Quarterly Report (10-q)

Date : 11/06/2019 @ 11:05AM
Source : Edgar (US Regulatory)
Stock : Electronic Arts Inc (EA)
Quote : 112.33  -1.15 (-1.01%) @ 1:00AM
After Hours
Last Trade
Last $ 112.33 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from   to
Commission File No. 000-17948
ELECTRONIC ARTS INC.
(Exact name of registrant as specified in its charter)
Delaware
 
94-2838567
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
209 Redwood Shores Parkway


94065
Redwood City
California
 
 
 
(Address of principal executive offices)
 
(Zip Code)
(650) 628-1500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
  
Trading Symbol
 
Name of Each Exchange on Which Registered

Common Stock, $0.01 par value
  
EA
 
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act.   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    No  
As of November 1, 2019, there were 291,978,913 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

1



ELECTRONIC ARTS INC.
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2019
Table of Contents
 
 
 
Page
 
Item 1.
 
 
3
 
4
 
5
 

6


 
7
 
8
 
31
Item 2.
32
Item 3.
49
Item 4.
51
 
 
 
 
Item 1.
52
Item 1A.
52
Item 2.
63
Item 3.
63
Item 4.
63
Item 6.
63
64
65

2



PART I – FINANCIAL INFORMATION

Item 1.
Condensed Consolidated Financial Statements (Unaudited)

ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS 
(Unaudited)
(In millions, except par value data)
September 30, 2019
 
March 31, 2019 (a)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,940

 
$
4,708

Short-term investments
1,943

 
737

Receivables, net
856

 
623

Other current assets
301

 
313

Total current assets
6,040

 
6,381

Property and equipment, net
442

 
448

Goodwill
1,890

 
1,892

Acquisition-related intangibles, net
72

 
87

Deferred income taxes, net
1,835

 
35

Other assets
314

 
114

TOTAL ASSETS
$
10,593

 
$
8,957

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
148

 
$
113

Accrued and other current liabilities
1,024

 
1,052

Deferred net revenue (online-enabled games)
646

 
1,100

Total current liabilities
1,818

 
2,265

Senior notes, net
995

 
994

Income tax obligations
361

 
233

Deferred income taxes, net
2

 
2

Other liabilities
259

 
132

Total liabilities
3,435

 
3,626

Commitments and contingencies (See Note 12)

 

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value. 1,000 shares authorized; 293 and 298 shares issued and outstanding, respectively
3

 
3

Additional paid-in capital

 

Retained earnings
7,165

 
5,358

Accumulated other comprehensive loss
(10
)
 
(30
)
Total stockholders’ equity
7,158

 
5,331

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
10,593

 
$
8,957

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
(a) Derived from audited Consolidated Financial Statements.

3



ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
Three Months Ended
September 30,
 
Six Months Ended
September 30,
(In millions, except per share data)
2019

2018
 
2019
 
2018
Net revenue:
 
 
 
 
 
 
 
Product
$
568

 
$
623

 
$
734

 
$
825

Service and other
780

 
663

 
1,823

 
1,598

Total net revenue
1,348

 
1,286

 
2,557

 
2,423

Cost of revenue:
 
 
 
 
 
 
 
Product
193

 
222

 
228

 
290

Service and other
212

 
196

 
364

 
343

Total cost of revenue
405

 
418

 
592

 
633

Gross profit
943

 
868

 
1,965

 
1,790

Operating expenses:
 
 
 
 
 
 
 
Research and development
387

 
339

 
768

 
701

Marketing and sales
152

 
146

 
262

 
286

General and administrative
128

 
117

 
238

 
231

Acquisition-related contingent consideration
2

 
2

 
3

 
2

Amortization of intangibles
6

 
6

 
11

 
12

Total operating expenses
675

 
610

 
1,282

 
1,232

Operating income
268

 
258

 
683

 
558

Interest and other income (expense), net
16

 
18

 
37

 
37

Income before provision for (benefit from) income taxes
284

 
276

 
720

 
595

Provision for (benefit from) income taxes
(570
)
 
21

 
(1,555
)
 
47

Net income
$
854

 
$
255

 
$
2,275

 
$
548

Earnings per share:
 
 
 
 
 
 
 
Basic
$
2.89

 
$
0.84

 
$
7.69

 
$
1.80

Diluted
$
2.89

 
$
0.83

 
$
7.66

 
$
1.77

Number of shares used in computation:
 
 
 
 
 
 
 
Basic
295

 
305

 
296

 
305

Diluted
296

 
307

 
297

 
309

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).


4



ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)
Three Months Ended
September 30,
 
Six Months Ended
September 30,
(In millions)
2019
 
2018
 
2019
 
2018
Net income
$
854

 
$
255

 
$
2,275

 
$
548

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Net gains on available-for-sale securities

 
1

 
3

 
1

Net gains on derivative instruments
16

 
3

 
25

 
96

Foreign currency translation adjustments
(9
)
 
3

 
(8
)
 
(12
)
Total other comprehensive income, net of tax
7

 
7

 
20

 
85

Total comprehensive income
$
861

 
$
262

 
$
2,295

 
$
633


See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

5



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, 2019
 
298,107

 
$
3

 
$

 
$
5,358

 
$
(30
)
 
$
5,331

Total comprehensive income
 

 

 

 
1,421

 
13

 
1,434

Stock-based compensation
 

 

 
73

 

 

 
73

Issuance of common stock
 
985

 

 
(48
)
 

 

 
(48
)
Repurchase and retirement of common stock
 
(3,205
)
 

 
(25
)
 
(280
)
 

 
(305
)
Balances as of June 30, 2019
 
295,887

 
3

 

 
6,499

 
(17
)
 
6,485

Total comprehensive income
 

 

 

 
854

 
7

 
861

Stock-based compensation
 

 

 
92

 

 

 
92

Issuance of common stock
 
584

 

 
26

 

 

 
26

Repurchase and retirement of common stock
 
(3,253
)
 

 
(118
)
 
(188
)
 

 
(306
)
Balances as of September 30, 2019
 
293,218

 
$
3

 
$

 
$
7,165

 
$
(10
)
 
$
7,158

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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, 2018
 
306,370

 
$
3

 
$
657

 
$
4,062

 
$
(127
)
 
$
4,595

Cumulative-effect adjustment from the adoption of ASC 606
 

 

 

 
590

 
22

 
612

Cumulative-effect adjustment from the adoption of ASU 2018-02
 

 

 

 
(1
)
 
1

 

Total comprehensive income
 

 

 

 
293

 
78

 
371

Stock-based compensation
 

 

 
70

 

 

 
70

Issuance of common stock
 
1,280

 

 
(88
)
 

 

 
(88
)
Repurchase and retirement of common stock
 
(2,264
)
 

 
(300
)
 

 

 
(300
)
Balances as of June 30, 2018
 
305,386

 
3

 
339

 
4,944

 
(26
)
 
5,260

Total comprehensive income
 

 

 

 
255

 
7

 
262

Stock-based compensation
 

 

 
66

 

 

 
66

Issuance of common stock
 
618

 

 
28

 

 

 
28

Repurchase and retirement of common stock
 
(2,334
)
 

 
(299
)
 

 

 
(299
)
Balances as of September 30, 2018
 
303,670

 
$
3

 
$
134

 
$
5,199

 
$
(19
)
 
$
5,317


See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).


6



ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
September 30,
(In millions)
2019
 
2018
OPERATING ACTIVITIES
 
 
 
Net income
$
2,275

 
$
548

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation, amortization and accretion
72

 
74

Stock-based compensation
165

 
136

Change in assets and liabilities:

 
 
Receivables, net
(235
)
 
(422
)
Other assets
33

 
20

Accounts payable
51

 
132

Accrued and other liabilities
88

 
(25
)
Deferred income taxes, net
(1,800
)
 
(94
)
Deferred net revenue (online-enabled games)
(454
)
 
(375
)
Net cash provided by (used in) operating activities
195

 
(6
)
INVESTING ACTIVITIES

 
 
Capital expenditures
(72
)
 
(63
)
Proceeds from maturities and sales of short-term investments
793

 
446

Purchase of short-term investments
(1,984
)
 
(1,029
)
Acquisition, net of cash acquired

 
(58
)
Net cash used in investing activities
(1,263
)
 
(704
)
FINANCING ACTIVITIES

 
 
Proceeds from issuance of common stock
33

 
36

Cash paid to taxing authorities for shares withheld from employees
(55
)
 
(96
)
Repurchase and retirement of common stock
(611
)
 
(599
)
Acquisition-related contingent consideration payment
(64
)
 

Net cash used in financing activities
(697
)
 
(659
)
Effect of foreign exchange on cash and cash equivalents
(3
)
 
(8
)
Decrease in cash and cash equivalents
(1,768
)
 
(1,377
)
Beginning cash and cash equivalents
4,708

 
4,258

Ending cash and cash equivalents
$
2,940

 
$
2,881

Supplemental cash flow information:

 
 
Cash paid during the period for income taxes, net
$
77

 
$
78

Cash paid during the period for interest
21

 
21

Non-cash investing activities:

 
 
Change in accrued capital expenditures
$
(16
)
 
$
(11
)

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

7



ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
We are a global leader in digital interactive entertainment, with a mission to inspire the world to play. We develop, market, publish and deliver games and services that can be played and watched on a variety of platforms, including game consoles, PCs, mobile phones and tablets. In our games and services, we use brands that we either wholly own (such as Battlefield, The Sims, Apex Legends, Anthem, Need for Speed and Plants v. Zombies) or license from others (such as FIFA, Madden NFL and Star Wars). We develop and publish games and services across diverse genres, such as sports, first-person shooter, action, role-playing and simulation, and offer our games and services through diverse business models and distribution channels, such as retail, download, subscription and free-to-play. We believe that the breadth and depth of our portfolio and our flexibility in business models and distribution channels provide us with strategic advantages.
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, 2020 contains 52 weeks and ends on March 28, 2020. Our results of operations for the fiscal year ended March 31, 2019 contained 52 weeks and ended on March 30, 2019. Our results of operations for the three months ended September 30, 2019 and 2018 contained 13 weeks each and ended on September 28, 2019 and September 29, 2018, respectively. Our results of operations for the six months ended September 30, 2019 and 2018 contained 26 weeks each and ended on September 28, 2019 and September 29, 2018, respectively. 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, 2019, as filed with the United States Securities and Exchange Commission (“SEC”) on May 24, 2019.
Recently Adopted Accounting Standards
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (“ASC Topic 842” or the “New Lease Standard”). The FASB issued this standard to increase transparency and comparability among organizations by recognizing right-of-use (“ROU”) lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements.

We adopted the New Lease Standard on April 1, 2019, the beginning of fiscal year 2020, using the optional transition method which allows us to use the effective date of the New Lease Standard as the date of initial application on transition, instead of at the beginning of the earliest comparative period presented. Accordingly, we did not adjust prior periods for the effects of the New Lease Standard. Additionally, we elected to apply the package of practical expedients, which allows us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our assessment of initial direct costs for any leases that exist prior to adoption of the new lease standard.

The adoption of the New Lease Standard on April 1, 2019 resulted in the recognition of operating lease ROU assets of $215 million, current operating lease liabilities of $50 million, and noncurrent operating lease liabilities of $197 million on our Condensed Consolidated Balance Sheet. In addition, upon transition, we eliminated prepaid rent assets of $6 million and deferred rent liabilities of $38 million. Operating lease ROU assets, operating lease liabilities, and noncurrent operating lease liabilities are included in other assets, accrued and other current liabilities, and other liabilities, respectively. The adoption of the New Lease Standard did not have an impact on our Condensed Consolidated Statements of Operations or Cash Flows.

8



BALANCE SHEETS
(In millions)
Balance at March 31, 2019
 
Adjustments due to New Lease Standard Adoption
 
Balance at
April 1, 2019
Assets
 
 
 
 
 
Other current assets
$
313

 
$
(6
)
 
$
307

Other assets
114

 
215

 
329

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Accrued and other current liabilities
$
1,052

 
$
47

 
$
1,099

Other liabilities
132

 
162

 
294



See Note 11 — Leases for additional information on leases.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This update is intended to make more financial and nonfinancial hedging strategies eligible for hedge accounting, simplify the application of hedge accounting by eliminating the requirement to separately measure and report hedge ineffectiveness, and increase transparency around the scope and results of hedging programs. We adopted ASU 2017-12 in the first quarter of fiscal 2020, using a modified-retrospective approach. Upon adoption of ASU 2017-12, we no longer measure and report hedge ineffectiveness separately. We instead present the entire change in the fair value of a hedging instrument in the same Condensed Consolidated Statements of Operations line as the hedged item. Additionally, the amount historically excluded from the assessment of hedge effectiveness for our cash flow hedges is now recognized into the Condensed Consolidated Statements of Operations in the period when the forecasted transaction is recognized. The cumulative-effect adjustment from the adoption had a de minimis impact on our Condensed Consolidated Financial Statements. See Note 4 — Derivative Financial Instruments for more information.
Other Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). The update changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. This update replaces the existing incurred loss impairment model with an expected loss model. It also requires credit losses related to available-for-sale debt securities to be recognized as an allowance for credit losses rather than as a reduction to the carrying value of the securities. In May 2019, the FASB issued ASU 2019-05, Targeted Transition Relief, which provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. This update is effective for us beginning in the first quarter of fiscal year 2021. We are currently evaluating the impact of this new standard on our Condensed Consolidated Financial Statements and related disclosures.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This update eliminates, adds, and modifies certain fair value measurement disclosure requirements. We expect to adopt these new disclosure requirements in the first quarter of fiscal 2021.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). This update requires a customer in a cloud computing service arrangement to follow the internal-use software guidance in order to determine which implementation costs to defer and recognize as an asset. This update is effective for us beginning in the first quarter of fiscal year 2021. Early adoption is permitted. We are currently evaluating the timing of adoption and impact of this new standard on our Consolidated Financial Statements and related disclosures.


9



(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 September 30, 2019 and March 31, 2019, 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
 
  
 
 
 
Quoted Prices in
Active Markets 
for Identical
Financial
Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
As of
September 30, 2019
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Balance Sheet Classification
Assets
 
 
 
 
 
 
 
 
 
Bank and time deposits
$
50

 
$
50

 
$

 
$

 
Cash equivalents
Money market funds
938

 
938

 

 

 
Cash equivalents
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Corporate bonds
746

 

 
746

 

 
Short-term investments
U.S. Treasury securities
520

 
520

 


 

 
Short-term investments and cash equivalents
U.S. agency securities
11

 

 
11

 

 
Short-term investments
Commercial paper
447

 

 
447

 

 
Short-term investments and cash equivalents
Foreign government securities
34

 

 
34

 

 
Short-term investments
Asset-backed securities
287

 

 
287

 

 
Short-term investments
Certificates of deposit
45

 

 
45

 

 
Short-term investments and cash equivalents
Foreign currency derivatives
55

 

 
55

 

 
Other current assets and other assets
Deferred compensation plan assets (a)
13

 
13

 

 

 
Other assets
Total assets at fair value
$
3,146

 
$
1,521

 
$
1,625

 
$

 
 
Liabilities
 
 
 
 
 
 
 
 
 
Contingent consideration (b)
$
69

 
$

 
$

 
$
69

 
Accrued and other current liabilities
Foreign currency derivatives
8

 

 
8

 

 
Accrued and other current liabilities and other liabilities
Deferred compensation plan liabilities (a)
13

 
13

 

 

 
Other liabilities
Total liabilities at fair value
$
90

 
$
13

 
$
8

 
$
69

 
 



10



 
 
 
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
 
 
 
 
 
 
 
 
 
Contingent
Consideration
 
 
Balance as of March 31, 2019
 
 
 
 
 
 
$
136

 
 
Change in fair value (c)
 
 
 
 
 
 
3

 
 
Payment (d)
 
 
 
 
 
 
(70
)
 
 
Balance as of September 30, 2019
 
 
 
 
 
 
$
69

 
 

 
 
 
 
Fair Value Measurements at Reporting Date Using
 
  
 
 
 
Quoted Prices in
Active Markets 
for Identical
Financial
Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
As of March 31, 2019
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Balance Sheet Classification
Assets
 
 
 
 
 
 
 
 
 
Bank and time deposits
$
23

 
$
23

 
$

 
$

 
Cash equivalents
Money market funds
2,704

 
2,704

 

 

 
Cash equivalents
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Corporate bonds
327

 

 
327

 

 
Short-term investments and cash equivalents
U.S. Treasury securities
294

 
294

 

 

 
Short-term investments and cash equivalents
U.S. agency securities
57

 

 
57

 

 
Short-term investments and cash equivalents
Commercial paper
233

 

 
233

 

 
Short-term investments and cash equivalents
Foreign government securities
58

 

 
58

 

 
Short-term investments and cash equivalents
Asset-backed securities
55

 

 
55

 

 
Short-term investments and cash equivalents
Certificates of deposit
2

 

 
2

 

 
Short-term investments and cash equivalents
Foreign currency derivatives
33

 

 
33

 

 
Other current assets and other assets
Deferred compensation plan assets (a)
11

 
11

 

 

 
Other assets
Total assets at fair value
$
3,797

 
$
3,032

 
$
765

 
$

 
 
Liabilities
 
 
 
 
 
 
 
 
 
Contingent consideration (b)
$
136

 
$

 
$

 
$
136

 
Accrued and other current liabilities
Foreign currency derivatives
16

 

 
16

 

 
Accrued and other current liabilities and other liabilities
Deferred compensation plan liabilities (a)
12

 
12

 

 

 
Other liabilities
Total liabilities at fair value
$
164

 
$
12

 
$
16

 
$
136

 
 


(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, 2019, for additional information regarding our Deferred Compensation Plan.

(b)
The contingent consideration represents the estimated fair value of the additional variable cash consideration payable in connection with our acquisition of Respawn Entertainment, LLC (“Respawn”) that is contingent upon the achievement of certain performance milestones. We estimated fair value using a probability-weighted income approach combined with a real options methodology, and applied a discount rate that appropriately captures the risk associated with the obligation. At September 30, 2019, the discount rates used ranged from 2.5 percent to 2.6 percent. There were no material changes in the fair value of the contingent consideration during the six months ended September 30, 2019. At March 31, 2019, the discount rates used ranged from 2.9 percent to 3.1 percent. See Note 7 in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019, for additional information regarding the Respawn acquisition.


11



(c)
The change in fair value is reported as acquisition-related contingent consideration in our Condensed Consolidated Statements of Operations.

(d) During the six months ended September 30, 2019, we paid $70 million for performance milestones achieved in connection with our acquisition of Respawn.

(3) FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
As of September 30, 2019 and March 31, 2019, our cash and cash equivalents were $2,940 million and $4,708 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 September 30, 2019 and March 31, 2019 (in millions): 
 
As of September 30, 2019
 
As of March 31, 2019
 
Cost or
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Cost or
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Gains
 
Losses
 
Gains
 
Losses
 
Corporate bonds
$
744

 
$
2

 
$

 
$
746

 
$
325

 
$

 
$
(1
)
 
$
324

U.S. Treasury securities
468

 

 

 
468

 
153

 

 

 
153

U.S. agency securities
11

 

 

 
11

 
44

 

 

 
44

Commercial paper
355

 

 

 
355

 
112

 

 

 
112

Foreign government securities

34

 

 

 
34

 
50

 

 

 
50

Asset-backed securities
287

 

 

 
287

 
53

 

 

 
53

Certificates of deposit
42

 

 

 
42

 
1

 

 

 
1

Short-term investments
$
1,941

 
$
2

 
$

 
$
1,943

 
$
738

 
$

 
$
(1
)
 
$
737


The following table summarizes the amortized cost and fair value of our short-term investments, classified by stated maturity as of September 30, 2019 and March 31, 2019 (in millions): 
 
As of September 30, 2019
 
As of March 31, 2019
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Short-term investments
 
 
 
 
 
 
 
Due within 1 year
$
1,464

 
$
1,465

 
$
449

 
$
448

Due 1 year through 5 years
457

 
458

 
287

 
287

Due after 5 years
20

 
20

 
2

 
2

Short-term investments
$
1,941

 
$
1,943

 
$
738

 
$
737



(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, 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.

12



Cash Flow Hedging Activities
Certain of our forward contracts are designated and qualify as cash flow hedges. The effectiveness of the cash flow hedge contracts, including time value, is assessed monthly using regression analysis, as well as other timing and probability criteria. 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 gross amount of 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 September 30, 2019
 
As of March 31, 2019
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
 
 
Asset
 
Liability
 
 
Asset
 
Liability
Forward contracts to purchase
$
225

 
$

 
$
5

 
$
295

 
$

 
$
10

Forward contracts to sell
$
1,143

 
$
53

 
$
1

 
$
1,355

 
$
31

 
$
4



The effects of cash flow hedge accounting in our Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2019 and 2018 are as follows (in millions):
 
Amount of Gain (Loss) Recognized in the Statement of Operations
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
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
$
1,348

 
$
387

 
$
1,286

 
$
339

 
$
2,557

 
$
768

 
$
2,423

 
$
701

Gains (losses) on foreign currency forward contracts designated as cash flow hedges
$
25

 
$
(1
)
 
$
2

 
$
(3
)
 
$
41

 
$
(7
)
 
$
(12
)
 
$
(4
)

The amounts excluded from the assessment of hedge effectiveness were gains of $7 million and $14 million during the three and six months ended September 30, 2018, respectively, and recognized in interest and other income (expense), net.
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.

13



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 September 30, 2019
 
As of March 31, 2019
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
 
 
Asset
 
Liability
 
 
Asset
 
Liability
Forward contracts to purchase
$
273

 
$

 
$
1

 
$
449

 
$

 
$
2

Forward contracts to sell
$
625

 
$
2

 
$
1

 
$
394

 
$
2

 
$


The effect of foreign currency forward contracts not designated as hedging instruments in our Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2019 and 2018 was as follows (in millions):
 
 
Amount of Gain (Loss) Recognized in the Statement of Operations
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
 
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
 
$
16

 
$
18

 
$
37

 
$
37

Gain (losses) on foreign currency forward contracts not designated as hedging instruments
 
$
1

 
$
(5
)
 
$
(3
)
 
$
4




14



(5) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The changes in accumulated other comprehensive income (loss) by component, net of tax, for the three months ended September 30, 2019 and 2018 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 June 30, 2019
$
2

 
$
31

 
$
(50
)
 
$
(17
)
Other comprehensive income (loss) before reclassifications
1

 
40

 
(9
)
 
32

Amounts reclassified from accumulated other comprehensive income (loss)
(1
)
 
(24
)
 

 
(25
)
Total other comprehensive income (loss), net of tax


 
16

 
(9
)
 
7

Balances as of September 30, 2019
$
2

 
$
47

 
$
(59
)
 
$
(10
)
 
Unrealized Net Gains (Losses) on Available-for-Sale Securities
 
Unrealized Net Gains (Losses) on Derivative Instruments
 
Foreign Currency Translation Adjustments
 
Total
Balances as of June 30, 2018
$
(8
)
 
$
27

 
$
(45
)
 
$
(26
)
Other comprehensive income (loss) before reclassifications
1

 
2

 
3

 
6

Amounts reclassified from accumulated other comprehensive income (loss)

 
1

 

 
1

Total other comprehensive income (loss), net of tax

1

 
3

 
3

 
7

Balances as of September 30, 2018
$
(7
)
 
$
30

 
$
(42
)
 
$
(19
)
The changes in accumulated other comprehensive income (loss) by component, net of tax, for the six months ended September 30, 2019 and 2018 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, 2019
$
(1
)
 
$
22

 
$
(51
)
 
$
(30
)
Other comprehensive income (loss) before reclassifications
4

 
59

 
(8
)
 
55

Amounts reclassified from accumulated other comprehensive income (loss)
(1
)
 
(34
)
 

 
(35
)
Total other comprehensive income (loss), net of tax

3

 
25

 
(8
)
 
20

Balances as of September 30, 2019
$
2

 
$
47

 
$
(59
)
 
$
(10
)


15



 
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, 2018
$
(8
)
 
$
(89
)
 
$
(30
)
 
$
(127
)
Cumulative-effect adjustment from the adoption of ASC 606

 
22

 

 
22

Cumulative-effect adjustment from the adoption of ASU 2018-02

 
1

 

 
1

Balances as of April 1, 2018
(8
)
 
(66
)
 
(30
)
 
(104
)
Other comprehensive income (loss) before reclassifications
1

 
80

 
(12
)
 
69

Amounts reclassified from accumulated other comprehensive income (loss)

 
16

 

 
16

Total other comprehensive income (loss), net of tax

1

 
96

 
(12
)
 
85

Balances as of September 30, 2018
$
(7
)
 
$
30

 
$
(42
)
 
$
(19
)


The effects on net income of amounts reclassified from accumulated other comprehensive income (loss) for the three and six months ended September 30, 2019 were as follows (in millions):
 
 
Amount Reclassified From Accumulated Other Comprehensive Income (Loss)
Statement of Operations Classification
 
Three Months Ended
September 30, 2019
 
Six Months Ended
September 30, 2019
(Gains) losses on foreign currency forward contracts designated as cash flow hedges
 
 
 
 
Net revenue
 
$
(25
)

$
(41
)
Research and development
 
1


7

Total, net of tax
 
$
(24
)
 
$
(34
)


The effects on net income of amounts reclassified from accumulated other comprehensive income (loss) for the three and six months ended September 30, 2018 were as follows (in millions):
 
 
Amount Reclassified From Accumulated Other Comprehensive Income (Loss)
Statement of Operations Classification
 
Three Months Ended
September 30, 2018
 
Six Months Ended
September 30, 2018
(Gains) losses on foreign currency forward contracts designated as cash flow hedges
 
 
 
 
Net revenue
 
$
(2
)
 
$
12

Research and development
 
3

 
4

Total net (gain) loss reclassified, net of tax
 
$
1

 
$
16




(6) GOODWILL AND ACQUISITION-RELATED INTANGIBLES, NET
The changes in the carrying amount of goodwill for the six months ended September 30, 2019 are as follows (in millions):
 
As of
March 31, 2019
 
Activity
 
Effects of Foreign Currency Translation
 
As of
September 30, 2019
Goodwill
$
2,260

 
$

 
$
(2
)
 
$
2,258

Accumulated impairment
(368
)
 

 

 
(368
)
Total
$
1,892

 
$

 
$
(2
)
 
$
1,890


Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets.

16



Acquisition-related intangibles consisted of the following (in millions):
 
As of September 30, 2019
 
As of March 31, 2019
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Acquisition-
Related
Intangibles, Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Acquisition-
Related
Intangibles, Net
Developed and core technology
$
469

 
$
(437
)
 
$
32

 
$
469

 
$
(427
)
 
$
42

Trade names and trademarks
161

 
(126
)
 
35

 
161

 
(121
)
 
40

Registered user base and other intangibles
5

 
(5
)
 

 
5

 
(5
)
 

Carrier contracts and related
85

 
(85
)
 

 
85

 
(85
)
 

In-process research and development
5

 

 
5

 
5

 

 
5

Total
$
725

 
$
(653
)
 
$
72

 
$
725

 
$
(638
)
 
$
87


Amortization of intangibles for the three and six months ended September 30, 2019 and 2018 are classified in the Condensed Consolidated Statement of Operations as follows (in millions):
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Cost of service and other
$
2

 
$

 
$
4

 
$

Cost of product

 
1

 

 
2

Operating expenses
6

 
6

 
11

 
12

Total
$
8

 
$
7

 
$
15

 
$
14


Acquisition-related intangible assets are amortized using the straight-line method over the lesser of their estimated useful lives or the agreement terms, ranging from 1 to 9 years. As of September 30, 2019 and March 31, 2019, the weighted-average remaining useful life for acquisition-related intangible assets was approximately 2.8 years and 3.2 years, respectively.
As of September 30, 2019, future amortization of finite-lived acquisition-related intangibles that will be recorded in the Condensed Consolidated Statement of Operations is estimated as follows (in millions): 
Fiscal Year Ending March 31,
 
2020 (remaining six months)
$
15

2021
22

2022
22

2023
8

2024 and thereafter

Total
$
67



(7) 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 six months ended September 30, 2019 and 2018, we did not recognize any material losses or impairment charges on royalty-based commitments, respectively.

17



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
September 30, 2019
 
As of
March 31, 2019
Other current assets
$
67

 
$
53

Other assets
27

 
30

Royalty-related assets
$
94

 
$
83


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
September 30, 2019
 
As of
March 31, 2019
Accrued royalties
$
141

 
$
144

Other liabilities
39

 
51

Royalty-related liabilities
$
180