Business Context and Reporting Period
Company: Electronic Arts Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008 (First Quarter of Fiscal Year 2009)
Business Overview: Electronic Arts develops, markets, publishes, and distributes video game software for consoles, PCs, handhelds, and wireless devices. Key franchises include Madden NFL, The Sims, Need for Speed, and Rock Band. The company recently reorganized its business into four "Labels" (EA SPORTS, EA Games, EA Casual Entertainment, and The Sims).
Key Financial Metrics
| Metric (in millions) | Three Months Ended Sep 30, 2008 |
Three Months Ended Sep 30, 2007 |
Six Months Ended Sep 30, 2008 |
Six Months Ended Sep 30, 2007 |
|---|---|---|---|---|
| Net Revenue | $894 | $640 | $1,698 | $1,035 |
| Gross Profit | $337 | $245 | $845 | $474 |
| Operating Loss | $(364) | $(274) | $(461) | $(456) |
| Net Loss | $(310) | $(195) | $(405) | $(328) |
| Net Loss Per Share (Diluted) | $(0.97) | $(0.62) | $(1.27) | $(1.05) |
| Cash and Cash Equivalents | $1,297 | $1,553 (Mar 31, 2008) | N/A | |
| Total Assets | $5,962 | $6,059 (Mar 31, 2008) | N/A | |
| Stockholders' Equity | $4,028 | $4,339 (Mar 31, 2008) | N/A |
Liquidity: As of September 30, 2008, the company held $1,297 million in cash and cash equivalents, $528 million in short-term investments, and $640 million in marketable equity securities. Total liquid assets represented approximately 41% of total assets.
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 40% ($254 million) for the quarter and 64% ($663 million) for the six months compared to the prior year. Growth was driven by strong sales of Rock Band, Madden NFL 09, and NCAA Football 09.
- Widening Losses: Despite revenue growth, the net loss increased significantly. The quarterly net loss grew from $195 million to $310 million. This was primarily due to a $162 million increase in cost of goods sold, a $92 million increase in personnel costs, and a $37 million increase in external development costs.
- Impairment Charges: The company recognized $34 million in losses on strategic investments for the quarter (and $40 million for the six months), primarily due to other-than-temporary impairments of investments in Neowiz Corporation.
- Abandoned Acquisition Costs: A one-time charge of $21 million was recognized in the quarter related to the termination of the proposed acquisition of Take-Two Interactive Software, Inc.
- Revenue Deferral Impact: Accounting changes regarding online-enabled packaged goods resulted in the deferral of $232 million of revenue in the quarter (compared to $296 million in the prior year), impacting reported revenue timing.
Guidance, Outlook, and Risks
- Economic Outlook: Management expressed caution regarding the upcoming holiday season due to the national and global economic downturn, noting that retailers are taking a more conservative stance on inventory ordering.
- Platform Transition: The company is transitioning from prior-generation consoles (PlayStation 2, Xbox, GameCube) to new-generation systems (PlayStation 3, Xbox 360, Wii). Sales for prior-generation systems are expected to decline, while development costs for new platforms are higher.
- Restructuring: The company is in the midst of a fiscal 2008 reorganization plan. Total expected charges for this plan are between $130 million and $135 million by fiscal 2010. An additional $8 million to $10 million in charges is anticipated for the remainder of fiscal 2009.
- Tax Outlook: The effective tax rate is volatile. The Emergency Economic Stabilization Act of 2008 extended the R&D Tax Credit, which is expected to reduce fiscal 2009 tax expense by approximately $12 million.
- Key Risks: Risks include dependence on third-party hardware manufacturers, the cyclical nature of the industry, intense competition, potential product delays, and the impact of foreign currency fluctuations (international sales represent ~42% of revenue).
Investor Verification Checklist
- Revenue Recognition Timing: Verify the impact of the $232 million revenue deferral related to online-enabled packaged goods and how this affects future quarters' reported revenue.
- Inventory Levels: Review the significant increase in inventory ($328 million vs. $168 million prior year-end), specifically the $83 million build-up of Rock Band inventory, to assess potential return risks.
- Investment Portfolio Health: Monitor the $640 million marketable equity securities portfolio for further impairment charges, given the $30 million impairment already recognized in the six-month period.
- Restructuring Progress: Track the execution of the fiscal 2008 reorganization plan and the associated cash outflows for facility closures and employee-related costs.
- Take-Two Acquisition Termination: Confirm that the $21 million charge related to the abandoned Take-Two acquisition is fully recognized and no further contingent liabilities exist.