The Beat

EA-Financial-Update-Banner-723x250.jpg POSTED BY EA Staff ON Jan 27, 2015

ELECTRONIC ARTS REPORTS Q3 FY15 FINANCIAL RESULTS

Q3 Net Revenue and EPS Results Exceed Guidance

Fiscal Year 2015 Net Revenue and EPS Guidance Raised

Achieved Record Cash Flow for a Calendar Year Period

REDWOOD CITY, CA – January 27, 2015 – Electronic Arts Inc. (NASDAQ: EA) today announced preliminary financial results for its third fiscal quarter ended December 31, 2014.

“Electronic Arts delivered amazing experiences to our players in Q3, from the award-winning Dragon Age: Inquisition to SimCity BuildIt to our live services for FIFA, Madden NFL and more,” said Chief Executive Officer Andrew Wilson.  “Great execution with our leading IP, new mobile hits and continued strength in our catalogue of top games and services were the foundation for an excellent performance in Q3.”

“EA has driven another quarter of record-breaking financials,” said Chief Financial Officer Blake Jorgensen.  “Our ongoing digital transformation, including live services like EA SPORTS Ultimate Team, coupled with ongoing cost discipline, enables us to deliver consistent cash flow and earnings growth.”

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

Selected Operating Highlights and Metrics:

  • Calendar year 2014 EA was the #1 publisher on PlayStation®4 and Xbox One consoles in the world, driven by the success of Dragon Age™: Inquisition, FIFA 15, NHL®15, Madden NFL 15, EA SPORTSTM UFC®, TitanfallTM, Battlefield 4TM, and FIFA 14.
  • SimCity™ BuildIt just launched in December and has already achieved 22 million downloads to date and has reached the top 5 iOS game downloads in more than 100 countries.
  • Dragon Age: Inquisition captivated fans and critics worldwide and it quickly became the most successful launch in BioWare™ history in addition to being named to more than 200 “Game of the Year” lists. The single player campaign alone has been enjoyed for more than 113 million hours.
  • Monthly active users for EA’s mobile titles averaged more than 160 million in Q3.
  • EA’s mobile sports games continue to engage players, with Madden NFL Mobile and FIFA 15 Ultimate Team™ together averaging 45% more monthly active players through Q3 compared to our previous iterations in the same period last year.

Selected Financial Highlights:

*On a non-GAAP basis

  • For the quarter, net revenue* of $1.428 billion was above our guidance of $1.275 billion. Diluted earnings per share* of $1.22 was above our guidance of $0.90.
  • On a trailing twelve month basis, EA had net revenue* of $4.337 billion of which a record $2.178 billion was digital* (more than half for the first time ever), net income* of $833 million and operating cash flow of $1.150 billion (a record for a calendar year).
  • EA raised fiscal 2015 net revenue* guidance from $4.175 billion to $4.253billion and diluted EPS* guidance from $2.05 to $2.35 per share.
  • Net revenue* for EA’s FIFA, Madden NFL and Hockey Ultimate Team services continued to grow, collectively up 82% year-over-year.
  • EA repurchased 2.5 million shares in Q3 for $97 million, pursuant to the $750 million share repurchase program initiated in May 2014.

(in millions of $, except per share amounts)

Quarter Ended 12/31/14

Quarter Ended 12/31/13

GAAP Digital Net Revenue

$541

$410

GAAP Packaged Goods and Other Net Revenue

585

398

GAAP Total Net Revenue

$1,126

$808

 

 

 

Non-GAAP Digital Net Revenue

$693

$517

Non-GAAP Packaged Goods and Other Net Revenue

735

1,055

Non-GAAP Total Net Revenue

$1,428

$1,572

 

 

 

GAAP Net Income (Loss)

$142

$(308)

Non-GAAP Net Income

388

398

GAAP Diluted Earnings/(Loss) Per Share

0.44

(1.00)

Non-GAAP Diluted Earnings Per Share

1.22

1.26

 

 

 

Operating Cash Flow

$682

$685


Trailing Twelve Month (TTM) Financial Highlights:

(in millions of $)

TTM Ended

12/31/14

TTM Ended

12/31/13

GAAP Net Revenue

$4,453

$3,661

GAAP Net Income (Loss)

847

(36)

Non-GAAP Net Revenue

4,337

4,147

Non-GAAP Net Income

833

551

 

 

 

Operating Cash Flow

$1,150

$664

Business Outlook as of January 27, 2015

 

The following forward-looking statements, as well as those made above, reflect expectations as of January 27, 2015. Electronic Arts assumes no obligation to update these statements. Results may be materially different and are affected by many factors detailed in this release and in EA’s annual and quarterly SEC filings.

Fiscal Year 2015 Expectations – Ending March 31, 2015

  • GAAP net revenue is expected to be approximately $4.485 billion.
  • Non-GAAP net revenue is expected to be approximately $4.253 billion.
  • GAAP diluted earnings per share is expected to be approximately $2.57.
  • Non-GAAP diluted earnings per share is expected to be approximately $2.35.
  • The Company estimates a share count of 324 million for purposes of calculating fiscal year 2015 GAAP diluted earnings per share and 320 million for purposes of calculating fiscal year 2015 non-GAAP diluted earnings per share. Non-GAAP shares used for computing diluted earnings per share differs from GAAP due to the inclusion of the anti-dilutive effect of the Convertible Bond Hedge.
  • Expected non-GAAP net income excludes the impact of the following items (estimate in millions) from expected GAAP net income:
Change in Deferred net revenue (online-enabled games) $ (232)
Income tax adjustments    (198)
College football settlement expenses     (5)
Amortization of debt discount      22
Acquisition-related expenses      63
Loss on licensed intellectual property commitment     122
Stock-based compensation      148
Expected Impact on Non-GAAP Net Income (net) $  (80)

 

 

 

 

 

 

 

Fourth Quarter Fiscal Year 2015 Expectations – Ending March 31, 2015

  • GAAP net revenue is expected to be approximately $1.155 billion.
  • Non-GAAP net revenue is expected to be approximately $830 million.
  • GAAP earnings per share is expected to be approximately $1.07.
  • Non-GAAP diluted earnings per share is expected to be approximately $0.22.
  • The Company estimates a share count of 329million for purposes of calculating fourth quarter fiscal year 2015 GAAP diluted earnings per share, and 322million for non-GAAP diluted earnings per share. Non-GAAP shares used for computing diluted earnings per share differs from GAAP due to the inclusion of the anti-dilutive effect of the Convertible Bond Hedge.
  • Expected non-GAAP net income excludes the impact of the following items (estimate in millions) from expected GAAP net income:
Change in deferred net revenue (online enabled games) $ (325)
Income tax adjustments       (19)
Amortization of debt discount          6
Acquisition-related expenses         16
Stock-based compensation         40
Expected Impact on Non-GAAP Net Income (net) $  (282)

 

 

 

 

 

Conference Call and Supporting Documents

Electronic Arts will host a conference call on January 27, 2015 at 2:00 pm PT (5:00 pm ET) to review its results for the third quarter ended December 31, 2014 and its outlook for the future.  During the course of the call, Electronic Arts may disclose material developments affecting its business and/or financial performance.  Listeners may access the conference call live through the following dial-in number: 888-469-0955 (domestic) or 312-470-7475 (international), using the password “EA” or via webcast at http://ir.ea.com.

EA will also post a slide presentation that accompanies the call at http://ir.ea.com.

A dial-in replay of the conference call will be provided until February 10, 2015 at 800-841-4034 (domestic) or 203-369-3360 (international). An audio webcast replay of the conference call will be available for one year at http://ir.ea.com.

Non-GAAP Financial Measures 

To supplement the Company’s unaudited condensed consolidated financial statements presented in accordance with GAAP, Electronic Arts uses certain non-GAAP measures of financial performance. The presentation of these non-GAAP financial measures is not intended to be considered in isolation from, as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP, and may be different from non-GAAP financial measures used by other companies. In addition, these non-GAAP measures have limitations in that they do not reflect all of the amounts associated with the Company’s results of operations as determined in accordance with GAAP. The non-GAAP financial measures used by Electronic Arts include: non-GAAP net revenue, non-GAAP gross profit, non-GAAP operating income (loss), non-GAAP net income (loss), non-GAAP diluted earnings (loss) per share and non-GAAP diluted shares.  These non-GAAP financial measures exclude the following items (other than Shares from Convertible Bond Hedge, which are included), as applicable in a given reporting period, from the Company’s unaudited condensed consolidated statements of operations:

  • Acquisition-related expenses
  • Amortization of debt discount
  • Change in deferred net revenue (online-enabled games)
  • College football settlement expenses
  • Income tax adjustments
  • Loss (gain) on strategic investments
  • Loss on licensed intellectual property commitment (COGS)
  • Restructuring charges
  • Shares from Convertible Bond Hedge
  • Stock-based compensation 

Electronic Arts may consider whether other significant non-recurring items that arise in the future should also be excluded in calculating the non-GAAP financial measures it uses. 

Electronic Arts believes that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding the Company’s performance by excluding certain items that may not be indicative of the Company’s core business, operating results or future outlook. Electronic Arts’ management uses, and believes that investors benefit from referring to, these non-GAAP financial measures in assessing the Company’s operating results both as a consolidated entity and at the business unit level, as well as when planning, forecasting and analyzing future periods. The Company’s management team is evaluated on the basis of non-GAAP financial measures and these measures also facilitate comparisons of the Company’s performance to prior periods.

In addition to the reasons stated above, which are generally applicable to each of the items Electronic Arts excludes from its non-GAAP financial measures, the Company believes it is appropriate to exclude certain items for the following reasons:

Acquisition-Related Expenses.  GAAP requires expenses to be recognized for various types of events associated with a business acquisition.  These events include, expensing acquired intangible assets, including acquired in-process technology, post-closing adjustments associated with changes in the estimated amount of contingent consideration to be paid in an acquisition, and the impairment of accounting goodwill created as a result of an acquisition when future events indicate there has been a decline in its value.  When analyzing the operating performance of an acquired entity, Electronic Arts’ management focuses on the total return provided by the investment (i.e., operating profit generated from the acquired entity as compared to the purchase price paid including the final amounts paid for contingent consideration) without taking into consideration any allocations made for accounting purposes.  When analyzing the operating performance of an acquisition in subsequent periods, the Company’s management excludes the GAAP impact of any adjustments to the fair value of these acquisition-related balances to its financial results. 

Amortization of Debt Discount on the Convertible Senior Notes.  Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate.  Accordingly, for GAAP purposes, we are required to amortize as a debt discount an amount equal to the fair value of the conversion option as interest expense on the Company’s $632.5 million of 0.75% convertible senior notes that were issued in a private placement in July 2011 over the term of the notes.  Electronic Arts’ management excludes the effect of this amortization in its non-GAAP financial measures.

Change in Deferred Net Revenue (Online-enabled Games).  The majority of our software games can be connected to the Internet whereby a consumer may be able to download unspecified content or updates on a when-and-if-available basis (“unspecified updates”) for use with the original game software.  In addition, we may also offer an online matchmaking service that permits consumers to play against each other via the Internet.  GAAP requires us to account for the consumer’s right to receive unspecified updates or the matchmaking service for no additional fee as a “bundled” sale, or multiple-element arrangement. Electronic Arts is not able to objectively determine the fair value of these unspecified updates or online service included in certain of its online-enabled games.  As a result, the Company recognizes the revenue from the sale of these online-enabled games on a straight-line basis over the estimated offering period.  Electronic Arts’ management excludes the impact of the change in deferred net revenue related to online-enabled games in its non-GAAP financial measures for the reasons stated above and also to facilitate an understanding of our operations because all related costs of revenue are expensed as incurred instead of deferred and recognized ratably.

College Football Settlement Expenses. During fiscal 2014, Electronic Arts recognized a $48 million charge for expected litigation settlement and license expenses related to our college football business. This expense is excluded from our non-GAAP financial measures.

Income Tax Adjustments.The Company uses a fixed, long-term projected tax rate internally to evaluate its operating performance, to forecast, plan and analyze future periods, and to assess the performance of its management team.  Prior to April 1, 2013, a 28 percent tax rate was applied to its non-GAAP financial results.  Based on a re-evaluation of its fixed, long-term projected tax rate, beginning in fiscal year 2014, the Company has applied a tax rate of 25 percent to its non-GAAP financial results.  

Loss (gain) on Strategic Investments.  From time to time, the Company makes strategic investments.  Electronic Arts’ management excludes the impact of any losses and gains on such investments from its non-GAAP financial measures.

Loss on Licensed Intellectual Property Commitment.  During the first quarter of fiscal 2015, Electronic Arts terminated its right to utilize certain intellectual property that the Company had previously licensed and we incurred a loss of $122 million on the corresponding license commitment.  This expense is excluded from our non-GAAP financial measures.

Restructuring Charges.Although Electronic Arts has engaged in various restructuring activities in the past, each has been a discrete event based on a unique set of business objectives.  Each of these restructurings has been unlike its predecessors in terms of its operational implementation, business impact and scope.  As such, the Company believes it is appropriate to exclude restructuring charges from its non-GAAP financial measures.

Shares from Convertible Bond Hedge.  In July 2011, the Company issued convertible senior notes that mature in July 2016 (the “Notes”) with an initial conversion price of approximately $31.74 per share.  When the quarterly average trading price of EA’s common stock is above $31.74 per share, the potential conversion of the Notes has a dilutive impact on the Company’s earnings per share.  At the time the Notes were issued, the Company entered into convertible note hedge transactions (the “Convertible Bond Hedge”) to offset the dilutive effect of the Notes.  The Company includes the anti-dilutive effect of the Convertible Bond Hedge in determining its non-GAAP dilutive shares.

Stock-Based Compensation.  When evaluating the performance of its individual business units, the Company does not consider stock-based compensation charges.  Likewise, the Company’s management teams exclude stock-based compensation expense from their short and long-term operating plans.  In contrast, the Company’s management teams are held accountable for cash-based compensation and such amounts are included in their operating plans.  Further, when considering the impact of equity award grants, Electronic Arts places a greater emphasis on overall shareholder dilution rather than the accounting charges associated with such grants. 

In the financial tables below, Electronic Arts has provided a reconciliation of the most comparable GAAP financial measures to non-GAAP financial measures used in this press release.

Forward-Looking Statements

Some statements set forth in this release, including the information relating to EA’s fiscal 2015 guidance information under the heading “Business Outlook,” contain forward-looking statements that are subject to change.  Statements including words such as “anticipate,” “believe,” “estimate” or “expect” and statements in the future tense are forward-looking statements.  These forward-looking statements are preliminary estimates and expectations based on current information and are subject to business and economic risks and uncertainties that could cause actual events or actual future results to differ materially from the expectations set forth in the forward-looking statements. 

Some of the factors which could cause the Company’s results to differ materially from its expectations include the following: sales of the Company’s titles; the Company’s ability to manage expenses; the competition in the interactive entertainment industry; the effectiveness of the Company’s sales and marketing programs; timely development and release of Electronic Arts’ products; the Company’s ability to realize the anticipated benefits of acquisitions; the consumer demand for, and the availability of an adequate supply of console hardware units; the Company’s ability to predict consumer preferences among competing platforms; the Company’s ability to service and support digital product offerings, including managing online security; general economic conditions; and other factors described in the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2014. 

These forward-looking statements are current as of January 27, 2015.  Electronic Arts assumes no obligation and does not intend to update these forward-looking statements.  In addition, the preliminary financial results set forth in this release are estimates based on information currently available to Electronic Arts. 

While Electronic Arts believes these estimates are meaningful, they could differ from the actual amounts that Electronic Arts ultimately reports in its Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2014.  Electronic Arts assumes no obligation and does not intend to update these estimates prior to filing its Form 10-Q for the fiscal quarter ended December 31, 2014.

About Electronic Arts

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

In fiscal year 2014, EA posted GAAP net revenue of $3.6 billion. Headquartered in Redwood City, California, EA is recognized for a portfolio of critically acclaimed, high-quality blockbuster brands such as The Sims™, Madden NFL, EA SPORTS™ FIFA, Battlefield™, Dragon Age™ and Plants vs. Zombies™. More information about EA is available at www.ea.com/news.

EA SPORTS, Ultimate Team, SimCity, BioWare, Battlefield 4, Battlefield, Battlefield Hardline, The Sims, Dragon Age, and Plants vs. Zombies are trademarks of Electronic Arts Inc. and its subsidiaries. Titanfall is a trademark of Respawn Entertainment, LLC.  UFC® is a registered trademark, trademark, trade dress or service mark owned exclusively by Zuffa, LLC and affiliated entities in the United States and other jurisdictions.  John Madden, NFL, NHL and FIFA are the property of their respective owners and used with permission. “PlayStation” is a registered trademark of Sony Computer Entertainment Inc.

For additional information, please contact:

Chris Evenden

John Reseburg

Vice President, Investor Relations

Senior Director, Corporate Communications

650-628-0255

650-628-3601

cevenden@ea.com

 

jreseburg@ea.com