Item 1.Condensed Consolidated Financial Statements (Unaudited)
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
(In millions, except par value data)
|
December 31, 2021
|
|
March 31, 2021 (a)
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
2,670
|
|
|
$
|
5,260
|
|
Short-term investments
|
346
|
|
|
1,106
|
|
Receivables, net
|
965
|
|
|
521
|
|
Other current assets
|
377
|
|
|
326
|
|
Total current assets
|
4,358
|
|
|
7,213
|
|
Property and equipment, net
|
522
|
|
|
491
|
|
Goodwill
|
5,389
|
|
|
2,868
|
|
Acquisition-related intangibles, net
|
1,052
|
|
|
309
|
|
Deferred income taxes, net
|
2,130
|
|
|
2,045
|
|
Other assets
|
479
|
|
|
362
|
|
TOTAL ASSETS
|
$
|
13,930
|
|
|
$
|
13,288
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
86
|
|
|
$
|
96
|
|
Accrued and other current liabilities
|
1,443
|
|
|
1,341
|
|
Deferred net revenue (online-enabled games)
|
2,101
|
|
|
1,527
|
|
Total current liabilities
|
3,630
|
|
|
2,964
|
|
Senior notes, net
|
1,878
|
|
|
1,876
|
|
Income tax obligations
|
326
|
|
|
315
|
|
Deferred income taxes, net
|
75
|
|
|
43
|
|
Other liabilities
|
404
|
|
|
250
|
|
Total liabilities
|
6,313
|
|
|
5,448
|
|
Commitments and contingencies (See Note 12)
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
Common stock, $0.01 par value. 1,000 shares authorized; 282 and 286 shares issued and outstanding, respectively
|
3
|
|
|
3
|
|
Additional paid-in capital
|
—
|
|
|
—
|
|
Retained earnings
|
7,608
|
|
|
7,887
|
|
Accumulated other comprehensive income (loss)
|
6
|
|
|
(50)
|
|
Total stockholders’ equity
|
7,617
|
|
|
7,840
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
13,930
|
|
|
$
|
13,288
|
|
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
(a) Derived from audited Consolidated Financial Statements.
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
(In millions, except per share data)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net revenue
|
$
|
1,789
|
|
|
$
|
1,673
|
|
|
$
|
5,166
|
|
|
$
|
4,283
|
|
Cost of revenue
|
631
|
|
|
601
|
|
|
1,440
|
|
|
1,175
|
|
Gross profit
|
1,158
|
|
|
1,072
|
|
|
3,726
|
|
|
3,108
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Research and development
|
539
|
|
|
451
|
|
|
1,607
|
|
|
1,310
|
|
Marketing and sales
|
293
|
|
|
216
|
|
|
716
|
|
|
493
|
|
General and administrative
|
163
|
|
|
149
|
|
|
508
|
|
|
418
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles
|
61
|
|
|
5
|
|
|
131
|
|
|
16
|
|
Total operating expenses
|
1,056
|
|
|
821
|
|
|
2,962
|
|
|
2,237
|
|
Operating income
|
102
|
|
|
251
|
|
|
764
|
|
|
871
|
|
Interest and other income (expense), net
|
(11)
|
|
|
(6)
|
|
|
(39)
|
|
|
(19)
|
|
Income before provision for income taxes
|
91
|
|
|
245
|
|
|
725
|
|
|
852
|
|
Provision for income taxes
|
25
|
|
|
34
|
|
|
161
|
|
|
91
|
|
Net income
|
$
|
66
|
|
|
$
|
211
|
|
|
$
|
564
|
|
|
$
|
761
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.23
|
|
|
$
|
0.73
|
|
|
$
|
1.99
|
|
|
$
|
2.63
|
|
Diluted
|
$
|
0.23
|
|
|
$
|
0.72
|
|
|
$
|
1.97
|
|
|
$
|
2.61
|
|
Number of shares used in computation:
|
|
|
|
|
|
|
|
Basic
|
283
|
|
|
290
|
|
|
284
|
|
|
289
|
|
Diluted
|
285
|
|
|
292
|
|
|
287
|
|
|
292
|
|
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
(In millions)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net income
|
$
|
66
|
|
|
$
|
211
|
|
|
$
|
564
|
|
|
$
|
761
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
Net gains (losses) on available-for-sale securities
|
(1)
|
|
|
(2)
|
|
|
(1)
|
|
|
6
|
|
Net gains (losses) on derivative instruments
|
10
|
|
|
(26)
|
|
|
66
|
|
|
(106)
|
|
Foreign currency translation adjustments
|
(1)
|
|
|
23
|
|
|
(9)
|
|
|
56
|
|
Total other comprehensive income (loss), net of tax
|
8
|
|
|
(5)
|
|
|
56
|
|
|
(44)
|
|
Total comprehensive income
|
$
|
74
|
|
|
$
|
206
|
|
|
$
|
620
|
|
|
$
|
717
|
|
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Common Stock
|
|
Additional Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income (loss)
|
|
Total
Stockholders’
Equity
|
(In millions, except per share data)
|
Shares
|
|
Amount
|
|
Balances as of March 31, 2021
|
|
286,465
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
7,887
|
|
|
$
|
(50)
|
|
|
$
|
7,840
|
|
Total comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
204
|
|
|
15
|
|
|
219
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
125
|
|
|
—
|
|
|
—
|
|
|
125
|
|
Awards assumed upon acquisition
|
|
—
|
|
|
—
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
23
|
|
Issuance of common stock
|
|
1,209
|
|
|
—
|
|
|
(105)
|
|
|
—
|
|
|
—
|
|
|
(105)
|
|
Repurchase and retirement of common stock
|
|
(2,292)
|
|
|
—
|
|
|
(43)
|
|
|
(282)
|
|
|
—
|
|
|
(325)
|
|
Cash dividends declared ($0.17 per common share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(49)
|
|
|
—
|
|
|
(49)
|
|
Balances as of June 30, 2021
|
|
285,382
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
7,760
|
|
|
$
|
(35)
|
|
|
$
|
7,728
|
|
Total comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
294
|
|
|
33
|
|
|
327
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
149
|
|
|
—
|
|
|
—
|
|
|
149
|
|
Issuance of common stock
|
|
602
|
|
|
—
|
|
|
25
|
|
|
—
|
|
|
—
|
|
|
25
|
|
Repurchase and retirement of common stock
|
|
(2,318)
|
|
|
—
|
|
|
(174)
|
|
|
(151)
|
|
|
—
|
|
|
(325)
|
|
Cash dividends declared ($0.17 per common share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(48)
|
|
|
—
|
|
|
(48)
|
|
Balances as of September 30, 2021
|
|
283,666
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
7,855
|
|
|
$
|
(2)
|
|
|
$
|
7,856
|
|
Total comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
66
|
|
|
8
|
|
|
74
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
129
|
|
|
—
|
|
|
—
|
|
|
129
|
|
Issuance of common stock
|
|
866
|
|
|
—
|
|
|
(69)
|
|
|
—
|
|
|
—
|
|
|
(69)
|
|
Repurchase and retirement of common stock
|
|
(2,415)
|
|
|
—
|
|
|
(60)
|
|
|
(265)
|
|
|
—
|
|
|
(325)
|
|
Cash dividends declared ($0.17 per common share)
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(48)
|
|
|
—
|
|
|
(48)
|
|
Balances as of December 31, 2021
|
|
282,117
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
7,608
|
|
|
$
|
6
|
|
|
$
|
7,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Common Stock
|
|
Additional Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income (loss)
|
|
Total
Stockholders’
Equity
|
(In millions, except per share data)
|
Shares
|
|
Amount
|
|
Balances as of March 31, 2020
|
|
288,413
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
7,508
|
|
|
$
|
(50)
|
|
|
$
|
7,461
|
|
Total comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
365
|
|
|
(2)
|
|
|
363
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
102
|
|
|
—
|
|
|
—
|
|
|
102
|
|
Issuance of common stock
|
|
1,088
|
|
|
—
|
|
|
(66)
|
|
|
—
|
|
|
—
|
|
|
(66)
|
|
Repurchase and retirement of common stock
|
|
(747)
|
|
|
—
|
|
|
(36)
|
|
|
(42)
|
|
|
—
|
|
|
(78)
|
|
Balances as of June 30, 2020
|
|
288,754
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
7,831
|
|
|
$
|
(52)
|
|
|
$
|
7,782
|
|
Total comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
185
|
|
|
(37)
|
|
|
148
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
113
|
|
|
—
|
|
|
—
|
|
|
113
|
|
Issuance of common stock
|
|
868
|
|
|
—
|
|
|
32
|
|
|
—
|
|
|
—
|
|
|
32
|
|
Repurchase and retirement of common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balances as of September 30, 2020
|
|
289,622
|
|
|
$
|
3
|
|
|
$
|
145
|
|
|
$
|
8,016
|
|
|
$
|
(89)
|
|
|
$
|
8,075
|
|
Total comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
211
|
|
|
(5)
|
|
|
206
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
111
|
|
|
—
|
|
|
—
|
|
|
111
|
|
Issuance of common stock
|
|
1,345
|
|
|
—
|
|
|
(54)
|
|
|
—
|
|
|
—
|
|
|
(54)
|
|
Repurchase and retirement of common stock
|
|
(2,524)
|
|
|
—
|
|
|
(202)
|
|
|
(124)
|
|
|
—
|
|
|
(326)
|
|
Cash dividends declared ($0.17 per common share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(49)
|
|
|
—
|
|
|
(49)
|
|
Balances as of December 31, 2020
|
|
288,443
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
8,054
|
|
|
$
|
(94)
|
|
|
$
|
7,963
|
|
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
Nine Months Ended
December 31,
|
(In millions)
|
2021
|
|
2020
|
OPERATING ACTIVITIES
|
|
|
|
Net income
|
$
|
564
|
|
|
$
|
761
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation, amortization and accretion
|
345
|
|
|
123
|
|
Stock-based compensation
|
403
|
|
|
326
|
|
Change in assets and liabilities:
|
|
|
|
Receivables, net
|
(390)
|
|
|
(309)
|
|
Other assets
|
(75)
|
|
|
(28)
|
|
Accounts payable
|
(9)
|
|
|
29
|
|
Accrued and other liabilities
|
183
|
|
|
245
|
|
Deferred income taxes, net
|
(140)
|
|
|
(18)
|
|
Deferred net revenue (online-enabled games)
|
574
|
|
|
434
|
|
Net cash provided by operating activities
|
1,455
|
|
|
1,563
|
|
INVESTING ACTIVITIES
|
|
|
|
Capital expenditures
|
(135)
|
|
|
(93)
|
|
Proceeds from maturities and sales of short-term investments
|
1,193
|
|
|
2,088
|
|
Purchase of short-term investments
|
(438)
|
|
|
(2,056)
|
|
Acquisitions, net of cash acquired
|
(3,391)
|
|
|
—
|
|
Net cash used in investing activities
|
(2,771)
|
|
|
(61)
|
|
FINANCING ACTIVITIES
|
|
|
|
Proceeds from issuance of common stock
|
44
|
|
|
56
|
|
Cash dividends paid
|
(145)
|
|
|
(49)
|
|
Cash paid to taxing authorities for shares withheld from employees
|
(193)
|
|
|
(144)
|
|
Repurchase and retirement of common stock
|
(975)
|
|
|
(404)
|
|
Net cash used in financing activities
|
(1,269)
|
|
|
(541)
|
|
Effect of foreign exchange on cash and cash equivalents
|
(5)
|
|
|
43
|
|
Increase (decrease) in cash and cash equivalents
|
(2,590)
|
|
|
1,004
|
|
Beginning cash and cash equivalents
|
5,260
|
|
|
3,768
|
|
Ending cash and cash equivalents
|
$
|
2,670
|
|
|
$
|
4,772
|
|
Supplemental cash flow information:
|
|
|
|
Cash paid during the period for income taxes, net
|
$
|
374
|
|
|
$
|
184
|
|
Cash paid during the period for interest
|
28
|
|
|
21
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Electronic Arts is a global leader in digital interactive entertainment. We develop, market, publish and deliver games, content and services that can be played and watched on game consoles, PCs, mobile phones and tablets. We believe that the breadth and depth of our portfolio, live services offerings, and our use of multiple business models and distribution channels provide us with strategic advantages. Our foundation is a collection of intellectual property from which we create innovative games and content that enables 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 Battlefield, The Sims, Apex Legends, Need for Speed and Plants vs. Zombies) or license from others (such as FIFA, Madden NFL, UFC, NHL, Formula 1 and Star Wars). 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.
Our fiscal year is reported on a 52- or 53-week period that ends on the Saturday nearest March 31. Our results of operations for the fiscal year ending March 31, 2022 contains 52 weeks and ends on April 2, 2022. Our results of operations for the fiscal year ended March 31, 2021 contained 53 weeks and ended on April 3, 2021. Our results of operations for the three and nine months ended December 31, 2021 contained 13 weeks and 39 weeks, respectively, and ended on January 1, 2022. Our results of operations for the three and nine months ended December 31, 2020 contained 13 weeks and 40 weeks, respectively, and ended on January 2, 2021. For simplicity of disclosure, all fiscal periods are referred to as ending on a calendar month end.
The Condensed Consolidated Financial Statements are unaudited and reflect all adjustments (consisting only of normal recurring accruals unless otherwise indicated) that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The preparation of these Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the amounts reported in these Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates. The results of operations for the current interim periods are not necessarily indicative of results to be expected for the current year or any other period.
These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2021, as filed with the United States Securities and Exchange Commission (“SEC”) on May 26, 2021.
Change in 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 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). For sales prior to July 1, 2020, revenues for service-related performance obligations were generally recognized over an estimated nine-month period beginning in the month after shipment for games and extra content sold through retail, and an estimated six-month period for digitally-distributed games and extra content beginning in the month of sale.
During the three months ended September 30, 2020, we completed our annual evaluation of the Estimated Offering Period and as a result, for sales after July 1, 2020, 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, and revenue for service-related performance obligations for digitally-distributed games and extra content is recognized over an estimated eight-month period beginning in the month of sale. During the three months ended December 31, 2021, this change to our Estimated Offering Period resulted in an increase in net revenue of $153 million and net income of $117 million, and an increase of $0.41 diluted earnings per share. During the nine months ended December 31, 2021, this change to our Estimated Offering Period resulted in an increase in net revenue of $255 million and net income of $194 million, and an increase of $0.68 diluted earnings per share.
During the three months ended September 30, 2021, we completed our annual evaluation of the Estimated Offering Period. We have noted consumers are playing certain of our Online Hosted Service Games, such as PC and console free-to-play games, for longer periods of time than in prior years as players engage with services we provide that are designed to enhance and extend gameplay, and as such, have concluded that the Estimated Offering Period for such games should be lengthened. As a result, for all new sales after July 1, 2021, the revenue that we recognize for service-related performance obligations related to our PC and console free-to-play games is recognized generally over a twelve-month period. During the three months ended December 31, 2021, this change to our Estimated Offering Period resulted in a decrease in net revenue of $45 million and net income of $34 million, and a decrease of $0.12 diluted earnings per share. During the nine months ended December 31, 2021, this change to our Estimated Offering Period resulted in a decrease in net revenue of $62 million and net income of $47 million, and a decrease of $0.16 diluted earnings per share.
Recently Adopted Accounting Standards
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. We adopted ASU 2019-12 in the first quarter of fiscal year 2022. The amendments did not have a material impact on our Condensed Consolidated Financial Statements upon adoption.
The standard clarified and amended existing guidance with respect to transactions in which a taxpayer realizes a step-up in tax basis of goodwill. As we integrate acquired intellectual property into our global operating structure, we may realize a tax basis step-up in goodwill. In such situations, we are required to assess whether the integration relates to the acquisition or is a separate transaction. When the integration is a separate transaction, we may be required to recognize deferred tax assets to the extent the stepped-up tax basis exceeds the associated U.S. GAAP basis. This assessment requires judgment around key indicators such as whether the tax basis step-up was contemplated as part of the original acquisition to which the intellectual property relates, whether the integration results in cash taxes, and whether the integration is achieved through a simple tax election. See Note 10 — Income Taxes for a discussion of the prospective application of this standard to our intra-entity transfer of Codemasters intellectual property (the “Codemasters intra-entity sale”) during the three months ended September 30, 2021.
Other Recently Issued Accounting Standards
In October 2021, the FASB issued ASU 2021-08, Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805). The amendments in this update require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. This update is effective for us beginning in the first quarter of fiscal year 2024. Early adoption is permitted. We are currently evaluating the timing of adoption and impact of this new standard on our Condensed Consolidated Financial Statements and related disclosures.
In November 2021, the FASB issued ASU 2021-10, Disclosures by Business Entities about Government Assistance (Topic 832). The amendments in this update establish Topic 832 and require additional disclosures regarding government grants and money contributions when entities accounted for transactions with a government by analogizing to a grant or contribution accounting model. This update is effective for us beginning in the first fiscal quarter of fiscal year 2023. Early adoption is permitted. We plan to adopt this provision in the first fiscal quarter of fiscal year 2023. This update is not expected to have a material impact on our Condensed Consolidated Financial Statements or related disclosures.
(2) FAIR VALUE MEASUREMENTS
There are various valuation techniques used to estimate fair value, the primary one being the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability. We measure certain financial and nonfinancial assets and liabilities at fair value on a recurring and nonrecurring basis.
Fair Value Hierarchy
The three levels of inputs that may be used to measure fair value are as follows:
•Level 1. Quoted prices in active markets for identical assets or liabilities.
•Level 2. Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities.
•Level 3. Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of December 31, 2021 and March 31, 2021, our assets and liabilities that were measured and recorded at fair value on a recurring basis were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
As of
December 31, 2021
|
|
Quoted Prices in
Active Markets
for Identical
Financial
Instruments
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
Balance Sheet
Classification
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Bank and time deposits
|
$
|
53
|
|
|
$
|
53
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cash equivalents
|
Money market funds
|
208
|
|
|
208
|
|
|
—
|
|
|
—
|
|
|
Cash equivalents
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
148
|
|
|
—
|
|
|
148
|
|
|
—
|
|
|
Short-term investments
|
U.S. Treasury securities
|
75
|
|
|
75
|
|
|
—
|
|
|
—
|
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
39
|
|
|
—
|
|
|
39
|
|
|
—
|
|
|
Short-term investments
|
Foreign government securities
|
30
|
|
|
—
|
|
|
30
|
|
|
—
|
|
|
Short-term investments
|
Asset-backed securities
|
38
|
|
|
—
|
|
|
38
|
|
|
—
|
|
|
Short-term investments
|
Certificates of deposit
|
16
|
|
|
—
|
|
|
16
|
|
|
—
|
|
|
Short-term investments
|
Foreign currency derivatives
|
47
|
|
|
—
|
|
|
47
|
|
|
—
|
|
|
Other current assets and other assets
|
Deferred compensation plan assets (a)
|
23
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
Other assets
|
Total assets at fair value
|
$
|
677
|
|
|
$
|
359
|
|
|
$
|
318
|
|
|
$
|
—
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
Accrued and other current liabilities and other liabilities
|
Deferred compensation plan liabilities (a)
|
23
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
Other liabilities
|
Total liabilities at fair value
|
$
|
39
|
|
|
$
|
23
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
As of
March 31, 2021
|
|
Quoted Prices in
Active Markets for Identical
Financial Instruments
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
Balance Sheet
Classification
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Bank and time deposits
|
$
|
157
|
|
|
$
|
157
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cash equivalents
|
Money market funds
|
2,100
|
|
|
2,100
|
|
|
—
|
|
|
—
|
|
|
Cash equivalents
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
380
|
|
|
—
|
|
|
380
|
|
|
—
|
|
|
Short-term investments and cash equivalents
|
U.S. Treasury securities
|
437
|
|
|
437
|
|
|
—
|
|
|
—
|
|
|
Short-term investments and cash equivalents
|
U.S. agency securities
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
Short-term investments
|
Commercial paper
|
142
|
|
|
—
|
|
|
142
|
|
|
—
|
|
|
Short-term investments and cash equivalents
|
Foreign government securities
|
67
|
|
|
—
|
|
|
67
|
|
|
—
|
|
|
Short-term investments
|
Asset-backed securities
|
112
|
|
|
—
|
|
|
112
|
|
|
—
|
|
|
Short-term investments
|
Certificates of deposit
|
41
|
|
|
—
|
|
|
41
|
|
|
—
|
|
|
Short-term investments
|
Foreign currency derivatives
|
33
|
|
|
—
|
|
|
33
|
|
|
—
|
|
|
Other current assets and other assets
|
Deferred compensation plan assets (a)
|
18
|
|
|
18
|
|
|
—
|
|
|
—
|
|
|
Other assets
|
Total assets at fair value
|
$
|
3,490
|
|
|
$
|
2,712
|
|
|
$
|
778
|
|
|
$
|
—
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
$
|
40
|
|
|
$
|
—
|
|
|
$
|
40
|
|
|
$
|
—
|
|
|
Accrued and other current liabilities and other liabilities
|
Deferred compensation plan liabilities (a)
|
19
|
|
|
19
|
|
|
—
|
|
|
—
|
|
|
Other liabilities
|
Total liabilities at fair value
|
$
|
59
|
|
|
$
|
19
|
|
|
$
|
40
|
|
|
$
|
—
|
|
|
|
(a)The Deferred Compensation Plan assets consist of various mutual funds. See Note 15 in our Annual Report on Form 10-K for the fiscal year ended March 31, 2021, for additional information regarding our Deferred Compensation Plan.
(3) FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
As of December 31, 2021 and March 31, 2021, our cash and cash equivalents were $2,670 million and $5,260 million, respectively. Cash equivalents were valued using quoted market prices or other readily available market information.
Short-Term Investments
Short-term investments consisted of the following as of December 31, 2021 and March 31, 2021 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2021
|
|
As of March 31, 2021
|
|
Cost or
Amortized
Cost
|
|
Gross Unrealized
|
|
Fair
Value
|
|
Cost or
Amortized
Cost
|
|
Gross Unrealized
|
|
Fair
Value
|
|
Gains
|
|
Losses
|
|
Gains
|
|
Losses
|
|
Corporate bonds
|
$
|
148
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
148
|
|
|
$
|
372
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
372
|
|
U.S. Treasury securities
|
75
|
|
|
—
|
|
|
—
|
|
|
75
|
|
|
374
|
|
|
1
|
|
|
—
|
|
|
375
|
|
U.S. agency securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Commercial paper
|
39
|
|
|
—
|
|
|
—
|
|
|
39
|
|
|
136
|
|
|
—
|
|
|
—
|
|
|
136
|
|
Foreign government securities
|
30
|
|
|
—
|
|
|
—
|
|
|
30
|
|
|
67
|
|
|
—
|
|
|
—
|
|
|
67
|
|
Asset-backed securities
|
38
|
|
|
—
|
|
|
—
|
|
|
38
|
|
|
112
|
|
|
—
|
|
|
—
|
|
|
112
|
|
Certificates of deposit
|
16
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
41
|
|
|
—
|
|
|
—
|
|
|
41
|
|
Short-term investments
|
$
|
346
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
346
|
|
|
$
|
1,105
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1,106
|
|
The following table summarizes the amortized cost and fair value of our short-term investments, classified by stated maturity as of December 31, 2021 and March 31, 2021 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2021
|
|
As of March 31, 2021
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
Short-term investments
|
|
|
|
|
|
|
|
Due within 1 year
|
$
|
244
|
|
|
$
|
244
|
|
|
$
|
895
|
|
|
$
|
896
|
|
Due 1 year through 5 years
|
98
|
|
|
98
|
|
|
203
|
|
|
203
|
|
Due after 5 years
|
4
|
|
|
4
|
|
|
7
|
|
|
7
|
|
Short-term investments
|
$
|
346
|
|
|
$
|
346
|
|
|
$
|
1,105
|
|
|
$
|
1,106
|
|
(4) DERIVATIVE FINANCIAL INSTRUMENTS
Assets or liabilities associated with our derivative instruments and hedging activities are recorded at fair value in other current assets/other assets, or accrued and other current liabilities/other liabilities, respectively, on our Condensed Consolidated Balance Sheets. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on the use of the derivative instrument and whether it is designated and qualifies for hedge accounting.
We transact business in various foreign currencies and have significant international sales and expenses denominated in foreign currencies, subjecting us to foreign currency risk. We purchase foreign currency forward contracts, generally with maturities of 18 months or less, to reduce the volatility of cash flows primarily related to forecasted revenue and expenses denominated in certain foreign currencies. Our cash flow risks are primarily related to fluctuations in the Euro, British pound sterling, Canadian dollar, Swedish krona, Australian dollar, Japanese yen, Chinese yuan, South Korean won and Polish zloty. In addition, we utilize foreign currency forward contracts to mitigate foreign currency exchange risk associated with foreign-currency-denominated monetary assets and liabilities, primarily intercompany receivables and payables. The foreign currency forward contracts not designated as hedging instruments generally have a contractual term of approximately three months or less and are transacted near month-end. We do not use foreign currency forward contracts for speculative trading purposes.
Cash Flow Hedging Activities
Certain of our forward contracts are designated and qualify as cash flow hedges. To qualify for hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedges and must be highly effective in offsetting changes to future cash flows on hedged transactions. The derivative assets or liabilities associated with our hedging activities are recorded at fair value in other current assets/other assets, or accrued and other current liabilities/other liabilities, respectively, on our Condensed Consolidated Balance Sheets. The gains or losses resulting from changes in the fair value of these hedges is initially reported, net of tax, as a component of accumulated other comprehensive income (loss) in stockholders’ equity. The gains or losses resulting from changes in the fair value of these hedges is subsequently reclassified into net revenue or research and development expenses, as appropriate, in the period when the forecasted transaction is recognized in our Condensed Consolidated Statements of Operations. In the event that the underlying forecasted transactions do not occur, or it becomes remote that they will occur, within the defined hedge period, the gains or losses on the related cash flow hedges are reclassified from accumulated other comprehensive income (loss) to net revenue or research and development expenses, in our Condensed Consolidated Statements of Operations.
Total gross notional amounts and fair values for currency derivatives with cash flow hedge accounting designation are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2021
|
|
As of March 31, 2021
|
|
Notional Amount
|
|
Fair Value
|
|
Notional Amount
|
|
Fair Value
|
|
|
Asset
|
|
Liability
|
|
|
Asset
|
|
Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts to purchase
|
$
|
277
|
|
|
$
|
1
|
|
|
$
|
7
|
|
|
$
|
370
|
|
|
$
|
14
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts to sell
|
$
|
1,377
|
|
|
$
|
42
|
|
|
$
|
3
|
|
|
$
|
1,840
|
|
|
$
|
15
|
|
|
$
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effects of cash flow hedge accounting in our Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2021 and 2020 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Nine Months Ended December 31,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Net revenue
|
|
Research and development
|
|
Net revenue
|
|
Research and development
|
|
Net revenue
|
|
Research and development
|
|
Net revenue
|
|
Research and development
|
Total amounts presented in our Condensed Consolidated Statements of Operations in which the effects of cash flow hedges are recorded
|
$
|
1,789
|
|
|
$
|
539
|
|
|
$
|
1,673
|
|
|
$
|
451
|
|
|
$
|
5,166
|
|
|
$
|
1,607
|
|
|
$
|
4,283
|
|
|
$
|
1,310
|
|
Gains (losses) on foreign currency forward contracts designated as cash flow hedges
|
$
|
12
|
|
|
$
|
2
|
|
|
$
|
(22)
|
|
|
$
|
2
|
|
|
$
|
(25)
|
|
|
$
|
14
|
|
|
$
|
(10)
|
|
|
$
|
(4)
|
|
Balance Sheet Hedging Activities
Our foreign currency forward contracts that are not designated as hedging instruments are accounted for as derivatives whereby the fair value of the contracts are reported as other current assets or accrued and other current liabilities on our Condensed Consolidated Balance Sheets, and gains and losses resulting from changes in the fair value are reported in interest and other income (expense), net, in our Condensed Consolidated Statements of Operations. The gains and losses on these foreign currency forward contracts generally offset the gains and losses in the underlying foreign-currency-denominated monetary assets and liabilities, which are also reported in interest and other income (expense), net, in our Condensed Consolidated Statements of Operations.
Total gross notional amounts and fair values for currency derivatives that are not designated as hedging instruments are accounted for as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2021
|
|
As of March 31, 2021
|
|
Notional Amount
|
|
Fair Value
|
|
Notional Amount
|
|
Fair Value
|
|
|
Asset
|
|
Liability
|
|
|
Asset
|
|
Liability
|
Forward contracts to purchase
|
$
|
615
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
599
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts to sell
|
$
|
857
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
450
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of foreign currency forward contracts not designated as hedging instruments in our Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2021 and 2020 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Interest and other income (expense), net
|
Total amounts presented in our Condensed Consolidated Statements of Operations in which the effects of balance sheet hedges are recorded
|
$
|
(11)
|
|
|
$
|
(6)
|
|
|
$
|
(39)
|
|
|
$
|
(19)
|
|
Gain (losses) on foreign currency forward contracts not designated as hedging instruments
|
$
|
19
|
|
|
$
|
(13)
|
|
|
$
|
16
|
|
|
$
|
(20)
|
|
(5) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in accumulated other comprehensive income (loss) by component, net of tax, for the three months ended December 31, 2021 and 2020 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Net Gains (Losses) on Available-for-Sale Securities
|
|
Unrealized Net Gains (Losses) on Derivative Instruments
|
|
Foreign Currency Translation Adjustments
|
|
Total
|
Balances as of September 30, 2021
|
$
|
—
|
|
|
$
|
27
|
|
|
$
|
(29)
|
|
|
$
|
(2)
|
|
Other comprehensive income (loss) before reclassifications
|
(1)
|
|
|
24
|
|
|
(1)
|
|
|
22
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
(14)
|
|
|
—
|
|
|
(14)
|
|
Total other comprehensive income (loss), net of tax
|
(1)
|
|
|
10
|
|
|
(1)
|
|
|
8
|
|
Balances as of December 31, 2021
|
$
|
(1)
|
|
|
$
|
37
|
|
|
$
|
(30)
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Net Gains (Losses) on Available-for-Sale Securities
|
|
Unrealized Net Gains (Losses) on Derivative Instruments
|
|
Foreign Currency Translation Adjustments
|
|
Total
|
Balances as of September 30, 2020
|
$
|
4
|
|
|
$
|
(41)
|
|
|
$
|
(52)
|
|
|
$
|
(89)
|
|
Other comprehensive income (loss) before reclassifications
|
(2)
|
|
|
(46)
|
|
|
23
|
|
|
(25)
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
20
|
|
|
—
|
|
|
20
|
|
Total other comprehensive income (loss), net of tax
|
(2)
|
|
|
(26)
|
|
|
23
|
|
|
(5)
|
|
Balances as of December 31, 2020
|
$
|
2
|
|
|
$
|
(67)
|
|
|
$
|
(29)
|
|
|
$
|
(94)
|
|
The changes in accumulated other comprehensive income (loss) by component, net of tax, for the nine months ended December 31, 2021 and 2020 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Net Gains (Losses) on Available-for-Sale Securities
|
|
Unrealized Net Gains (Losses) on Derivative Instruments
|
|
Foreign Currency Translation Adjustments
|
|
Total
|
Balances as of March 31, 2021
|
$
|
—
|
|
|
$
|
(29)
|
|
|
$
|
(21)
|
|
|
$
|
(50)
|
|
Other comprehensive income (loss) before reclassifications
|
(1)
|
|
|
55
|
|
|
(9)
|
|
|
45
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
11
|
|
|
—
|
|
|
11
|
|
Total other comprehensive income (loss), net of tax
|
(1)
|
|
|
66
|
|
|
(9)
|
|
|
56
|
|
Balances as of December 31, 2021
|
$
|
(1)
|
|
|
$
|
37
|
|
|
$
|
(30)
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Net Gains (Losses) on Available-for-Sale Securities
|
|
Unrealized Net Gains (Losses) on Derivative Instruments
|
|
Foreign Currency Translation Adjustments
|
|
Total
|
Balances as of March 31, 2020
|
$
|
(4)
|
|
|
$
|
39
|
|
|
$
|
(85)
|
|
|
$
|
(50)
|
|
Other comprehensive income (loss) before reclassifications
|
6
|
|
|
(120)
|
|
|
56
|
|
|
(58)
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
14
|
|
|
—
|
|
|
14
|
|
Total other comprehensive income (loss), net of tax
|
6
|
|
|
(106)
|
|
|
56
|
|
|
(44)
|
|
Balances as of December 31, 2020
|
$
|
2
|
|
|
$
|
(67)
|
|
|
$
|
(29)
|
|
|
$
|
(94)
|
|
The effects on net income of amounts reclassified from accumulated other comprehensive income (loss) for the three and nine months ended December 31, 2021 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Reclassified From Accumulated Other Comprehensive Income (Loss)
|
Statement of Operations Classification
|
|
Three Months Ended
December 31, 2021
|
|
Nine Months Ended
December 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gains) losses on foreign currency forward contracts designated as cash flow hedges
|
|
|
|
|
Net revenue
|
|
$
|
(12)
|
|
|
$
|
25
|
|
Research and development
|
|
(2)
|
|
|
(14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net (gain) loss reclassified, net of tax
|
|
$
|
(14)
|
|
|
$
|
11
|
|
The effects on net income of amounts reclassified from accumulated other comprehensive income (loss) for the three and nine months ended December 31, 2020 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Reclassified From Accumulated Other Comprehensive Income (Loss)
|
Statement of Operations Classification
|
|
Three Months Ended
December 31, 2020
|
|
Nine Months Ended
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gains) losses on foreign currency forward contracts designated as cash flow hedges
|
|
|
|
|
Net revenue
|
|
$
|
22
|
|
|
$
|
10
|
|
Research and development
|
|
(2)
|
|
|
4
|
|
Total net (gain) loss reclassified, net of tax
|
|
$
|
20
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6) BUSINESS COMBINATIONS
Codemasters Group Holdings plc
On February 18, 2021, we completed our acquisition of 100% of the equity interests of Codemasters Group Holdings plc, a public limited company registered in England and Wales (“Codemasters”), for a total purchase price of $1.2 billion, net of cash acquired. The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions, and are considered preliminary as of the reporting date pending finalization of the valuation of certain immaterial tax liabilities. We expect to finalize the valuation as soon as practicable, but not later than one year from the acquisition date. During the three months ended December 31, 2021, we recorded an immaterial purchase accounting adjustment related to an acquired tax liability, which resulted in a $6 million decrease to goodwill.
Glu Mobile Inc.
On April 29, 2021, we completed the acquisition of 100% of the equity interests of Glu Mobile Inc., a leading global developer and publisher of mobile games (“Glu” and the “Glu acquisition”) for a total purchase price of $2.0 billion, net of cash acquired of $332 million. The acquisition of Glu is expected to accelerate our mobile growth by creating a combined organization with ongoing live services across multiple games and genres. We also believe that the acquisition will create value by adding Glu’s expertise in casual sports and lifestyle genres to new titles based on our intellectual property. The transaction costs associated with the acquisition totaled approximately $15 million and were recognized in general and administrative expense, of which $11 million were recognized during fiscal 2022, all within the three months ended June 30, 2021.
In addition, upon the closing of the Glu acquisition, we assumed all outstanding unvested options and unvested restricted stock units relating to Glu common stock and such awards were converted into corresponding awards relating to a number of shares of our common stock using an exchange ratio equal to 0.0880, with substantially identical terms and conditions as were applicable to the corresponding Glu awards immediately prior to the closing of the acquisition, except as such terms and conditions were modified in the acquisition agreements (“Replacement Awards”). The estimated fair value of the Replacement Awards was $133 million, of which $23 million related to awards for which services were rendered prior to the Glu acquisition and represented part of the purchase consideration transferred in the Glu acquisition. The remaining $110 million is attributable to services to be rendered after the Glu acquisition and will be recognized as stock-based compensation expense over their remaining vesting periods.
The following table summarizes the allocation of the purchase price to the fair value of the assets acquired and liabilities assumed:
|
|
|
|
|
|
(In millions)
|
|
Current assets
|
$
|
63
|
|
Property and equipment, net
|
14
|
|
Other assets
|
48
|
|
Intangible assets
|
526
|
|
Goodwill
|
1,506
|
|
Deferred tax liabilities
|
(38)
|
|
Current liabilities
|
(78)
|
|
Other liabilities
|
(39)
|
|
Purchase price, net of cash acquired
|
$
|
2,002
|
|
|
|
Intangibles assets by asset category(a)
|
|
Developed and core technology
|
$
|
232
|
|
Trade names and trademarks
|
209
|
|
Registered user base and other intangibles
|
12
|
|
In-process research and development
|
73
|
|
Total
|
$
|
526
|
|
(a) In-process research and development assets are considered indefinite-lived until complete. Excluding the in-process research and development assets, the weighted-average useful life of the Glu’s acquired intangible assets is currently estimated to be approximately 5.5 years.
|
Goodwill consists largely of workforce and synergies with our existing business. The goodwill is not deductible for tax purposes.
The results of operations of Glu and the fair value of the assets acquired have been included in our Condensed Consolidated Financial Statements since the date of acquisition.
Playdemic Limited
On September 20, 2021, we completed the acquisition of 100% of the equity interests of Playdemic Limited, a private limited company incorporated in England and Wales (“Playdemic” and the “Playdemic acquisition”) for a total purchase price of $1.4 billion, net of cash acquired. The Playdemic acquisition is intended to be another step in our strategy of continued leadership in sports and mobile expansion. The transaction costs associated with the acquisition totaled approximately $11 million and were recognized in general and administrative expense during the six months ended September 30, 2021.
The fair values assigned to assets acquired and liabilities assumed are based on management's best estimates and assumptions. Our purchase accounting is preliminary as of the reporting date, pending finalization of the valuation of acquired intangible assets, including associated deferred tax impacts, tangible assets, and assumed liabilities. We expect to finalize the purchase accounting as soon as practicable, but not later than one year from the acquisition date, and do not expect material purchase accounting adjustments in future periods.
During the three months ended December 31, 2021, we recorded a preliminary net working capital adjustment, which resulted in a $4 million decrease to the purchase price, net of cash acquired and adjusted the fair values assigned to the Playdemic assets acquired and liabilities assumed. The differences between the provisional estimates recognized during the second quarter of fiscal 2022 and the adjusted preliminary amounts are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Previously Reported
at September 30, 2021
|
|
Measurement Period Adjustments
|
|
As Adjusted
at December 31, 2021
|
Current assets
|
$
|
22
|
|
|
$
|
(5)
|
|
|
$
|
17
|
|
Property and equipment, net
|
2
|
|
|
—
|
|
|
2
|
|
Other assets
|
2
|
|
|
1
|
|
|
3
|
|
Intangible assets
|
354
|
|
|
77
|
|
|
431
|
|
Goodwill
|
1,100
|
|
|
(64)
|
|
|
1,036
|
|
Deferred tax liabilities
|
(67)
|
|
|
(15)
|
|
|
(82)
|
|
Current liabilities
|
(6)
|
|
|
2
|
|
|
(4)
|
|
Other liabilities
|
(2)
|
|
|
—
|
|
|
(2)
|
|
Purchase price, net of cash acquired
|
$
|
1,405
|
|
|
$
|
(4)
|
|
|
$
|
1,401
|
|
|
|
|
|
|
|
Intangibles assets by asset category(b)
|
|
|
|
|
|
Developed and core technology
|
|
|
|
|
$
|
174
|
|
Trade names and trademarks
|
|
|
|
|
219
|
|
Registered user base and other intangibles
|
|
|
|
|
38
|
|
Total
|
|
|
|
|
$
|
431
|
|
(b) We currently estimate the weighted-average useful life of Playdemic’s acquired intangible assets to be approximately 6.6 years.
|
The measurement period adjustments would not have had a material impact on the Condensed Consolidated Statements of Operations in the second quarter of fiscal 2022 had the adjustments to the provisional amounts been recognized as of the acquisition date.
Goodwill consists largely of workforce and synergies with our existing business. The goodwill is not deductible for local tax purposes.
The results of operations of Playdemic and the preliminary fair value of the assets acquired have been included in our Condensed Consolidated Financial Statements.
Additional Acquisition Related Information
During the nine months ended December 31, 2021, we completed one other acquisition that was not material to our Condensed Consolidated Financial Statements.
Pro forma results of operations of our acquisitions have not been presented because the effect of the acquisitions were not material to our Condensed Consolidated Statements of Operations individually, and in the aggregate.
(7) GOODWILL AND ACQUISITION-RELATED INTANGIBLES, NET
The changes in the carrying amount of goodwill for the nine months ended December 31, 2021 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
March 31, 2021
|
|
Activity
|
|
Effects of Foreign Currency Translation
|
|
As of
December 31, 2021
|
Goodwill
|
$
|
3,236
|
|
|
$
|
2,522
|
|
|
$
|
(1)
|
|
|
$
|
5,757
|
|
Accumulated impairment
|
(368)
|
|
|
—
|
|
|
—
|
|
|
(368)
|
|
Total
|
$
|
2,868
|
|
|
$
|
2,522
|
|
|
$
|
(1)
|
|
|
$
|
5,389
|
|
Acquisition-related intangibles consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2021
|
|
As of March 31, 2021
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Acquisition-
Related
Intangibles, Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Acquisition-
Related
Intangibles, Net
|
Finite-lived acquisition-related intangibles
|
|
|
|
|
|
|
|
|
|
|
|
Developed and core technology
|
$
|
1,107
|
|
|
$
|
(597)
|
|
|
$
|
510
|
|
|
$
|
691
|
|
|
$
|
(472)
|
|
|
$
|
219
|
|
Trade names and trademarks
|
607
|
|
|
(191)
|
|
|
416
|
|
|
188
|
|
|
(144)
|
|
|
44
|
|
Registered user base and other intangibles
|
56
|
|
|
(20)
|
|
|
36
|
|
|
5
|
|
|
(5)
|
|
|
—
|
|
Carrier contracts and related
|
85
|
|
|
(85)
|
|
|
—
|
|
|
85
|
|
|
(85)
|
|
|
—
|
|
Total finite-lived acquisition-related intangibles
|
$
|
1,855
|
|
|
$
|
(893)
|
|
|
$
|
962
|
|
|
$
|
969
|
|
|
$
|
(706)
|
|
|
$
|
263
|
|
Indefinite-lived acquisition-related intangibles
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development
|
$
|
90
|
|
|
$
|
—
|
|
|
$
|
90
|
|
|
$
|
46
|
|
|
$
|
—
|
|
|
$
|
46
|
|
Total acquisition-related intangibles, net
|
$
|
1,945
|
|
|
$
|
(893)
|
|
|
$
|
1,052
|
|
|
$
|
1,015
|
|
|
$
|
(706)
|
|
|
$
|
309
|
|
Amortization of intangibles for the three and nine months ended December 31, 2021 and 2020 are classified in the Condensed Consolidated Statements of Operations as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Cost of revenue
|
$
|
44
|
|
|
$
|
—
|
|
|
$
|
88
|
|
|
$
|
—
|
|
Operating expenses
|
61
|
|
|
5
|
|
|
131
|
|
|
16
|
|
Total
|
$
|
105
|
|
|
$
|
5
|
|
|
$
|
219
|
|
|
$
|
16
|
|
During the three and nine months ended December 31, 2021, as part of the amortization of intangibles we recorded impairment charges of $14 million and $26 million, respectively, for acquisition-related intangible assets, which were recorded within operating expenses.
Acquisition-related intangible assets are generally amortized using the straight-line method over the lesser of their estimated useful lives or the agreement terms, currently from 1 to 7 years. As of December 31, 2021 and March 31, 2021, the weighted-average remaining useful life for acquisition-related intangible assets was approximately 5.3 and 3.5 years, respectively.
As of December 31, 2021, future amortization of finite-lived acquisition-related intangibles that will be recorded in the Condensed Consolidated Statements of Operations is estimated as follows (in millions):
|
|
|
|
|
|
Fiscal Year Ending March 31,
|
|
2022 (remaining three months)
|
$
|
75
|
|
2023
|
236
|
|
2024
|
176
|
|
2025
|
126
|
|
2026
|
121
|
|
2027
|
101
|
|
2028 and thereafter
|
127
|
|
Total
|
$
|
962
|
|
(8) ROYALTIES AND LICENSES
Our royalty expenses consist of payments to (1) content licensors, (2) independent software developers, and (3) co-publishing and distribution affiliates. License royalties consist of payments made to celebrities, professional sports organizations, movie studios and other organizations for our use of their trademarks, copyrights, personal publicity rights, content and/or other intellectual property. Royalty payments to independent software developers are payments for the development of intellectual property related to our games. Co-publishing and distribution royalties are payments made to third parties for the delivery of products.
During the three and nine months ended December 31, 2021 and 2020, we did not recognize any material losses or impairment charges on royalty-based commitments.
The current and long-term portions of prepaid royalties and minimum guaranteed royalty-related assets, included in other current assets and other assets, consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2021
|
|
As of
March 31, 2021
|
Other current assets
|
$
|
26
|
|
|
$
|
24
|
|
Other assets
|
22
|
|
|
20
|
|
Royalty-related assets
|
$
|
48
|
|
|
$
|
44
|
|
At any given time, depending on the timing of our payments to our co-publishing and/or distribution affiliates, content licensors, and/or independent software developers, we classify any recognized unpaid royalty amounts due to these parties as accrued liabilities. The current and long-term portions of accrued royalties, included in accrued and other current liabilities and other liabilities, consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2021
|
|
As of
March 31, 2021
|
Accrued royalties
|
$
|
232
|
|
|
$
|
210
|
|
Other liabilities
|
1
|
|
|
—
|
|
Royalty-related liabilities
|
$
|
233
|
|
|
$
|
210
|
|
As of December 31, 2021, we were committed to pay approximately $2,064 million to content licensors, independent software developers, and co-publishing and/or distribution affiliates, but performance remained with the counterparty (i.e., delivery of the product or content or other factors) and such commitments were therefore not recorded in our Condensed Consolidated Financial Statements. See Note 12 for further information on our developer and licensor commitments.
(9) BALANCE SHEET DETAILS
Property and Equipment, Net
Property and equipment, net, as of December 31, 2021 and March 31, 2021 consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2021
|
|
As of
March 31, 2021
|
Computer, equipment and software
|
$
|
835
|
|
|
$
|
808
|
|
Buildings
|
370
|
|
|
370
|
|
Leasehold improvements
|
198
|
|
|
172
|
|
Equipment, furniture and fixtures, and other
|
91
|
|
|
93
|
|
Land
|
66
|
|
|
66
|
|
Construction in progress
|
21
|
|
|
12
|
|
|
1,581
|
|
|
1,521
|
|
Less: accumulated depreciation
|
(1,059)
|
|
|
(1,030)
|
|
Property and equipment, net
|
$
|
522
|
|
|
$
|
491
|
|
Depreciation expense associated with property and equipment was $41 million and $120 million for the three and nine months ended December 31, 2021, respectively.
Depreciation expense associated with property and equipment was $37 million and $100 million for the three and nine months ended December 31, 2020, respectively.
Accrued and Other Current Liabilities
Accrued and other current liabilities as of December 31, 2021 and March 31, 2021 consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2021
|
|
As of
March 31, 2021
|
Other accrued expenses
|
$
|
354
|
|
|
$
|
351
|
|
Accrued compensation and benefits
|
424
|
|
|
494
|
|
|
|
|
|
Accrued royalties
|
232
|
|
|
210
|
|
Sales returns and price protection reserves
|
205
|
|
|
115
|
|
|
|
|
|
Deferred net revenue (other)
|
141
|
|
|
95
|
|
Operating lease liabilities
|
87
|
|
|
76
|
|
Accrued and other current liabilities
|
$
|
1,443
|
|
|
$
|
1,341
|
|
Deferred net revenue (other) includes the deferral of subscription revenue, licensing arrangements, advertising revenue, and other revenue for which revenue recognition criteria has not been met.
Deferred net revenue
Deferred net revenue as of December 31, 2021 and March 31, 2021 consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2021
|
|
As of
March 31, 2021
|
Deferred net revenue (online-enabled games)
|
$
|
2,101
|
|
|
$
|
1,527
|
|
Deferred net revenue (other)
|
141
|
|
|
95
|
|
Deferred net revenue (noncurrent)
|
76
|
|
|
14
|
|
Total deferred net revenue
|
$
|
2,318
|
|
|
$
|
1,636
|
|
During the nine months ended December 31, 2021 and 2020, we recognized $1,607 million and $1,002 million of revenue, respectively, that were included in the deferred net revenue balance at the beginning of the period.
Remaining Performance Obligations
As of December 31, 2021, revenue allocated to remaining performance obligations consists of our deferred revenue balance of $2,318 million and amounts to be invoiced in future periods of $74 million, of which $46 million are expected to be recognized as revenue over the next 12 months, and the remainder thereafter. These balances exclude any estimates for future variable consideration as we have elected the optional exemption to exclude sales-based royalty revenue.
(10) INCOME TAXES
The provision for income taxes for the three and nine months ended December 31, 2021 is based on our projected annual effective tax rate for fiscal year 2022, 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 nine months ended December 31, 2021 was 27 percent and 22 percent, respectively, as compared to 14 percent and 11 percent, respectively, for the same period in fiscal year 2021. Our effective tax rate for the three and nine months ended December 31, 2021 was higher than prior year due to our decision to capitalize for income tax purposes certain foreign expenses which increased the taxable income in our foreign entities that is subject to U.S. tax. In accordance with our existing accounting policy, we do not establish deferred tax assets to offset this charge, but we expect future deductions of the capitalized amounts. The prior year effective tax rates for the nine months ended December 31, 2020 included a tax benefit, net of valuation allowance, resulting from the Supreme Court of the United States denial of Altera’s appeal of the Altera opinion (the “Altera opinion”). Excluding the Altera opinion, the effective tax rate for the nine months ended December 31, 2020 would have been 18 percent.
In addition, during the three months ended September 30, 2021, we completed the Codemasters intra-entity sale of intellectual property rights to our U.S. and Swiss intellectual property owners. The transaction resulted in a taxable gain. Under U.S. GAAP, any profit resulting from this intercompany transaction will be 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 the nine months ended December 31, 2021 would have been 30 percent.
We are subject to income tax examinations in various jurisdictions with respect to fiscal years after 2011. The timing and potential resolution of income tax examinations is highly uncertain. The gross unrecognized tax benefits as of December 31, 2021 were $590 million.
While we continue to measure our uncertain tax positions, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued. For example, in the period ended June 30, 2020, the Altera opinion resulted in a partial decrease of our unrecognized tax benefits. A complete resolution and settlement of the matters underlying the Altera opinion is reasonably possible within the next 12 months, which would result in an additional reduction of our gross unrecognized tax benefits. However, it is uncertain whether a complete resolution and settlement of such matters would also result in resolution of all related and unrelated U.S. positions for all applicable years. Therefore, it is not possible to provide a range of potential outcomes associated with a reversal of our gross unrecognized tax benefits.
It is also reasonably possible that an additional reduction of up to $7 million of unrecognized tax benefits may occur within the next 12 months, unrelated to the Altera opinion, a portion of which would impact our effective tax rate. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements and tax interpretations.
Each 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. During the three and nine months ended December 31, 2021, we recognized a decrease of $6 million and an increase of $1 million of valuation allowance against our deferred tax assets primarily due to the expected alignment of the recently acquired businesses with our global operating structure.
(11) FINANCING ARRANGEMENTS
Senior Notes
In February 2021, we issued $750 million aggregate principal amount of 1.85% Senior Notes due February 15, 2031 (the “2031 Notes”) and $750 million aggregate principal amount of 2.95% Senior Notes due February 15, 2051 (the “2051 Notes”). Our proceeds were $1,478 million, net of discount of $6 million and issuance costs of $16 million. Both the discount and issuance costs are being amortized to interest expense over the respective terms of the 2031 Notes and the 2051 Notes using the effective interest rate method. The effective interest rate is 1.98% for the 2031 Notes and 3.04% for the 2051 Notes. Interest is payable semiannually in arrears, on February 15 and August 15 of each year.
In February 2016, we issued $400 million aggregate principal amount of 4.80% Senior Notes due March 1, 2026 (the “2026 Notes”). Our proceeds were $395 million, net of discount of $1 million and issuance costs of $4 million. Both the discount and issuance costs are being amortized to interest expense over the term of the 2026 Notes using the effective interest rate method. The effective interest rate was 4.97%. Interest is payable semiannually in arrears, on March 1 and September 1 of each year.
The carrying and fair values of the Senior Notes are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2021
|
|
As of
March 31, 2021
|
Senior Notes:
|
|
|
|
4.80% Senior Notes due 2026
|
$
|
400
|
|
|
$
|
400
|
|
1.85% Senior Notes due 2031
|
750
|
|
|
750
|
|
2.95% Senior Notes due 2051
|
750
|
|
|
750
|
|
Total principal amount
|
$
|
1,900
|
|
|
$
|
1,900
|
|
Unaccreted discount
|
(6)
|
|
|
(7)
|
|
Unamortized debt issuance costs
|
(16)
|
|
|
(17)
|
|
Net carrying value of Senior Notes
|
$
|
1,878
|
|
|
$
|
1,876
|
|
|
|
|
|
Fair value of Senior Notes (Level 2)
|
$
|
1,881
|
|
|
$
|
1,873
|
|
As of December 31, 2021, the remaining life of the 2026 Notes, 2031 Notes and 2051 Notes is approximately 4.2 years, 9.1 years, and 29.1 years, respectively.
The Senior Notes are senior unsecured obligations and rank equally with all our other existing and future unsubordinated obligations and any indebtedness that we may incur from time to time under our Credit Facility.
The 2026 Notes, 2031 Notes and 2051 Notes are redeemable at our option at any time prior to December 1, 2025, November 15, 2030, and August 15, 2050, respectively, subject to a make-whole premium. After such dates, we may redeem each such series of Notes, respectively, at a redemption price equal to 100% of the aggregate principal amount plus accrued and unpaid interest. In addition, upon the occurrence of a change of control repurchase event, the holders of each such series of Notes may require us to repurchase all or a portion of these Notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. Each such series of Notes also include covenants that limit our ability to incur liens on assets and to enter into sale and leaseback transactions, subject to certain allowances.
Credit Facility
On August 29, 2019, we entered into a $500 million unsecured revolving credit facility (“Credit Facility”) with a syndicate of banks. The Credit Facility terminates on August 29, 2024 unless the maturity is extended in accordance with its terms. The Credit Facility contains an option to arrange with existing lenders and/or new lenders to provide up to an aggregate of $500 million in additional commitments for revolving loans. Proceeds of loans made under the Credit Facility may be used for general corporate purposes.
The credit agreement contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, incur subsidiary indebtedness, grant liens, and dispose of all or substantially all assets, in each case subject to customary exceptions for a credit facility of this size and type. We are also required to maintain compliance with a debt to EBITDA ratio. As of December 31, 2021, we were in compliance with the debt to EBITDA ratio.
As of December 31, 2021, no amounts were outstanding under the Credit Facility. $2 million of debt issuance costs that were paid in connection with obtaining this credit facility are being amortized to interest expense over the 5-year term of the Credit Facility.
Interest Expense
The following table summarizes our interest expense recognized for the three and nine months ended December 31, 2021 and 2020 that is included in interest and other income (expense), net on our Condensed Consolidated Statements of Operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
Amortization of debt issuance costs
|
$
|
(1)
|
|
|
$
|
(1)
|
|
|
$
|
(2)
|
|
|
$
|
(2)
|
|
Coupon interest expense
|
(13)
|
|
|
(10)
|
|
|
(41)
|
|
|
(31)
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
$
|
(14)
|
|
|
$
|
(11)
|
|
|
$
|
(43)
|
|
|
$
|
(33)
|
|
(12) COMMITMENTS AND CONTINGENCIES
Development, Celebrity, League and Content Licenses: Payments and Commitments
The products we produce in our studios are designed and created by our employee designers, artists, software programmers and by non-employee software developers (“independent artists” or “third-party developers”). We typically advance development funds to the independent artists and third-party developers during development of our games, usually in installment payments made upon the completion of specified development milestones. Contractually, these payments are generally considered advances against subsequent royalties on the sales of the products. These terms are set forth in written agreements entered into with the independent artists and third-party developers.
In addition, we have certain celebrity, league and content license contracts that contain minimum guarantee payments and marketing commitments to promote the games we publish that may not be dependent on any deliverables. Celebrities and organizations with whom we have contracts include, but are not limited to: CONMEBOL (Confederación Sudamericana de Fútbol), DFL Deutsche Fußball Liga E.V. (German Soccer League), FAPL (Football Association Premier League Limited), FIFA (Fédération Internationale de Football Association), FIFPRO Foundation, La Liga (Liga Nacional De Futbol Profesional), LFP (Ligue de Football Professionnel), Major League Soccer, Major League Soccer Players Association on behalf of OneTeam Partners, LLC, Serie A (Lega Nazionale Professionisti Serie A), and UEFA (Union des Associations Européennes de Football) (professional soccer); National Basketball Association and National Basketball Players Association (professional basketball); National Hockey League and NHL Players’ Association (professional hockey); NFL Properties LLC, NFL Players Association and NFL Players Inc. on behalf of OneTeam Partners, LLC (professional football); William Morris Endeavor Entertainment LLC (professional mixed martial arts); ESPN (content in EA SPORTS games); Disney Interactive (Star Wars and Disney Sorcerer’s Arena); Formula One Digital Media Limited and Formula Motorsport Limited (professional racing); PGA Tour, Inc. (professional golf); Major League Baseball and MLB Players Association (professional baseball); and Kimsaprincess, Inc. (Kim Kardashian: Hollywood). These developer and content license commitments represent the sum of (1) the cash payments due under non-royalty-bearing licenses and services agreements and (2) the minimum guaranteed payments and advances against royalties due under royalty-bearing licenses and services agreements, the majority of which are conditional upon performance by the counterparty. These minimum guarantee payments and any related marketing commitments are included in the table below.
The following table summarizes our minimum contractual obligations as of December 31, 2021 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ending March 31,
|
|
|
|
2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
three mos.)
|
|
2023
|
|
2024
|
|
2025
|
|
2026
|
|
2027
|
|
Thereafter
|
Unrecognized commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developer/licensor commitments
|
$
|
2,064
|
|
|
$
|
55
|
|
|
$
|
383
|
|
|
$
|
487
|
|
|
$
|
491
|
|
|
$
|
365
|
|
|
$
|
83
|
|
|
$
|
200
|
|
Marketing commitments
|
667
|
|
|
32
|
|
|
155
|
|
|
148
|
|
|
142
|
|
|
116
|
|
|
44
|
|
|
30
|
|
Senior Notes interest
|
849
|
|
|
7
|
|
|
55
|
|
|
55
|
|
|
55
|
|
|
54
|
|
|
36
|
|
|
587
|
|
Operating lease imputed interest
|
34
|
|
|
2
|
|
|
8
|
|
|
6
|
|
|
5
|
|
|
3
|
|
|
2
|
|
|
8
|
|
Operating leases not yet commenced (a)
|
131
|
|
|
1
|
|
|
13
|
|
|
10
|
|
|
7
|
|
|
8
|
|
|
8
|
|
|
84
|
|
Other purchase obligations
|
151
|
|
|
7
|
|
|
69
|
|
|
67
|
|
|
6
|
|
|
2
|
|
|
—
|
|
|
—
|
|
Total unrecognized commitments
|
3,896
|
|
|
104
|
|
|
683
|
|
|
773
|
|
|
706
|
|
|
548
|
|
|
173
|
|
|
909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Notes principal and interest
|
1,920
|
|
|
20
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
400
|
|
|
—
|
|
|
1,500
|
|
Operating leases
|
365
|
|
|
16
|
|
|
77
|
|
|
61
|
|
|
52
|
|
|
44
|
|
|
29
|
|
|
86
|
|
Transition Tax and other taxes
|
24
|
|
|
5
|
|
|
2
|
|
|
4
|
|
|
6
|
|
|
7
|
|
|
—
|
|
|
—
|
|
Licensing commitments
|
7
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total recognized commitments
|
2,316
|
|
|
48
|
|
|
79
|
|
|
65
|
|
|
58
|
|
|
451
|
|
|
29
|
|
|
1,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commitments
|
$
|
6,212
|
|
|
$
|
152
|
|
|
$
|
762
|
|
|
$
|
838
|
|
|
$
|
764
|
|
|
$
|
999
|
|
|
$
|
202
|
|
|
$
|
2,495
|
|
(a)As of December 31, 2021, we have entered into two office leases and two equipment leases that have not yet commenced with aggregate future lease payments of approximately $131 million. These leases are expected to commence between fiscal year 2022 and fiscal year 2025, and will have lease terms ranging from 2 to 12 years.
The unrecognized amounts represented in the table above reflect our minimum cash obligations for the respective fiscal years, but do not necessarily represent the periods in which they will be recognized and expensed in our Condensed Consolidated Financial Statements. In addition, the amounts in the table above are presented based on the dates the amounts are contractually due as of December 31, 2021; however, certain payment obligations may be accelerated depending on the performance of our operating results.
In addition to what is included in the table above, as of December 31, 2021, we had a net liability for unrecognized tax benefits and an accrual for the payment of related interest totaling $309 million, of which we are unable to make a reasonably reliable estimate of when cash settlement with a taxing authority will occur.
Legal Proceedings
The Netherlands Gambling Authority (“NGA”) has asserted that the randomized selection of virtual items in the FIFA Ultimate Team mode of our FIFA franchise contravenes the Dutch Betting and Gaming Act. On October 15, 2020, the District Court of the Hague affirmed the NGA’s decision. We have appealed the District Court’s order, and the NGA’s decision is suspended through the appeals process. We do not believe that the operational or financial consequences from these proceedings will have a material adverse effect on our Condensed Consolidated Financial Statements. We do not believe that our products and services violate applicable gambling laws.
We are also subject to claims and litigation arising in the ordinary course of business. We do not believe that any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on our Condensed Consolidated Financial Statements.
(13) STOCK-BASED COMPENSATION
Valuation Assumptions
We recognize compensation cost for stock-based awards to employees based on the awards’ estimated grant-date fair value using a straight-line approach over the service period for which such awards are expected to vest. We account for forfeitures as they occur.
The estimation of the fair value of market-based restricted stock units, stock options and ESPP purchase rights is affected by assumptions regarding subjective and complex variables. Generally, our assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes. We estimate the fair value of our stock-based awards as follows:
•Restricted Stock Units and Performance-Based Restricted Stock Units. The fair value of restricted stock units and performance-based restricted stock units (other than market-based restricted stock units) is determined based on the quoted market price of our common stock on the date of grant.
•Market-Based Restricted Stock Units. Market-based restricted stock units consist of grants of performance-based restricted stock units to certain members of executive management that vest contingent upon the achievement of pre-determined market and service conditions (referred to herein as “market-based restricted stock units”). The fair value of our market-based restricted stock units is estimated using a Monte-Carlo simulation model. Key assumptions for the Monte-Carlo simulation model are the risk-free interest rate, expected volatility, expected dividends and correlation coefficient.
•Stock Options and Employee Stock Purchase Plan. The fair value of stock options and stock purchase rights granted pursuant to our equity incentive plans and our 2000 Employee Stock Purchase Plan, as amended (“ESPP”), respectively, is estimated using the Black-Scholes valuation model based on the multiple-award valuation method. Key assumptions of the Black-Scholes valuation model are the risk-free interest rate, expected volatility, expected term and expected dividends. The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant for the expected term of the option. Expected volatility is based on a combination of historical stock price volatility and implied volatility of publicly-traded options on our common stock. An expected term is estimated based on historical exercise behavior, post-vesting termination patterns, options outstanding and future expected exercise behavior.
There were an insignificant number of stock options granted during the three and nine months ended December 31, 2021 and 2020.
Stock Options
The following table summarizes our stock option activity for the nine months ended December 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
(in thousands)
|
|
Weighted-
Average
Exercise Prices
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
Aggregate
Intrinsic Value
(in millions)
|
Outstanding as of March 31, 2021
|
|
267
|
|
|
$
|
35.71
|
|
|
|
|
|
Assumed via acquisition
|
|
150
|
|
|
60.87
|
|
|
|
|
|
Granted
|
|
2
|
|
|
142.46
|
|
|
|
|
|
Exercised
|
|
(77)
|
|
|
55.73
|
|
|
|
|
|
Forfeited, cancelled or expired
|
|
(41)
|
|
|
66.97
|
|
|
|
|
|
Outstanding as of December 31, 2021
|
|
301
|
|
|
$
|
39.56
|
|
|
3.10
|
|
$
|
28
|
|
Vested and expected to vest
|
|
301
|
|
|
$
|
39.56
|
|
|
3.10
|
|
$
|
28
|
|
Exercisable as of December 31, 2021
|
|
282
|
|
|
$
|
37.62
|
|
|
2.85
|
|
$
|
27
|
|
The aggregate intrinsic value represents the total pre-tax intrinsic value based on our closing stock price as of December 31, 2021, which would have been received by the option holders had all the option holders exercised their options as of that date. We issue new common stock from our authorized shares upon the exercise of stock options.
Restricted Stock Units
The following table summarizes our restricted stock unit activity for the nine months ended December 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Rights
(in thousands)
|
|
Weighted-
Average Grant
Date Fair Values
|
Outstanding as of March 31, 2021
|
5,764
|
|
|
$
|
113.25
|
|
Assumed via acquisition
|
816
|
|
|
120.54
|
|
Granted
|
4,058
|
|
|
140.94
|
|
Vested
|
(3,125)
|
|
|
114.13
|
|
Forfeited or cancelled
|
(871)
|
|
|
123.64
|
|
Outstanding as of December 31, 2021
|
6,642
|
|
|
$
|
129.29
|
|
Performance-Based Restricted Stock Units
Our performance-based restricted stock units vest upon the achievement of pre-determined performance-based milestones, such as company-wide net bookings and operating income milestones, as well as service conditions. If these performance-based milestones are not met but service conditions are met, the performance-based restricted stock units will not vest, in which case any compensation expense we have recognized to date will be reversed. Generally, the measurement periods of our performance-based restricted stock units are 3 to 4 years, with awards vesting after each annual measurement period or cliff-vesting after the completion of the total aggregate measurement period.
Each quarter, we update our assessment of the probability that the performance milestones will be achieved. We amortize the fair values of performance-based restricted stock units over the requisite service period. The performance-based restricted stock units contain threshold, target and maximum milestones for each performance-based milestone. The number of shares of common stock to be issued at vesting will range from zero to 200 percent of the target number of performance-based restricted stock units attributable to each performance-based milestone based on the company’s performance as compared to these threshold, target and maximum performance-based milestones. Each performance-based milestone is weighted evenly and the number of shares that vest based on each performance-based milestone is independent from the other.
The following table summarizes our performance-based restricted stock unit activity, presented with the maximum number of shares that could potentially vest, for the nine months ended December 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-
Based Restricted
Stock Units
(in thousands)
|
|
Weighted-
Average Grant
Date Fair Value
|
Outstanding as of March 31, 2021
|
579
|
|
|
$
|
110.51
|
|
Granted
|
300
|
|
|
140.48
|
|
Vested
|
(266)
|
|
|
110.51
|
|
Forfeited or cancelled
|
(342)
|
|
|
113.23
|
|
Outstanding as of December 31, 2021
|
271
|
|
|
$
|
140.25
|
|
Market-Based Restricted Stock Units
Our market-based restricted stock units vest contingent upon the achievement of pre-determined market and service conditions. If these market conditions are not met but service conditions are met, the market-based restricted stock units will not vest; however, any compensation expense we have recognized to date will not be reversed. The number of shares of common stock to be issued at vesting will range from zero to 200 percent of the target number of market-based restricted stock units based on our total stockholder return (“TSR”) relative to the performance of companies in the NASDAQ-100 Index for each measurement period, over either a one-year, two-year cumulative, and three-year cumulative period, a two-year and four-year cumulative period or a three-year period.
The following table summarizes our market-based restricted stock unit activity, presented with the maximum number of shares that could potentially vest, for the nine months ended December 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
Market-Based
Restricted Stock
Units
(in thousands)
|
|
Weighted-
Average Grant
Date Fair Value
|
Outstanding as of March 31, 2021
|
2,195
|
|
|
$
|
134.60
|
|
Granted
|
159
|
|
|
173.25
|
|
Vested
|
(271)
|
|
|
123.82
|
|
Forfeited or cancelled
|
(778)
|
|
|
146.26
|
|
Outstanding as of December 31, 2021
|
1,305
|
|
|
$
|
134.59
|
|
Stock-Based Compensation Expense
The following table summarizes stock-based compensation expense resulting from stock options, restricted stock units, market-based restricted stock units, performance-based restricted stock units, and the ESPP purchase rights included in our Condensed Consolidated Statements of Operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Cost of revenue
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
4
|
|
|
$
|
4
|
|
Research and development
|
86
|
|
|
74
|
|
|
272
|
|
|
214
|
|
Marketing and sales
|
14
|
|
|
11
|
|
|
41
|
|
|
34
|
|
General and administrative
|
28
|
|
|
25
|
|
|
86
|
|
|
74
|
|
Stock-based compensation expense
|
$
|
129
|
|
|
$
|
111
|
|
|
$
|
403
|
|
|
$
|
326
|
|
During the three and nine months ended December 31, 2021, we recognized $3 million and $54 million, respectively, of deferred income tax benefit related to our stock-based compensation expense. During the three and nine months ended December 31, 2020, we recognized $8 million and $46 million, respectively, of deferred income tax benefit related to our stock-based compensation expense.
As of December 31, 2021, our total unrecognized compensation cost related to stock options, restricted stock units, market-based restricted stock units, and performance-based restricted stock units was $772 million and is expected to be recognized over a weighted-average service period of 2.0 years. Of the $772 million of unrecognized compensation cost, $704 million relates to restricted stock units, $56 million relates to market-based restricted stock units, $11 million relates to performance-based restricted stock units at an 128 percent average payout, and $1 million relates to stock options.
Stock Repurchase Program
In May 2018, a Special Committee of our Board of Directors, on behalf of the full Board of Directors, authorized a program to repurchase up to $2.4 billion of our common stock. We completed repurchases under the May 2018 program in April 2020.
In November 2020, our Board of Directors authorized a program to repurchase up to $2.6 billion of our common stock. This stock repurchase program expires on November 4, 2022. 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. We are actively repurchasing shares under this program.
The following table summarizes total shares repurchased during the three and nine months ended December 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2018 Program
|
|
November 2020 Program
|
|
Total
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
Three months ended December 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
$
|
—
|
|
|
2.4
|
|
$
|
325
|
|
|
2.4
|
|
$
|
325
|
|
|
|
|
|
Nine months ended December 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
$
|
—
|
|
|
7.0
|
|
$
|
975
|
|
|
7.0
|
|
$
|
975
|
|
|
|
|
|
Three months ended December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
$
|
—
|
|
|
2.5
|
|
$
|
326
|
|
|
2.5
|
|
$
|
326
|
|
|
|
|
|
Nine months ended December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
$
|
78
|
|
|
2.5
|
|
$
|
326
|
|
|
3.2
|
|
|
$
|
404
|
|
|
|
|
|
(14) EARNINGS PER SHARE
The following table summarizes the computations of basic earnings per share (“Basic EPS”) and diluted earnings per share (“Diluted EPS”). Basic EPS is computed as net income divided by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation plans including stock options, restricted stock, restricted stock units, and ESPP purchase rights using the treasury stock method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
(In millions, except per share amounts)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net income
|
$
|
66
|
|
|
$
|
211
|
|
|
$
|
564
|
|
|
$
|
761
|
|
Shares used to compute earnings per share:
|
|
|
|
|
|
|
|
Weighted-average common stock outstanding — basic
|
283
|
|
|
290
|
|
|
284
|
|
|
289
|
|
Dilutive potential common shares related to stock award plans and from assumed exercise of stock options
|
2
|
|
|
2
|
|
|
3
|
|
|
3
|
|
Weighted-average common stock outstanding — diluted
|
285
|
|
|
292
|
|
|
287
|
|
|
292
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.23
|
|
|
$
|
0.73
|
|
|
$
|
1.99
|
|
|
$
|
2.63
|
|
Diluted
|
$
|
0.23
|
|
|
$
|
0.72
|
|
|
$
|
1.97
|
|
|
$
|
2.61
|
|
For the three and nine months ended December 31, 2021, one million of stock options, restricted stock units and market-based restricted stock units were excluded from the treasury stock method computation of diluted shares, respectively, as their inclusion would have had an antidilutive effect.
Our performance-based restricted stock units, which are considered contingently issuable shares, are also excluded from the treasury stock method computation because the related performance-based milestones were not achieved as of the end of the three and nine months ended December 31, 2021.
For the three and nine months ended December 31, 2020, two million of restricted stock units, market-based restricted stock units and performance-based restricted stock units were excluded from the treasury stock method computation of diluted shares, respectively, as their inclusion would have had an antidilutive effect.
(15) SEGMENT AND REVENUE INFORMATION
Our reporting segment is based upon: our internal organizational structure; the manner in which our operations are managed; the criteria used by our Chief Executive Officer, our Chief Operating Decision Maker (“CODM”), to evaluate segment performance; the availability of separate financial information; and overall materiality considerations. Our CODM currently reviews total company operating results to assess overall performance and allocate resources. As of December 31, 2021, we have only one reportable segment, which represents our only operating segment.
Information about our total net revenue by timing of recognition for the three and nine months ended December 31, 2021 and 2020 is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net revenue by timing of recognition
|
|
|
|
|
|
|
|
Revenue recognized at a point in time
|
$
|
673
|
|
|
$
|
860
|
|
|
$
|
1,848
|
|
|
$
|
1,639
|
|
Revenue recognized over time
|
1,116
|
|
|
813
|
|
|
3,318
|
|
|
2,644
|
|
Net revenue
|
$
|
1,789
|
|
|
$
|
1,673
|
|
|
$
|
5,166
|
|
|
$
|
4,283
|
|
Generally, performance obligations that are recognized upfront upon transfer of control are classified as revenue recognized at a point in time, while performance obligations that are recognized over the estimated offering period or subscription period as the services are provided are classified as revenue recognized over time.
Revenue recognized at a point in time includes revenue allocated to the software license performance obligation. This also includes revenue from the licensing of software to third-parties.
Revenue recognized over time includes service revenue allocated to the future update rights and the online hosting performance obligations. This also includes service revenue allocated to the future update rights from the licensing of software to third-parties, online-only software services such as our Ultimate Team game mode, and subscription services.
Information about our total net revenue by composition for the three and nine months ended December 31, 2021 and 2020 is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net revenue by composition
|
|
|
|
|
|
|
|
Full game downloads
|
$
|
400
|
|
|
$
|
347
|
|
|
$
|
970
|
|
|
$
|
733
|
|
Packaged goods
|
216
|
|
|
375
|
|
|
585
|
|
|
630
|
|
Full game
|
616
|
|
|
722
|
|
|
1,555
|
|
|
1,363
|
|
|
|
|
|
|
|
|
|
Live services and other
|
1,173
|
|
|
951
|
|
|
3,611
|
|
|
2,920
|
|
Net revenue
|
$
|
1,789
|
|
|
$
|
1,673
|
|
|
$
|
5,166
|
|
|
$
|
4,283
|
|
Full game net revenue includes full game downloads and packaged goods. Full game downloads includes revenue from digital sales of full games on console, PC, and mobile phones and tablets. Packaged goods includes revenue from software that is sold physically. This includes (1) net revenue from game software sold physically through traditional channels such as brick and mortar retailers, and (2) software licensing revenue from third parties (for example, makers of console platforms, personal computers or computer accessories) who include certain of our full games for sale with their products (for example, OEM bundles).
Live services and other net revenue includes revenue from sales of extra content for console, PC and mobile games, licensing revenue from third-party publishing partners who distribute our games digitally, subscriptions, advertising, and non-software licensing.
Information about our total net revenue by platform for the three and nine months ended December 31, 2021 and 2020 is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Platform net revenue
|
|
|
|
|
|
|
|
Console
|
$
|
1,138
|
|
|
$
|
1,191
|
|
|
$
|
3,308
|
|
|
$
|
2,837
|
|
PC and other
|
374
|
|
|
326
|
|
|
1,112
|
|
|
900
|
|
Mobile
|
277
|
|
|
156
|
|
|
746
|
|
|
546
|
|
Net revenue
|
$
|
1,789
|
|
|
$
|
1,673
|
|
|
$
|
5,166
|
|
|
$
|
4,283
|
|
Information about our operations in North America and internationally for the three and nine months ended December 31, 2021 and 2020 is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net revenue from unaffiliated customers
|
|
|
|
|
|
|
|
North America
|
$
|
783
|
|
|
$
|
678
|
|
|
$
|
2,243
|
|
|
$
|
1,883
|
|
International
|
1,006
|
|
|
995
|
|
|
2,923
|
|
|
2,400
|
|
Net revenue
|
$
|
1,789
|
|
|
$
|
1,673
|
|
|
$
|
5,166
|
|
|
$
|
4,283
|
|
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Electronic Arts Inc.:
Results of Review of Interim Financial Information
We have reviewed the condensed consolidated balance sheet of Electronic Arts, Inc. and subsidiaries (the Company) as of January 1, 2022, the related condensed consolidated statements of operations, comprehensive income and stockholders’ equity for the three-month and nine-month periods ended January 1, 2022 and January 2, 2021, and cash flows for the nine-month periods ended January 1, 2022 and January 2, 2021, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of April 3, 2021, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated May 26, 2021, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of April 3, 2021, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
(Signed) KPMG LLP
Santa Clara, California
February 8, 2022
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
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”, “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 the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the fiscal year ended March 31, 2021. 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 ended December 31, 2021, 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 ended March 31, 2021 as filed with the SEC on May 26, 2021 and in other documents we have filed with the SEC.
About Electronic Arts
Electronic Arts is a global leader in digital interactive entertainment. We develop, market, publish and deliver games, content and services that can be played and watched on game consoles, PCs, mobile phones and tablets. We believe that the breadth and depth of our portfolio, live services offerings, and our use of multiple business models and distribution channels provide us with strategic advantages. Our foundation is a collection of intellectual property from which we create innovative games and content that enables 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 Battlefield, The Sims, Apex Legends, Need for Speed and Plants vs. Zombies) or license from others (such as FIFA, Madden NFL, UFC, NHL, Formula 1 and Star Wars). Through our live services offerings, we offer our players high-quality experiences designed to provide value to players and extend and enhance gameplay. These live services include extra content, subscription offerings and other revenue generated in addition to the sale of our base games and free-to-play games. In addition, we are focused on reaching more players whenever and wherever they want to play. We believe that we can add value to our network by making it easier for players to connect to a world of play by offering choice of business model, distribution channel and device.
Financial Results
Our key financial results for our fiscal quarter ended December 31, 2021 were as follows:
•Total net revenue was $1,789 million, up 7 percent year-over-year. On a constant currency basis, we estimate total net revenue would have been $1,740 million, up 4 percent year-over-year.
•Live services and other net revenue was $1,173 million, up 23 percent year-over-year.
•Gross margin was 64.7 percent, up 1 percentage point year-over-year.
•Operating expenses were $1,056 million, up 29 percent year-over-year. On a constant currency basis, we estimate that
operating expenses would have been $1,050 million, up 28 percent year-over-year.
•Operating income was $102 million, down 59 percent year-over-year.
•Net income was $66 million with diluted earnings per share of $0.23.
•Operating cash flow was $1,534 million, up 36 percent year-over-year.
•Total cash, cash equivalents and short-term investments were $3,016 million.
•We repurchased 2.4 million shares of our common stock for $325 million.
•We paid cash dividends of $48 million during the quarter ended December 31, 2021.
From time to time, we make comparisons of current periods to prior periods with reference to constant currency. Constant
currency comparisons are based on translating local currency amounts in the current period at actual foreign exchange rates
from the prior comparable period, net of the impact of hedging activities. We evaluate our financial performance on a constant currency basis in order to facilitate period-to-period comparisons without regard to the impact of changing foreign currency exchange rates.
Trends in Our Business
COVID-19 Impact. We are closely monitoring the impact of the COVID-19 pandemic to our people and our business. Since the outbreak of COVID-19, 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.
Our People: The well-being of our people is our top priority, and to keep everyone as safe as possible, the vast majority of our workforce continues to work from home. We are offering support to our people to assist with work from home and care needs, a pandemic care leave program, and additional services for mental and physical health. We have developed a detailed protocol for how we evaluate the readiness to return to work for each of our offices around the world, accounting for guidance from health authorities and government, vaccine availability and effectiveness, the comfort level of our employees, and preparation of our facilities for continued physical distancing.
Our Business and Future Outlook: During fiscal year 2021 and fiscal year 2022, longer-term trends that benefit our business have 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.
The full extent of the impact of the COVID-19 pandemic to our business, operations and financial results will depend on numerous evolving factors that cannot be accurately predicted at this time, such as the duration and spread of the pandemic, the extent, speed and effectiveness of worldwide containment and vaccination efforts and the impact of these and other factors on our employees, customers, partners and vendors. Trends that have benefited our industry and business may not be indicative of results for future periods, particularly as factors related to the COVID-19 pandemic lessen and consumers can engage with other forms of entertainment, if the trend towards digital adoption decelerates, or if global macroeconomic effects of the COVID-19 pandemic persist even after the pandemic has subsided. Additional factors that could impact our business include: our ability to timely deliver high quality and technically stable games and services while our teams, including our development teams, work in a distributed environment, our ability to safely reintroduce our employees to our offices when it is appropriate to do so, and other factors included in Part II, Item 1A of this Quarterly Report under the heading “Risk Factors”.
Live Services Business. We offer our players high-quality experiences designed to provide value to players and to extend and enhance gameplay. These live services include extra content, subscription offerings and other revenue generated in addition to the sale of our base games and free-to-play games. Our net revenue attributable to live services and other was $4,707 million, $3,951 million and $3,550 million for the trailing twelve months ended December 31, 2021, 2020 and 2019, respectively, and we expect that live services net revenue will continue to be material to our business. Within live services and other, net revenue attributable to extra content was $3,668 million, $3,073 million and $2,728 million for the trailing twelve months ended December 31, 2021, 2020 and 2019, respectively. Extra content net revenue has increased as players engage with our games and services over longer periods of time, and purchase additional content designed to provide value to players and extend and enhance gameplay. Our most popular live service is the extra content purchased for the Ultimate Team mode associated with our sports franchises. Ultimate Team allows players to collect current and former professional players in order to build and compete as a personalized team. Net revenue from extra content sales for Ultimate Team was $1,623 million, $1,491 million and $1,369 million during fiscal years 2021, 2020 and 2019, respectively, a substantial portion of which was derived from FIFA Ultimate Team.
Digital Delivery of Games. In our industry, players increasingly purchase games digitally as opposed to purchasing physical discs. While this trend, as applied to our business, may not be linear because of product mix during a fiscal year, consumer buying patterns and other factors, over time we expect players to purchase an increasingly higher proportion of our games digitally; therefore we expect net revenue attributable to digital full game downloads to increase over time and net revenue attributable to sales of packaged goods to decrease.
Our net revenue attributable to digital full game downloads was $918 million, $811 million and $681 million during fiscal years 2021, 2020 and 2019, respectively; while our net revenue attributable to packaged goods sales decreased from $1,112 million in fiscal year 2019 to $1,076 million in fiscal year 2020 and $695 million in fiscal year 2021. 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 62 percent, 49 percent, and 49 percent of our total units sold during fiscal years 2021, 2020 and 2019 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 in North America, Europe and Asia, 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.
Free-to-Play Games. The global adoption of mobile devices and a business model for those devices that allows consumers to try new games with no up-front cost, and that are monetized through a live service associated with the game, particularly extra content sales, has led to significant sales growth in the mobile gaming industry. Similarly, sales of extra content are the primary driver of our mobile business. We are investing resources in our mobile business, seeking to maximize our mobile live services, innovate on mobile with our franchises, and have added additional growth opportunities through mergers and acquisitions activity. 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 largest and most popular game, FIFA, 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 are currently reviewing our naming rights agreement with FIFA which is separate from our other official partnerships and licenses with the players, clubs, and leagues included in the game.
Recurring Revenue Sources. Our business model includes revenue that we deem recurring in nature, such as revenue from our annualized sports franchises (e.g., FIFA, Madden NFL), our console, PC and mobile catalog titles (i.e., titles that did not launch in the current fiscal year), and our live services. We have been able to forecast revenue from these areas of our business with greater relative confidence than for new games, services and business models. As we continue to incorporate new business models and modalities of play into our games, our goal is to continue to look for opportunities to expand the recurring portion of our business.
Net Bookings. In order to improve transparency into our business, we disclose an operating performance metric, net bookings. Net bookings is defined as the net amount of products and services sold digitally or sold-in physically in the period. Net bookings is calculated by adding total net revenue to the change in deferred net revenue for online-enabled games.
The following is a calculation of our total net bookings for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
(In millions)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Total net revenue
|
$
|
1,789
|
|
|
$
|
1,673
|
|
|
$
|
5,166
|
|
|
$
|
4,283
|
|
Change in deferred net revenue (online-enabled games)
|
788
|
|
|
727
|
|
|
598
|
|
|
417
|
|
Net bookings
|
$
|
2,577
|
|
|
$
|
2,400
|
|
|
$
|
5,764
|
|
|
$
|
4,700
|
|
Net bookings were $2,577 million for the three months ended December 31, 2021 primarily driven by sales related to FIFA 22, Battlefield 2042, Apex Legends, and Madden NFL 22. Net bookings increased $177 million, or 7 percent, as compared to the three months ended December 31, 2020 primarily due to Battlefield 2042, Apex Legends, and new games added to our portfolio through acquisitions activity, partially offset by the year-over-year change in the launch date of our FIFA console and PC title from the third quarter in fiscal year 2021 to the second quarter in fiscal year 2022 and the Star Wars franchise. Live services and other net bookings were $1,677 million for the three months ended December 31, 2021, and increased $135 million, or 9 percent, as compared to the three months ended December 31, 2020. The increase in live services and other net bookings was due primarily to an increase in sales of extra content for Apex Legends, new games added to our portfolio through acquisitions activity, and Battlefield 2042, partially offset by The Sims 4. Full game net bookings were $900 million for the three months ended December 31, 2021, and increased $42 million, or 5 percent, as compared to the three months ended December 31, 2020 primarily due to Battlefield 2042, partially offset by year-over-year change in the launch date of our FIFA console and PC title from the third quarter in fiscal year 2021 to the second quarter in fiscal year 2022.
Mergers and Acquisitions
Acquisition of Codemasters. On February 18, 2021, we completed the acquisition of Codemasters Group Holdings plc for total cash consideration of $1.2 billion, net of cash acquired. Codemasters is a UK-based game developer and publisher of high-quality racing games across console, PC and mobile. We expect the Codemasters acquisition to grow our presence in racing, creating a global leader in racing entertainment. Codemasters was integrated into the Company for financial reporting purposes during the fourth quarter of fiscal year 2021.
Acquisition of Glu Mobile. On April 29, 2021, we completed the acquisition of 100% of the equity interests of Glu Mobile Inc., a leading global developer and publisher of mobile games for a total purchase price of $2.0 billion, net of cash acquired of $332 million. The acquisition of Glu is expected to accelerate our mobile growth by creating a combined organization with ongoing live services across multiple games and genres. We also believe that the acquisition will create value by adding Glu’s expertise in casual sports and lifestyle genres to new titles based on our intellectual property. Glu was integrated into the Company for financial reporting purposes during the first fiscal quarter of fiscal year 2022.
Acquisition of Playdemic. On September 20, 2021, we completed the acquisition of 100% of the equity interests of Playdemic Limited, a private limited company incorporated in England and Wales for a total purchase price of $1.4 billion, net of cash acquired. The acquisition of Playdemic is intended to be another step in our strategy of continued leadership in sports and mobile expansion. Playdemic was integrated into the Company for financial reporting purposes during the second quarter of fiscal year 2022.
For more information about our acquisitions, see Part I, Item 1 of this Form 10-Q in the Notes to the Condensed Consolidated Financial Statements in Note 6 — Business Combinations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, and revenue and expenses during the reporting periods. The policies discussed below are considered by management to be critical because they are not only important to the portrayal of our financial condition and results of operations, but also because application and interpretation of these policies requires both management judgment and estimates of matters that are inherently uncertain and unknown, including uncertainty in the current economic environment due to the COVID-19 pandemic. As a result, actual results may differ materially from our estimates.
Revenue Recognition
We derive revenue principally from sales of our games, and related extra content and services that can be played 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 offers 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 (which is usually at or near the same time as the booking of the transaction). The remaining 25 percent is allocated to the future update rights and the online hosting performance obligations and recognized ratably as the service is provided (over the Estimated Offering Period).
Online-Hosted Service Games. Sales of our Online-Hosted Service Games are determined to have one distinct performance obligation: the online hosting. We recognize revenue from these arrangements as the service is provided.
Extra Content. Revenue received from sales of downloadable content are derived primarily from the sale of virtual currencies and digital in-game content that are designed to extend and enhance players’ game experience. Sales of extra content are accounted for in a manner consistent with the treatment for our Games with Services and Online-Hosted Service Games as discussed above, depending upon whether or not the extra content has offline functionality. That is, if the extra content has offline functionality, then the extra content is accounted for similarly to Games with Services (generally determined to have three distinct performance obligations: software license, future update rights, and the online hosting). If the extra content does not have offline functionality, then the extra content is determined to have one distinct performance obligation: the online-hosted service offering.
Subscriptions
Sales of our subscriptions are deemed to be one performance obligation and we recognize revenue from these arrangements ratably over the subscription term as the performance obligation is satisfied.
Licensing Revenue
In certain countries, 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 analyses, third-party external pricing of similar or same products and services such as software licenses and maintenance support within the enterprise software industry. The results of our analysis resulted in a specific percentage of the transaction price being allocated to each performance obligation.
Determining the Estimated Offering Period. The offering period is the period in which we offer to provide the future update rights and/or online hosting for the game and related extra content sold. Because the offering period is not an explicitly defined period, we must make an estimate of the offering period for the service-related performance obligations (i.e., future update rights and online hosting). Determining the Estimated Offering Period is inherently subjective and is subject to regular revision. Generally, we consider the average period of time customers are online when estimating the offering period. We also consider the estimated period of time between the date a game unit is sold to a reseller and the date the reseller sells the game unit to the customer (i.e., time in channel). Based on these two factors, we then consider the method of distribution. For example, games
and extra content sold at retail would have a composite offering period equal to the online gameplay period plus time in channel as opposed to digitally-distributed games and extra content which are delivered immediately via digital download and therefore, the offering period is estimated to be only the online gameplay period.
Additionally, we consider results from prior analyses, known and expected online gameplay trends, as well as disclosed service periods for competitors’ games in determining the Estimated Offering Period for future sales. We believe this provides a reasonable depiction of the transfer of future update rights and online hosting to our customers, as it is the best representation of the time period during which our games and extra content are played. We recognize revenue for future update rights and online hosting performance obligations ratably on a straight-line basis over this period as there is a consistent pattern of delivery for these performance obligations. Prior to July 1, 2020, these performance obligations were generally recognized over an estimated nine-month period beginning in the month after shipment for games and extra content sold through retail and an estimated six-month period for digitally-distributed games and extra content beginning in the month of sale.
During the three months ended September 30, 2020, we completed our annual evaluation of the Estimated Offering Period and as a result, for sales after July 1, 2020, revenue for service-related performance obligations for games and extra content sold through retail are recognized over an estimated ten-month period beginning in the month of sale, and revenue for service-related performance obligations for digitally-distributed games and extra content is recognized over an estimated eight-month period beginning in the month of sale. The fiscal year 2021 change in Estimated Offering period did not impact the amount of net bookings or the operating cash flows that we report. During the three months ended December 31, 2021, this change to our Estimated Offering Period resulted in an increase in net revenue of $153 million and net income of $117 million, and an increase of $0.41 diluted earnings per share. During the nine months ended December 31, 2021, this change to our Estimated Offering Period resulted in an increase in net revenue of $255 million and net income of $194 million, and an increase of $0.68 diluted earnings per share.
During the three months ended September 30, 2021, we completed our annual evaluation of the Estimated Offering Period. We have noted consumers are playing certain of our Online Hosted Service Games, such as PC and console free-to-play games, for longer periods of time than in prior years as players engage with services we provide that are designed to enhance and extend gameplay, and as such, have concluded that the Estimated Offering Period for such games should be lengthened. As a result, for all new sales after July 1, 2021, the revenue that we recognize for service-related performance obligations related to our PC and console free-to-play games is recognized generally over a twelve-month period. This change in Estimated Offering Period did not impact the amount of net bookings or the operating cash flows that we report. We expect that this change will move the recognition of approximately $135 million in net revenue from fiscal year 2022 into fiscal year 2023. During the three months ended December 31, 2021, this change to our Estimated Offering Period resulted in a decrease in net revenue of $45 million and net income of $34 million, and a decrease of $0.12 diluted earnings per share. During the nine months ended December 31, 2021, this change to our Estimated Offering Period resulted in a decrease in net revenue of $62 million and net income of $47 million, and a decrease of $0.16 diluted earnings per share.
Principal Agent Considerations
We evaluate sales to end customers of our full games and related content via third-party storefronts, including digital storefronts such as Microsoft’s Xbox Store, Sony’s PlayStation Store, Apple App Store, and Google 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 inventory risk before the specified good or service has been transferred to the end customer; and
•which party has discretion in establishing the price for the specified good or service.
Based on an evaluation of the above indicators, except as discussed below, we have determined that generally the third party is considered the principal to end customers for the sale of our full games and related content. We therefore report revenue related to these arrangements net of the fees retained by the storefront. However, as an example, for sales arrangements via Apple App Store and Google 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. Determining the fair value of assets acquired requires an assessment of the highest and best use of the asset or group of assets that maximizes the value from a market participant perspective or the expected price to sell the asset and the related expected future cash flows. Determining the fair value of acquired in-process technology also requires an assessment of our expectations related to the use of that technology. Such estimates are inherently difficult and subjective and can have a material impact on our Consolidated Financial Statements.
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 the U.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.
Each 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. In particular, 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 significant judgment involved in estimating future Swiss taxable income, specifically related to assumptions about expected growth rates of future Swiss taxable income, which are based primarily on third party market and industry growth data. Actual results that differ materially from those estimates could have a material impact on our valuation allowance assessment. Although objectively verifiable, Swiss interest rates have an impact on the valuation allowance and are based on published Swiss guidance. Any significant changes to such interest rates could result in a material impact to the valuation allowance. Switzerland has a seven-year carryforward period and does not permit the carry back of losses. Changes in Estimated Offering Period and actions we take in connection with acquisitions could also impact the utilization of our Swiss deferred tax asset.
As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each jurisdiction in which we operate prior to the completion and filing of tax returns for such periods. This process requires estimating both our geographic mix of income and our uncertain tax positions in each jurisdiction where we operate. These estimates involve complex issues and 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 and the alignment of them with our global operating structure, changes in our international corporate structure, changes in the geographic location of business functions or assets, changes in the geographic mix and amount of income, as well as changes in our agreements with tax authorities, valuation allowances, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in the estimated and actual level of annual pre-tax income can affect the overall effective tax rate.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
RESULTS OF OPERATIONS
Our fiscal year is reported on a 52- or 53-week period that ends on the Saturday nearest March 31. Our results of operations for the fiscal year ending March 31, 2022 contains 52 weeks and ends on April 2, 2022. Our results of operations for the fiscal year ended March 31, 2021 contained 53 weeks and ended on April 3, 2021. Our results of operations for the three and nine months ended December 31, 2021 contained 13 weeks and 39 weeks, respectively, and ended on January 1, 2022. Our results of operations for the three and nine months ended December 31, 2020 contained 13 weeks and 40 weeks, respectively, and ended on January 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 ended December 31, 2021 was $1,789 million, primarily driven by sales of our FIFA franchise, Apex Legends, Madden NFL 22, and The Sims 4. Net revenue for the three months ended December 31, 2021 increased $116 million as compared to the three months ended December 31, 2020. This increase was driven by a $379 million increase in net revenue primarily due to Apex Legends, Battlefield 2042, It Takes Two, and new games added to our portfolio through acquisitions activity, partially offset by a $263 million decrease in net revenue primarily due to the year-over-year change in the launch date of our FIFA console and PC title from the third quarter in fiscal year 2021 to the second quarter in fiscal year 2022, the Star Wars franchise, and Medal of Honor: Above and Beyond.
Net Revenue by Composition
Our net revenue by composition for the three months ended December 31, 2021 and 2020 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
2021
|
|
2020
|
|
$ Change
|
|
% Change
|
Net revenue:
|
|
|
|
|
|
|
|
Full game downloads
|
$
|
400
|
|
|
$
|
347
|
|
|
$
|
53
|
|
|
15
|
%
|
Packaged goods
|
216
|
|
|
375
|
|
|
(159)
|
|
|
(42)
|
%
|
Full game
|
$
|
616
|
|
|
$
|
722
|
|
|
$
|
(106)
|
|
|
(15)
|
%
|
|
|
|
|
|
|
|
|
Live services and other
|
$
|
1,173
|
|
|
$
|
951
|
|
|
$
|
222
|
|
|
23
|
%
|
Total net revenue
|
$
|
1,789
|
|
|
$
|
1,673
|
|
|
$
|
116
|
|
|
7
|
%
|
Full Game Net Revenue
Full game net revenue includes full game downloads and packaged goods. Full game downloads includes revenue from digital sales of full games on console, PC, and mobile phones and tablets. Packaged goods includes revenue from software that is sold physically. This includes (1) net revenue from game software sold physically through traditional channels such as brick and mortar retailers, and (2) software licensing revenue from third parties (for example, makers of console platforms, personal computers or computer accessories) who include certain of our full games for sale with their products (for example, OEM bundles).
For the three months ended December 31, 2021, full game net revenue was $616 million, primarily driven by FIFA 22, Madden NFL 22, and NHL 22. Full game net revenue for the three months ended December 31, 2021 decreased $106 million, or 15 percent, as compared to the three months ended December 31, 2020. This decrease was driven by a $159 million decrease in packaged goods net revenue primarily due to year-over-year change in the launch date of our FIFA console and PC title from the third quarter in fiscal year 2021 to the second quarter in fiscal year 2022. This decrease was offset by a $53 million increase in full game downloads net revenue primarily driven by Battlefield 2042, It Takes Two, and F1 2021, partially offset by the Star Wars franchise.
Live Services and Other Net Revenue
Live services and other net revenue includes revenue from sales of extra content for console, PC and mobile games, licensing revenue from third-party publishing partners who distribute our games digitally, subscriptions, advertising, and non-software licensing.
For the three months ended December 31, 2021, live services and other net revenue was $1,173 million primarily driven by sales of extra content for FIFA Ultimate Team, Apex Legends, The Sims 4, Star Wars: Galaxy of Heroes, and Madden Ultimate Team. Live services and other net revenue for the three months ended December 31, 2021 increased $222 million, or 23 percent, as compared to the three months ended December 31, 2020. This increase was primarily driven by sales of extra content for Apex Legends, FIFA Ultimate Team, and new games added to our portfolio through acquisitions activity, partially offset by Medal of Honor: Above and Beyond.
Net Revenue Year-to-Date Analysis
Net Revenue
Net revenue for the nine months ended December 31, 2021 was $5,166 million, primarily driven by sales of our FIFA franchise, Apex Legends, The Sims 4, and our Madden franchise. Net revenue for the nine months ended December 31, 2021 increased $883 million, or 21 percent, as compared to the nine months ended December 31, 2020. This increase was driven by a $1,323 million increase in net revenue primarily driven by year-over-year growth in the FIFA franchise, Apex Legends, Mass Effect Trilogy Remaster, and new games added to our portfolio through acquisitions activity, partially offset by a $440 million decrease in net revenue primarily from the Star Wars, The Sims, Need for Speed, and UFC franchises.
Net Revenue by Composition
Our net revenue by composition for the nine months ended December 31, 2021 and 2020 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31,
|
|
2021
|
|
2020
|
|
$ Change
|
|
% Change
|
Net revenue:
|
|
|
|
|
|
|
|
Full game downloads
|
$
|
970
|
|
|
$
|
733
|
|
|
$
|
237
|
|
|
32
|
%
|
Packaged goods
|
585
|
|
|
630
|
|
|
(45)
|
|
|
(7)
|
%
|
Full game
|
$
|
1,555
|
|
|
$
|
1,363
|
|
|
$
|
192
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
Live services and other
|
$
|
3,611
|
|
|
$
|
2,920
|
|
|
$
|
691
|
|
|
24
|
%
|
Total net revenue
|
$
|
5,166
|
|
|
$
|
4,283
|
|
|
$
|
883
|
|
|
21
|
%
|
Full Game Net Revenue
For the nine months ended December 31, 2021, full game net revenue was $1,555 million, primarily driven by sales of our FIFA franchise, Madden NFL 22, and Mass Effect Trilogy Remaster. Full game net revenue for the nine months ended December 31, 2021 increased $192 million, or 14 percent, as compared to the nine months ended December 31, 2020. This increase was driven by a $237 million increase in full game downloads net revenue primarily driven by year-over-year growth in the FIFA franchise and the change in the launch date of our FIFA console and PC title from the third quarter in fiscal year 2021 to the second quarter in fiscal year 2022, It Takes Two, and Mass Effect Trilogy Remaster. This increase was offset by a $45 million decrease in packaged goods net revenue primarily driven by the Star Wars and Need for Speed franchises, partially offset by F1 2021.
Live Services and Other Net Revenue
For the nine months ended December 31, 2021, live services and other net revenue was $3,611 million primarily driven by sales of extra content for FIFA Ultimate Team, Apex Legends, The Sims 4, Madden Ultimate Team, and Star Wars: Galaxy of Heroes. Live services and other net revenue for the nine months ended December 31, 2021 increased $691 million, or 24 percent, as compared to the nine months ended December 31, 2020. This increase was primarily driven by sales of extra content for FIFA Ultimate Team, Apex Legends and new games added to our portfolio through acquisitions activity, partially offset by The Sims 4.
Cost of Revenue Quarterly Analysis
Cost of revenue consists of (1) manufacturing royalties, net of volume discounts and other vendor reimbursements, (2) certain royalty expenses for celebrities, professional sports leagues, movie studios and other organizations, and independent software developers, (3) data center, bandwidth and server costs associated with hosting our online games and websites, (4) inventory costs, (5) payment processing fees, (6) 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), (7) expenses for defective products, (8) write-offs of post launch prepaid royalty costs and losses on previously unrecognized licensed intellectual property commitments, (9) amortization of certain intangible assets, (10) personnel-related costs, and (11) warehousing and distribution costs. We generally recognize volume discounts when they are earned from the manufacturer (typically in connection with the achievement of unit-based milestones); whereas other vendor reimbursements are generally recognized as the related revenue is recognized.
Cost of revenue for the three months ended December 31, 2021 and 2020 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2021
|
|
|
|
% of Net Revenue
|
|
December 31,
2020
|
|
% of Net Revenue
|
|
% Change
|
|
Change as a % of Net Revenue
|
$
|
631
|
|
|
|
|
35
|
%
|
|
$
|
601
|
|
|
36
|
%
|
|
5
|
%
|
|
(1)
|
%
|
Cost of Revenue
Cost of revenue increased by $30 million, or 5 percent during the three months ended December 31, 2021, as compared to the three months ended December 31, 2020. This increase was primarily due to an increase in platform and hosting fees due to new games added to our portfolio through acquisitions activity and higher engagement with Apex Legends, and an increase in acquisition-related intangible amortization, partially offset by a decrease in inventory and royalty costs driven by year-over-year change in the launch date of our FIFA console and PC title from the third quarter in fiscal year 2021 to the second quarter in fiscal year 2022.
Cost of Revenue Year-to-Date Analysis
Cost of revenue for the nine months ended December 31, 2021 and 2020 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2021
|
|
|
|
% of Net Revenue
|
|
December 31,
2020
|
|
% of Net Revenue
|
|
% Change
|
|
Change as a % of Net Revenue
|
1,440
|
|
|
|
|
28
|
%
|
|
1,175
|
|
|
27
|
%
|
|
23
|
%
|
|
1
|
%
|
Cost of Revenue
Cost of revenue increased by $265 million, or 23 percent during the nine months ended December 31, 2021, as compared to the nine months ended December 31, 2020. This increase was primarily due to an increase in platform and hosting fees due to new games added to our portfolio through acquisitions activity and higher engagement with Apex Legends, an increase in acquisition-related intangible amortization, and an increase in royalty costs driven by the growth in the FIFA franchise.
Research and Development
Research and development expenses consist of expenses incurred by our production studios for personnel-related costs, related overhead costs, external third-party development costs, contracted services, depreciation and any impairment of prepaid royalties for pre-launch products. Research and development expenses for our online products include expenses incurred by our studios consisting of direct development and related overhead costs in connection with the development and production of our online games. Research and development expenses also include expenses associated with our digital platform, software licenses and maintenance, and management overhead.
Research and development expenses for the three and nine months ended December 31, 2021 and 2020 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2021
|
|
% of Net
Revenue
|
|
December 31,
2020
|
|
% of Net
Revenue
|
|
$ Change
|
|
% Change
|
Three months ended
|
$
|
539
|
|
|
30
|
%
|
|
$
|
451
|
|
|
27
|
%
|
|
$
|
88
|
|
|
20
|
%
|
Nine months ended
|
$
|
1,607
|
|
|
31
|
%
|
|
$
|
1,310
|
|
|
31
|
%
|
|
$
|
297
|
|
|
23
|
%
|
Research and development expenses increased by $88 million, or 20 percent, during the three months ended December 31, 2021, as compared to the three months ended December 31, 2020. This increase was primarily due to a $44 million increase in personnel-related costs primarily resulting from an investment in headcount due to acquisitions and our continued investment in our studios, a $12 million increase in stock-based compensation, a $12 million increase in studio related contracted services, and an $8 million increase in facility related costs.
Research and development expenses increased by $297 million, or 23 percent, during the nine months ended December 31, 2021, as compared to the nine months ended December 31, 2020. This increase was primarily due to a $161 million increase in personnel-related costs primarily resulting from an investment in headcount due to acquisitions and our continued investment in our studios, a $58 million increase in stock-based compensation, a $46 million increase in studio related contracted services, and a $24 million increase in facility related costs. These increases were partially offset by an $18 million benefit in cash flow hedging activities. We use hedges to protect against currency exchange rate movements in our research and development expenses.
Marketing and Sales
Marketing and sales expenses consist of personnel-related costs, related overhead costs, advertising, marketing and promotional expenses, net of qualified advertising cost reimbursements from third parties.
Marketing and sales expenses for the three and nine months ended December 31, 2021 and 2020 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2021
|
|
% of Net
Revenue
|
|
December 31,
2020
|
|
% of Net
Revenue
|
|
$ Change
|
|
% Change
|
Three months ended
|
$
|
293
|
|
|
16
|
%
|
|
$
|
216
|
|
|
13
|
%
|
|
$
|
77
|
|
|
36
|
%
|
Nine months ended
|
$
|
716
|
|
|
14
|
%
|
|
$
|
493
|
|
|
12
|
%
|
|
$
|
223
|
|
|
45
|
%
|
Marketing and sales expenses increased by $77 million, or 36 percent, and $223 million, or 45 percent, during the three and nine months ended December 31, 2021, as compared to the three and nine months ended December 31, 2020, respectively. These increases were primarily due to an increase in advertising and promotional spending primarily on our mobile titles, FIFA 22, and Battlefield 2042.
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, related overhead costs, fees for professional services such as legal and accounting, and allowances for doubtful accounts.
General and administrative expenses for the three and nine months ended December 31, 2021 and 2020 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2021
|
|
% of Net
Revenue
|
|
December 31,
2020
|
|
% of Net
Revenue
|
|
$ Change
|
|
% Change
|
Three months ended
|
$
|
163
|
|
|
9
|
%
|
|
$
|
149
|
|
|
9
|
%
|
|
$
|
14
|
|
|
9
|
%
|
Nine months ended
|
$
|
508
|
|
|
10
|
%
|
|
$
|
418
|
|
|
10
|
%
|
|
$
|
90
|
|
|
22
|
%
|
General and administrative expenses increased by $14 million, or 9 percent, during the three months ended December 31, 2021, as compared to the three months ended December 31, 2020. This increase was primarily due to a $6 million increase in personnel-related costs primarily resulting from an increase in headcount, including those resulting from acquisitions, a $4 million increase in contracted services, and a $3 million increase in stock-based compensation.
General and administrative expenses increased by $90 million, or 22 percent, during the nine months ended December 31, 2021, as compared to the nine months ended December 31, 2020. This increase was primarily due to a $29 million increase in personnel-related costs primarily resulting from an increase in headcount, including those resulting from acquisitions, a $22 million increase in acquisition-related transaction and integration costs, a $14 million increase in contracted services, and a $12 million increase in stock-based compensation.
Amortization of Intangibles
Amortization of intangibles for the three and nine months ended December 31, 2021 and 2020 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2021
|
|
% of Net
Revenue
|
|
December 31,
2020
|
|
% of Net
Revenue
|
|
$ Change
|
|
% Change
|
Three months ended
|
$
|
61
|
|
|
3
|
%
|
|
$
|
5
|
|
|
—
|
%
|
|
$
|
56
|
|
|
1,120
|
%
|
Nine months ended
|
$
|
131
|
|
|
3
|
%
|
|
$
|
16
|
|
|
—
|
%
|
|
$
|
115
|
|
|
719
|
%
|
Amortization of intangibles increased by $56 million and $115 million during the three and nine months ended December 31, 2021, as compared to the three and nine months ended December 31, 2020, respectively, due to an increase in acquired intangible assets from recent acquisitions.
Income Taxes
Provision for income taxes for the three and nine months ended December 31, 2021 and 2020 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021
|
|
Effective Tax Rate
|
|
December 31, 2020
|
|
Effective Tax Rate
|
Three months ended
|
$
|
25
|
|
|
27
|
%
|
|
$
|
34
|
|
|
14
|
%
|
Nine months ended
|
$
|
161
|
|
|
22
|
%
|
|
$
|
91
|
|
|
11
|
%
|
The provision for income taxes for the three and nine months ended December 31, 2021 is based on our projected annual effective tax rate for fiscal year 2022, 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 nine months ended December 31, 2021 was 27 percent and 22 percent, respectively, as compared to 14 percent and 11 percent, respectively, for the same period in fiscal year 2021. Our effective tax rate for the three and nine months ended December 31, 2021 was higher than prior year due to our decision to capitalize for income tax purposes certain foreign expenses which increased the taxable income in our foreign entities that is subject to U.S. tax. In accordance with our existing accounting policy, we do not establish deferred tax assets to offset this charge, but we expect future deductions of the capitalized amounts. The prior year effective tax rates included a tax benefit, net of valuation allowance, resulting from the Altera opinion. Excluding the Altera opinion, the effective tax rate for the nine months ended December 31, 2020 would have been 18 percent.
In addition, during the three months ended September 30, 2021, we completed the Codemasters intra-entity sale of intellectual property rights to our U.S. and Swiss intellectual property owners. The transaction resulted in a taxable gain. Under U.S. GAAP, any profit resulting from this intercompany transaction will be 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 the nine months ended December 31, 2021 would have been 30 percent.
Each 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. During the three and nine months ended December 31, 2021, we recognized a decrease of $6 million and an increase of $1 million of valuation allowance against our deferred tax assets primarily due to the expected alignment of the recently acquired businesses with our global operating structure.
LIQUIDITY AND CAPITAL RESOURCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
As of
December 31, 2021
|
|
As of
March 31, 2021
|
|
Increase/(Decrease)
|
Cash and cash equivalents
|
$
|
2,670
|
|
|
$
|
5,260
|
|
|
$
|
(2,590)
|
|
Short-term investments
|
346
|
|
|
1,106
|
|
|
(760)
|
|
Total
|
$
|
3,016
|
|
|
$
|
6,366
|
|
|
$
|
(3,350)
|
|
Percentage of total assets
|
22
|
%
|
|
48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31,
|
|
|
(In millions)
|
2021
|
|
2020
|
|
Change
|
Net cash provided by operating activities
|
$
|
1,455
|
|
|
$
|
1,563
|
|
|
$
|
(108)
|
|
Net cash used in investing activities
|
(2,771)
|
|
|
(61)
|
|
|
(2,710)
|
|
Net cash used in financing activities
|
(1,269)
|
|
|
(541)
|
|
|
(728)
|
|
Effect of foreign exchange on cash and cash equivalents
|
(5)
|
|
|
43
|
|
|
(48)
|
|
Net increase (decrease) in cash and cash equivalents
|
$
|
(2,590)
|
|
|
$
|
1,004
|
|
|
$
|
(3,594)
|
|
Changes in Cash Flow
Operating Activities. Net cash provided by operating activities decreased by $108 million during the nine months ended December 31, 2021, as compared to the nine months ended December 31, 2020, primarily driven by higher cash payments for income taxes, higher marketing and advertising payments, higher personnel-related payments primarily from an increase in headcount and higher variable compensation payments, and higher cash payments for royalties. These decreases were offset by higher collections due to improved performance as we executed against our strategic pillars and increased engagement with our products and services which led to growth in our business.
Investing Activities. Net cash used in investing activities increased by $2,710 million during the nine months ended December 31, 2021, as compared to the nine months ended December 31, 2020, primarily driven by payments of $3,391 million in connection with acquisitions completed during the nine months ended December 31, 2021, an $895 million decrease in proceeds from maturities and sales of short-term investments, and a $42 million increase in capital expenditures. These increases were offset by a $1,618 million decrease in the purchase of short-term investments.
Financing Activities. Net cash used in financing activities increased by $728 million during the nine months ended December 31, 2021, as compared to the nine months ended December 31, 2020, primarily driven by a $571 million increase in the repurchase and retirement of our common stock, a $96 million increase in cash dividend payments during the nine months ended December 31, 2021, and a $49 million increase in cash paid to taxing authorities in connection with withholding taxes for stock-based compensation.
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 of December 31, 2021, our short-term investments had gross unrealized gains and losses of less than $1 million, or less than 1 percent of the total in short-term investments. From time to time, we may liquidate some or all of our short-term investments to fund operational needs or other activities, such as capital expenditures, business acquisitions or stock repurchase programs.
Senior Notes
In February 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, on February 15 and August 15 of each year.
In February 2016, we issued $400 million aggregate principal amount of the 2026 Notes. The effective interest rate is 4.97% for the 2026 Notes. Interest is payable semiannually in arrears, on March 1 and September 1 of each year.
See Note 11 — 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
On August 29, 2019, we entered into a $500 million unsecured revolving credit facility (“Credit Facility”) with a syndicate of banks. The Credit Facility terminates on August 29, 2024 unless the maturity is extended in accordance with its terms. As of December 31, 2021, no amounts were outstanding under the Credit Facility. See Note 11 — 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.
Financial Condition
Our material cash requirements as of December 31, 2021 are set forth in our Note 12 — 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 2022 due to facility buildouts, which we expect to continue in fiscal year 2023. 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 debt repayment obligations of $1.9 billion, and fund our operating requirements for the next 12 months and beyond, including working capital requirements, capital expenditures, the remaining portion of our $2.6 billion share repurchase program, quarterly cash dividend,
which is currently $0.17 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 nine months ended December 31, 2021, we returned $1,120 million to stockholders through our capital return programs, repurchasing 7 million shares for approximately $975 million and $145 million through our quarterly cash dividend program which was initiated in November 2020.
During the nine months ended December 31, 2021, we also completed mergers and acquisitions activity, including the acquisitions of 100% of the equity interests of Glu and Playdemic for cash considerations of $2.0 billion and $1.4 billion, net of cash acquired, respectively, and one other immaterial acquisition.
Our foreign subsidiaries are generally subject to U.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 of December 31, 2021, approximately $1.8 billion of our cash and cash equivalents were domiciled in foreign tax jurisdictions. All of our foreign cash is available for repatriation without a material tax cost.
We have a “shelf” registration statement on Form S-3 on file with the SEC. 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 in the 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 December 31, 2021, we did not have any off-balance sheet arrangements.