.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The information under the subheading "Impact of Recently Issued Accounting Standards" in Note 1 - Description of Business and Basis of Presentation
to
the Consolidated Financial Statements in this Form 10-K is incorporated by reference into this Item 7.
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Table of Contents RESULTS OF OPERATIONS Our fiscal year is reported on a 52- or 53-week period that ends on the Saturday nearestMarch 31 . Our results of operations for the fiscal year endedMarch 31, 2022 contained 52 weeks and ended onApril 2, 2022 . Our results of operations for the fiscal year endedMarch 31, 2021 contained 53 weeks and ended onApril 3, 2021 . For simplicity of disclosure, all fiscal periods are referred to as ending on a calendar month end.
Net Revenue
Net revenue consists of sales generated from (1) full games sold as digital downloads or as packaged goods and designed for play on game consoles, PCs and mobile phones and tablets (2) live services associated with these games, such as extra-content, (3) subscriptions that generally offer access to a selection of full games, in-game content, online services and other benefits, and (4) licensing our games to third parties to distribute and host our games.
Comparison of Fiscal Year 2022 to Fiscal Year 2021
Net Revenue
Net revenue for fiscal year 2022 was$6,991 million , primarily driven by sales related to ourFIFA and Madden franchises, Apex Legends, and The Sims 4. Net revenue for fiscal year 2022 increased$1,362 million , as compared to fiscal year 2021. This increase was driven by a$1,839 million increase in net revenue primarily driven by increased year-over-year sales for theFIFA franchise and Apex Legends, new games added to our portfolio through acquisitions activity, including F1 2021 and several mobile titles, and Battlefield 2042. This increase was partially offset by a$477 million decrease in net revenue primarily from the Star Wars, The Sims, Need for Speed and UFC franchises.
Net Revenue by Composition
As our business has evolved, and management focuses less on the differentiation
between our packaged goods business and our digital business and more on our
full game sales and live services that extend and enhance gameplay, we present
net revenue by composition to align with this management view.
Our net revenue by composition for fiscal years 2022 and 2021 was as follows (in
millions):
Year Ended March 31,
2022 2021 $ Change % Change
Net revenue:
Full game downloads $ 1,282 $ 918 $ 364 40 %
Packaged goods 711 695 16 2 %
Full game $ 1,993 $ 1,613 $ 380 24 %
Live services and other $ 4,998 $ 4,016 $ 982 24 %
Total net revenue $ 6,991 $ 5,629 $ 1,362 24 %
Full Game Net Revenue
Full game net revenue includes full game downloads and packaged goods. Full game
downloads includes revenue from digital sales of full games on console, PC, and
mobile phones and tablets. Packaged goods includes revenue from software that is
sold physically. This includes (1) net revenue from game software sold
physically through traditional channels such as brick and mortar retailers, and
(2) software licensing revenue from third parties (for example, makers of
console platforms, personal computers or computer accessories) who include
certain of our full games for sale with their products (for example, Original
Equipment Manufacturer ("OEM") bundles).
Full game net revenue for fiscal year 2022 was $1,993 million , primarily driven
by sales related to our FIFA franchise, Madden NFL 22, Battlefield 2042, and It
Takes Two. Full game net revenue for fiscal year 2022 increased $380 million , or
24 percent, as compared to fiscal year 2021. This increase was primarily driven
by a $364 million increase in full game downloads net revenue primarily driven
by year-over-year growth in the FIFA franchise, Battlefield 2042, It Takes Two,
and Mass Effect Trilogy Remaster, partially offset by the Star Wars franchise.
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Live Services and Other Net Revenue
Live services and other net revenue includes revenue from sales of extra content for console, PC and mobile games, licensing revenue from third-party publishing partners who distribute our games digitally, subscriptions, advertising, and non-software licensing. Live services and other net revenue for fiscal year 2022 was$4,998 million , primarily driven by sales of extra content for FIFA Ultimate Team, Apex Legends, The Sims 4, Madden Ultimate Team, and Star Wars: Galaxy of Heroes. Live services and other net revenue for fiscal year 2022 increased$982 million , or 24 percent, as compared to fiscal year 2021. This increase was primarily driven by sales of extra content for FIFA Ultimate Team, Apex Legends and new games added to our mobile portfolio through acquisitions activity, partially offset by a year-over-year decrease in sales of extra content for The Sims 4.
Cost of Revenue
Cost of revenue consists of (1) certain royalty expenses for celebrities, professional sports leagues, movie studios and other organizations, and independent software developers, (2) mobile platform fees associated with our mobile revenue (for transactions in which we are acting as the principal in the sale to the end customer), (3) data center, bandwidth and server costs associated with hosting our online games and websites, (4) inventory costs, (5) payment processing fees, (6) amortization and impairment of certain intangible assets, (7) personnel-related costs, (8) manufacturing royalties, and (9) warehousing and distribution costs.
Cost of revenue for fiscal years 2022 and 2021 was as follows (in millions):
2022 Revenue 2021 Revenue % Change Change as a % of Net Revenue
$ 1,859 27 % $ 1,494 27 % 24 % - %
Cost of Revenue
Cost of revenue increased by $365 million , or 24 percent during fiscal year
2022, as compared to fiscal year 2021. This increase was primarily due to an
increase in platform and hosting fees due to new games added to our mobile
portfolio through acquisitions activity and higher engagement with Apex Legends,
an increase in acquisition-related intangible amortization, and an increase in
royalty costs driven by It Takes Two and the growth in the FIFA franchise.
Research and Development
Research and development expenses consist of expenses incurred by our production
studios for personnel-related costs, related overhead costs, external
third-party development costs, contracted services, depreciation and any
impairment of prepaid royalties for pre-launch products. Research and
development expenses for our online products include expenses incurred by our
studios consisting of direct development and related overhead costs in
connection with the development and production of our online games. Research and
development expenses also include expenses associated with our digital platform,
software licenses and maintenance, and management overhead.
Research and development expenses for fiscal years 2022 and 2021 were as follows
(in millions):
March 31, % of Net March 31, % of Net
2022 Revenue 2021 Revenue $ Change % Change
$ 2,186 31 % $ 1,778 32 % $ 408 23 %
Research and development expenses increased by $408 million , or 23 percent, in
fiscal year 2022, as compared to fiscal year 2021. This increase was primarily
due to a $229 million increase in personnel-related costs primarily resulting
from headcount due to acquisitions and continued investment in our studios, a
$71 million increase in stock-based compensation, a $60 million increase in
studio-related contracted services, and a $31 million increase in
facility-related costs.
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Marketing and Sales
Marketing and sales expenses consist of advertising, marketing and promotional
expenses, personnel-related costs, and related overhead costs, net of qualified
advertising cost reimbursements from third parties.
Marketing and sales expenses for fiscal years 2022 and 2021 were as follows (in
millions):
March 31, % of Net March 31, % of Net
2022 Revenue 2021 Revenue $ Change % Change
$ 961 14 % $ 689 12 % $ 272 39 %
Marketing and sales expenses increased by $272 million , or 39 percent, in fiscal
year 2022, as compared to fiscal year 2021. This increase was primarily due to
an increase in advertising and promotional spending primarily on our mobile
titles, Battlefield 2042, and Apex Legends.
General and Administrative
General and administrative expenses consist of personnel and related expenses of
executive and administrative staff, corporate functions such as finance, legal,
human resources, and information technology ("IT"), related overhead costs, fees
for professional services such as legal and accounting, and allowances for
doubtful accounts.
General and administrative expenses for fiscal years 2022 and 2021 were as
follows (in millions):
March 31, % of Net March 31, % of Net
2022 Revenue 2021 Revenue $ Change % Change
$ 673 10 % $ 592 11 % $ 81 14 %
General and administrative expenses increased by $81 million , or 14 percent, in
fiscal year 2022, as compared to fiscal year 2021. This increase was primarily
due to a $22 million increase in acquisition-related transaction and integration
costs, a $16 million increase in personnel-related costs primarily resulting
from an increase in headcount, a $15 million increase in IT-related costs, a $13
million increase in stock-based compensation, and a $7 million increase in
contracted services.
Amortization and Impairment of Intangibles
Amortization and impairment of intangibles for fiscal years 2022 and 2021 were
as follows (in millions):
March 31, % of Net March 31, % of Net
2022 Revenue 2021 Revenue $ Change % Change
$ 183 3 % $ 30 1 % $ 153 510 %
Amortization and impairment of intangibles increased by
Income Taxes
Provision for (benefit from) income taxes for fiscal years 2022 and 2021 was as follows (in millions):
March 31, 2022 Effective Tax Rate March 31, 2021 Effective Tax Rate $ 292 27.0 % $ 180 17.7 %
Our effective tax rate for the fiscal year ended
During the fiscal year endedMarch 31, 2022 , we completed intra-entity sales of intellectual property rights related to recent acquisitions to ourU.S. and Swiss intellectual property owners (the "Acquired IP intra-entity sales"). The transactions resulted in overall taxable gains. UnderU.S. GAAP, any profit resulting from the Acquired IP intra-entity sales was eliminated upon 35
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Table of Contents consolidation. However, the transactions resulted in a step-up of theU.S. and Swiss tax-deductible basis in the transferred intellectual property rights and, accordingly, created a temporary difference between the book basis and the tax basis of such intellectual property rights. As a result, we recognized a$64 million net tax benefit for the current and deferred tax impacts of the sales. In addition, during the fiscal year endedMarch 31, 2022 , we recognized a$29 million tax charge to increase the valuation allowance on Swiss deferred tax assets that are not more likely than not to be realized. The Acquired IP intra-entity sales and the change in valuation allowance had the effect of reducing our effective tax rate for the fiscal year endedMarch 31, 2022 by 3.2 percentage points. Our effective tax rate and resulting provision for income taxes for the fiscal year endedMarch 31, 2021 includes a$141 million tax benefit for changes in uncertain tax positions and the valuation allowance related to our Swiss deferred tax assets. This benefit had the effect of reducing our effective tax rate for the fiscal year endedMarch 31, 2021 by 13.9 percentage points. Our effective tax rates for future periods will continue to depend on a variety of factors, including changes in our business, such as acquisitions and intercompany transactions, our corporate structure, the geographic location of business functions or assets, the geographic mix of income, our agreements with tax authorities, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in our annual pre-tax income or loss. We anticipate that the impact of excess tax benefits, tax deficiencies, and changes in valuation allowances may result in significant fluctuations to our effective tax rate in the future.
Comparison of Fiscal Year 2021 to Fiscal Year 2020
For the comparison of fiscal year 2021 to fiscal year 2020, refer to Part II, Item 7 " Management's Discussion and Analysis of Financial Condition and Results of Operations " of our Annual Report on Form 10-K for our fiscal year endedMarch 31, 2021 , filed with theSEC onMay 26, 2021 under the subheading "Comparison of Fiscal Year 2021 to Fiscal Year 2020."
LIQUIDITY AND CAPITAL RESOURCES
As of March 31,
(In millions) 2022 2021 Increase/(Decrease) Cash and cash equivalents$ 2,732 $ 5,260 $ (2,528) Short-term investments 330 1,106 (776) Total$ 3,062 $ 6,366 $ (3,304) Percentage of total assets 22 % 48 % Year Ended March 31, (In millions) 2022 2021 Change Net cash provided by operating activities$ 1,899 $ 1,934 $ (35) Net cash used in investing activities (2,804) (505) (2,299) Net cash used in financing activities (1,620) (15) (1,605) Effect of foreign exchange on cash and cash (3) 78 (81)
equivalents
Net increase (decrease) in cash and cash equivalents
(4,020)
For the comparison of fiscal year 2021 to fiscal year 2020, refer to Part II,
Item 7 " Management's Discussion and Analysis of Financial Condition and
Results of Operations " of our Annual Report on Form 10-K for our fiscal year
ended March 31, 2021 , filed with the SEC on May 26, 2021 under the subheading
"Liquidity and Capital Resources."
Changes in Cash Flow
Operating Activities. Net cash provided by operating activities decreased by$35 million during fiscal year 2022, as compared to fiscal year 2021, primarily driven by higher cash payments for income taxes, higher personnel-related payments primarily from an increase in headcount, higher marketing and advertising payments, higher cash payments for royalties, and higher cash payments for platform and hosting fees. These decreases were offset by higher cash generated due to improved performance as we executed against our strategic pillars and increased engagement with our products and services which led to growth in our business. 36
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Table of Contents Investing Activities. Net cash used in investing activities increased by$2,299 million during fiscal year 2022, as compared to fiscal year 2021, primarily driven by a$2,357 million decrease in proceeds from maturities and sales of short-term investments, higher payments of$2,152 million in connection with acquisitions completed during fiscal year 2022, and a$64 million increase in capital expenditures. These increases were offset by a$2,274 million decrease in the purchase of short-term investments. Financing Activities. Net cash used in financing activities increased by$1,605 million during fiscal year 2022, as compared to fiscal year 2021, primarily driven by net proceeds from the issuance of the 2031 Notes and 2051 Notes for$1,478 million during fiscal year 2021, a$571 million increase in the repurchase and retirement of our common stock, a$95 million increase in cash dividend payments during fiscal year 2022, and a$52 million increase in cash paid to taxing authorities in connection with employee withholding taxes for stock-based compensation. These increases were offset by a repayment of$600 million of our 2021 Notes during fiscal year 2021.
Short-term Investments
Due to our mix of fixed and variable rate securities, our short-term investment portfolio is susceptible to changes in short-term interest rates. As ofMarch 31, 2022 , our short-term investments had gross unrealized losses of$2 million , or less than 1 percent of the total in short-term investments. From time to time, we may liquidate some or all of our short-term investments to fund operational needs or other activities, such as capital expenditures, business acquisitions or stock repurchase programs.
Senior Notes
InFebruary 2021 , we issued$750 million aggregate principal amount of the 2031 Notes and$750 million aggregate principal amount of the 2051 Notes. The effective interest rate is 1.98% for the 2031 Notes and 3.04% for the 2051 Notes. Interest is payable semiannually in arrears, onFebruary 15 andAugust 15 of each year.
In
See Note 12 - Financing Arrangements to the Consolidated Financial Statements in this Form 10-K as it relates to our Senior Notes, which is incorporated by reference into this Item 7.
Credit Facility
OnAugust 29, 2019 , we entered into a$500 million unsecured revolving credit facility ("Credit Facility") with a syndicate of banks. The Credit Facility terminates onAugust 29, 2024 unless the maturity is extended in accordance with its terms. As ofMarch 31, 2022 , no amounts were outstanding under the Credit Facility. See Note 12 - Financing Arrangements to the Consolidated Financial Statements in this Form 10-K as it relates to our Credit Facility, which is incorporated by reference into this Item 7.
Financial Condition
Our material cash requirements as ofMarch 31, 2022 are set forth in our Note 14 - Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-K, which is incorporated by reference into this Item 7. We expect capital expenditures to be approximately$200 million in fiscal year 2023 due to facility buildouts. We believe that our cash, cash equivalents, short-term investments, cash generated from operations and available financing facilities will be sufficient to meet these material cash requirements, which include licensing intellectual property from professional sports leagues and players associations used in our EA SPORTS titles (e.g., the 300+ licenses within our global football ecosystem,NFL Properties LLC ,NFL Players Association andNFL Players Inc. on behalf ofOneTeam Partners, LLC ) and third-party content and celebrities (e.g., Disney Interactive), debt repayment obligations of$1.9 billion , and to fund our operating requirements for the next 12 months and beyond. Our operating requirements include working capital requirements, capital expenditures, the remaining portion of our$2.6 billion share repurchase program, quarterly cash dividend, which is currently$0.19 per share, subject to declaration by our Board of Directors or a designated Committee of the Board of Directors, and potentially, future acquisitions or strategic investments. We may choose at any time to raise additional capital to repay debt, strengthen our financial position, facilitate expansion, repurchase our stock, pursue strategic acquisitions and investments, and/or to take advantage of business opportunities as they arise. There can be no assurance, however, that such additional capital will be available to us on favorable terms, if at all, or that it will not result in substantial dilution to our existing stockholders. 37
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During fiscal year 2022, we returned
During fiscal year 2022, we also completed mergers and acquisitions activity, including the acquisitions of 100% of the equity interests of Glu andPlaydemic for cash considerations of$2.0 billion and$1.4 billion , net of cash acquired, respectively, and one other immaterial acquisition. Our foreign subsidiaries are generally subject toU.S. tax, and to the extent earnings from these subsidiaries can be repatriated without a material tax cost, such earnings will not be indefinitely reinvested. As ofMarch 31, 2022 , approximately$2.0 billion of our cash and cash equivalents were domiciled in foreign tax jurisdictions. All of our foreign cash is available for repatriation without a material tax cost. We have a "shelf" registration statement on Form S-3 on file with theSEC . This shelf registration statement, which includes a base prospectus, allows us at any time to offer any combination of securities described in the prospectus in one or more offerings. Unless otherwise specified in a prospectus supplement accompanying the base prospectus, we would use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes, which may include funding for working capital, financing capital expenditures, research and development, marketing and distribution efforts, and if opportunities arise, for acquisitions or strategic alliances. Pending such uses, we may invest the net proceeds in interest-bearing securities. In addition, we may conduct concurrent or other financings at any time. Our ability to maintain sufficient liquidity could be affected by various risks and uncertainties including, but not limited to, customer demand and acceptance of our products, our ability to collect our accounts receivable as they become due, successfully achieving our product release schedules and attaining our forecasted sales objectives, economic and geopolitical conditions inthe United States and abroad, the impact of acquisitions and other strategic transactions in which we may engage, the impact of competition, the seasonal and cyclical nature of our business and operating results, and the other risks described in the " Risk Factors " section, included in Part I, Item 1A of this report.
As of
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