Electronic Arts Inc. (NASDAQ: EA) today announced preliminary financial results for its first fiscal quarter ended June 30, 2017.

“Q1 was an outstanding quarter, with thriving player communities in our top franchises like Battlefield, our EA SPORTS portfolio, Star Wars, and The Sims continuing to grow our network and drive our digital business,” said Chief Executive Officer Andrew Wilson. “We have built strong momentum, and now we are accelerating into a year of tremendous innovation, where extraordinary new games, content-rich live services, and expanding global competitions will deliver more fun for our players and fuel growth for Electronic Arts.”

“We had a great start to the fiscal year, primarily due to our event-driven live services,” said Chief Financial Officer Blake Jorgensen. “Our operating cash flow was the highest ever for a first quarter, and underlines how live services have fundamentally transformed our business model. Driven by innovation and live services, we expect to continue to grow our profitability and cash generation.”

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

Selected Operating Highlights and Metrics:

  • Digital net sales* of $3.147 billion for the trailing-twelve-month period represents 63% of total net sales, up 23% year-over-year.
  • Ultimate TeamTM total unique player population grew 11% year-over-year.
  • BattlefieldTM 1 had more than 21 million players joining the game as of quarter end.
  • Monthly active players for The SimsTM 4 on PC increased more than 20% year-over-year.
  • FIFA Mobile unique player base grew to more than 95 million.
  • Since launching its first season, NBA LIVE Mobile has engaged more than 70 million unique users.

* Net sales is defined as the net amount of products and services sold digitally or sold-in physically in the period.

Selected Financial Highlights and Metrics:

All financial measures are presented on a GAAP basis.

  • Net cash provided by operating activities was $176 million, a record for the first fiscal quarter.
  • Net cash provided by operating activities for the trailing-twelve-months was a record $1.872 billion.
  • In Q1, EA repurchased 1.4 million shares for $150 million.
   

Quarterly Financial Highlights:

(in $ millions, except per share amounts)
Three Months Ended June 30,
2017 2016
 
Digital net revenue 879 689
Packaged goods and other net revenue 570 582
Total net revenue 1,449 1,271
 
Net income 644 440
Diluted earnings per share 2.06 1.40
 
Operating cash flow 176 (118)*
 
Value of shares repurchased 150 129
Number of shares repurchased 1.4 1.9

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

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

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

Statement of
Operations

Acquisition-
related
expenses

Change in
deferred net
revenue
(online-
enabled
games)

Stock-based
compensation

Net revenue 1,449 - (674 ) -
Cost of revenue 154 -   -   (1 )
Gross profit 1,295 - (674 ) 1
Total operating expenses 552 (1 ) -   (47 )
Operating income 743 1 (674 ) 48
Interest and other income (expense), net 6 -   -   -  
Income before provision for income taxes 749 1 (674 ) 48
Number of shares used in computation
Diluted 313
 

For more information about the nature of the GAAP-based financial data, please refer to EA’s Form 10-K for the fiscal year ended March 31, 2017.

Business Outlook as of July 27, 2017

The following forward-looking statements reflect expectations as of July 27, 2017. Electronic Arts assumes no obligation to update these statements. Results may be materially different and are affected by many factors detailed in this release and in EA’s annual and quarterly SEC filings.

Fiscal Year 2018 Expectations – Ending March 31, 2018

Financial metrics:

  • Net revenue is expected to be approximately $5.075 billion.
    • Change in deferred net revenue (online-enabled games) is expected to be approximately $25 million.
  • Net income is expected to be approximately $1.125 billion.
  • Diluted earnings per share is expected to be approximately $3.57.
  • Operating cash flow, reflecting the recently adopted accounting standard related to stock-based compensation discussed below, is expected to be approximately $1.575 billion.
  • The Company estimates a share count of 315 million for purposes of calculating fiscal year 2018 diluted earnings per share.

Operational metric:

  • Net sales is expected to be approximately $5.100 billion.

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

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

GAAP
Guidance

Acquisition-
related
expenses

  

Change in
deferred net
revenue
(online-
enabled
games)

  

Stock-based
compensation

(in $ millions)
Digital net revenue 3,295 - 80 -
Packaged goods & other net revenue   1,780   -     (55 )   -  
Total net revenue   5,075   -     25     -  
Cost of revenue 1,276 - - (1 )
Operating expense 2,420 (6 ) - (239 )
Income before provision for income taxes 1,364 6 25 240
Net income 1,125
Number of shares used in computation
Diluted shares 315
 

Second Quarter Fiscal Year 2018 Expectations – Ending September 30, 2017

Financial metrics:

  • Net revenue is expected to be approximately $955 million.
    • Change in deferred net revenue (online-enabled games) is expected to be approximately $205 million.
  • Net loss is expected to be approximately ($57) million.
  • Loss per share is expected to be approximately ($0.18).
  • The Company estimates a GAAP basic and diluted share count of 310 million shares due to a forecasted net loss. If the Company reports net income instead of a net loss, diluted share count for calculating diluted earnings per share would be 314 million shares.

Operational metric:

  • Net sales is expected to be approximately $1.160 billion.

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

 
Three Months Ending September 30, 2017
  GAAP-Based Financial Data

GAAP
Guidance

Acquisition-
related
expenses

  

Change in
deferred net
revenue
(online-
enabled
games)

  

Stock-based
compensation

(in $ millions)                
Total net revenue   955     -     205   -  
Cost of revenue 389 - - -
Operating expense 638 (2 ) - (61 )
Income/(loss) before provision for income taxes (69 ) 2 205 61
Net income/(loss) (57 )
Number of shares used in computation
Basic shares 310

Impact of Recently Adopted Accounting Standard

At the beginning of fiscal 2018, EA adopted FASB ASU 2016-09, related to stock-based compensation. In the first quarter of fiscal 2018, we recorded a $39 million benefit to income tax expense that would have been recognized in additional paid-in capital under rules in effect prior to adoption.

This pronouncement also requires EA to change how it reports the cash effects of stock-based compensation in the Consolidated Statement of Cash Flow. It does not impact total cash and cash flow, but it does increase operating cash flow and decrease cash flow from financing activities. The following table reflects the impact of this standard on operating cash flow for the periods presented:

   
Three Months Ended June 30,
(in $ millions) 2017 2016
Operating cash flow under historical GAAP 42 (248 )
 
Operating cash flow under ASU 2016-09 176 (118 )
Impact of ASU 2016-09 on operating cash flow 134 130
 

Conference Call and Supporting Documents

Electronic Arts will host a conference call on July 27, 2017 at 2:00 pm PT (5:00 pm ET) to review its results for the first fiscal quarter ended June 30, 2017 and its outlook for the future. During the course of the call, Electronic Arts may disclose material developments affecting its business and/or financial performance. Listeners may access the conference call live through the following dial-in number 844-215-4106 (domestic) or 918-534-8313 (international), using the password “EA” or via webcast at EA’s IR Website at http://ir.ea.com.

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

A dial-in replay of the conference call will be available until August 9, 2017 at 855-859-2056 (domestic) or 404-537-3406 (international) using pin code 90758729. An audio webcast replay of the conference call will be available for one year on EA’s IR Website.

Forward-Looking Statements

Some statements set forth in this release, including the information relating to EA’s fiscal 2018 expectations under the heading “Business Outlook as of July 27, 2017,” contain forward-looking statements that are subject to change. Statements including words such as “anticipate,” “believe,” “estimate” or “expect” and statements in the future tense are forward-looking statements. These forward-looking statements are preliminary estimates and expectations based on current information and are subject to business and economic risks and uncertainties that could cause actual events or actual future results to differ materially from the expectations set forth in the forward-looking statements.

Some of the factors which could cause the Company’s results to differ materially from its expectations include the following: sales of the Company’s titles; the Company’s ability to develop and support digital products and services, including managing online security and privacy; the Company’s ability to manage expenses; the competition in the interactive entertainment industry; the effectiveness of the Company’s sales and marketing programs; timely development and release of Electronic Arts’ products; the Company’s ability to realize the anticipated benefits of acquisitions; the consumer demand for, and the availability of an adequate supply of console hardware units; the Company’s ability to predict consumer preferences among competing platforms; the Company’s ability to develop and implement new technology; foreign currency exchange rate fluctuations; general economic conditions; and other factors described in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2017.

These forward-looking statements are current as of July 27, 2017. Electronic Arts assumes no obligation and does not intend to update these forward-looking statements. In addition, the preliminary financial results set forth in this release are estimates based on information currently available to Electronic Arts.

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

About Electronic Arts

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

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

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

 
ELECTRONIC ARTS INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statement of Operations
(in $ millions, except share per data)
   
Three Months Ended June 30,
2017   2016
Net revenue
Product 828 684
Service and other 621   587  
Total net revenue 1,449 1,271
Cost of revenue
Product 64 90
Service and other 90   89  
Total cost of revenue 154   179  
Gross profit 1,295 1,092
Operating expenses:
Research and development 325 294
Marketing and sales 121 128
General and administrative 105 108
Amortization of intangibles 1   2  
Total operating expenses 552   532  
Operating income 743 560
Interest and other income (expense), net 6   (8 )
Income before provision for income taxes 749 552
Provision for income taxes 105   112  
Net income 644   440  
Earnings per share
Basic 2.08 1.46
Diluted 2.06 1.40
Number of shares used in computation
Basic 309 301
Diluted 313 315
 

Results (in $ millions, except per share data)

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

 
    Three Months Ended June 30,
2017     2017   2016
Guidance Variance

 Actuals 

 Actuals 

Net revenue
Net revenue 1,425 24 1,449 1,271
GAAP-based financial data
Change in deferred net revenue (online-enabled games) (675 ) 1 (674 ) (589 )
Cost of revenue
Cost of revenue 157 (3 ) 154 179
GAAP-based financial data
Acquisition-related expenses — — — (13 )
Stock-based compensation — (1 ) (1 ) (1 )
Operating expenses
Operating expenses 546 6 552 532
GAAP-based financial data
Acquisition-related expenses (1 ) — (1 ) (2 )
Stock-based compensation (50 ) 3 (47 ) (47 )
Income before tax
Income before tax 724 25 749 552
GAAP-based financial data
Acquisition-related expenses 1 — 1 15
Amortization of debt discount and loss on conversion of notes — — — 2
Change in deferred net revenue (online-enabled games) (675 ) 1 (674 ) (589 )
Stock-based compensation 50 (2 ) 48 48
Tax rate used for management reporting 21 % 21 % 21 %
Earnings per share
Basic 1.95 0.13 2.08 1.46
Diluted 1.93 0.13 2.06 1.40
Number of shares
Basic 310 (1 ) 309 301
Diluted 314 (1 ) 313 315
 
 
ELECTRONIC ARTS INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(in $ millions)
     
June 30, 2017

March 31, 20171

ASSETS
Current assets:
Cash and cash equivalents 2,248 2,565
Short-term investments 2,222 1,967
Receivables, net of allowances of $136 and $145, respectively 222 359
Other current assets 210   308  
Total current assets 4,902 5,199
Property and equipment, net 436 434
Goodwill 1,708 1,707
Acquisition-related intangibles, net 7 8
Deferred income taxes, net 232 286
Other assets 90   84  
TOTAL ASSETS 7,375   7,718  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable 38 87
Accrued and other current liabilities 709 789
Deferred net revenue (online-enabled games) 882   1,539  
Total current liabilities 1,629 2,415
Senior notes, net 991 990
Income tax obligations 114 104
Deferred income taxes, net 1 1
Other liabilities 154   148  
Total liabilities 2,889 3,658
 
Stockholders’ equity:
Common stock 3 3
Additional paid-in capital 891 1,049
Retained earnings 3,663 3,027
Accumulated other comprehensive loss (71 ) (19 )
Total stockholders’ equity 4,486   4,060  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY 7,375   7,718  
 

1Derived from audited consolidated financial statements.

 
 
ELECTRONIC ARTS INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(in $ millions)
     
Three Months Ended

June 30,

2017

20162

OPERATING ACTIVITIES
Net income 644 440
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, amortization and accretion 31 46
Stock-based compensation 48 48
Change in assets and liabilities
Receivables, net 135 (12 )
Other assets 80 6
Accounts payable (44 ) (32 )
Accrued and other liabilities (116 ) (72 )
Deferred income taxes, net 55 43
Deferred net revenue (online-enabled games) (657 ) (585 )
Net cash provided by (used in) operating activities 176   (118 )
INVESTING ACTIVITIES
Capital expenditures (33 ) (40 )
Proceeds from maturities and sales of short-term investments 438 276
Purchase of short-term investments (693 ) (317 )
Net cash used in investing activities (288 ) (81 )
FINANCING ACTIVITIES
Payment of convertible notes — (27 )
Proceeds from issuance of common stock 30 4
Cash paid to taxing authorities for shares withheld from employees (95 ) (97 )
Repurchase and retirement of common stock (150 ) (129 )
Net cash used in financing activities (215 ) (249 )
Effect of foreign exchange on cash and cash equivalents 10   (3 )
Decrease in cash and cash equivalents (317 ) (451 )
Beginning cash and cash equivalents 2,565   2,493  
Ending cash and cash equivalents 2,248   2,042  
 

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

 
 
ELECTRONIC ARTS INC. AND SUBSIDIARIES
Unaudited Supplemental Financial Information and Business Metrics
(in $ millions, except per share data)
             
Q1 Q2 Q3 Q4 Q1 YOY %
FY17 FY17 FY17 FY17 FY18 Change
Net revenue
Net revenue 1,271 898 1,149 1,527 1,44914%
GAAP-based financial data
Change in deferred net revenue (online-enabled games)3 (589 ) 200 921 (435 ) (674 )
Gross profit
Gross profit 1,092 497 633 1,325 1,29519%
GAAP-based financial data
Acquisition-related expenses 13 12 18 — —
Change in deferred net revenue (online-enabled games)3 (589 ) 200 921 (435 ) (674 )
Stock-based compensation 1 1 — 1 1
Gross profit (as a % of net revenue) 86 % 55 % 55 % 87 % 89 %

Operating income (loss)

Operating income (loss)

560 (49 ) (4 ) 717 74333%
GAAP-based financial data
Acquisition-related expenses 15 13 20 1 1
Change in deferred net revenue (online-enabled games)3 (589 ) 200 921 (435 ) (674 )
Stock-based compensation 48 48 48 52 48
Operating income (loss) (as a % of net revenue) 44 % (5 %) — 47 % 51 %
Net income (loss)
Net income (loss) 440 (38 ) (1 ) 566 64446%
GAAP-based financial data
Acquisition-related expenses 15 13 20 1 1
Amortization of debt discount and loss on conversion of notes 2 — — — —
Change in deferred net revenue (online-enabled games)3 (589 ) 200 921 (435 ) (674 )
Stock-based compensation 48 48 48 52 48
Tax rate used for management reporting 21 % 21 % 21 % 21 % 21 %
Net income (loss) (as a % of net revenue) 35 % (4 %) — 37 % 44 %
Diluted earnings (loss) per share 1.40 (0.13 ) (0.00 ) 1.81 2.0647%
Number of diluted shares used in computation
Basic 301 301 303 308 309
Diluted 315 301 303 312 313
Anti-dilutive shares excluded for loss position4 — 13 10 — —
Shares from convertible bond hedge (2 ) — — — —
 
3The difference between the balances of deferred net revenue (online-enabled games) does not necessarily equal the change in deferred net revenue (online-enabled games) in the unaudited condensed consolidated statements of cash flows due to the impact of unrecognized gains/losses on cash flow hedges.
 
4Diluted earnings per share reflects the potential dilution from common shares (calculated using the treasury stock method), issuable through stock-based compensation plans. When the company incurs a loss, shares issuable through stock-based compensation plans are excluded from the diluted loss per share calculation as inclusion would be anti-dilutive.
 
 
ELECTRONIC ARTS INC. AND SUBSIDIARIES
Unaudited Supplemental Financial Information and Business Metrics
(in $ millions)
             
Q1 Q2 Q3 Q4 Q1 YOY %
FY17

 FY17 

FY17 FY17 FY18 Change
QUARTERLY NET REVENUE PRESENTATIONS
Net revenue by geography
North America 525 389 561 644 611 16 %
International 746   509   588   883   838   12 %
Total net revenue 1,271   898   1,149   1,527   1,449   14%
North America (245 ) 58 370 (198 ) (287 )
International (344 ) 142   551   (237 ) (387 )
Change in deferred net revenue (online-enabled games)3 (589 ) 200   921   (435 ) (674 )
North America 41 % 43 % 49 % 42 % 42 %
International 59 % 57 % 51 % 58 % 58 %
Total net revenue %100%100%100%100%100%
 
Net revenue by composition
Full game downloads 137 94 169 259 209 53 %
Live services5 387 323 369 510 501 29 %
Mobile 165   149   147   165   169   2 %
Total digital 689   566   685   934   879   28 %
Packaged goods and other 582   332   464   593   570   (2 %)
Total net revenue 1,271   898   1,149   1,527   1,449   14%
Full game downloads (53 ) (1 ) 186 (67 ) (98 )
Live services5 (44 ) (68 ) 197 8 (81 )
Mobile (24 ) (11 ) 27   10   (19 )
Total digital (121 ) (80 ) 410   (49 ) (198 )
Packaged goods and other (468 ) 280   511   (386 ) (476 )
Change in deferred net revenue (online-enabled games)3 (589 ) 200   921   (435 ) (674 )
Full game downloads 11 % 10 % 15 % 17 % 14 %
Live services5 30 % 36 % 32 % 33 % 35 %
Mobile 13 % 17 % 13 % 11 % 12 %
Total digital 54 % 63 % 60 % 61 % 61 %
Packaged goods and other 46 % 37 % 40 % 39 % 39 %
Total net revenue %100%100%100%100%100%
 
3The difference between the balances of deferred net revenue (online-enabled games) does not necessarily equal the change in deferred net revenue (online-enabled games) in the unaudited condensed consolidated statements of cash flows due to the impact of unrecognized gains/losses on cash flow hedges.
 
5Live services includes net revenue previously presented as “Extra Content” and “Subscriptions, Advertising and Other” through Q4 FY17.
 
 
ELECTRONIC ARTS INC. AND SUBSIDIARIES
Unaudited Supplemental Financial Information and Business Metrics
(in $ millions)
             
Q1 Q2 Q3 Q4 Q1 YOY %
FY17

 FY17 

FY17 FY17 FY18 Change
QUARTERLY NET REVENUE PRESENTATIONS
Net revenue by platform
Xbox One, PLAYSTATION 4 776 513 728 1,039 974 26 %
Other consoles 134   65   65   70   60   (55 %)
Total consoles 910 578 793 1,109 1,034 14 %
PC / Browser 179 158 190 246 240 34 %
Mobile 165 149 148 165 171 4 %
Other 17   13   18   7   4   (76 %)
Total net revenue 1,271   898   1,149   1,527   1,449   14%
Xbox One, PLAYSTATION 4 (441 ) 177 762 (375 ) (548 )
Other consoles (92 ) 43   3   (40 ) (42 )
Total consoles (533 ) 220 765 (415 ) (590 )
PC / Browser (30 ) (9 ) 127 (30 ) (61 )
Mobile (24 ) (11 ) 27 9 (20 )
Other (2 ) —   2   1   (3 )
Change in deferred net revenue (online-enabled games)3 (589 ) 200   921   (435 ) (674 )
Xbox One, PLAYSTATION 4 61 % 57 % 63 % 68 % 67 %
Other consoles 11 % 7 % 6 % 5 % 4 %
Total consoles 72 % 64 % 69 % 73 % 71 %
PC / Browser 14 % 18 % 17 % 16 % 17 %
Mobile 13 % 17 % 13 % 11 % 12 %
Other 1 % 1 % 1 % —   —  
Total net revenue %100%100%100%100%100%
 
3The difference between the balances of deferred net revenue (online-enabled games) does not necessarily equal the change in deferred net revenue (online-enabled games) in the unaudited condensed consolidated statements of cash flows due to the impact of unrecognized gains/losses on cash flow hedges.
 
 
ELECTRONIC ARTS INC. AND SUBSIDIARIES
Unaudited Supplemental Financial Information and Business Metrics
(in $ millions)
   
Q1   Q2   Q3   Q4   Q1   YOY %
FY17 FY17 FY17 FY17 FY18 Change
CASH FLOW DATA

Operating cash flow6

 (118 ) 122 1,137 437 176 249 %

Operating cash flow6 - TTM

1,248 1,323 1,555 1,578 1,872 50 %
Capital expenditures 40 29 25 29 33 (18 %)
Capital expenditures - TTM 109 120 124 123 116 6 %
Repurchase and retirement of common stock 129 127 127 125 150 16 %

DEPRECIATION

Depreciation expense 29 28 29 29 29 —
BALANCE SHEET DATA
Cash and cash equivalents 2,042 1,746 2,483 2,565 2,248
Short-term investments 1,385   1,520   1,736   1,967   2,222  
Cash and cash equivalents, and short-term investments 3,427 3,266 4,219 4,532 4,470 30 %
Receivables, net 246 723 587 359 222 (10 %)
STOCK-BASED COMPENSATION
Cost of revenue 1 1 — 1 1
Research and development 27 27 27 28 28
Marketing and sales 7 8 8 8 7
General and administrative 13   12   13   15   12  
Total stock-based compensation 48   48   48   52   48  
 

6Operating cash flow has been recast to reflect the impact of ASU 2016-09 which EA adopted at the beginning of FY18