Electronic Arts(US:EA)2024-11-01 20:07Part I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents Electronic Arts Inc.'s unaudited condensed consolidated financial statements for the periods ended September 30, 2024, detailing financial position, operating results, and cash flows Condensed Consolidated Balance Sheets The balance sheet as of September 30, 2024, shows a decrease in total assets, liabilities, and stockholders' equity compared to March 31, 2024, primarily due to reduced cash and deferred net revenue Condensed Consolidated Balance Sheet Highlights (in millions) | Account | Sep 30, 2024 | Mar 31, 2024 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $2,197 | $2,900 | | Total current assets | $3,972 | $4,247 | | Goodwill | $5,381 | $5,379 | | Total Assets | $13,136 | $13,420 | | Liabilities & Equity | | | | Deferred net revenue (current) | $1,475 | $1,814 | | Total current liabilities | $2,787 | $3,090 | | Senior notes, net | $1,883 | $1,882 | | Total Liabilities | $5,728 | $5,907 | | Total Stockholders' Equity | $7,408 | $7,513 | Condensed Consolidated Statements of Operations For the three months ended September 30, 2024, net revenue increased while net income decreased due to higher operating expenses and taxes, with a similar trend for the six-month period Statement of Operations Highlights (in millions, except per share data) | Metric | Q2 2024 (Three Months) | Q2 2023 (Three Months) | H1 2024 (Six Months) | H1 2023 (Six Months) | | :--- | :--- | :--- | :--- | :--- | | Net Revenue | $2,025 | $1,914 | $3,685 | $3,838 | | Gross Profit | $1,569 | $1,458 | $2,966 | $3,014 | | Operating Income | $384 | $377 | $748 | $919 | | Net Income | $294 | $399 | $574 | $801 | | Diluted EPS | $1.11 | $1.47 | $2.15 | $2.93 | - Restructuring charges for the three and six months ended September 30, 2024 were $51 million and $53 million, respectively, compared to minimal charges in the prior year periods8 Condensed Consolidated Statements of Comprehensive Income Total comprehensive income for the three and six months ended September 30, 2024, decreased year-over-year, primarily due to lower net income and losses on derivative instruments Comprehensive Income Summary (in millions) | Metric | Q2 2024 (Three Months) | Q2 2023 (Three Months) | H1 2024 (Six Months) | H1 2023 (Six Months) | | :--- | :--- | :--- | :--- | :--- | | Net Income | $294 | $399 | $574 | $801 | | Other Comprehensive Income (Loss) | ($55) | $41 | ($43) | $33 | | Total Comprehensive Income | $239 | $440 | $531 | $834 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity decreased from March 31 to September 30, 2024, primarily due to common stock repurchases and cash dividends, partially offset by net income and stock-based compensation - For the six months ended September 30, 2024, the company repurchased 5.4 million shares for a total of $750 million14113 - Cash dividends declared were $0.19 per common share in each of the first two quarters of fiscal 2025, totaling $101 million for the six-month period14 Condensed Consolidated Statements of Cash Flows For the six months ended September 30, 2024, net cash provided by operating activities decreased, while significant cash was used in financing activities, primarily for stock repurchases, leading to a net decrease in cash and cash equivalents Cash Flow Summary (Six Months Ended Sep 30, in millions) | Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $354 | $471 | | Net cash used in investing activities | ($115) | ($107) | | Net cash used in financing activities | ($948) | ($833) | | Net decrease in cash and cash equivalents | ($703) | ($478) | - The decrease in operating cash flow was mainly due to changes in working capital, including a $447 million increase in receivables and a $339 million decrease in deferred net revenue17 Notes to Condensed Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, financial instruments, restructuring charges, and commitments, confirming the company operates as a single reportable segment - The company operates as a single reportable segment, as the Chief Operating Decision Maker reviews operating results on a total company basis to assess performance and allocate resources116 - The 2024 Restructuring Plan is estimated to incur total charges of $125 million to $165 million, with actions expected to be substantially completed by March 31, 2025, and $119 million in net charges incurred to date565758 - As of September 30, 2024, the company had unrecognized commitments of approximately $1,760 million for developer/licensor agreements and $1,265 million for marketing89 - In May 2024, a new stock repurchase program was authorized for up to $5.0 billion, expiring in May 2027, replacing the previous program112 Report of Independent Registered Public Accounting Firm KPMG LLP reviewed the interim financial information and found no material modifications needed for conformity with U.S. GAAP, noting the review's scope is less than an audit - The accounting firm KPMG LLP conducted a review, not an audit, of the interim financial statements128 - KPMG LLP stated they are not aware of any material modifications needed for the financial information to conform with U.S. GAAP125 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial results, business trends, critical accounting policies, and liquidity, highlighting increased net revenue and bookings for Q2 2025 Overview This section summarizes EA's business, recent financial performance, and key trends, including a 6% year-over-year increase in net revenue and a 14% increase in net bookings for the quarter Q2 2025 Financial Highlights | Metric | Value | Change (YoY) | | :--- | :--- | :--- | | Total net revenue | $2,025 million | +6% | | Live services and other net revenue | $1,309 million | +1% | | Operating income | $384 million | +2% | | Diluted earnings per share | $1.11 | - | | Net cash provided by operating activities | $234 million | +109% | - Key business trends include focusing on live services, the shift to digital game delivery, intense competition, reliance on major franchises (EA SPORTS FC, Madden NFL, Apex Legends), and building re-occurring revenue streams135136139140141 Net Bookings (in millions) | Period | 2024 | 2023 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Three Months Ended Sep 30 | $2,079 | $1,820 | $259 | 14% | | Six Months Ended Sep 30 | $3,341 | $3,398 | ($57) | -2% | Critical Accounting Policies and Estimates This section details critical accounting policies and estimates, primarily focusing on revenue recognition judgments for 'Games with Services' and significant estimates required for income taxes, including deferred tax assets - For 'Games with Services', the sales price is generally allocated 75% to the software license (recognized at a point in time) and 25% to future update rights and online hosting (recognized ratably over the Estimated Offering Period)150 - The Estimated Offering Period for recognizing service-related revenue is a key judgment, estimated to be 8 months for digital sales, 10 months for retail sales, and 12 months for free-to-play games159 - The realizability analysis for the Swiss deferred tax asset is a critical estimate, relying on judgments about future Swiss taxable income and interest rates164 Results of Operations For the three months ended September 30, 2024, net revenue increased 6% year-over-year, driven by full game sales, while operating expenses rose due to higher R&D and G&A costs Net Revenue by Composition - Q2 (Three Months Ended Sep 30, in millions) | Composition | 2024 | 2023 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Full game | $716 | $621 | $95 | 15% | | Live services and other | $1,309 | $1,293 | $16 | 1% | | Total net revenue | $2,025 | $1,914 | $111 | 6% | - The increase in Q2 full game revenue was primarily due to the American football franchises, driven by the release of EA SPORTS College Football 25173 Operating Expenses - Q2 (Three Months Ended Sep 30, in millions) | Expense Category | 2024 | 2023 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Cost of Revenue | $456 | $456 | $0 | 0% | | Research and development | $648 | $602 | $46 | 8% | | Marketing and sales | $272 | $280 | ($8) | (3)% | | General and administrative | $197 | $173 | $24 | 14% | Liquidity and Capital Resources As of September 30, 2024, cash and equivalents decreased due to significant cash used in financing activities, primarily stock repurchases, though the company believes its liquidity remains sufficient Cash Flow Summary (Six Months Ended Sep 30, in millions) | Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $354 | $471 | | Net cash used in investing activities | ($115) | ($107) | | Net cash used in financing activities | ($948) | ($833) | - During the six months ended September 30, 2024, the company returned $851 million to stockholders, consisting of $750 million in share repurchases and $101 million in dividends210 - The company has a $500 million unsecured revolving credit facility, which was undrawn as of September 30, 2024208 - As of September 30, 2024, approximately $857 million of cash and cash equivalents were held in foreign jurisdictions, all of which is available for repatriation without material tax cost211 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from foreign currency exchange rates and interest rates, using hedging strategies for currency risk and managing its short-term investment portfolio for interest rate risk - The company is exposed to foreign currency risk from international sales, where a strengthening U.S. dollar negatively impacts reported international net revenue217 - EA uses foreign currency forward contracts to hedge a portion of forecasted foreign-currency-denominated sales and expenses and to mitigate risk from foreign-currency-denominated monetary assets and liabilities218219 - A hypothetical adverse 10% foreign currency exchange rate movement would result in a potential decline of $229 million in the fair value of cash flow hedges221 - Interest rate risk primarily affects the short-term investment portfolio, where a hypothetical 150 basis point increase in interest rates would decrease the fair market value by approximately $3 million225 Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2024, with no material changes in internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2024227 - There were no changes in internal control over financial reporting during the quarter that materially affected or are reasonably likely to materially affect such controls228 Part II - OTHER INFORMATION Item 1. Legal Proceedings The company is subject to various claims and litigation in the ordinary course of business, which management does not expect to have a material adverse effect on its financial statements - The company is subject to claims and litigation arising in the ordinary course of business but does not expect any reasonably foreseeable disposition to have a material adverse effect on its financial statements92231 Item 1A. Risk Factors This section outlines the company's strategic, operational, legal, financial, and general risks, including intense competition, cybersecurity threats, regulatory compliance, and economic volatility Strategic Risks The company faces strategic risks from intense competition, reliance on a few popular franchises, potential failure to meet development schedules, and dependence on third-party intellectual property and partners - The business is intensely competitive, and a significant portion of revenue is derived from a few popular franchises, such as EA SPORTS FC, making the company vulnerable to the underperformance of a single major title233235 - Failure to meet product development schedules can lead to delayed revenue, increased expenses, and harm to profitability, especially if key selling periods are missed236237 - The business depends on the success of third-party consoles and platforms, and the ability to acquire and maintain licenses for key intellectual property (e.g., sports leagues, Star Wars) is critical245252 Operational Risks Operational risks include disruption from catastrophic events, security breaches, service outages, and challenges in retaining key talent, alongside significant reliance on major platform partners - The company has experienced and may continue to experience security breaches and cyber threats, which could lead to loss of data, business interruptions, and damage to brand reputation256258 - The business depends on the ability to attract, train, and retain key executive, technical, and creative talent in a highly competitive market262 - A significant percentage of digital net revenue comes from partners like Sony, Microsoft, Apple, and Google, who have significant control over distribution, promotion, and fees, exposing EA to risks associated with their businesses and policies265266267 Legal and Compliance Risks Legal and compliance risks include complex and evolving global regulations on data privacy and consumer protection, increased scrutiny on virtual items and AI, and challenges related to intellectual property infringement and protection - The business is subject to complex and evolving global data privacy, security, and consumer-protection laws, and non-compliance could result in significant penalties and brand damage268269 - Business models involving virtual items and the use of artificial intelligence are subject to evolving laws and regulations that could limit offerings or increase compliance costs273 - The company may be subject to costly claims of infringing third-party intellectual property rights and faces challenges in protecting its own IP from unauthorized copying, particularly in certain foreign countries275279 Financial Risks Financial risks include exposure to foreign currency fluctuations, the impact of outstanding debt on cash flow, and potential adverse effects from changes in tax laws or audit outcomes - With 60% of total net revenue from international sales in FY24, the company is significantly exposed to foreign currency exchange rate fluctuations280 - The company has outstanding senior notes and a credit facility, and this indebtedness could impact financial condition by requiring dedication of cash flow to repayment and increasing vulnerability to downturns281 - Changes in tax laws or interpretations, particularly in the U.S. and Switzerland, could adversely affect the company's effective tax rate and financial condition283284 General Risks General risks include exposure to macroeconomic conditions like inflation and recession impacting consumer spending, and the inherent volatility of the company's stock price - The business is subject to macroeconomic conditions like inflation and recession that can negatively impact discretionary consumer spending288 - The company's stock price is historically volatile and subject to significant fluctuations due to operating results, analyst estimates, and general market conditions290 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds A new $5.0 billion stock repurchase program was authorized in May 2024, under which the company repurchased approximately 2.6 million shares for $375 million during the quarter - In May 2024, the company authorized a new stock repurchase program for up to $5.0 billion, expiring May 9, 2027291 Share Repurchases (Three Months Ended Sep 30, 2024) | Period | Total Shares Purchased | Average Price Paid | Total Cost (approx.) | | :--- | :--- | :--- | :--- | | Total for Quarter | 2,587,975 | $144.83 | $375 million | Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported - None292 Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable298 Item 5. Other Information This section discloses that several company executives adopted Rule 10b5-1 trading plans during the quarter to manage their personal equity holdings - CEO Andrew Wilson, CFO Stuart Canfield, and President of EA Entertainment & Technology Laura Miele each adopted a Rule 10b5-1 trading plan during the quarter294295296 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q report, including corporate governance documents, CEO and CFO certifications, and financial data in Inline XBRL format - The report includes certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act302 - Financial statements and notes are provided in Inline XBRL format as part of the exhibits302