ELECTRONIC ARTS INC. CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. We use words such as "anticipate," "believe," "expect," "intend," "estimate", "plan", "predict", "seek", "goal", "will", "may", "likely", "would", "should", "could" (and the negative of any of these terms), "future" and similar expressions to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our business, projections of markets relevant to our business, uncertain events and assumptions and other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements consist of, among other things, statements related to the impact of the COVID-19 pandemic to our business, operations and financial results, industry prospects, our future financial performance, and our business plans and objectives, and may include certain assumptions that underlie the forward-looking statements. These forward-looking statements are not guarantees of future performance and reflect management's current expectations. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that might cause or contribute to such differences include those discussed in Part II, Item 1A of this Quarterly Report under the heading "Risk Factors" in, as well as in other documents we have filed with theSecurities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 . We assume no obligation to revise or update any forward-looking statement for any reason, except as required by law.
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 three months endedSeptember 30, 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-Q, including in the remainder of "Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")," "Risk Factors," and the Condensed Consolidated Financial Statements and related Notes. Additional information can be found in the "Business" section of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 as filed with theSEC onMay 25, 2022 and in other documents we have filed with theSEC . AboutElectronic Arts 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. 29 -------------------------------------------------------------------------------- Table of Contents Financial Results
Our key financial results for our fiscal quarter ended
•Total net revenue was$1,904 million , up 4 percent year-over-year. On a constant currency basis, we estimate that total net revenue would have been$1,930 million , up 7 percent year-over-year. •Live services and other net revenue was$1,302 million , up 8 percent year-over-year. •Gross margin was 75.7 percent, up 3 percentage points year-over-year. •Operating expenses were$1,015 million , up 2 percent year-over-year. On a constant currency basis, we estimate that operating expenses would have been$1,034 million , up 5 percent year-over-year. •Operating income was$427 million , up 26 percent year-over-year. •Net income was$299 million with diluted earnings per share of$1.07 . •Net cash used in operating activities was$112 million , up 275 percent year-over-year. •Total cash, cash equivalents and short-term investments were$1,874 million . •We repurchased 2.6 million shares of our common stock for$325 million . •We paid cash dividends of$53 million during the quarter endedSeptember 30, 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
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$5,288 million ,$4,485 million and$3,904 million for the trailing twelve months endedSeptember 30, 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$4,140 million ,$3,382 million and$3,090 million for the trailing twelve months endedSeptember 30, 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 from 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 due to a mix of products 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. As a result, 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. 30 -------------------------------------------------------------------------------- Table of ContentsIncreased 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 definitive agreement to acquire Activision Blizzard. 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 historically in the mobile gaming industry. Similarly, sales of extra content are the primary driver of our mobile business. While the mobile gaming industry has recently experienced headwinds, it remains a strategic focus for us, as we look to reach new players, grow our existing network, and build interconnected ecosystems. We expect growth in our mobile business and mobile net revenue in fiscal year 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. 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. 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. Re-occurring Revenue Sources. Our business model includes revenue that we deem re-occurring in nature, such as revenue from our live services, annualized sports franchises (e.g., global football, Madden NFL), and our console, PC and mobile catalog titles (i.e., titles that did not launch in the current fiscal year). 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. 31
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The following is a calculation of our total net bookings for the periods
presented:
Three Months Ended Six Months Ended
September 30, September 30,
(In millions) 2022 2021 2022 2021
Total net revenue $ 1,904 $ 1,826 $ 3,671 $ 3,377
Change in deferred net revenue (online-enabled
games) (150) 25 (618) (190)
Net bookings $ 1,754 $ 1,851 $ 3,053 $ 3,187
Net bookings were $1,754 million for the three months ended September 30, 2022
primarily driven by sales related to our FIFA franchise, Apex Legends, our
Madden franchise, The Sims 4, and our F1 franchise. Net bookings decreased $97
million , or 5 percent, as compared to the three months ended September 30, 2021 ,
primarily due to a $51 million impact related to fluctuations in foreign
exchange rates, net of hedging activities, decreased sales of extra content
related to Apex Legends due to timing of in-game events, and the year-over-year
change in the launch date of F1 from the second quarter in fiscal year 2022 to
the first quarter in fiscal year 2023. The decreases were partially offset by
sales of extra content from the addition of Golf Clash, and strength in our FIFA
franchise. Live services and other net bookings were $1,119 million for the
three months ended September 30, 2022 , and decreased $36 million , or 3 percent,
as compared to the three months ended September 30, 2021 . The decrease in live
services and other net bookings was primarily due to fluctuations in foreign
exchange rates, net of hedging activities, decreased sales of extra content
related to Apex Legends due to timing of in-game events, and The Sims 4,
partially offset by sales of extra content from the addition of Golf Clash and
strength in our FIFA franchise. Full game net bookings were $635 million for the
three months ended September 30, 2022 , and decreased $61 million , or 9 percent,
as compared to the three months ended September 30, 2021 primarily due to the
year-over-year change in the launch date of F1 from the second quarter in fiscal
year 2022 to the first quarter in fiscal year 2023 and the fluctuations in
foreign exchange rates, net of hedging activities.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Condensed Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States ("U.S.
GAAP"). The preparation of these Condensed 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. 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").
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).
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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.
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
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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. Revenue for
service-related performance obligations for games and extra content sold through
retail is recognized over an estimated ten-month period beginning in the month
of sale, 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, and revenue for service
related performance obligations related to our PC and console free-to-play games
is recognized generally over a twelve-month period.
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:
•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 discretion in establishing the price for the specified good or service; and
•which party has inventory risk before the specified good or service has been transferred to the end customer.
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;
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•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 Condensed 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 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. Swiss interest rates have an impact on the valuation allowance and are based on published Swiss guidance, which generally occurs in the fourth quarter of our fiscal year. Any significant changes to such interest rates could result in a material impact to the valuation allowance and to our Consolidated Financial Statements. We have adjusted our valuation allowance for changes in the published interest rates in the past and it is probable that we will do so again based on current global interest rate trends.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 Condensed 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. 36 -------------------------------------------------------------------------------- Table of Contents IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The information under the subheading "Other Recently Issued Accounting Standards" in Note 1 - Description of Business and Basis of Presentation
to
the Condensed Consolidated Financial Statements in this Form 10-Q is incorporated by reference into this Item 2.
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 endingMarch 31, 2023 contains 52 weeks and ends onApril 1, 2023 . 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 three and six months endedSeptember 30, 2022 contained 13 weeks and 26 weeks, respectively, and ended onOctober 1, 2022 . Our results of operations for the three and six months endedSeptember 30, 2021 contained 13 weeks and 26 weeks, respectively, and ended onOctober 2, 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.
Net Revenue Quarterly Analysis
Net Revenue
Net revenue for the three months endedSeptember 30, 2022 was$1,904 million , primarily driven by sales related toFIFA 22,FIFA 23, Apex Legends, Madden NFL 23, and The Sims 4. Net revenue for the three months endedSeptember 30, 2022 increased$78 million as compared to the three months endedSeptember 30, 2021 . This increase was driven by a$234 million increase in net revenue primarily due to Battlefield 2042, the addition of Golf Clash, and Apex Legends, partially offset by a$156 million decrease in net revenue primarily due to the Star Wars franchise and fluctuations in foreign exchange rates, net of hedging activities.
Net Revenue by Composition
Our net revenue by composition for the three months ended
Three Months Ended September 30,
2022 2021 $ Change % Change
Net revenue:
Full game downloads $ 328 $ 337 $ (9) (3) %
Packaged goods 274 280 (6) (2) %
Full game $ 602 $ 617 $ (15) (2) %
Live services and other $ 1,302 $ 1,209 $ 93 8 %
Total net revenue $ 1,904 $ 1,826 $ 78 4 %
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 primarily includes revenue from
software that is sold physically through traditional channels such as brick and
mortar retailers and software licensing revenue from third parties who include
certain of our full games for sale with their products.
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For the three months ended September 30, 2022 , full game net revenue was $602
million , primarily driven by FIFA 23, Madden NFL 23, and Battlefield 2042. Full
game net revenue for the three months ended September 30, 2022 decreased $15
million , or 2 percent, as compared to the three months ended September 30, 2021 .
This decrease was primarily driven by the year-over-year change in the launch
date of F1 from the second quarter in fiscal year 2022 to the first quarter in
fiscal year 2023, our FIFA franchise primarily due to fluctuations in foreign
exchange rates, net of hedging activities, Mass Effect Trilogy Remaster, and our
Madden franchise, partially offset by Battlefield 2042.
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, subscriptions, and advertising.
For the three months endedSeptember 30, 2022 , live services and other net revenue was$1,302 million primarily driven by sales of extra content forFIFA Ultimate Team, Apex Legends, The Sims 4, and Madden Ultimate Team. Live services and other net revenue for the three months endedSeptember 30, 2022 increased$93 million , or 8 percent, as compared to the three months endedSeptember 30, 2021 . This increase was primarily driven by sales of extra content from the addition of Golf Clash and Apex Legends, partially offset by the Star Wars franchise and The Sims 4.
Net Revenue Year-to-Date Analysis
Net Revenue
Net revenue for the six months endedSeptember 30, 2022 was$3,671 million , primarily driven by sales related toFIFA 22, Apex Legends,FIFA 23, Battlefield 2042, and The Sims 4. Net revenue for the six months endedSeptember 30, 2022 increased$294 million as compared to the six months endedSeptember 30, 2021 . This increase was driven by a$613 million increase in net revenue primarily due to Battlefield 2042, new games added to our mobile portfolio through acquisitions activity, and Apex Legends, partially offset by a$319 million decrease in net revenue primarily due to the prior year release of Mass Effect Trilogy Remaster. Net Revenue by Composition
Our net revenue by composition for the six months ended
Six Months Ended September 30,
2022 2021 $ Change % Change
Net revenue:
Full game downloads $ 565 $ 570 $ (5) (1) %
Packaged goods 378 369 9 2 %
Full game $ 943 $ 939 $ 4 - %
Live services and other $ 2,728 $ 2,438 290 12 %
Total net revenue $ 3,671 $ 3,377 $ 294 9 %
Full Game Net Revenue
For the six months ended September 30, 2022 , full game net revenue was $943
million , primarily driven by FIFA 23, Battlefield 2042, FIFA 22, and Madden NFL
23. Full game net revenue for the six months ended September 30, 2022 increased
$4 million , or less than 1 percent, as compared to the six months ended
September 30, 2021 . This increase was primarily driven by Battlefield 2042,
partially offset by Mass Effect Trilogy Remaster, It Takes Two, and the Need For
Speed, UFC, and Madden franchises.
Live Services and Other Net Revenue
For the six months endedSeptember 30, 2022 , live services and other net revenue was$2,728 million primarily driven by sales of extra content for FIFA Ultimate Team, Apex Legends, The Sims 4, and Madden Ultimate Team. Live services and other net revenue for the six months endedSeptember 30, 2022 increased$290 million , or 12 percent, as compared to the six months endedSeptember 30, 2021 . This increase was primarily driven by sales of extra content related to new games added to our 38
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mobile portfolio through acquisitions activity, Apex Legends, and our
Cost of Revenue Quarterly Analysis
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 the three months endedSeptember 30, 2022 and 2021 was as follows (in millions): September 30, September 30, Change as a % of 2022 % of Net Revenue 2021 % of Net Revenue % Change Net Revenue $ 462 24 % $ 494 27 % (6) % (3) % Cost of Revenue Cost of revenue decreased by$32 million during the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 . The decrease was primarily due to a decrease in royalty costs due to product mix, and a decrease in inventory costs due to the year-over-year change in the launch date of F1 from the second quarter in fiscal year 2022 to the first quarter in fiscal year 2023, partially offset by an increase in acquisition-related intangible asset amortization and impairment and an increase in platform and hosting fees. Cost of revenue as a percentage of total net revenue decreased by 3 percent during the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 . This decrease was primarily due to a decrease in royalty costs due to product mix, a decrease in inventory costs due to the year-over-year change in the launch date of F1 from the second quarter in fiscal year 2022 to the first quarter in fiscal year 2023, partially offset by a decrease in digital sales.
Cost of Revenue Year-to-Date Analysis
Cost of revenue for the six months endedSeptember 30, 2022 and 2021 was as follows (in millions): September 30, September 30, Change as a % of 2022 % of Net Revenue 2021 % of Net Revenue % Change Net Revenue $ 776 21 % 809 24 % (4) % (3) % Cost of Revenue Cost of revenue decreased by$33 million during the six months endedSeptember 30, 2022 , as compared to the six months endedSeptember 30, 2021 . The decrease was primarily due to lower royalty costs due to product mix, and a decrease in inventory costs driven by theFIFA franchise and the prior year release of Mass Effect Trilogy Remaster, partially offset by an increase in platform and hosting fees and an increase in acquisition-related intangible asset amortization and impairment. Cost of revenue as a percentage of total net revenue decreased by 3 percent during the six months endedSeptember 30, 2022 , as compared to the six months endedSeptember 30, 2021 . This decrease was primarily due to lower royalty costs due to product mix, a decrease in inventory costs due to the year-over-year change in the launch date of F1 from the second quarter in fiscal year 2022 to the first quarter in fiscal year 2023, partially offset by a decrease in digital sales. 39
-------------------------------------------------------------------------------- Table of Contents 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 the three and six months ended
September 30, % of Net September 30, % of Net
2022 Revenue 2021 Revenue $ Change % Change
Three months ended $ 565 30 % $ 553 30 % $ 12 2 %
Six months ended $ 1,137 31 % $ 1,068 32 % $ 69 6 %
Research and development expenses increased by $12 million , or 2 percent, during
the three months ended September 30, 2022 , as compared to the three months ended
September 30, 2021 . This increase was primarily due to an $8 million increase in
studio related contracted services, and a $9 million increase due to hedging
activities, partially offset by a $6 million decrease in stock-based
compensation.
Research and development expenses increased by $69 million , or 6 percent, during
the six months ended September 30, 2022 , as compared to the six months ended
September 30, 2021 . This increase was primarily due to a $30 million increase in
personnel-related costs primarily resulting from continued investment in our
studios, including headcount from prior year acquisitions, a $20 million
increase due to hedging activities, and a $15 million increase in studio related
contracted services.
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 the three and six months ended
September 30, % of Net September 30, % of Net
2022 Revenue 2021 Revenue $ Change % Change
Three months ended $ 233 12 % $ 233 13 % $ - - %
Six months ended $ 467 13 % $ 423 13 % $ 44 10 %
Marketing and sales expenses increased by $44 million , or 10 percent, during the
six months ended September 30, 2022 , as compared to the six months ended
September 30, 2021 . This increase was primarily due to an increase in
advertising and promotional spending related to the release of our Apex Legends
Mobile title in the first quarter of fiscal year 2023 and our FIFA franchise,
partially offset by a decrease in advertising and promotional spending primarily
related to our mobile portfolio, and Mass Effect Trilogy Remaster and It Takes
Two, which were launched in previous fiscal years.
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.
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General and administrative expenses for the three and six months ended September
30, 2022 and 2021 were as follows (in millions):
September 30, % of Net September 30, % of Net
2022 Revenue 2021 Revenue $ Change % Change
Three months ended $ 174 9 % $ 176 10 % $ (2) (1) %
Six months ended $ 341 9 % $ 345 10 % $ (4) (1) %
General and administrative expenses decreased by $2 million , or 1 percent, and
$4 million , or 1 percent during the three and six months ended September 30,
2022 , as compared to the three and six months ended September 30, 2021 ,
respectively. These decreases were primarily due to a decrease in contracted
services driven by prior year acquisition-related transaction and integration
costs, partially offset by an increase in IT-related costs.
Income Taxes
Provision for income taxes for the three and six months ended
September 30, 2022 Effective Tax Rate September 30, 2021 Effective Tax Rate
Three months ended $ 128 30 % $ 32 10 %
Six months ended $ 253 29 % $ 136 21 %
The provision for income taxes for the three and six months ended September 30,
2022 is based on our projected annual effective tax rate for fiscal year 2023,
adjusted for specific items that are required to be recognized in the period in
which they are incurred. Our effective tax rate for the three and six months
ended September 30, 2022 was 30 percent and 29 percent, respectively, as
compared to 10 percent and 21 percent, respectively, for the same period in
fiscal year 2022. The current period rate was higher due to the Codemasters
intra-entity sale of intellectual property rights to our U.S. and Swiss
intellectual property owners completed during the three months ended September
30, 2021 , which resulted in a taxable gain. Under U.S. GAAP, any profit
resulting from this intercompany transaction was eliminated upon consolidation.
However, the transaction resulted in a step-up of the U.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 $60
million net tax benefit for the current and deferred tax impacts of the sale.
Excluding the Codemasters intra-entity sale, the effective tax rate for three
and six months ended September 30, 2021 would have been 28 percent and 31
percent, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of As of
(In millions) September 30, 2022 March 31, 2022 Increase/(Decrease)
Cash and cash equivalents $ 1,539 $ 2,732 $ (1,193)
Short-term investments 335 330 5
Total $ 1,874 $ 3,062 $ (1,188)
Percentage of total assets 14 % 22 %
Six Months Ended September 30,
(In millions) 2022 2021 Change
Net cash used in operating activities $ (190) $ (79) $ (111)
Net cash used in investing activities (119) (2,722) 2,603
Net cash used in financing activities (824) (827) 3
Effect of foreign exchange on cash and cash
equivalents (60) (2) (58)
Net increase (decrease) in cash and cash
equivalents $ (1,193) $ (3,630) $ 2,437
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-------------------------------------------------------------------------------- Table of Contents Changes in Cash Flow Operating Activities. Net cash used in operating activities increased by$111 million during the six months endedSeptember 30, 2022 , as compared to the six months endedSeptember 30, 2021 , primarily driven by lower cash receipts, higher marketing and advertising payments, higher personnel-related payments primarily from an increase in headcount and higher variable compensation payments, partially offset by cash inflows from hedging activities, and lower cash payments for royalties. Investing Activities. Net cash used in investing activities decreased by$2,603 million during the six months endedSeptember 30, 2022 , as compared to the six months endedSeptember 30, 2021 , primarily driven by payments of$3,394 million in connection with acquisitions completed in the prior year, and a$196 million decrease in the purchase of short-term investments, partially offset by a$962 million increase from maturities and sales of short-term investments. Financing Activities. Net cash used in financing activities decreased by$3 million during the six months endedSeptember 30, 2022 , as compared to the six months endedSeptember 30, 2021 , primarily due to a decrease in the repurchase and retirement of our common stock, cash paid to taxing authorities in connection with withholding taxes for stock-based compensation, and partially offset by an increase in cash dividend payments.
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 ofSeptember 30, 2022 , our short-term investments had gross unrealized losses of$3 million or 1 percent of total 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 10 - Financing Arrangements to the Condensed Consolidated Financial Statements in this Form 10-Q as it relates to our Senior Notes, which is incorporated by reference into this Item 2.
Credit Facility
OnAugust 29, 2019 , we entered into a$500 million unsecured revolving credit facility (as amended, the "Credit Facility") with a syndicate of banks which was amended onOctober 18, 2022 . The Credit Facility terminates onAugust 29, 2024 unless the maturity is extended in accordance with its terms. As ofSeptember 30, 2022 , no amounts were outstanding under the Credit Facility. See
Note 10 - Financing Arrangements to the Condensed Consolidated Financial Statements in this Form 10-Q as it relates to our Credit Facility, which is incorporated by reference into this Item 2.
Return of Capital Program
InNovember 2020 , our Board of Directors authorized a program to repurchase up to$2.6 billion of our common stock. Repurchases under theNovember 2020 program were completed inOctober 2022 . InAugust 2022 , our Board of Directors authorized a program to repurchase up to$2.6 billion of our common stock. This stock repurchase program expires onNovember 4, 2024 . Under this program, we may purchase stock in the open market or through privately negotiated transactions in accordance with applicable securities laws, including pursuant to pre-arranged stock trading plans. The timing and actual amount of the stock repurchases will depend on several factors including price, capital availability, regulatory requirements, alternative investment opportunities and other market conditions. We are not obligated to repurchase a specific number of shares under this program and it may be modified, suspended or discontinued at any time. Upon completion of theNovember 2020 program inOctober 2022 , we began repurchasing shares under the current program. 42
-------------------------------------------------------------------------------- Table of Contents Financial Condition Our material cash requirements, including commitments for capital expenditure, as ofSeptember 30, 2022 are set forth in our Note 11 - Commitments and Contingencies to the Condensed Consolidated Financial Statements in this Form 10-Q, which is incorporated by reference into this Item 2. We expect capital expenditures to be approximately$200 million in fiscal year 2023 primarily 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, our recently authorized$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. During the six months endedSeptember 30, 2022 , we returned$751 million to stockholders through our capital return programs, repurchasing 5.1 million shares for approximately$645 million and returning$106 million through our quarterly cash dividend program which was initiated inNovember 2020 . 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 ofSeptember 30, 2022 , approximately$858 million 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 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 II, Item 1A of this report.
As of
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