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REDWOOD CITY, Calif., Aug 04, 2009 (BUSINESS WIRE) Electronic Arts Inc. (NASDAQ: ERTS) today announced preliminary financial results for its fiscal first quarter ended June 30, 2009.
Fiscal First Quarter Results (comparisons are to the quarter ended June 30, 2008)
GAAP net revenue for the quarter, which includes the impact of deferred revenue adjustments, was $644 million, as compared with $804 million for the prior year. During the quarter, EA had a net revenue deferral of $172 million related to certain online-enabled packaged goods games and digital content as compared with a net benefit of $195 million in the first quarter of the prior year.
Non-GAAP net revenue was $816 million, up 34 percent as compared with $609 million for the prior year. Sales were driven by launches of The Sims(TM) 3, EA SPORTS Active(TM), and Fight Night Round 4.
GAAP net loss for the quarter, including the impact of deferred revenue, was $234 million as compared with a net loss of $95 million for the prior year. GAAP diluted loss per share was $0.72 as compared with GAAP diluted loss per share of $0.30 for the prior year.
Non-GAAP net loss was $6 million as compared with a non-GAAP net loss of $135 million a year ago. Non-GAAP diluted loss per share was $0.02 as compared with a non-GAAP diluted loss per share of $0.42 for the prior year.
Trailing-twelve-month cash flow used in operations was $25 million as compared with cash flow generated from operations of $239 million a year ago. The Company ended the quarter with cash, cash equivalents and short-term investments of $1.8 billion.
Good execution delivered better-than-expected financial results in the first quarter, said John Riccitiello, Chief Executive Officer. We are very pleased with the success of both The Sims 3 and EA SPORTS Active.
Our Q1 performance was driven by our previously announced cost-cutting initiatives and a strong frontline slate, said Eric Brown, Chief Financial Officer. We had a solid Q1 both top and bottom line and we are focused on delivering the balance of the year.
Highlights (comparisons are to the quarter ended June 30, 2008)
* EA was the #1 publisher in North America and Europe in the June quarter. EA had four of the top-ten games in North America and Europe.
* EA launched five titles in the quarter that received a Metacritic rating of 80 or above, including: Fight Night Round 4, BOOM BLOX(TM) Bash Party, The Sims 3, Tiger Woods PGA TOUR(R) 10 and EA SPORTS Active. Calendar year-to-date, EA has nine titles rated at 80 or above.
* Four titles won Best of E3 awards: Mass Effect(TM) 2 won Best RPG; Fight Night Round 4 won Best Sports Game; Star Wars(R): The Old Republic(TM) won Best PC Game; Left 4 Dead 2 won Best Online Multiplayer.
* The Sims 3 was the #1 selling title at retail in Europe and North America combined for the quarter.
* EA SPORTS Active sold over 1.8 million copies in the quarter making it EAs best-selling Wii title ever.
* EAs Wii share hit a record 21 percent in North America and was 13 percent in Europe driven by EA SPORTS Active, Tiger Woods PGA TOUR 10, EA SPORTS Grand Slam(R) Tennis and Rock Band(R) 2 in partnership with MTV Games.
* EA Digital non-GAAP revenue $124 million up 38 percent year-over-year.
* EA Mobile(TM), the worlds leading publisher of games for phones, delivered $50 million of non-GAAP revenue in the quarter up 14 percent year-over-year.
* EA acquired J2Play, a leading social gaming company.
Business Outlook
The following forward-looking statements, as well as those made above, reflect expectations as of August 4, 2009. Results may be materially different and are affected by many factors, including: development delays on EAs products; competition in the industry; the health of the economy in the U.S. and abroad and the related impact on discretionary consumer spending; changes in anticipated costs; expected savings and impact on EAs operations of the Companys cost reduction plan; consumer demand for console hardware and the ability of the console manufacturers to produce an adequate supply of consoles to meet that demand; changes in foreign exchange rates; the financial impact of potential future acquisitions by EA; the popular appeal of EAs products; EAs effective tax rate; and other factors detailed in this release and in EAs annual and quarterly SEC filings.
Fiscal Year Expectations Ending March 31, 2010
* GAAP net revenue is expected to be between $3.7 and $3.85 billion consistent with the Companys previously provided guidance.
* Non-GAAP net revenue is expected to be approximately $4.3 billion consistent with the Companys previously provided guidance.
* GAAP diluted loss per share is expected to be between $0.85 and $1.35 adjusted from the Companys previously provided guidance of $0.85 and $1.45.
* Non-GAAP diluted earnings per share are expected to be approximately $1.00 consistent with the Companys previously provided guidance.
* For purposes of calculating fiscal year 2010 GAAP loss per share, the Company estimates a share count of 323 million and for non-GAAP EPS, the Company estimates a share count of 325 million.
* Expected non-GAAP net income excludes the following items from expected GAAP net income:
* $450 to $600 million for the impact of the change in deferred net revenue (packaged goods and digital content),
* $210 million of estimated stock-based compensation,
* $55 million of amortization of intangible assets,
* $25 to $35 million of restructuring charges,
* $14M loss on lease termination and facilities acquisition, and
* ($152) million in the difference between the Companys GAAP and non-GAAP tax expenses.
Conference Call
Electronic Arts will host a conference call today at 2:00 pm PT (5:00 pm ET) to review its results for the fiscal first quarter ended June 30, 2009 and its outlook for the future. During the course of the call, Electronic Arts may also disclose material developments affecting its business and/or financial performance. Listeners may access the conference call live through the following dial-in number: (877) 627-6511, access code 220497, or via webcast: http://investor.ea.com.
A dial-in replay of the conference call will be provided until August 11, 2009 at (719) 457-0820, access code 220497. A webcast archive of the conference call will be available for one year at http://investor.ea.com.
*Non-GAAP Financial Measures
To supplement the Companys 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 Companys 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) and historical and estimated non-GAAP diluted earnings (loss) per share. These non-GAAP financial measures exclude the following items, as applicable in a given reporting period, from the Companys unaudited condensed consolidated statements of operations:
* Acquired in-process technology
* Amortization of intangibles
* Certain abandoned acquisition-related costs
* Change in deferred net revenue (packaged goods and digital content)
* Goodwill impairment
* Income tax adjustments
* Losses (gains) on strategic investments
* Loss on lease termination and facilities acquisition
* Loss on licensed intellectual property commitment
* Restructuring charges
* 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 Companys performance by excluding certain items that may not be indicative of the Companys 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 Companys operating results both as a consolidated entity and at the business unit level, as well as when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate comparisons of the Companys 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:
Amortization of Intangibles. 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) without taking into consideration any allocations made for accounting purposes. Because the purchase price for an acquisition necessarily reflects the accounting value assigned to intangible assets (including acquired in-process technology and goodwill), when analyzing the operating performance of an acquisition in subsequent periods, the Companys management excludes the GAAP impact of acquired intangible assets to its financial results. Electronic Arts believes that such an approach is useful in understanding the long-term return provided by an acquisition and that investors benefit from a supplemental non-GAAP financial measure that excludes the accounting expense associated with acquired intangible assets.
In addition, in accordance with GAAP, Electronic Arts generally recognizes expenses for internally-developed intangible assets as they are incurred, notwithstanding the potential future benefit such assets may provide. Unlike internally-developed intangible assets, however, and also in accordance with GAAP, the Company generally capitalizes the cost of acquired intangible assets and recognizes that cost as an expense over the useful lives of the assets acquired (other than goodwill, which is not amortized, and acquired in-process technology, which is expensed immediately, as required under GAAP). As a result of their GAAP treatment, there is an inherent lack of comparability between the financial performance of internally-developed intangible assets and acquired intangible assets. Accordingly, Electronic Arts believes it is useful to provide, as a supplement to its GAAP operating results, a non-GAAP financial measure that excludes the amortization of acquired intangibles.
Certain Abandoned Acquisition-Related Costs. Electronic Arts incurred significant legal, banking and other consulting fees related to the Companys proposed acquisition and related cash tender offer for all of the outstanding shares of Take-Two Interactive Software, Inc.On August 18, 2008, the Company allowed the tender offer to expire without purchasing any shares of Take-Two and, on September 14, 2008, the Company announced that it had terminated discussions with Take-Two. The costs incurred in connection with the abandoned proposal and tender offer were outside the ordinary course of business and were excluded by the Company when assessing the performance of its management team. As such, the Company believes it is appropriate to exclude such expenses from its non-GAAP financial measures.
Change in Deferred Net Revenue (Packaged Goods and Digital Content). Electronic Arts is not able to objectively determine the fair value of the online service included in certain of its packaged goods games and online content. As a result, the Company recognizes the revenue from the sale of these games and content over the estimated online service period. In other transactions, at the date we sell the software product we have an obligation to provide incremental unspecified digital content in the future without an additional fee. In these cases, we account for the sale of the software product as a multiple element arrangement and recognize the revenue on a straight-line basis over the estimated life of the game. Internally, Electronic Arts management excludes the impact of the change in deferred net revenue related to packaged goods games and digital content in its non-GAAP financial measures when evaluating the Companys operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of its management team. The Company believes that excluding the impact of the change in deferred net revenue from its operating results is important to (1) facilitate comparisons to prior periods during which the Company was able to objectively determine the fair value of the online service and not delay the recognition of significant amounts of net revenue related to online-enabled packaged goods and (2) understanding our operations because all related costs are expensed as incurred instead of deferred and recognized ratably.
Goodwill Impairment. Adverse economic conditions, including the decline in the Companys market capitalization and expected financial performance, indicated that a potential impairment of goodwill existed during the three months ended December 31, 2008. As a result, the Company performed goodwill impairment tests for its reporting units in accordance with SFAS No. 142, Goodwill and Other Intangible Assets and determined that goodwill related to its mobile reporting unit was impaired. As the Company excludes the GAAP impact of acquired intangible assets (such as goodwill) from its financial results when analyzing the operating performance of an acquisition in subsequent periods, Electronic Arts believes it is appropriate to exclude goodwill impairment charges from its non-GAAP financial measures.
Income taxes adjustments. The Company uses a fixed, long-term projected tax rate of 28 percent internally to evaluate its operating performance, to forecast, plan and analyze future periods, and to assess the performance of its management team. Accordingly, the Company has applied the same 28 percent tax rate to its non-GAAP financial results.
Losses (Gains) 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 when evaluating the Companys operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of its management team. In addition, the Company believes that excluding the impact of such losses and gains on these investments from its operating results is important to facilitate comparisons to prior periods.
Loss on Lease Termination and Facilities Acquisition. During the second quarter of fiscal 2010, Electronic Arts completed the acquisition of its headquarters facilities in Redwood City, California pursuant to the terms of the loan financing agreements underlying the build-to-suit leases for the facilities. EA exercised its option to purchase the facilities concurrent with the maturity of those financing arrangements, which were extinguished by payment of the purchase price. The aggregate purchase price of the facilities was approximately $247 million in cash, which reflects the amount financed by the lessor under the leases. Electronic Arts expects to recognize in the second quarter of fiscal 2010 a pre-tax loss associated with this acquisition as the estimated fair value of the facilities is less than the $247 million purchase price by approximately $14 million. In addition, Electronic Arts will reduce its income tax valuation allowance by $35 to $40 million as a result of this lease termination and facility acquisition such that on an after-tax basis, Electronic Arts will incur a positive net income effect of $21 to $26 million from this transaction. Electronic Arts management will exclude the effect of this transaction when evaluating the Companys operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of its management team.
Loss on Licensed Intellectual Property Commitment. During the fourth quarter of fiscal 2009, Electronic Arts amended an agreement with a content licensor. This amendment resulted in the termination of our rights to use the licensors intellectual property in certain products and we incurred a related loss of $38 million. This significant non-recurring loss is excluded from our Non-GAAP financial measures in order to provide comparability between periods. Further, the Company excluded this loss when evaluating its operating performance and the performance of its management team during this period and will continue to do so when it plans, forecasts and analyzes future periods.
Restructuring Charges. Although Electronic Arts has engaged in various restructuring activities in the past, each has been a discrete, extraordinary 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. The Company does not engage in restructuring activities on a regular basis or in the ordinary course of business. As such, the Company believes it is appropriate to exclude restructuring charges from its non-GAAP financial measures.
Stock-Based Compensation. Electronic Arts adopted SFAS 123(R), Share-Based Payment beginning in its fiscal year 2007. When evaluating the performance of its individual business units, the Company does not consider stock-based compensation charges. Likewise, the Companys management teams exclude stock-based compensation expense from their short and long-term operating plans. In contrast, the Companys 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.
Video game platforms have historically had a life cycle of four to six years, which causes the video game software market to be cyclical. The Companys management analyzes its business and operating performance in the context of these business cycles, comparing Electronic Arts performance at similar stages of different cycles. For comparability purposes, Electronic Arts believes it is useful to provide a non-GAAP financial measure that excludes stock-based compensation in order to better understand the long-term performance of its core business.
In the financial tables below, Electronic Arts has provided a reconciliation of the most comparable GAAP financial measure to the historical non-GAAP financial measures used in this press release.
Forward-Looking Statements
Some statements set forth in this release, including the estimates relating to EAs fiscal year 2010 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 Companys results to differ materially from its expectations include the following: sales of the Companys titles during fiscal year 2010; the general health of the U.S. and global economy and the related impact on discretionary consumer spending; fluctuations in foreign exchange rates; consumer spending trends; the Companys ability to manage expenses; the competition in the interactive entertainment industry; the effectiveness of the Companys sales and marketing programs; timely development and release of Electronic Arts products; the consumer demand for, and the availability of an adequate supply of console hardware units (including the Xbox 360(R) video game and entertainment system, the PLAYSTATION(R)3 computer entertainment system and the Wii(TM)); consumer demand for software for the PlayStation(R)2; the Companys ability to predict consumer preferences among competing hardware platforms; the financial impact of potential future acquisitions by EA; the Companys ability to realize the anticipated benefits of acquisitions; the seasonal and cyclical nature of the interactive game segment; the Companys ability to attract and retain key personnel; changes in the Companys effective tax rates; the performance of strategic investments; the impact of certain accounting requirements, such as the Companys ability to estimate and recognize goodwill impairment charges and make tax valuation allowances; adoption of new accounting regulations and standards; potential regulation of the Companys products in key territories; developments in the law regarding protection of the Companys products; the Companys ability to secure licenses to valuable entertainment properties on favorable terms; the stability of the Companys key customers, and other factors described in the Companys Annual Report on Form 10-K for the fiscal year ended March 31, 2009. These forward-looking statements speak only as of August 4, 2009. 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, 2009. 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, 2009.
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