Electronic Arts Reports Q2 FY18 Financial Results

REDWOOD CITY, Calif.–Electronic Arts Inc. (NASDAQ: EA) today announced preliminary financial results
for its second fiscal quarter ended September 30, 2017.

“It was a strong second quarter for Electronic Arts, with players around
the world captivated by our new EA SPORTS titles, top-performing mobile
games, and expanding esports competitions,” said Chief Executive Officer
Andrew Wilson. “The digital transformation is accelerating across our
industry, and we are well-positioned for continued growth with more
stunning new titles, thriving event-driven live services including
competitive gaming, and continuing innovation for our players on all
platforms.”

“We saw a notable shift to digital in our sports titles and remarkable
growth in Ultimate Team,” said Chief Financial Officer Blake Jorgensen.
“Our sports titles have once again shown their value in delivering a
stable and dependable performance. This quarter demonstrates how they
can drive our business and offers a window into how our games will
evolve over the months and years to come.”

News and ongoing updates regarding EA and its games are available on
EA’s blog at www.ea.com/news.

Selected Operating Highlights and Metrics

  • Digital net bookings* for the trailing twelve months was $3.240
    billion, up 26% year-over-year, and now represents 63% of total net
    bookings for the same period.
  • More than 50% of Madden NFL 18 players engaged in the “Longshot” story
    mode through Q2 and Madden Ultimate Team™ players are up 25%
    year-over-year.
  • FIFA Mobile unique player base grew to more than 113 million.
  • The BattlefieldTM 1 community grew to more than 23.5
    million players worldwide.
  • Monthly active players for The SimsTM 4 on PC increased
    more than 40% year-over-year.

* Net bookings, previously referred to as net sales, 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.

Selected Financial Highlights and Metrics

All financial measures are presented on a GAAP basis.

  • Net cash provided by operating activities was $52 million.
  • Net cash provided by operating activities for the trailing twelve
    months was $1.802 billion, a record measured at the end of the second
    quarter.
  • In Q2, EA repurchased 1.3 million shares for $153 million.

Quarterly Financial Highlights

Three Months Ended September 30,
20172016
(in $ millions, except per share amounts)
Digital net revenue689566
Packaged goods and other net revenue270332
Total net revenue959898
Net loss(22)(38)
Loss per share(0.07)(0.13)
Operating cash flow52

122

*

Value of shares repurchased153127
Number of shares repurchased1.31.6
*At the beginning of fiscal 2018, EA adopted FASB ASU 2016-09,
related to stock-based compensation. Operating cash flow for the
three months ended September 30, 2016 has been recast to reflect the
impact of this standard.

While EA no longer reports certain non-GAAP financial measures, the
following GAAP-based financial data and a long-term tax rate of 21% are
used internally by company management to adjust its GAAP results in
order to assess EA’s operating results:

Three Months Ended September 30, 2017
GAAP-Based Financial Data
(in $ millions)

Statement

of

Operations

Acquisition-

related

expenses

Change in

deferred net

revenue

(online-

enabled

games)

Stock-based

compensation

Total net revenue959220
Cost of revenue389(1)
Gross profit5702201
Total operating expenses611(2)(61)
Operating income (loss)(41)222062
Interest and other income, net3
Income (loss) before provision for (benefit from) income taxes(38)222062
Number of shares used in computation:
Basic and diluted309

EA’s GAAP loss per share for the three months ended September 30, 2017
was calculated using the basic share count of 309 million. Had EA
reported a profit, the diluted share count would have been 312 million
shares.

For more information about the nature of the GAAP-based financial data,
please refer to EA’s Form 10-Q for the fiscal quarter ended June 30,
2017.

TTM Financial Highlights

TTM Ended September 30,
20172016
(in $ millions)
Digital net revenue3,1872,539
Packaged goods and other net revenue1,8972,008
Total net revenue5,0844,547
Net income1,1871,256
Operating cash flow*1,8021,323
Value of shares repurchased5551,016
Number of shares repurchased5.715.2
*At the beginning of fiscal 2018, EA adopted FASB ASU 2016-09,
related to stock-based compensation. Operating cash flow has been
recast to reflect the impact of this standard.

While EA no longer reports certain non-GAAP financial measures, the
following GAAP-based financial data and a long-term tax rate of 21% are
used internally by company management to adjust its GAAP results in
order to assess EA’s operating results:

TTM Ended September 30, 2017
GAAP-Based Financial Data
(in $ millions)

Statement of

Operations

Acquisition-

related

expenses

Change in

deferred net

revenue

(online-

enabled

games)

Stock-based

compensation

Total net revenue5,08432
Cost of revenue1,261(18)(3)
Gross profit3,82318323
Total operating expenses2,408(6)(207)
Operating income1,4152432210
Interest and other income, net6
Income before provision for income taxes1,4212432210

For more information about the nature of the GAAP-based financial data,
please refer to EA’s Form 10-Q for the fiscal quarter ended June 30,
2017.

Operating Metric

EA has renamed the operating metric “net sales” to “net bookings”. The
following is a calculation of our total net bookings for the periods
presented:

Three Months Ended
September 30,
TTM Ended
September 30,
2017201620172016
(in $ millions)
Total net revenue9598985,0844,547
Change in deferred net revenue (online-enabled games)22020032(40)
Net bookings1,1791,0985,1164,507

Business Outlook as of October 31, 2017

The following forward-looking statements reflect expectations as of
October 31, 2017. Electronic Arts assumes no obligation to update these
statements. Results may be materially different and are affected by many
factors detailed in this release and in EA’s annual and quarterly SEC
filings.

Fiscal Year 2018 Expectations – Ending March 31, 2018

Financial metrics:

  • Net revenue is expected to be approximately $5.075 billion.
    • Change in deferred net revenue (online-enabled games) is expected
      to be approximately $75 million.
  • Net income is expected to be approximately $1.136 billion.
  • Diluted earnings per share is expected to be approximately $3.63.
  • Operating cash flow, reflecting the recently adopted accounting
    standard related to stock-based compensation discussed below, is
    expected to be approximately $1.600 billion.
  • The Company estimates a share count of 313 million for purposes of
    calculating fiscal year 2018 diluted earnings per share.

Operational metric:

  • Net bookings is expected to be approximately $5.150 billion.

In addition, the following outlook for GAAP-based financial data and a
long-term tax rate of 21% are used internally by EA to adjust our GAAP
expectations to assess EA’s operating results and plan for future
periods:

Twelve Months Ending March 31, 2018
GAAP-Based Financial Data

GAAP

Guidance

Acquisition-

related

expenses

Change in

deferred net

revenue

(online-

enabled

games)

Stock-based

compensation

(in $ millions)
Digital net revenue3,295115
Packaged goods & other net revenue1,780(40)
Total net revenue5,07575
Cost of revenue1,290(3)
Operating expense2,443(6)(237)
Income before provision for income taxes1,344675240
Net income1,136
Number of shares used in computation:
Diluted shares313

Third Quarter Fiscal Year 2018 Expectations – Ending December 31, 2017

Financial metrics:

  • Net revenue is expected to be approximately $1.135 billion.
    • Change in deferred net revenue (online-enabled games) is expected
      to be approximately $865 million.
  • Net loss is expected to be approximately ($64) million.
  • Loss per share is expected to be approximately ($0.21).
  • The Company estimates a GAAP basic and diluted share count of 309
    million shares due to a forecasted net loss. If the Company reports
    net income instead of a net loss, diluted share count for calculating
    diluted earnings per share would be 313 million shares.

Operational metric:

  • Net bookings is expected to be approximately $2.000 billion.

In addition, the following outlook for GAAP-based financial data and a
long-term tax rate of 21% are used internally by EA to adjust our GAAP
expectations to assess EA’s operating results and plan for future
periods:

Three Months Ending December 31, 2017
GAAP-Based Financial Data

GAAP

Guidance

Acquisition-

related

expenses

Change in

deferred net

revenue

(online-

enabled

games)

Stock-based

compensation

(in $ millions)
Total net revenue1,135865
Cost of revenue521(1)
Operating expense690(1)(64)
Income/(loss) before provision for (benefit from) income taxes(79)186565
Net loss(64)
Number of shares used in computation:
Basic shares309

Impact of Recently Adopted Accounting Standard

At the beginning of fiscal 2018, EA adopted FASB ASU 2016-09, related to
stock-based compensation. This pronouncement required EA to change how
it reports the cash effects of stock-based compensation in the
Consolidated Statement of Cash Flow. It does not impact total cash and
cash flow, but it does increase operating cash flow and decrease cash
flow from financing activities. The following table reflects the impact
of this standard on operating cash flow for the periods presented:

Three Months Ended September 30,
(in $ millions)20172016
Operating cash flow under historical GAAP39109
Operating cash flow under ASU 2016-0952122
Impact of ASU 2016-09 on operating cash flow1313

Conference Call and Supporting Documents

Electronic Arts will host a conference call on October 31, 2017 at 2:00
pm PT (5:00 pm ET) to review its results for the second fiscal quarter
ended September 30, 2017 and its outlook for the future. During the
course of the call, Electronic Arts may disclose material developments
affecting its business and/or financial performance. Listeners may
access the conference call live through the following dial-in number
844-215-4106 (domestic) or 918-534-8313 (international), using the
password “EA” or via webcast at EA’s IR Website at http://ir.ea.com.

EA has posted a slide presentation and a financial model of EA’s
historical results and guidance on EA’s
IR Website. EA will also post the prepared remarks and a transcript from
the conference call on EA’s IR Website.

A dial-in replay of the conference call will be available until November
14, 2017 at 855-859-2056 (domestic) or 404-537-3406 (international)
using pin code 90760245. An audio webcast replay of the conference call
will be available for one year on EA’s
IR Website.

Forward-Looking Statements

Some statements set forth in this release, including the information
relating to EA’s fiscal 2018 expectations under the heading “Business
Outlook as of October 31, 2017,” contain forward-looking statements that
are subject to change. Statements including words such as “anticipate,”
“believe,” “estimate” or “expect” and statements in the future tense are
forward-looking statements. These forward-looking statements are
preliminary estimates and expectations based on current information and
are subject to business and economic risks and uncertainties that could
cause actual events or actual future results to differ materially from
the expectations set forth in the forward-looking statements.

Some of the factors which could cause the Company’s results to differ
materially from its expectations include the following: sales of the
Company’s titles; the Company’s ability to develop and support digital
products and services, including managing online security and privacy;
the Company’s ability to manage expenses; the competition in the
interactive entertainment industry; the effectiveness of the Company’s
sales and marketing programs; timely development and release of
Electronic Arts’ products; the Company’s ability to realize the
anticipated benefits of acquisitions; the consumer demand for, and the
availability of an adequate supply of console hardware units; the
Company’s ability to predict consumer preferences among competing
platforms; the Company’s ability to develop and implement new
technology; foreign currency exchange rate fluctuations; general
economic conditions; and other factors described in the Company’s
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2017.

These forward-looking statements are current as of October 31, 2017.
Electronic Arts assumes no obligation and does not intend to update
these forward-looking statements. In addition, the preliminary financial
results set forth in this release are estimates based on information
currently available to Electronic Arts.

While Electronic Arts believes these estimates are meaningful, they
could differ from the actual amounts that Electronic Arts ultimately
reports in its Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 2017. Electronic Arts assumes no obligation and does
not intend to update these estimates prior to filing its Form 10-Q for
the fiscal quarter ended September 30, 2017.

About Electronic Arts

Electronic Arts (NASDAQ: EA) is a global leader in digital interactive
entertainment. The Company develops and delivers games, content and
online services for Internet-connected consoles, mobile devices and
personal computers. EA has more than 300 million registered players
around the world.

In fiscal year 2017, EA posted GAAP net revenue of $4.8 billion.
Headquartered in Redwood City, California, EA is recognized for a
portfolio of critically acclaimed, high-quality brands such as The
Sims™, Madden NFL, EA SPORTS™ FIFA, Battlefield™, Need for Speed™,
Dragon Age™ and Plants vs. Zombies™. More information about EA is
available at www.ea.com/news.

Ultimate Team, EA SPORTS, Battlefield, Battlefield 1, The Sims, Need for
Speed, Dragon Age, and Plants vs. Zombies are trademarks of Electronic
Arts Inc. John Madden, NFL and FIFA are the property of their respective
owners and used with permission.

ELECTRONIC ARTS INC. AND SUBSIDIARIES
Unaudited
Condensed Consolidated Statement of Operations

(in $
millions, except share per data)

Three Months Ended
September 30,

Six Months Ended
September 30,
2017201620172016
Net revenue
Product4544201,2821,104
Service and other5054781,1261,065
Total net revenue9598982,4082,169
Cost of revenue
Product300317364407
Service and other8984179173
Total cost of revenue389401543580
Gross profit5704971,8651,589
Operating expenses:
Research and development331291656585
Marketing and sales160143281271
General and administrative118111223219
Amortization of intangibles2133
Total operating expenses6115461,1631,078
Operating income (loss)(41)(49)702511
Interest and other income (expense), net3(3)9(11)
Income (loss) before provision for (benefit from) income taxes(38)(52)711500
Provision for (benefit from) income taxes(16)(14)8998
Net income (loss)(22)(38)622402
Earnings (loss) per share
Basic(0.07)(0.13)2.011.34
Diluted(0.07)(0.13)1.991.28
Number of shares used in computation
Basic309301309301
Diluted309301313315

Results (in $ millions, except per share data)

The following table reports the variance of the actuals versus our
guidance for the three months ended September 30, 2017 plus a comparison
to the actuals for the three months ended September 30, 2016.

Three Months Ended September 30,
2017
Guidance
Variance2017
Actuals
2016
Actuals
Net revenue
Net revenue9554959898
GAAP-based financial data
Change in deferred net revenue (online-enabled games)20515220200
Cost of revenue
Cost of revenue389389401
GAAP-based financial data
Acquisition-related expenses(12)
Stock-based compensation(1)(1)(1)
Operating expenses
Operating expenses638(27)611546
GAAP-based financial data
Acquisition-related expenses(2)(2)(1)
Stock-based compensation(61)(61)(47)
Loss before tax
Loss before tax(69)31(38)(52)
GAAP-based financial data
Acquisition-related expenses2213
Change in deferred net revenue (online-enabled games)20515220200
Stock-based compensation6116248
Tax rate used for management reporting21%21%21%
Loss per share
Basic(0.18)0.11(0.07)(0.13)
Diluted(0.18)0.11(0.07)(0.13)
Number of shares
Basic310(1)309301
Diluted310(1)309301
ELECTRONIC ARTS INC. AND SUBSIDIARIES
Unaudited
Condensed Consolidated Balance Sheets

(in $ millions)
September 30, 2017March 31, 20171
ASSETS
Current assets:
Cash and cash equivalents2,0672,565
Short-term investments2,2881,967
Receivables, net of allowances of $116 and $145, respectively812359
Other current assets248308
Total current assets5,4155,199
Property and equipment, net444434
Goodwill1,7111,707
Acquisition-related intangibles, net58
Deferred income taxes, net248286
Other assets9984
TOTAL ASSETS7,9227,718
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable18787
Accrued and other current liabilities969789
Deferred net revenue (online-enabled games)1,1161,539
Total current liabilities2,2722,415
Senior notes, net991990
Income tax obligations122104
Deferred income taxes, net11
Other liabilities148148
Total liabilities3,5343,658
Stockholders’ equity:
Common stock33
Additional paid-in capital8171,049
Retained earnings3,6413,027
Accumulated other comprehensive loss(73)(19)
Total stockholders’ equity4,3884,060
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY7,9227,718

1Derived from audited consolidated financial statements.

ELECTRONIC ARTS INC. AND SUBSIDIARIES
Unaudited
Condensed Consolidated Statements of Cash Flows

(in $
millions)
Three Months Ended
September 30,
Six Months Ended
September 30,
2017

2016 2

2017

2016 2

OPERATING ACTIVITIES
Net income (loss)(22)(38)622402
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation, amortization and accretion32456391
Stock-based compensation624811096
Change in assets and liabilities
Receivables, net(589)(481)(454)(493)
Other assets(14)316637
Accounts payable148165104133
Accrued and other liabilities216181100109
Deferred income taxes, net(15)(23)4020
Deferred net revenue (online-enabled games)234194(423)(391)
Net cash provided by operating activities521222284
INVESTING ACTIVITIES
Capital expenditures(30)(29)(63)(69)
Proceeds from maturities and sales of short-term investments6123681,050644
Purchase of short-term investments(702)(507)(1,395)(824)
Net cash used in investing activities(120)(168)(408)(249)
FINANCING ACTIVITIES
Payment of convertible notes(136)(163)
Proceeds from issuance of common stock27275731
Cash paid to taxing authorities for shares withheld from employees(10)(9)(105)(106)
Repurchase and retirement of common stock(153)(127)(303)(256)
Net cash used in financing activities(136)(245)(351)(494)
Effect of foreign exchange on cash and cash equivalents23(5)33(8)
Decrease in cash and cash equivalents(181)(296)(498)(747)
Beginning cash and cash equivalents2,2482,0422,5652,493
Ending cash and cash equivalents2,0671,7462,0671,746

2Operating and financing cash flow figures for the
three and six months ended September 30, 2016 have been recast to
reflect the impact of ASU 2016-09 which EA adopted at the
beginning of FY18.

ELECTRONIC ARTS INC. AND SUBSIDIARIES
Unaudited
Supplemental Financial Information and Business Metrics

(in
$ millions, except per share data)
Q2
FY17
Q3
FY17
Q4
FY17
Q1
FY18
Q2
FY18
YOY %
Change
Net revenue
Net revenue8981,1491,5271,4499597%
GAAP-based financial data
Change in deferred net revenue (online-enabled games)3200921(435)(674)220
Gross profit
Gross profit4976331,3251,29557015%
GAAP-based financial data
Acquisition-related expenses1218
Change in deferred net revenue (online-enabled games)3200921(435)(674)220
Stock-based compensation1111
Gross profit (as a % of net revenue)55%55%87%89%59%
Operating income (loss)
Operating income (loss)(49)(4)717743(41)16%
GAAP-based financial data
Acquisition-related expenses1320112
Change in deferred net revenue (online-enabled games)3200921(435)(674)220
Stock-based compensation4848524862
Operating income (loss) (as a % of net revenue)(5%)47%51%(4%)
Net income (loss)
Net income (loss)(38)(1)566644(22)42%
GAAP-based financial data
Acquisition-related expenses1320112
Change in deferred net revenue (online-enabled games)3200921(435)(674)220
Stock-based compensation4848524862
Tax rate used for management reporting21%21%21%21%21%
Net income (loss) (as a % of net revenue)(4%)37%44%(2%)
Diluted earnings (loss) per share(0.13)(0.00)1.812.06(0.07)46%
Number of diluted shares used in computation
Basic301303308309309
Diluted301303312313309
Anti-dilutive shares excluded for loss position413103

3The difference between the balances of deferred net
revenue (online-enabled games) in the unaudited condensed
consolidated balance sheets does not necessarily equal the change
in deferred net revenue (online-enabled games) in the unaudited
condensed consolidated statements of cash flows due to the impact
of unrecognized gains/losses on cash flow hedges.

4Diluted earnings per share reflects the potential
dilution from common shares (calculated using the treasury stock
method), issuable through stock-based compensation plans. When the
company incurs a loss, shares issuable through stock-based
compensation plans are excluded from the diluted loss per share
calculation as inclusion would be anti-dilutive.

ELECTRONIC ARTS INC. AND SUBSIDIARIES
Unaudited
Supplemental Financial Information and Business Metrics

(in
$ millions)
Q2
FY17
Q3
FY17
Q4
FY17
Q1
FY18
Q2
FY18

YOY
%
Change

QUARTERLY NET REVENUE PRESENTATIONS
Net revenue by geography
North America38956164461142710%
International5095888838385325%
Total net revenue8981,1491,5271,4499597%
North America58370(198)(287)59
International142551(237)(387)161
Change in deferred net revenue (online-enabled games)3200921(435)(674)220
North America43%49%42%42%45%
International57%51%58%58%55%
Total net revenue %100%100%100%100%100%
Net revenue by composition
Full game downloads9416925920912331%
Live services532336951050140826%
Mobile1491471651691586%
Total digital56668593487968922%
Packaged goods and other332464593570270(19%)
Total net revenue8981,1491,5271,4499597%
Full game downloads(1)186(67)(98)(4)
Live services5(68)1978(81)(98)
Mobile(11)2710(19)(8)
Total digital(80)410(49)(198)(110)
Packaged goods and other280511(386)(476)330
Change in deferred net revenue (online-enabled games)3200921(435)(674)220
Full game downloads10%15%17%14%13%
Live services536%32%33%35%43%
Mobile17%13%11%12%16%
Total digital63%60%61%61%72%
Packaged goods and other37%40%39%39%28%
Total net revenue %100%100%100%100%100%

3The difference between the balances of deferred net
revenue (online-enabled games) in the unaudited condensed
consolidated balance sheets does not necessarily equal the change
in deferred net revenue (online-enabled games) in the unaudited
condensed consolidated statements of cash flows due to the impact
of unrecognized gains/losses on cash flow hedges.

5Live services includes net revenue previously
presented as “Extra Content” and “Subscriptions, Advertising and
Other” through Q4 FY17.


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