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, 2020
|
|
March 31, 2020 (a)
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
4,059
|
|
|
$
|
3,768
|
|
Short-term investments
|
1,972
|
|
|
1,967
|
|
Receivables, net
|
423
|
|
|
461
|
|
Other current assets
|
376
|
|
|
321
|
|
Total current assets
|
6,830
|
|
|
6,517
|
|
Property and equipment, net
|
458
|
|
|
449
|
|
Goodwill
|
1,891
|
|
|
1,885
|
|
Acquisition-related intangibles, net
|
42
|
|
|
53
|
|
Deferred income taxes, net
|
1,937
|
|
|
1,903
|
|
Other assets
|
312
|
|
|
305
|
|
TOTAL ASSETS
|
$
|
11,470
|
|
|
$
|
11,112
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
164
|
|
|
$
|
68
|
|
Accrued and other current liabilities
|
1,083
|
|
|
1,052
|
|
Deferred net revenue (online-enabled games)
|
639
|
|
|
945
|
|
Senior notes, current, net
|
599
|
|
|
599
|
|
Total current liabilities
|
2,485
|
|
|
2,664
|
|
Senior notes, net
|
397
|
|
|
397
|
|
Income tax obligations
|
301
|
|
|
373
|
|
Deferred income taxes, net
|
1
|
|
|
1
|
|
Other liabilities
|
211
|
|
|
216
|
|
Total liabilities
|
3,395
|
|
|
3,651
|
|
Commitments and contingencies (See Note 11)
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
Common stock, $0.01 par value. 1,000 shares authorized; 290 and 288 shares issued and outstanding, respectively
|
3
|
|
|
3
|
|
Additional paid-in capital
|
145
|
|
|
—
|
|
Retained earnings
|
8,016
|
|
|
7,508
|
|
Accumulated other comprehensive loss
|
(89)
|
|
|
(50)
|
|
Total stockholders’ equity
|
8,075
|
|
|
7,461
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
11,470
|
|
|
$
|
11,112
|
|
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
(a) Derived from audited Consolidated Financial Statements.
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
Three Months Ended
September 30,
|
|
Six Months Ended
September 30,
|
(In millions, except per share data)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net revenue
|
$
|
1,151
|
|
|
$
|
1,348
|
|
|
$
|
2,610
|
|
|
$
|
2,557
|
|
Cost of revenue
|
286
|
|
|
405
|
|
|
574
|
|
|
592
|
|
Gross profit
|
865
|
|
|
943
|
|
|
2,036
|
|
|
1,965
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Research and development
|
421
|
|
|
387
|
|
|
859
|
|
|
768
|
|
Marketing and sales
|
156
|
|
|
152
|
|
|
277
|
|
|
262
|
|
General and administrative
|
133
|
|
|
128
|
|
|
269
|
|
|
238
|
|
Acquisition-related contingent consideration
|
—
|
|
|
2
|
|
|
—
|
|
|
3
|
|
Amortization of intangibles
|
6
|
|
|
6
|
|
|
11
|
|
|
11
|
|
Total operating expenses
|
716
|
|
|
675
|
|
|
1,416
|
|
|
1,282
|
|
Operating income
|
149
|
|
|
268
|
|
|
620
|
|
|
683
|
|
Interest and other income (expense), net
|
(10)
|
|
|
16
|
|
|
(13)
|
|
|
37
|
|
Income before provision for (benefit from) income taxes
|
139
|
|
|
284
|
|
|
607
|
|
|
720
|
|
Provision for (benefit from) income taxes
|
(46)
|
|
|
(570)
|
|
|
57
|
|
|
(1,555)
|
|
Net income
|
$
|
185
|
|
|
$
|
854
|
|
|
$
|
550
|
|
|
$
|
2,275
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.64
|
|
|
$
|
2.89
|
|
|
$
|
1.90
|
|
|
$
|
7.69
|
|
Diluted
|
$
|
0.63
|
|
|
$
|
2.89
|
|
|
$
|
1.88
|
|
|
$
|
7.66
|
|
Number of shares used in computation:
|
|
|
|
|
|
|
|
Basic
|
289
|
|
|
295
|
|
|
289
|
|
|
296
|
|
Diluted
|
293
|
|
|
296
|
|
|
292
|
|
|
297
|
|
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
Three Months Ended
September 30,
|
|
Six Months Ended
September 30,
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net income
|
$
|
185
|
|
|
$
|
854
|
|
|
$
|
550
|
|
|
$
|
2,275
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
Net gains (losses) on available-for-sale securities
|
(3)
|
|
|
—
|
|
|
8
|
|
|
3
|
|
Net gains (losses) on derivative instruments
|
(43)
|
|
|
16
|
|
|
(80)
|
|
|
25
|
|
Foreign currency translation adjustments
|
9
|
|
|
(9)
|
|
|
33
|
|
|
(8)
|
|
Total other comprehensive income (loss), net of tax
|
(37)
|
|
|
7
|
|
|
(39)
|
|
|
20
|
|
Total comprehensive income
|
$
|
148
|
|
|
$
|
861
|
|
|
$
|
511
|
|
|
$
|
2,295
|
|
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Common Stock
|
|
Additional Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income (loss)
|
|
Total
Stockholders’
Equity
|
(In millions, except per share data)
|
Shares
|
|
Amount
|
|
Balances as of March 31, 2020
|
|
288,413
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
7,508
|
|
|
$
|
(50)
|
|
|
$
|
7,461
|
|
Total comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
365
|
|
|
(2)
|
|
|
363
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
102
|
|
|
—
|
|
|
—
|
|
|
102
|
|
Issuance of common stock
|
|
1,088
|
|
|
—
|
|
|
(66)
|
|
|
—
|
|
|
—
|
|
|
(66)
|
|
Repurchase and retirement of common stock
|
|
(747)
|
|
|
—
|
|
|
(36)
|
|
|
(42)
|
|
|
—
|
|
|
(78)
|
|
Balances as of June 30, 2020
|
|
288,754
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
7,831
|
|
|
$
|
(52)
|
|
|
$
|
7,782
|
|
Total comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
185
|
|
|
(37)
|
|
|
148
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
113
|
|
|
—
|
|
|
—
|
|
|
113
|
|
Issuance of common stock
|
|
868
|
|
|
—
|
|
|
32
|
|
|
—
|
|
|
—
|
|
|
32
|
|
Repurchase and retirement of common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balances as of September 30, 2020
|
|
289,622
|
|
|
$
|
3
|
|
|
$
|
145
|
|
|
$
|
8,016
|
|
|
$
|
(89)
|
|
|
$
|
8,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
Six Months Ended
September 30,
|
(In millions)
|
2020
|
|
2019
|
OPERATING ACTIVITIES
|
|
|
|
Net income
|
$
|
550
|
|
|
$
|
2,275
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation, amortization and accretion
|
77
|
|
|
72
|
|
Stock-based compensation
|
215
|
|
|
165
|
|
|
|
|
|
Change in assets and liabilities:
|
|
|
|
Receivables, net
|
39
|
|
|
(235)
|
|
Other assets
|
(113)
|
|
|
33
|
|
Accounts payable
|
106
|
|
|
51
|
|
Accrued and other liabilities
|
(96)
|
|
|
88
|
|
Deferred income taxes, net
|
(32)
|
|
|
(1,800)
|
|
Deferred net revenue (online-enabled games)
|
(307)
|
|
|
(454)
|
|
Net cash provided by operating activities
|
439
|
|
|
195
|
|
INVESTING ACTIVITIES
|
|
|
|
Capital expenditures
|
(63)
|
|
|
(72)
|
|
Proceeds from maturities and sales of short-term investments
|
1,418
|
|
|
793
|
|
Purchase of short-term investments
|
(1,416)
|
|
|
(1,984)
|
|
|
|
|
|
Net cash used in investing activities
|
(61)
|
|
|
(1,263)
|
|
FINANCING ACTIVITIES
|
|
|
|
Proceeds from issuance of common stock
|
43
|
|
|
33
|
|
Cash paid to taxing authorities for shares withheld from employees
|
(77)
|
|
|
(55)
|
|
Repurchase and retirement of common stock
|
(78)
|
|
|
(611)
|
|
Acquisition-related contingent consideration payment
|
—
|
|
|
(64)
|
|
Net cash used in financing activities
|
(112)
|
|
|
(697)
|
|
Effect of foreign exchange on cash and cash equivalents
|
25
|
|
|
(3)
|
|
Increase (decrease) in cash and cash equivalents
|
291
|
|
|
(1,768)
|
|
Beginning cash and cash equivalents
|
3,768
|
|
|
4,708
|
|
Ending cash and cash equivalents
|
$
|
4,059
|
|
|
$
|
2,940
|
|
Supplemental cash flow information:
|
|
|
|
Cash paid during the period for income taxes, net
|
$
|
173
|
|
|
$
|
77
|
|
Cash paid during the period for interest
|
21
|
|
|
21
|
|
Non-cash investing activities:
|
|
|
|
Change in accrued capital expenditures
|
$
|
(4)
|
|
|
$
|
(16)
|
|
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Electronic Arts is a global leader in digital interactive entertainment. We develop, market, publish and deliver games, content and services that can be played and watched on game consoles, PCs, mobile phones and tablets. We believe that the breadth and depth of our portfolio, live services offerings, and our use of multiple business models and distribution channels provide us with strategic advantages. Our foundation is a collection of intellectual property from which we create innovative games and content that enables us to build on-going and meaningful relationships with a community of players, creators and viewers. Our portfolio includes brands that we either wholly own (such as Battlefield, The Sims, Apex Legends, Need for Speed and Plants vs. Zombies) or license from others (such as FIFA, Madden NFL, UFC, NHL and Star Wars). We also offer our players high-quality experiences designed to provide value to players and to extend and enhance gameplay. These live services include extra content, subscription offerings and other revenue generated outside of the sale of our base games. And we are focused on reaching more players whenever and wherever they want to play. We believe that we can add value to our network by making it easier for players to connect to a world of play by offering choice of business model, distribution channel and device.
Our fiscal year is reported on a 52- or 53-week period that ends on the Saturday nearest March 31. Our results of operations for the fiscal year ending March 31, 2021 contains 53 weeks and ends on April 3, 2021. Our results of operations for the fiscal year ended March 31, 2020 contained 52 weeks and ended on March 28, 2020. Our results of operations for the three and six months ended September 30, 2020 contained 13 weeks and 27 weeks, respectively, and ended on October 3, 2020. Our results of operations for the three and six months ended September 30, 2019 contained 13 weeks and 26 weeks, respectively, and ended on September 28, 2019. 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, 2020, as filed with the United States Securities and Exchange Commission (“SEC”) on May 20, 2020.
Change in Estimated Offering Period
The offering period is the period in which we offer to provide the future update rights and/or online hosting for the game and extra content sold. Because the offering period is not an explicitly defined period, we must make an estimate of the offering period for the service related performance obligations (i.e., future update rights and online hosting). For sales prior to July 1, 2020, revenues for service related performance obligations were generally recognized over an estimated nine-month period beginning in the month after shipment for games and extra content sold through retail, and an estimated six-month period for digitally-distributed games and extra content beginning in the month of sale. During the three months ended September 30, 2020, we completed our annual evaluation of the Estimated Offering Period, and noted that generally, consumers were playing our games for longer periods of time as players engage with services we provide that are designed to enhance and extend gameplay. Based on this, we concluded that the Estimated Offering Period applied to sales made after June 30, 2020 should be lengthened. Revenues for service related performance obligations for games and extra content sold through retail are now recognized over an estimated ten-month period beginning in the month of sale, and revenues for service related performance obligations for digitally-distributed games and extra content are now recognized over an estimated eight-month period beginning in the month of sale, which results in revenue being recognized over a longer period of time. During the three months ended September 30, 2020, this change to our Estimated Offering Period resulted in an estimated decrease in net revenue of $26 million and net income of $20 million, and a decrease of $0.07 diluted earnings per share.
Reclassifications
As our business has evolved and management focuses less on the differentiation between our packaged goods business and our digital business and more on our full game sales and live services that extend and enhance gameplay, we have updated our presentation of net revenue by composition to align with this management view. Certain prior year amounts were reclassified to conform to current year presentation.
Recently Adopted 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. We adopted ASU 2016-13 in the first quarter of fiscal year 2021. The adoption did not have a material impact on our Condensed Consolidated Financial Statements.
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 adopted ASU 2018-13 in the first quarter of fiscal year 2021. The adoption did not have an impact on our Condensed Consolidated Financial Statements.
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. We adopted ASU 2018-15 in the first quarter of fiscal year 2021. The adoption did not have a material impact on our Condensed Consolidated Financial Statements.
Other Recently Issued Accounting Standards
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This update is effective for us beginning in the first quarter of fiscal year 2022. Early adoption is permitted. We are currently evaluating the impact of this new standard on our Condensed Consolidated Financial Statements and related disclosures.
(2) FAIR VALUE MEASUREMENTS
There are various valuation techniques used to estimate fair value, the primary one being the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability. We measure certain financial and nonfinancial assets and liabilities at fair value on a recurring and nonrecurring basis.
Fair Value Hierarchy
The three levels of inputs that may be used to measure fair value are as follows:
•Level 1. Quoted prices in active markets for identical assets or liabilities.
•Level 2. Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities.
•Level 3. Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of September 30, 2020 and March 31, 2020, our assets and liabilities that were measured and recorded at fair value on a recurring basis were as follows (in millions):
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Fair Value Measurements at Reporting Date Using
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As of
September 30, 2020
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Quoted Prices in
Active Markets
for Identical
Financial
Instruments
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Significant
Other
Observable
Inputs
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Significant
Unobservable
Inputs
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Balance Sheet
Classification
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(Level 1)
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(Level 2)
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(Level 3)
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Assets
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|
Bank and time deposits
|
$
|
107
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|
$
|
107
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|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cash equivalents
|
Money market funds
|
2,004
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|
|
2,004
|
|
|
—
|
|
|
—
|
|
|
Cash equivalents
|
Available-for-sale securities:
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|
|
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|
Corporate bonds
|
526
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—
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|
|
526
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|
—
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|
|
Short-term investments and cash equivalents
|
U.S. Treasury securities
|
726
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|
|
726
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|
|
—
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—
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|
|
Short-term investments
|
U.S. agency securities
|
5
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|
—
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|
|
5
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|
|
—
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|
|
Short-term investments
|
Commercial paper
|
390
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|
—
|
|
|
390
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|
|
—
|
|
|
Short-term investments and cash equivalents
|
Foreign government securities
|
82
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|
|
—
|
|
|
82
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|
|
—
|
|
|
Short-term investments and cash equivalents
|
Asset-backed securities
|
240
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|
|
—
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|
|
240
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|
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—
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|
|
Short-term investments and cash equivalents
|
Certificates of deposit
|
55
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|
—
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|
|
55
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|
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—
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|
Short-term investments
|
Foreign currency derivatives
|
19
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—
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|
19
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—
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Other current assets and other assets
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Deferred compensation plan assets (a)
|
16
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|
16
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|
|
—
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|
|
—
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|
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Other assets
|
Total assets at fair value
|
$
|
4,170
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|
|
$
|
2,853
|
|
|
$
|
1,317
|
|
|
$
|
—
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|
|
Liabilities
|
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|
|
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Foreign currency derivatives
|
$
|
44
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|
|
$
|
—
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|
|
$
|
44
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|
|
$
|
—
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|
|
Accrued and other current liabilities and other liabilities
|
Deferred compensation plan liabilities (a)
|
17
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|
|
17
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|
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—
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|
|
—
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|
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Other liabilities
|
Total liabilities at fair value
|
$
|
61
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|
$
|
17
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|
|
$
|
44
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|
|
$
|
—
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|
|
Fair Value Measurements at Reporting Date Using
|
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|
|
As of
March 31, 2020
|
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Quoted Prices in
Active Markets for Identical
Financial Instruments
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
Balance Sheet
Classification
|
|
(Level 1)
|
|
(Level 2)
|
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(Level 3)
|
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Assets
|
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|
|
|
|
|
|
|
|
Bank and time deposits
|
$
|
78
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|
|
$
|
78
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|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cash equivalents
|
Money market funds
|
1,599
|
|
|
1,599
|
|
|
—
|
|
|
—
|
|
|
Cash equivalents
|
Available-for-sale securities:
|
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|
|
|
|
|
|
|
|
Corporate bonds
|
687
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|
|
—
|
|
|
687
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|
|
—
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|
|
Short-term investments and cash equivalents
|
U.S. Treasury securities
|
603
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|
|
603
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|
|
—
|
|
|
—
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|
|
Short-term investments and cash equivalents
|
U.S. agency securities
|
8
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|
|
—
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|
|
8
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|
|
—
|
|
|
Short-term investments
|
Commercial paper
|
414
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|
|
—
|
|
|
414
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|
|
—
|
|
|
Short-term investments and cash equivalents
|
Foreign government securities
|
42
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|
|
—
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|
|
42
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|
|
—
|
|
|
Short-term investments
|
Asset-backed securities
|
269
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|
|
—
|
|
|
269
|
|
|
—
|
|
|
Short-term investments
|
Certificates of deposit
|
56
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|
|
—
|
|
|
56
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|
|
—
|
|
|
Short-term investments
|
Foreign currency derivatives
|
76
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|
|
—
|
|
|
76
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|
|
—
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|
|
Other current assets and other assets
|
Deferred compensation plan assets (a)
|
13
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|
|
13
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|
|
—
|
|
|
—
|
|
|
Other assets
|
Total assets at fair value
|
$
|
3,845
|
|
|
$
|
2,293
|
|
|
$
|
1,552
|
|
|
$
|
—
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
$
|
36
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|
|
$
|
—
|
|
|
$
|
36
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|
|
$
|
—
|
|
|
Accrued and other current liabilities and other liabilities
|
Deferred compensation plan liabilities (a)
|
14
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|
|
14
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|
|
—
|
|
|
—
|
|
|
Other liabilities
|
Total liabilities at fair value
|
$
|
50
|
|
|
$
|
14
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|
|
$
|
36
|
|
|
$
|
—
|
|
|
|
(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, 2020, for additional information regarding our Deferred Compensation Plan.
(3) FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
As of September 30, 2020 and March 31, 2020, our cash and cash equivalents were $4,059 million and $3,768 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, 2020 and March 31, 2020 (in millions):
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|
As of September 30, 2020
|
|
As of March 31, 2020
|
|
Cost or
Amortized
Cost
|
|
Gross Unrealized
|
|
Fair
Value
|
|
Cost or
Amortized
Cost
|
|
Gross Unrealized
|
|
Fair
Value
|
|
Gains
|
|
Losses
|
|
Gains
|
|
Losses
|
|
Corporate bonds
|
$
|
513
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
514
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|
|
$
|
684
|
|
|
$
|
1
|
|
|
$
|
(4)
|
|
|
$
|
681
|
|
U.S. Treasury securities
|
724
|
|
|
2
|
|
|
—
|
|
|
726
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|
|
530
|
|
|
4
|
|
|
—
|
|
|
534
|
|
U.S. agency securities
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
Commercial paper
|
358
|
|
|
—
|
|
|
—
|
|
|
358
|
|
|
377
|
|
|
—
|
|
|
—
|
|
|
377
|
|
Foreign government securities
|
75
|
|
|
—
|
|
|
—
|
|
|
75
|
|
|
42
|
|
|
—
|
|
|
—
|
|
|
42
|
|
Asset-backed securities
|
237
|
|
|
2
|
|
|
—
|
|
|
239
|
|
|
273
|
|
|
—
|
|
|
(4)
|
|
|
269
|
|
Certificates of deposit
|
55
|
|
|
—
|
|
|
—
|
|
|
55
|
|
|
56
|
|
|
—
|
|
|
—
|
|
|
56
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|
Short-term investments
|
$
|
1,967
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
1,972
|
|
|
$
|
1,970
|
|
|
$
|
5
|
|
|
$
|
(8)
|
|
|
$
|
1,967
|
|
The following table summarizes the amortized cost and fair value of our short-term investments, classified by stated maturity as of September 30, 2020 and March 31, 2020 (in millions):
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|
|
|
|
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|
|
As of September 30, 2020
|
|
As of March 31, 2020
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
Short-term investments
|
|
|
|
|
|
|
|
Due within 1 year
|
$
|
1,600
|
|
|
$
|
1,603
|
|
|
$
|
1,568
|
|
|
$
|
1,567
|
|
Due 1 year through 5 years
|
360
|
|
|
362
|
|
|
395
|
|
|
393
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|
Due after 5 years
|
7
|
|
|
7
|
|
|
7
|
|
|
7
|
|
Short-term investments
|
$
|
1,967
|
|
|
$
|
1,972
|
|
|
$
|
1,970
|
|
|
$
|
1,967
|
|
(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.
Cash Flow Hedging Activities
Certain of our forward contracts are designated and qualify as cash flow hedges. To qualify for hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedges and must be highly effective in offsetting changes to future cash flows on hedged transactions. The derivative assets or liabilities associated with our hedging activities are recorded at fair value in other current assets/other assets, or accrued and other current liabilities/other liabilities, respectively, on our Condensed Consolidated Balance Sheets. The gains or losses resulting from changes in the fair value of these hedges is initially reported, net of tax, as a component of accumulated other comprehensive income (loss) in stockholders’ equity. The gains or losses resulting from changes in the fair value of these hedges is subsequently reclassified into net revenue or research and development expenses, as appropriate, in the period when the forecasted transaction is recognized in our Condensed Consolidated Statements of Operations. In the event that the underlying forecasted transactions do not occur, or it becomes remote that they will occur, within the defined hedge period, the gains or losses on the related cash flow hedges are reclassified from accumulated other comprehensive income (loss) to net revenue or research and development expenses, in our Condensed Consolidated Statements of Operations.
Total gross notional amounts and fair values for currency derivatives with cash flow hedge accounting designation are as follows (in millions):
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As of September 30, 2020
|
|
As of March 31, 2020
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Notional Amount
|
|
Fair Value
|
|
Notional Amount
|
|
Fair Value
|
|
|
Asset
|
|
Liability
|
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|
Asset
|
|
Liability
|
|
|
|
|
|
|
|
|
|
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|
Forward contracts to purchase
|
$
|
207
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|
|
$
|
8
|
|
|
$
|
1
|
|
|
$
|
316
|
|
|
$
|
1
|
|
|
$
|
19
|
|
|
|
|
|
|
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|
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|
Forward contracts to sell
|
$
|
1,177
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|
|
$
|
4
|
|
|
$
|
34
|
|
|
$
|
1,371
|
|
|
$
|
61
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|
|
$
|
1
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|
|
|
|
|
|
|
|
|
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|
|
The effects of cash flow hedge accounting in our Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2020 and 2019 are as follows (in millions):
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|
Three Months Ended September 30,
|
|
Six Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
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
|
$
|
1,151
|
|
|
$
|
421
|
|
|
$
|
1,348
|
|
|
$
|
387
|
|
|
$
|
2,610
|
|
|
$
|
859
|
|
|
$
|
2,557
|
|
|
$
|
768
|
|
Gains (losses) on foreign currency forward contracts designated as cash flow hedges
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
25
|
|
|
$
|
(1)
|
|
|
$
|
12
|
|
|
$
|
(6)
|
|
|
$
|
41
|
|
|
$
|
(7)
|
|
Balance Sheet Hedging Activities
Our foreign currency forward contracts that are not designated as hedging instruments are accounted for as derivatives whereby the fair value of the contracts are reported as other current assets or accrued and other current liabilities on our Condensed Consolidated Balance Sheets, and gains and losses resulting from changes in the fair value are reported in interest and other income (expense), net, in our Condensed Consolidated Statements of Operations. The gains and losses on these foreign currency forward contracts generally offset the gains and losses in the underlying foreign-currency-denominated monetary assets and liabilities, which are also reported in interest and other income (expense), net, in our Condensed Consolidated Statements of Operations.
Total gross notional amounts and fair values for currency derivatives that are not designated as hedging instruments are accounted for as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020
|
|
As of March 31, 2020
|
|
Notional Amount
|
|
Fair Value
|
|
Notional Amount
|
|
Fair Value
|
|
|
Asset
|
|
Liability
|
|
|
Asset
|
|
Liability
|
Forward contracts to purchase
|
$
|
608
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
388
|
|
|
$
|
1
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts to sell
|
$
|
1,012
|
|
|
$
|
7
|
|
|
$
|
1
|
|
|
$
|
292
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2020 and 2019 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Six Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
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
|
$
|
(10)
|
|
|
$
|
16
|
|
|
$
|
(13)
|
|
|
$
|
37
|
|
Gain (losses) on foreign currency forward contracts not designated as hedging instruments
|
$
|
(3)
|
|
|
$
|
1
|
|
|
$
|
(7)
|
|
|
$
|
(3)
|
|
(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, 2020 and 2019 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, 2020
|
$
|
7
|
|
|
$
|
2
|
|
|
$
|
(61)
|
|
|
$
|
(52)
|
|
Other comprehensive income (loss) before reclassifications
|
(3)
|
|
|
(42)
|
|
|
9
|
|
|
(36)
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
(1)
|
|
|
—
|
|
|
(1)
|
|
Total other comprehensive income (loss), net of tax
|
(3)
|
|
|
(43)
|
|
|
9
|
|
|
(37)
|
|
Balances as of September 30, 2020
|
$
|
4
|
|
|
$
|
(41)
|
|
|
$
|
(52)
|
|
|
$
|
(89)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
The changes in accumulated other comprehensive income (loss) by component, net of tax, for the six months ended September 30, 2020 and 2019 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, 2020
|
$
|
(4)
|
|
|
$
|
39
|
|
|
$
|
(85)
|
|
|
$
|
(50)
|
|
Other comprehensive income (loss) before reclassifications
|
8
|
|
|
(74)
|
|
|
33
|
|
|
(33)
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
(6)
|
|
|
—
|
|
|
(6)
|
|
Total other comprehensive income (loss), net of tax
|
8
|
|
|
(80)
|
|
|
33
|
|
|
(39)
|
|
Balances as of September 30, 2020
|
$
|
4
|
|
|
$
|
(41)
|
|
|
$
|
(52)
|
|
|
$
|
(89)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
The effects on net income of amounts reclassified from accumulated other comprehensive income (loss) for the three and six months ended September 30, 2020 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Reclassified From Accumulated Other Comprehensive Income (Loss)
|
Statement of Operations Classification
|
|
Three Months Ended
September 30, 2020
|
|
Six Months Ended
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gains) losses on foreign currency forward contracts designated as cash flow hedges
|
|
|
|
|
Net revenue
|
|
$
|
(1)
|
|
|
$
|
(12)
|
|
Research and development
|
|
—
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net (gain) loss reclassified, net of tax
|
|
$
|
(1)
|
|
|
$
|
(6)
|
|
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 (gain) loss reclassified, net of tax
|
|
$
|
(24)
|
|
|
$
|
(34)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6) GOODWILL AND ACQUISITION-RELATED INTANGIBLES, NET
The changes in the carrying amount of goodwill for the six months ended September 30, 2020 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
March 31, 2020
|
|
Activity
|
|
Effects of Foreign Currency Translation
|
|
As of
September 30, 2020
|
Goodwill
|
$
|
2,253
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
2,259
|
|
Accumulated impairment
|
(368)
|
|
|
—
|
|
|
—
|
|
|
(368)
|
|
Total
|
$
|
1,885
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
1,891
|
|
Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets.
Acquisition-related intangibles consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020
|
|
As of March 31, 2020
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Acquisition-
Related
Intangibles, Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Acquisition-
Related
Intangibles, Net
|
Developed and core technology
|
$
|
474
|
|
|
$
|
(456)
|
|
|
$
|
18
|
|
|
$
|
474
|
|
|
$
|
(450)
|
|
|
$
|
24
|
|
Trade names and trademarks
|
161
|
|
|
(137)
|
|
|
24
|
|
|
161
|
|
|
(132)
|
|
|
29
|
|
Registered user base and other intangibles
|
5
|
|
|
(5)
|
|
|
—
|
|
|
5
|
|
|
(5)
|
|
|
—
|
|
Carrier contracts and related
|
85
|
|
|
(85)
|
|
|
—
|
|
|
85
|
|
|
(85)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
725
|
|
|
$
|
(683)
|
|
|
$
|
42
|
|
|
$
|
725
|
|
|
$
|
(672)
|
|
|
$
|
53
|
|
Amortization of intangibles for the three and six months ended September 30, 2020 and 2019 are classified in the Condensed Consolidated Statements of Operations as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Six Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Cost of revenue
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
4
|
|
Operating expenses
|
6
|
|
|
6
|
|
|
11
|
|
|
11
|
|
Total
|
$
|
6
|
|
|
$
|
8
|
|
|
$
|
11
|
|
|
$
|
15
|
|
Acquisition-related intangible assets are amortized using the straight-line method over the lesser of their estimated useful lives or the agreement terms, currently from 1 to 5 years. As of September 30, 2020 and March 31, 2020, the weighted-average remaining useful life for acquisition-related intangible assets was approximately 1.9 and 2.4 years, respectively.
As of September 30, 2020, future amortization of finite-lived acquisition-related intangibles that will be recorded in the Condensed Consolidated Statements of Operations is estimated as follows (in millions):
|
|
|
|
|
|
Fiscal Year Ending March 31,
|
|
2021 (remaining six months)
|
$
|
11
|
|
2022
|
22
|
|
2023
|
9
|
|
2024 and thereafter
|
—
|
|
Total
|
$
|
42
|
|
(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, 2020 and 2019, we did not recognize any material losses or impairment charges on royalty-based commitments.
The current and long-term portions of prepaid royalties and minimum guaranteed royalty-related assets, included in other current assets and other assets, consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30, 2020
|
|
As of
March 31, 2020
|
Other current assets
|
$
|
92
|
|
|
$
|
74
|
|
Other assets
|
22
|
|
|
25
|
|
Royalty-related assets
|
$
|
114
|
|
|
$
|
99
|
|
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, 2020
|
|
As of
March 31, 2020
|
Accrued royalties
|
$
|
129
|
|
|
$
|
171
|
|
|
|
|
|
Other liabilities
|
13
|
|
|
26
|
|
Royalty-related liabilities
|
$
|
142
|
|
|
$
|
197
|
|
As of September 30, 2020, we were committed to pay approximately $1,895 million to content licensors, independent software developers, and co-publishing and/or distribution affiliates, but performance remained with the counterparty (i.e., delivery of the product or content or other factors) and such commitments were therefore not recorded in our Condensed Consolidated Financial Statements. See Note 11 for further information on our developer and licensor commitments.
(8) BALANCE SHEET DETAILS
Property and Equipment, Net
Property and equipment, net, as of September 30, 2020 and March 31, 2020 consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30, 2020
|
|
As of
March 31, 2020
|
Computer, equipment and software
|
$
|
795
|
|
|
$
|
722
|
|
Buildings
|
351
|
|
|
340
|
|
Leasehold improvements
|
168
|
|
|
161
|
|
Equipment, furniture and fixtures, and other
|
87
|
|
|
83
|
|
Land
|
66
|
|
|
65
|
|
Construction in progress
|
6
|
|
|
20
|
|
|
1,473
|
|
|
1,391
|
|
Less: accumulated depreciation
|
(1,015)
|
|
|
(942)
|
|
Property and equipment, net
|
$
|
458
|
|
|
$
|
449
|
|
During the three and six months ended September 30, 2020, depreciation expense associated with property and equipment was $32 million and $63 million, respectively.
During the three and six months ended September 30, 2019, depreciation expense associated with property and equipment was $30 million and $60 million, respectively.
Accrued and Other Current Liabilities
Accrued and other current liabilities as of September 30, 2020 and March 31, 2020 consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30, 2020
|
|
As of
March 31, 2020
|
Other accrued expenses
|
$
|
362
|
|
|
$
|
273
|
|
Accrued compensation and benefits
|
285
|
|
|
326
|
|
|
|
|
|
Accrued royalties
|
129
|
|
|
171
|
|
Sales returns and price protection reserves
|
72
|
|
|
109
|
|
|
|
|
|
Deferred net revenue (other)
|
149
|
|
|
104
|
|
Operating lease liabilities
|
86
|
|
|
69
|
|
Accrued and other current liabilities
|
$
|
1,083
|
|
|
$
|
1,052
|
|
Deferred net revenue (other) includes the deferral of subscription revenue, advertising revenue, licensing arrangements, and other revenue for which revenue recognition criteria has not been met.
Deferred net revenue
Deferred net revenue as of September 30, 2020 and March 31, 2020 consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30, 2020
|
|
As of
March 31, 2020
|
Deferred net revenue (online-enabled games)
|
$
|
639
|
|
|
$
|
945
|
|
Deferred net revenue (other)
|
149
|
|
|
104
|
|
Deferred net revenue (noncurrent)
|
11
|
|
|
8
|
|
Total Deferred net revenue
|
$
|
799
|
|
|
$
|
1,057
|
|
During the six months ended September 30, 2020 and 2019, we recognized $985 million and $1,131 million of revenue, respectively, that were included in the deferred net revenue balance at the beginning of the period.
Remaining Performance Obligations
As of September 30, 2020, revenue allocated to remaining performance obligations consists of our deferred revenue balance of $799 million. These balances exclude any estimates for future variable consideration as we have elected the optional exemption to exclude sales-based royalty revenue. We expect to recognize substantially all of these balances as revenue over the next 12 months.
(9) INCOME TAXES
The provision for income taxes for the six months ended September 30, 2020 is based on our projected annual effective tax rate for fiscal year 2021, adjusted for specific items that are required to be recognized in the period in which they are incurred.
Our effective tax rates for the three and six months ended September 30, 2020 were negative 33 percent and 9 percent, respectively, as compared to negative 201 percent and negative 216 percent, respectively, for the same periods in fiscal year 2020.
During the three months ended June 30, 2019, we completed an intra-entity sale of some of our intellectual property rights to our Swiss subsidiary, where our international business is headquartered (the “Swiss intra-entity sale”), resulting in the recognition of a $1.17 billion net Swiss deferred tax asset, which will reverse over a 20-year period. Separately, during the three months ended September 30, 2019, Switzerland enacted a new statutory tax rate. As a result of the enactment, we remeasured our Swiss deferred tax asset and recognized an additional net tax benefit of $630 million through continuing operations (“Swiss rate change benefit”). In addition, the opinion of the Ninth Circuit Court of Appeals in Altera Corp. v Commissioner (the “Altera opinion”) resulted in the recognition of $90 million of unrecognized tax benefits related to U.S. uncertain tax positions during the three months ended June 30, 2019. Excluding the Swiss intra-entity sale, Swiss rate change benefit and Altera opinion, the effective tax rate for the three and six months ended September 30, 2019 would have been 13 percent and 14 percent, respectively.
When compared to the statutory rate of 21 percent, the effective tax rates for the three and six months ended September 30, 2020 were lower primarily due to the decreases in unrecognized tax benefits related to prior year tax positions, net of a partial valuation allowance.
We are subject to income tax examinations in various jurisdictions with respect to fiscal years after 2010. The timing and potential resolution of income tax examinations is highly uncertain. The total unrecognized tax benefits as of September 30, 2020 were $584 million:
|
|
|
|
|
|
Balance as of March 31, 2020
|
$
|
983
|
|
Increases in unrecognized tax benefits related to prior year tax positions
|
5
|
|
Decreases in unrecognized tax benefits related to prior year tax positions
|
(414)
|
|
Increases in unrecognized tax benefits related to current year tax positions
|
27
|
|
Decreases in unrecognized tax benefits related to settlements with taxing authorities
|
—
|
|
Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations
|
(22)
|
|
Changes in unrecognized tax benefits due to foreign currency translation
|
5
|
|
Balance as of September 30, 2020
|
$
|
584
|
|
While we continue to measure our uncertain tax positions, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued. In the period ended June 30, 2020, the Supreme Court of the United States denied Altera’s appeal of the Altera opinion, resulting in a partial decrease of our unrecognized tax benefits, as well as a reclassification of approximately $80 million of non-current payable to current payable. A complete resolution and settlement of the matters underlying the Altera opinion is reasonably possible within the next 12 months, which would result in an additional reduction of our gross unrecognized tax benefits. However, it is uncertain whether a complete resolution and settlement of such matters would also result in resolution of all related and unrelated U.S. positions for all applicable years. Therefore, it is not possible to provide a range of potential outcomes associated with a reversal of our gross unrecognized tax benefits.
Every quarter, we perform a realizability analysis to evaluate whether it is more likely than not that all or a portion of our deferred tax assets will not be realized. During the three and six months ended September 30, 2020, we recognized an additional $41 million of valuation allowance against our deferred tax assets primarily due to the recognition of previously unrecognized tax benefits related to prior year tax positions and a change in current year estimated ordinary income.
(10) FINANCING ARRANGEMENTS
Senior Notes
In February 2016, we issued $600 million aggregate principal amount of 3.70% Senior Notes due March 1, 2021 (the “2021 Notes”) and $400 million aggregate principal amount of 4.80% Senior Notes due March 1, 2026 (the “2026 Notes,” and together with the 2021 Notes, the “Senior Notes”). Our proceeds were $989 million, net of discount of $2 million and issuance costs of $9 million. Both the discount and issuance costs are being amortized to interest expense over the respective terms of the 2021 Notes and the 2026 Notes using the effective interest rate method. The effective interest rate is 3.94% for the 2021 Notes and 4.97% for the 2026 Notes. Interest is payable semiannually in arrears, on March 1 and September 1 of each year.
The carrying and fair values of the Senior Notes are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30, 2020
|
|
As of
March 31, 2020
|
Senior Notes:
|
|
|
|
3.70% Senior Notes due 2021
|
$
|
600
|
|
|
$
|
600
|
|
4.80% Senior Notes due 2026
|
400
|
|
|
400
|
|
Total principal amount
|
$
|
1,000
|
|
|
$
|
1,000
|
|
Unaccreted discount
|
(1)
|
|
|
(1)
|
|
Unamortized debt issuance costs
|
(3)
|
|
|
(3)
|
|
Net carrying value of Senior Notes
|
$
|
996
|
|
|
$
|
996
|
|
|
|
|
|
Fair value of Senior Notes (Level 2)
|
$
|
1,082
|
|
|
$
|
1,030
|
|
As of September 30, 2020, the remaining life of the 2021 Notes and 2026 Notes is approximately 0.4 years and 5.4 years, respectively.
The Senior Notes are senior unsecured obligations and rank equally with all our other existing and future unsubordinated obligations and any indebtedness that we may incur from time to time under our Credit Facility.
The 2021 Notes and the 2026 Notes are redeemable at our option at any time prior to February 1, 2021 or December 1, 2025, respectively, subject to a make-whole premium. Within one and three months of maturity, we may redeem the 2021 Notes or the 2026 Notes, respectively, at a redemption price equal to 100% of the aggregate principal amount plus accrued and unpaid interest. In addition, upon the occurrence of a change of control repurchase event, the holders of the Senior Notes may require us to repurchase all or a portion of the Senior Notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. The Senior Notes also include covenants that limit our ability to incur liens on assets and to enter into sale and leaseback transactions, subject to certain allowances.
Credit Facility
On August 29, 2019, we entered into a $500 million unsecured revolving credit facility (“Credit Facility”) with a syndicate of banks. The Credit Facility terminates on August 29, 2024 unless the maturity is extended in accordance with its terms. The Credit Facility contains an option to arrange with existing lenders and/or new lenders to provide up to an aggregate of $500 million in additional commitments for revolving loans. Proceeds of loans made under the Credit Facility may be used for general corporate purposes.
The credit agreement contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, incur subsidiary indebtedness, grant liens, and dispose of all or substantially all assets, in each case subject to customary exceptions for a credit facility of this size and type. We are also required to maintain compliance with a debt to EBITDA ratio. As of September 30, 2020, we were in compliance with the debt to EBITDA ratio.
As of September 30, 2020, no amounts were outstanding under the Credit Facility. $2 million of debt issuance costs that were paid in connection with obtaining this credit facility are being amortized to interest expense over the 5-year term of the Credit Facility.
Interest Expense
The following table summarizes our interest expense recognized for the three and six months ended September 30, 2020 and 2019 that is included in interest and other income (expense), net on our Condensed Consolidated Statements of Operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Six Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
Amortization of debt issuance costs
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1)
|
|
|
$
|
(1)
|
|
Coupon interest expense
|
(11)
|
|
|
(11)
|
|
|
(21)
|
|
|
(21)
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
$
|
(11)
|
|
|
$
|
(11)
|
|
|
$
|
(22)
|
|
|
$
|
(22)
|
|
(11) COMMITMENTS AND CONTINGENCIES
Development, Celebrity, League and Content Licenses: Payments and Commitments
The products we produce in our studios are designed and created by our employee designers, artists, software programmers and by non-employee software developers (“independent artists” or “third-party developers”). We typically advance development funds to the independent artists and third-party developers during development of our games, usually in installment payments made upon the completion of specified development milestones. Contractually, these payments are generally considered advances against subsequent royalties on the sales of the products. These terms are set forth in written agreements entered into with the independent artists and third-party developers.
In addition, we have certain celebrity, league and content license contracts that contain minimum guarantee payments and marketing commitments that may not be dependent on any deliverables. Celebrities and organizations with whom we have contracts include, but are not limited to: FIFA (Fédération Internationale de Football Association), FIFPRO Foundation, FAPL (Football Association Premier League Limited), DFL Deutsche Fußball Liga E.V. (German Soccer League), and Liga Nacional De Futbol Profesional (professional soccer); National Basketball Association and National Basketball Players Association (professional basketball); National Hockey League and NHL Players’ Association (professional hockey); National Football League Properties and PLAYERS Inc. (professional football); William Morris Endeavor Entertainment LLC (professional mixed martial arts); ESPN (content in EA SPORTS games); Disney Interactive (Star Wars); and Fox Digital Entertainment, Inc. (The Simpsons). These developer and content license commitments represent the sum of (1) the cash payments due under non-royalty-bearing licenses and services agreements and (2) the minimum guaranteed payments and advances against royalties due under royalty-bearing licenses and services agreements, the majority of which are conditional upon performance by the counterparty. These minimum guarantee payments and any related marketing commitments are included in the table below.
The following table summarizes our minimum contractual obligations as of September 30, 2020 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ending March 31,
|
|
|
|
2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
six mos.)
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
2026
|
|
Thereafter
|
Unrecognized commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developer/licensor commitments
|
$
|
1,895
|
|
|
$
|
86
|
|
|
$
|
340
|
|
|
$
|
358
|
|
|
$
|
349
|
|
|
$
|
359
|
|
|
$
|
271
|
|
|
$
|
132
|
|
Marketing commitments
|
668
|
|
|
65
|
|
|
145
|
|
|
120
|
|
|
118
|
|
|
109
|
|
|
78
|
|
|
33
|
|
Senior Notes interest
|
112
|
|
|
17
|
|
|
20
|
|
|
19
|
|
|
19
|
|
|
19
|
|
|
18
|
|
|
—
|
|
Operating lease imputed interest
|
19
|
|
|
3
|
|
|
5
|
|
|
4
|
|
|
3
|
|
|
2
|
|
|
1
|
|
|
1
|
|
Operating leases not yet commenced (a)
|
180
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
13
|
|
|
14
|
|
|
14
|
|
|
135
|
|
Other purchase obligations
|
130
|
|
|
31
|
|
|
65
|
|
|
21
|
|
|
5
|
|
|
4
|
|
|
4
|
|
|
—
|
|
Total unrecognized commitments
|
3,004
|
|
|
202
|
|
|
575
|
|
|
526
|
|
|
507
|
|
|
507
|
|
|
386
|
|
|
301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Notes principal and interest
|
1,003
|
|
|
603
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
400
|
|
|
—
|
|
Operating leases
|
243
|
|
|
44
|
|
|
70
|
|
|
38
|
|
|
32
|
|
|
25
|
|
|
18
|
|
|
16
|
|
Transition Tax and other taxes
|
66
|
|
|
22
|
|
|
24
|
|
|
3
|
|
|
4
|
|
|
6
|
|
|
7
|
|
|
—
|
|
Licensing commitments
|
39
|
|
|
12
|
|
|
27
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total recognized commitments
|
1,351
|
|
|
681
|
|
|
121
|
|
|
41
|
|
|
36
|
|
|
31
|
|
|
425
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commitments
|
$
|
4,355
|
|
|
$
|
883
|
|
|
$
|
696
|
|
|
$
|
567
|
|
|
$
|
543
|
|
|
$
|
538
|
|
|
$
|
811
|
|
|
$
|
317
|
|
(a)As of September 30, 2020, we have entered into three office leases that have not yet commenced with aggregate future lease payments of approximately $180 million. These office leases are expected to commence in fiscal year 2021 and 2023, and will have lease terms ranging from 7 to 15 years.
The unrecognized amounts represented in the table above reflect our minimum cash obligations for the respective fiscal years, but do not necessarily represent the periods in which they will be recognized and expensed in our Condensed Consolidated Financial Statements. In addition, the amounts in the table above are presented based on the dates the amounts are contractually due as of September 30, 2020; however, certain payment obligations may be accelerated depending on the performance of our operating results.
In addition to what is included in the table above, as of September 30, 2020, we had a liability for unrecognized tax benefits and an accrual for the payment of related interest totaling $279 million, of which we are unable to make a reasonably reliable estimate of when cash settlement with a taxing authority will occur.
Legal Proceedings
The Netherlands Gambling Authority (“NGA”) has asserted that the randomized selection of virtual items in the FIFA Ultimate Team mode of our FIFA franchise contravenes the Dutch Betting and Gaming Act. On October 15, 2020, the District Court of the Hague affirmed the NGA’s decision. We intend to appeal the District Court’s order, and request a suspension of the NGA’s decision pending that appeal. We do not believe that the operational or financial consequences from these proceedings will have a material adverse effect on our consolidated financial statements. We do not believe that our products and services violate applicable gambling laws.
We are also subject to claims and litigation arising in the ordinary course of business. We do not believe that any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on our Condensed Consolidated Financial Statements.
(12) STOCK-BASED COMPENSATION
Valuation Assumptions
We recognize compensation cost for stock-based awards to employees based on the awards’ estimated grant-date fair value using a straight-line approach over the service period for which such awards are expected to vest. We account for forfeitures as they occur.
The estimation of the fair value of market-based restricted stock units, stock options and ESPP purchase rights is affected by assumptions regarding subjective and complex variables. Generally, our assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes. We estimate the fair value of our stock-based awards as follows:
•Restricted Stock Units and Performance-Based Restricted Stock Units. The fair value of restricted stock units and performance-based restricted stock units (other than market-based restricted stock units) is determined based on the quoted market price of our common stock on the date of grant.
•Market-Based Restricted Stock Units. Market-based restricted stock units consist of grants of performance-based restricted stock units to certain members of executive management that vest contingent upon the achievement of pre-determined market and service conditions (referred to herein as “market-based restricted stock units”). The fair value of our market-based restricted stock units is estimated using a Monte-Carlo simulation model. Key assumptions for the Monte-Carlo simulation model are the risk-free interest rate, expected volatility, expected dividends and correlation coefficient.
•Stock Options and Employee Stock Purchase Plan. The fair value of stock options and stock purchase rights granted pursuant to our equity incentive plans and our 2000 Employee Stock Purchase Plan, as amended (“ESPP”), respectively, is estimated using the Black-Scholes valuation model based on the multiple-award valuation method. Key assumptions of the Black-Scholes valuation model are the risk-free interest rate, expected volatility, expected term and expected dividends. The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant for the expected term of the option. Expected volatility is based on a combination of historical stock price volatility and implied volatility of publicly-traded options on our common stock. An expected term is estimated based on historical exercise behavior, post-vesting termination patterns, options outstanding and future expected exercise behavior.
There were an insignificant number of stock options granted during the three and six months ended September 30, 2020 and 2019.
The estimated assumptions used in the Black-Scholes valuation model to value our ESPP purchase rights were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESPP Purchase Rights
|
|
|
Three Months Ended
September 30,
|
|
|
2020
|
|
2019
|
|
Risk-free interest rate
|
0.1
|
%
|
|
1.7 - 1.9%
|
|
Expected volatility
|
34 - 39%
|
|
34 - 37%
|
|
Weighted-average volatility
|
37
|
%
|
|
36
|
%
|
|
Expected term
|
6 - 12 months
|
|
6 - 12 months
|
|
Expected dividends
|
None
|
|
None
|
|
Stock Options
The following table summarizes our stock option activity for the six months ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
(in thousands)
|
|
Weighted-
Average
Exercise Prices
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
Aggregate
Intrinsic Value
(in millions)
|
Outstanding as of March 31, 2020
|
|
1,074
|
|
|
$
|
30.85
|
|
|
|
|
|
Granted
|
|
2
|
|
|
124.20
|
|
|
|
|
|
Exercised
|
|
(351)
|
|
|
28.27
|
|
|
|
|
|
Forfeited, cancelled or expired
|
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding as of September 30, 2020
|
|
725
|
|
|
$
|
32.31
|
|
|
3.49
|
|
$
|
70
|
|
Vested and expected to vest
|
|
725
|
|
|
$
|
32.31
|
|
|
3.49
|
|
$
|
70
|
|
Exercisable as of September 30, 2020
|
|
725
|
|
|
$
|
32.31
|
|
|
3.49
|
|
$
|
70
|
|
The aggregate intrinsic value represents the total pre-tax intrinsic value based on our closing stock price as of September 30, 2020, which would have been received by the option holders had all the option holders exercised their options as of that date. We issue new common stock from our authorized shares upon the exercise of stock options.
Restricted Stock Units
The following table summarizes our restricted stock unit activity for the six months ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Rights
(in thousands)
|
|
Weighted-
Average Grant
Date Fair Values
|
Outstanding as of March 31, 2020
|
6,217
|
|
|
$
|
100.42
|
|
Granted
|
2,825
|
|
|
126.20
|
|
Vested
|
(1,645)
|
|
|
103.67
|
|
Forfeited or cancelled
|
(204)
|
|
|
106.79
|
|
Outstanding as of September 30, 2020
|
7,193
|
|
|
$
|
109.62
|
|
Performance-Based Restricted Stock Units
Our performance-based restricted stock units cliff vest after a four-year performance period contingent upon the achievement of pre-determined performance-based milestones based on our non-GAAP net revenue and free cash flow as well as service conditions. If these performance-based milestones are not met but service conditions are met, the performance-based restricted stock units will not vest, in which case any compensation expense we have recognized to date will be reversed. Each quarter, we update our assessment of the probability that the non-GAAP net revenue and free cash flow performance milestones will be achieved. We amortize the fair values of performance-based restricted stock units over the requisite service period. The performance-based restricted stock units contain threshold, target and maximum milestones for each of non-GAAP net revenue and free cash flow. The number of shares of common stock to be issued at vesting will range from zero to 200 percent of the target number of performance-based restricted stock units attributable to each performance-based milestone based on the company’s performance as compared to these threshold, target and maximum performance-based milestones. Each performance-based milestone is weighted evenly where 50 percent of the total performance-based restricted stock units that vest will be determined based on non-GAAP net revenue and the other 50 percent will be determined based on free cash flow. The number of shares that vest based on each performance-based milestone is independent from the other.
The following table summarizes our performance-based restricted stock unit activity, presented with the maximum number of shares that could potentially vest, for the six months ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-
Based Restricted
Stock Units
(in thousands)
|
|
Weighted-
Average Grant
Date Fair Value
|
Outstanding as of March 31, 2020
|
579
|
|
|
$
|
110.51
|
|
Granted
|
—
|
|
|
—
|
|
Forfeited or cancelled
|
—
|
|
|
—
|
|
Outstanding as of September 30, 2020
|
579
|
|
|
$
|
110.51
|
|
Market-Based Restricted Stock Units
Our market-based restricted stock units vest contingent upon the achievement of pre-determined market and service conditions. If these market conditions are not met but service conditions are met, the market-based restricted stock units will not vest; however, any compensation expense we have recognized to date will not be reversed. The number of shares of common stock to be issued at vesting will range from zero to 200 percent of the target number of market-based restricted stock units based on our total stockholder return (“TSR”) relative to the performance of companies in the NASDAQ-100 Index for each measurement period, over either a one-year, two-year cumulative, three-year cumulative period or a two-year and four-year cumulative period.
The following table summarizes our market-based restricted stock unit activity, presented with the maximum number of shares that could potentially vest, for the six months ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Market-Based
Restricted Stock
Units
(in thousands)
|
|
Weighted-
Average Grant
Date Fair Value
|
Outstanding as of March 31, 2020
|
1,898
|
|
|
$
|
128.41
|
|
Granted
|
874
|
|
|
145.78
|
|
Vested
|
(157)
|
|
|
113.72
|
|
Forfeited or cancelled
|
(398)
|
|
|
137.98
|
|
Outstanding as of September 30, 2020
|
2,217
|
|
|
$
|
134.58
|
|
Stock-Based Compensation Expense
The following table summarizes stock-based compensation expense resulting from stock options, restricted stock units, market-based restricted stock units, performance-based restricted stock units, and the ESPP purchase rights included in our Condensed Consolidated Statements of Operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Six Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Cost of revenue
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
2
|
|
Research and development
|
74
|
|
|
61
|
|
|
140
|
|
|
110
|
|
Marketing and sales
|
12
|
|
|
10
|
|
|
23
|
|
|
17
|
|
General and administrative
|
25
|
|
|
20
|
|
|
49
|
|
|
36
|
|
Stock-based compensation expense
|
$
|
113
|
|
|
$
|
92
|
|
|
$
|
215
|
|
|
$
|
165
|
|
During the three and six months ended September 30, 2020, we recognized $15 million and $38 million, respectively, of deferred income tax benefit related to our stock-based compensation expense. During the three and six months ended September 30, 2019, we recognized $5 million and $11 million, respectively, of deferred income tax benefit related to our stock-based compensation expense.
As of September 30, 2020, our total unrecognized compensation cost related to restricted stock units, market-based restricted stock units, and performance-based restricted stock units was $734 million and is expected to be recognized over a weighted-average service period of 1.9 years. Of the $734 million of unrecognized compensation cost, $618 million relates to restricted stock units, $112 million relates to market-based restricted stock units, and $4 million relates to performance-based restricted stock units at an 83 percent average payout.
Stock Repurchase Program
In May 2018, a Special Committee of our Board of Directors, on behalf of the full Board of Directors, authorized a program to repurchase up to $2.4 billion of our common stock. Repurchases under the May 2018 program were completed in April 2020.
The following table summarizes total shares repurchased during the three and six months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
Three months ended September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
$
|
—
|
|
|
|
|
|
Six months ended September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
$
|
78
|
|
|
|
|
|
Three months ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
$
|
306
|
|
|
|
|
|
Six months ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
6.5
|
|
|
$
|
611
|
|
|
|
|
|
Subsequent Events
In November 2020, our Board of Directors authorized a program to repurchase up to $2.6 billion of our common stock. This stock repurchase program expires on November 4, 2022. Under this program, we may purchase stock in the open market or through privately negotiated transactions in accordance with applicable securities laws, including pursuant to pre-arranged stock trading plans. The timing and actual amount of the stock repurchases will depend on several factors including price, capital availability, regulatory requirements, alternative investment opportunities and other market conditions. We are not obligated to repurchase a specific number of shares under this program and it may be modified, suspended or discontinued at any time. We are actively repurchasing shares under this program.
In November 2020, our Board of Directors initiated a quarterly cash dividend on the Company’s common stock and declared a cash dividend of $0.17 per share of common stock.
(13) EARNINGS PER SHARE
The following table summarizes the computations of basic earnings per share (“Basic EPS”) and diluted earnings per share (“Diluted EPS”). Basic EPS is computed as net income divided by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation plans including stock options, restricted stock, restricted stock units, and ESPP purchase rights using the treasury stock method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Six Months Ended
September 30,
|
(In millions, except per share amounts)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net income
|
$
|
185
|
|
|
$
|
854
|
|
|
$
|
550
|
|
|
$
|
2,275
|
|
Shares used to compute earnings per share:
|
|
|
|
|
|
|
|
Weighted-average common stock outstanding — basic
|
289
|
|
|
295
|
|
|
289
|
|
|
296
|
|
Dilutive potential common shares related to stock award plans and from assumed exercise of stock options
|
4
|
|
|
1
|
|
|
3
|
|
|
1
|
|
Weighted-average common stock outstanding — diluted
|
293
|
|
|
296
|
|
|
292
|
|
|
297
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.64
|
|
|
$
|
2.89
|
|
|
$
|
1.90
|
|
|
$
|
7.69
|
|
Diluted
|
$
|
0.63
|
|
|
$
|
2.89
|
|
|
$
|
1.88
|
|
|
$
|
7.66
|
|
For the three and six months ended September 30, 2020, one million of restricted stock units and market-based restricted stock units were excluded from the treasury stock method computation of diluted shares, respectively, as their inclusion would have had an antidilutive effect.
For the three and six months ended September 30, 2019, two million of restricted stock units and market-based restricted stock units were excluded from the treasury stock method computation of diluted shares, respectively, as their inclusion would have had an antidilutive effect.
Our performance-based restricted stock units, which are considered contingently issuable shares, are also excluded from the treasury stock method computation because the related performance-based milestones were not achieved as of the end of the three months ended September 30, 2020.
(14) SEGMENT AND REVENUE INFORMATION
Our reporting segment is based upon: our internal organizational structure; the manner in which our operations are managed; the criteria used by our Chief Executive Officer, our Chief Operating Decision Maker (“CODM”), to evaluate segment performance; the availability of separate financial information; and overall materiality considerations. Our CODM currently reviews total company operating results to assess overall performance and allocate resources. As of September 30, 2020, we have only one reportable segment, which represents our only operating segment.
Information about our total net revenue by timing of recognition for the three and six months ended September 30, 2020 and 2019 is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Six Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net revenue by timing of recognition
|
|
|
|
|
|
|
|
Revenue recognized at a point in time
|
$
|
337
|
|
|
$
|
629
|
|
|
$
|
779
|
|
|
$
|
877
|
|
Revenue recognized over time
|
814
|
|
|
719
|
|
|
1,831
|
|
|
1,680
|
|
Net revenue
|
$
|
1,151
|
|
|
$
|
1,348
|
|
|
$
|
2,610
|
|
|
$
|
2,557
|
|
Generally, performance obligations that are recognized upfront upon transfer of control are classified as revenue recognized at a point in time, while performance obligations that are recognized over the estimated offering period or subscription period as the services are provided are classified as revenue recognized over time.
Revenue recognized at a point in time includes revenue allocated to the software license performance obligation. This also includes revenue from the licensing of software to third-parties.
Revenue recognized over time includes service revenue allocated to the future update rights and the online hosting performance obligations. This also includes service revenue allocated to the future update rights from the licensing of software to third-parties, online-only software services such as our Ultimate Team game mode, and subscription services.
Information about our total net revenue by composition for the three and six months ended September 30, 2020 and 2019 is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Six Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net revenue by composition
|
|
|
|
|
|
|
|
Full game downloads
|
$
|
163
|
|
|
$
|
181
|
|
|
$
|
386
|
|
|
$
|
314
|
|
Packaged goods
|
119
|
|
|
399
|
|
|
255
|
|
|
528
|
|
Full game
|
282
|
|
|
580
|
|
|
641
|
|
|
842
|
|
|
|
|
|
|
|
|
|
Live services and other
|
869
|
|
|
768
|
|
|
1,969
|
|
|
1,715
|
|
Net revenue
|
$
|
1,151
|
|
|
$
|
1,348
|
|
|
$
|
2,610
|
|
|
$
|
2,557
|
|
Full game net revenue includes full game downloads and packaged goods. Full game downloads includes revenue from digital sales of full games on console, PC, and mobile. Packaged goods includes revenue from software that is sold physically. This includes (1) net revenue from game software sold physically through traditional channels such as brick and mortar retailers, and (2) software licensing revenue from third parties (for example, makers of console platforms, personal computers or computer accessories) who include certain of our full games for sale with their products (for example, OEM bundles).
Live services and other net revenue includes revenue from sales of extra content for console, PC and mobile games, licensing revenue from third-party publishing partners who distribute our games digitally, subscriptions, advertising, and non-software licensing.
Information about our total net revenue by platform for the three and six months ended September 30, 2020 and 2019 is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Six Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Platform net revenue
|
|
|
|
|
|
|
|
Console
|
$
|
714
|
|
|
$
|
923
|
|
|
$
|
1,646
|
|
|
$
|
1,683
|
|
PC and other
|
249
|
|
|
248
|
|
|
574
|
|
|
501
|
|
Mobile
|
188
|
|
|
177
|
|
|
390
|
|
|
373
|
|
Net revenue
|
$
|
1,151
|
|
|
$
|
1,348
|
|
|
$
|
2,610
|
|
|
$
|
2,557
|
|
Information about our operations in North America and internationally for the three and six months ended September 30, 2020 and 2019 is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Six Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net revenue from unaffiliated customers
|
|
|
|
|
|
|
|
North America
|
$
|
578
|
|
|
$
|
531
|
|
|
$
|
1,205
|
|
|
$
|
1,021
|
|
International
|
573
|
|
|
817
|
|
|
1,405
|
|
|
1,536
|
|
Net revenue
|
$
|
1,151
|
|
|
$
|
1,348
|
|
|
$
|
2,610
|
|
|
$
|
2,557
|
|
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Electronic Arts Inc.:
Results of Review of Interim Financial Information
We have reviewed the condensed consolidated balance sheet of Electronic Arts, Inc. and subsidiaries (the Company) as of October 3, 2020, the related condensed consolidated statements of operations, comprehensive income, and stockholders’ equity for the three-month and six-month periods ended October 3, 2020 and September 28, 2019, the related condensed consolidated statements of cash flows for the six-month periods ended October 3, 2020 and September 28, 2019, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of March 28, 2020, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated May 20, 2020, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 28, 2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
(Signed) KPMG LLP
Santa Clara, California
November 10, 2020
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. We use words such as “anticipate,” “believe,” “expect,” “intend,” “estimate”, “plan”, “predict”, “seek”, “goal”, “will”, “may”, “likely”, “should”, “could” (and the negative of any of these terms), “future” and similar expressions to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our business, projections of markets relevant to our business, uncertain events and assumptions and other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements consist of, among other things, statements related to the impact of the COVID-19 pandemic to our business, industry prospects, our future financial performance, and our business plans and objectives, and may include certain assumptions that underlie the forward-looking statements. These forward-looking statements are not guarantees of future performance and reflect management’s current expectations. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that might cause or contribute to such differences include those discussed in Part II, Item 1A of this Quarterly Report under the heading “Risk Factors” in, as well as in other documents we have filed with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the fiscal year ended March 31, 2020. We assume no obligation to revise or update any forward-looking statement for any reason, except as required by law.
OVERVIEW
The following overview is a high-level discussion of our operating results, as well as some of the trends and drivers that affect our business. Management believes that an understanding of these trends and drivers provides important context for our results for the three months ended September 30, 2020, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Form 10-Q, including in the remainder of “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”),” “Risk Factors,” and the Condensed Consolidated Financial Statements and related Notes. Additional information can be found in the “Business” section of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020 as filed with the SEC on May 20, 2020 and in other documents we have filed with the SEC.
About Electronic Arts
Electronic Arts is a global leader in digital interactive entertainment. We develop, market, publish and deliver games, content and services that can be played and watched on game consoles, PCs, mobile phones and tablets. We believe that the breadth and depth of our portfolio, live services offerings, and our use of multiple business models and distribution channels provide us with strategic advantages. Our foundation is a collection of intellectual property from which we create innovative games and content that enables us to build on-going and meaningful relationships with a community of players, creators and viewers. Our portfolio includes brands that we either wholly own (such as Battlefield, The Sims, Apex Legends, Need for Speed and Plants v. Zombies) or license from others (such as FIFA, Madden NFL, UFC, NHL and Star Wars). We also offer our players high-quality experiences designed to provide value to players and extend and enhance gameplay. Our live services experiences include extra content, subscription offerings and other revenue generated outside of the sale of our base games. In addition, we are focused on reaching more players whenever and wherever they want to play. We believe that we can add value to our network by making it easier for players to connect to a world of play by offering choice of business model, distribution channel and device.
Financial Results
Our key financial results for our fiscal quarter ended September 30, 2020 were as follows:
•Total net revenue was $1,151 million, down 15 percent year-over-year. On a constant currency basis, we estimate
total net revenue would have been $1,193 million, down 11 percent year-over-year.
•Live services and other net revenue was $869 million, up 13 percent year-over-year.
•Gross margin was 75.2 percent, up 5.2 percentage points year-over-year.
•Operating expenses were $716 million, up 6 percent year-over-year.
•Operating income was $149 million, down 44 percent year-over-year.
•Net income was $185 million, down 78 percent year-over-year. Net income for the three months ended September 30, 2019 was $854 million and included a one-time net tax benefit of $630 million.
•Diluted earnings per share was $0.63, down 78 percent year-over-year driven by the one-time net tax benefit included in net income for the three months ended September 30, 2019.
•Operating cash flow was $61 million, up 65 percent year-over-year.
•Total cash, cash equivalents and short-term investments were $6,031 million.
From time to time, we make comparisons of current periods to prior periods with reference to constant currency. Constant currency comparisons are based on translating local currency amounts in the current period at actual foreign exchange rates from the prior comparable period. We evaluate our financial performance on a constant currency basis in order to facilitate period-to-period comparisons without regard to the impact of changing foreign currency exchange rates.
Trends in Our Business
COVID-19 Impact. We are closely monitoring the impact of the COVID-19 pandemic to our people and our business. Since the outbreak of COVID-19, we have focused on actions to support our people, our players, and communities around the world that have been affected by the COVID-19 pandemic.
Our People: The wellbeing of our people is our top priority, and to keep everyone as safe as possible, the vast majority of our workforce will be working from home at least until March 2021. We are offering support and resources to our people, including quarterly payments to assist with work from home costs and care needs, a pandemic care leave program, and additional services for mental and physical health. We have developed a detailed protocol for how we will evaluate the readiness to return to work for each of our offices around the world, accounting for guidance from health authorities and government, the comfort level of our employees, and preparation of our facilities for continued physical distancing.
Our Business: With more people staying home, we have seen growth in our business and across the industry. We have continued to execute against our plans, delivering eight new games so far in fiscal 2021, and tens of millions of new players have joined our network. In addition, live services net bookings for the six months ended September 30, 2020 increased more than 28 percent year-over-year. We have also experienced a significant increase in the percentage of our games purchased digitally, and we believe this step-up is likely a permanent structural change driven by shelter-in-place orders resulting from the COVID-19 pandemic.
Future Outlook: The full extent of the impact of the COVID-19 pandemic to our business, operations and financial results will depend on numerous evolving factors that we may not be able to predict. For example, we do not know how our products and services will be impacted as the response to the COVID-19 pandemic evolves. Engagement and net bookings could subside as a result of macroeconomic deterioration or other challenges. Additional factors that could impact our business include: our ability to continue to deliver new games and services in a distributed work environment, impacts to our key business partners, foreign exchange rate fluctuations, and other factors included in Part II, Item 1A of this Quarterly Report under the heading “Risk Factors”.
Live Services Business. We offer our players high-quality experiences designed to provide value to players and to extend and enhance gameplay. These live services include extra content, subscription offerings and other revenue generated outside of the sale of our base games. Our net revenue attributable to live services and other was $3,904 million, $3,358 million and $3,104 million for the trailing twelve months ended September 30, 2020, 2019, and 2018, respectively, and we expect that live services net revenue will continue to be material to our business. Within live services and other, net revenue attributable to extra content was $3,090 million, $2,599 million and $2,190 million for the trailing twelve months ended September 30, 2020, 2019, and 2018, respectively. Extra content net revenue has increased as players engage with our games and services over longer periods of time, and purchase additional content designed to provide value to players and extend and enhance gameplay. Our most popular live service is the extra content purchased for the Ultimate Team mode associated with our sports franchises. Ultimate Team allows players to collect current and former professional players in order to build and compete as a personalized team. Net revenue from extra content sales for Ultimate Team was $1,491 million, $1,369 million and $1,180 million during fiscal years 2020, 2019 and 2018, respectively, a substantial portion of which was derived from FIFA Ultimate Team.
Digital Delivery of Games. In our industry, players increasingly purchase games digitally as opposed to purchasing physical discs. While this trend, as applied to our business, may not be linear because of product mix during a fiscal year, consumer buying patterns and other factors, over time we expect players to purchase an increasingly higher proportion of our games digitally; therefore we expect net revenue attributable to digital full game downloads to increase over time and net revenue attributable to sales of packaged goods to decrease.
Our net revenue attributable to digital full game downloads was $811 million, $681 million and $714 million during fiscal years 2020, 2019 and 2018, respectively; while our net revenue attributable to packaged goods sales decreased from $1,542 million in fiscal year 2018 to $1,112 million in fiscal year 2019 and $1,076 million in fiscal year 2020. In addition, as measured based on total units sold on Microsoft’s Xbox One and Sony’s PlayStation 4 rather than by net revenue, we estimate that 49 percent, 49 percent, and 39 percent of our total units sold during fiscal years 2020, 2019 and 2018 were sold digitally. Digital full game units are based on sales information provided by Microsoft and Sony; packaged goods units sold through are estimated by obtaining data from significant retail partners in North America, Europe and Asia, and applying internal sales estimates with respect to retail partners from which we do not obtain data. We believe that these percentages are reasonable estimates of the proportion of our games that are digitally downloaded in relation to our total number of units sold for the applicable period of measurement.
We expect the long-term trends in revenue and in the percentage of games digitally downloaded to continue. During fiscal year 2021, the percentage of our games purchased digitally has increased significantly and we believe this step-up is likely a permanent structural change driven by shelter-in-place orders resulting from the COVID-19 pandemic. Increases in consumer adoption of digital purchase of games combined with increases in our live services revenue generally results in expansion of our gross margin, as costs associated with selling a game digitally is generally less than selling the same game through traditional retail and distribution channels.
Free-to-Play Games. The global adoption of mobile devices and a business model for those devices that allows consumers to try new games with no up-front cost, and that are monetized through a live service associated with the game, particularly extra content sales, has led to significant sales growth in the mobile gaming industry. Similarly, sales of extra content are the primary driver of our mobile business. We expect the mobile gaming industry to continue to grow during our 2021 fiscal year. Likewise, the consumer acceptance of free-to-play, live service-based, online PC games has broadened our consumer base and has begun to expand into the console market. For example, within our business, we offer Apex Legends as a free-to-play, live service-based PC and console game. We expect extra content revenue generated from mobile, PC and console free-to-play games to remain an important part of our business.
Concentration of Sales Among the Most Popular Games. In all major segments of our industry, we see a large portion of games sales concentrated on the most popular titles. Similarly, a significant portion of our revenue historically has been derived from games based on a few popular franchises, several of which we have released on an annual or bi-annual basis. In particular, we have historically derived a significant portion of our net revenue from our largest and most popular game, FIFA, the annualized version of which is consistently one of the best-selling games in the marketplace.
Recurring Revenue Sources. Our business model includes revenue that we deem recurring in nature, such as revenue from our annualized sports franchises (e.g., FIFA, Madden NFL), our console, PC and mobile catalog titles (i.e., titles that did not launch in the current fiscal year), and our live services. We have been able to forecast revenue from these areas of our business with greater relative confidence than for new games, services and business models. As we continue to incorporate new business models and modalities of play into our games, our goal is to continue to look for opportunities to expand the recurring portion of our business.
Net Bookings. In order to improve transparency into our business, we disclose an operating performance metric, net bookings. Net bookings is defined as the net amount of products and services sold digitally or sold-in physically in the period. Net bookings is calculated by adding total net revenue to the change in deferred net revenue for online-enabled games.
The following is a calculation of our total net bookings for the periods presented:
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Three Months Ended
September 30,
|
|
Six Months Ended
September 30,
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(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Total net revenue
|
$
|
1,151
|
|
|
$
|
1,348
|
|
|
$
|
2,610
|
|
|
$
|
2,557
|
|
Change in deferred net revenue (online-enabled games)
|
(241)
|
|
|
(35)
|
|
|
(310)
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|
|
(462)
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|
Net bookings (a)
|
$
|
910
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|
|
$
|
1,313
|
|
|
$
|
2,300
|
|
|
$
|
2,095
|
|
(a) At the beginning of fiscal year 2021, we changed the way in which we present net bookings to align with GAAP net revenue measures. Net bookings from mobile platform partners are now presented gross of platform provider fees. Historically, we presented net bookings from these partners net of platform fees. Net bookings for the three and six months ended September 30, 2019 has been recast for comparability.
Net bookings were $910 million for the three months ended September 30, 2020 driven by sales related to Madden NFL 21, Apex Legends, The Sims 4 and FIFA Ultimate Team. Net bookings decreased $403 million or 31 percent as compared to the three months ended September 30, 2019 due primarily to year-over-year change in the launch date of our FIFA console title from the second quarter in fiscal year 2020 to the third quarter in fiscal year 2021, partially offset by the Star Wars franchise and UFC 4. Full game net bookings were $266 million for the three months ended September 30, 2020, and decreased $371 million or 58 percent as compared to the three months ended September 30, 2019 due primarily to year-over-year change in the launch date of our FIFA console title, partially offset by UFC 4 and the Star Wars franchise. Live services and other net bookings were $644 million for the three months ended September 30, 2020, and decreased $32 million or 5 percent as compared to the three months ended September 30, 2019. The decrease in live services and other net bookings was due primarily to a decrease in sales of extra content for FIFA Ultimate Team, partially offset by Apex Legends and Star Wars: Galaxy of Heroes.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, and revenue and expenses during the reporting periods. The policies discussed below are considered by management to be critical because they are not only important to the portrayal of our financial condition and results of operations, but also because application and interpretation of these policies requires both management judgment and estimates of matters that are inherently uncertain and unknown, including uncertainty in the current economic environment due to the COVID-19 pandemic. As a result, actual results may differ materially from our estimates.
Revenue Recognition
We derive revenue principally from sales of our games, and related extra content and services that can be played on game consoles, PCs, mobile phones and tablets. Our product and service offerings include, but are not limited to, the following:
•full games with both online and offline functionality (“Games with Services”), which generally includes (1) the initial game delivered digitally or via physical disc at the time of sale and typically provide access to offline core game content (“software license”); (2) updates on a when-and-if-available basis, such as software patches or updates, and/or additional free content to be delivered in the future (“future update rights”); and (3) a hosted connection for online playability (“online hosting”);
•full games with online-only functionality which require an Internet connection to access all gameplay and functionality (“Online-Hosted Service Games”);
•extra content related to Games with Services and Online-Hosted Service Games which provides access to additional in-game content;
•subscriptions, such as EA Play and EA Play Pro, that generally offers access to a selection of full games, in-game content, online services and other benefits typically for a recurring monthly or annual fee; and
•licensing to third parties to distribute and host our games and content.
We evaluate and recognize revenue by:
•identifying the contract(s) with the customer;
•identifying the performance obligations in the contract;
•determining the transaction price;
•allocating the transaction price to performance obligations in the contract; and
•recognizing revenue as each performance obligation is satisfied through the transfer of a promised good or service to a customer (i.e., “transfer of control”).
Certain of our full game and/or extra content are sold to resellers with a contingency that the full game and/or extra content cannot be resold prior to a specific date (“Street Date Contingency”). We recognize revenue for transactions that have a Street Date Contingency when the Street Date Contingency is removed and the full game and/or extra content can be resold by the reseller. For digital full game and/or extra content downloads sold to customers, we recognize revenue when the full game and/or extra content is made available for download to the customer.
Online-Enabled Games
Games with Services. Our sales of Games with Services are evaluated to determine whether the software license, future update rights and the online hosting are distinct and separable. Sales of Games with Services are generally determined to have three distinct performance obligations: software license, future update rights, and the online hosting.
Since we do not sell the performance obligations on a stand-alone basis, we consider market conditions and other observable inputs to estimate the stand-alone selling price for each performance obligation. For Games with Services, generally 75 percent of the sales price is allocated to the software license performance obligation and recognized at a point in time when control of the license has been transferred to the customer (which is usually at or near the same time as the booking of the transaction). The remaining 25 percent is allocated to the future update rights and the online hosting performance obligations and recognized ratably as the service is provided (over the Estimated Offering Period).
Online-Hosted Service Games. Sales of our Online-Hosted Service Games are determined to have one distinct performance obligation: the online hosting. We recognize revenue from these arrangements as the service is provided.
Extra Content. Revenue received from sales of downloadable content are derived primarily from the sale of virtual currencies and digital in-game content that enhance players’ game experience. Sales of extra content are accounted for in a manner consistent with the treatment for our Games with Services and Online-Hosted Service Games as discussed above, depending upon whether or not the extra content has offline functionality. That is, if the extra content has offline functionality, then the extra content is accounted for similarly to Games with Services (generally determined to have three distinct performance obligations: software license, future update rights, and the online hosting). If the extra content does not have offline functionality, then the extra content is determined to have one distinct performance obligation: the online-hosted service offering.
Subscriptions
Sales of our subscriptions are deemed to be one performance obligation and we recognize revenue from these arrangements ratably over the subscription term as the performance obligation is satisfied.
Licensing Revenue
In certain countries, we utilize third-party licensees to distribute and host our games and content in accordance with license agreements, for which the licensees typically pay us a fixed minimum guarantee and/or sales-based royalties. These arrangements typically include multiple performance obligations, such as a time-based license of software and future update rights. We recognize as revenue a portion of the minimum guarantee when we transfer control of the license of software (generally upon commercial launch) and the remaining portion ratably over the contractual term in which we provide the licensee with future update rights. Any sales-based royalties are generally recognized as the related sales occur by the licensee.
Significant Judgments around Revenue Arrangements
Identifying performance obligations. Performance obligations promised in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct, (i.e., the customer can benefit from the goods or services either on its own or together with other resources that are readily available), and are distinct in the context of the contract (i.e., it is separately identifiable from other goods or services in the contract). To the extent a contract includes multiple promises, we must apply judgment to determine whether those promises are separate and distinct performance obligations. If these criteria are not met, the promises are accounted for as a combined performance obligation.
Determining the transaction price. The transaction price is determined based on the consideration that we will be entitled to receive in exchange for transferring our goods and services to the customer. Determining the transaction price often requires judgment, based on an assessment of contractual terms and business practices. It further includes review of variable consideration such as discounts, sales returns, price protection, and rebates, which is estimated at the time of the transaction. In addition, the transaction price does not include an estimate of the variable consideration related to sales-based royalties. Sales-based royalties are recognized as the sales occur.
Allocating the transaction price. Allocating the transaction price requires that we determine an estimate of the relative stand-alone selling price for each distinct performance obligation. Determining the relative stand-alone selling price is inherently subjective, especially in situations where we do not sell the performance obligation on a stand-alone basis (which occurs in the majority of our transactions). In those situations, we determine the relative stand-alone selling price based on various observable inputs using all information that is reasonably available. Examples of observable inputs and information include: historical internal pricing data, cost plus margin analyses, third-party external pricing of similar or same products and services such as software licenses and maintenance support within the enterprise software industry. The results of our analysis resulted in a specific percentage of the transaction price being allocated to each performance obligation.
Determining the Estimated Offering Period. The offering period is the period in which we offer to provide the future update rights and/or online hosting for the game and related extra content sold. Because the offering period is not an explicitly defined period, we must make an estimate of the offering period for the service related performance obligations (i.e., future update rights and online hosting). Determining the Estimated Offering Period is inherently subjective and is subject to regular revision. Generally, we consider the average period of time customers are online when estimating the offering period. We also consider the estimated period of time between the date a game unit is sold to a reseller and the date the reseller sells the game unit to the customer (i.e., time in channel). Based on these two factors, we then consider the method of distribution. For example, games and extra content sold at retail would have a composite offering period equal to the online gameplay period plus time in channel as opposed to digitally-distributed games and extra content which are delivered immediately via digital download and therefore, the offering period is estimated to be only the online gameplay period.
Additionally, we consider results from prior analyses, known and expected online gameplay trends, as well as disclosed service periods for competitors’ games in determining the Estimated Offering Period for future sales. We believe this provides a reasonable depiction of the transfer of future update rights and online hosting to our customers, as it is the best representation of the time period during which our games and extra content are played. We recognize revenue for future update rights and online hosting performance obligations ratably on a straight-line basis over this period as there is a consistent pattern of delivery for these performance obligations. Prior to July 1, 2020, these performance obligations were generally recognized over an estimated nine-month period beginning in the month after shipment for games and extra content sold through retail and an estimated six-month period for digitally-distributed games and extra content beginning in the month of sale.
During the three months ended September 30, 2020, we completed our annual evaluation of the Estimated Offering Period, and noted that generally, consumers were playing our games for longer periods of time as players engage with services we provide that are designed to enhance and extend gameplay. Based on this, we concluded that the Estimated Offering Period applied to sales made after June 30, 2020 should be lengthened. Revenues for service related performance obligations for games and extra content sold through retail are now recognized over an estimated ten-month period beginning in the month of sale, and revenues for service related performance obligations for digitally-distributed games and extra content are now recognized over an estimated eight-month period beginning in the month of sale, which results in revenue being recognized over a longer period of time. This change in Estimated Offering Period did not impact the amount of net bookings or the operating cash flows that we report. We expect that this change will move the recognition of approximately $300 million in net revenue from fiscal year 2021 into fiscal year 2022. During the three months ended September 30, 2020, this change to our Estimated Offering Period resulted in an estimated decrease in net revenue of $26 million and net income of $20 million, and a decrease of $0.07 diluted earnings per share.
Principal Agent Considerations
We evaluate sales to end customers of our full games and related content via third-party storefronts, including digital storefronts such as Microsoft’s Xbox Store, Sony’s PlayStation Store, Apple App Store, and Google Play Store, in order to determine whether or not we are acting as the principal in the sale to the end customer, which we consider in determining if revenue should be reported gross or net of fees retained by the third-party storefront. An entity is the principal if it controls a good or service before it is transferred to the end customer. Key indicators that we evaluate in determining gross versus net treatment include but are not limited to the following:
•the underlying contract terms and conditions between the various parties to the transaction;
•which party is primarily responsible for fulfilling the promise to provide the specified good or service to the end customer;
•which party has inventory risk before the specified good or service has been transferred to the end customer; and
•which party has discretion in establishing the price for the specified good or service.
Based on an evaluation of the above indicators, except as discussed below, we have determined that generally the third party is considered the principal to end customers for the sale of our full games and related content. We therefore report revenue related to these arrangements net of the fees retained by the storefront. However, for sales arrangements via Apple App Store and Google Play Store, EA is considered the principal to the end customer and thus, we report revenue on a gross basis and mobile platform fees are reported within cost of revenue.
Income Taxes
We recognize deferred tax assets and liabilities for both (1) the expected impact of differences between the financial statement amount and the tax basis of assets and liabilities and (2) the expected future tax benefit to be derived from tax losses and tax credit carryforwards. We record a valuation allowance against deferred tax assets when it is considered more likely than not that all or a portion of our deferred tax assets will not be realized. In making this determination, we are required to give significant weight to evidence that can be objectively verified. It is generally difficult to conclude that a valuation allowance is not needed when there is significant negative evidence, such as cumulative losses in recent years. Forecasts of future taxable income are considered to be less objective than past results. Therefore, cumulative losses weigh heavily in the overall assessment.
In addition to considering forecasts of future taxable income, we are also required to evaluate and quantify other possible sources of taxable income in order to assess the realization of our deferred tax assets, namely the reversal of existing deferred tax liabilities, the carryback of losses and credits as allowed under current tax law, and the implementation of tax planning strategies. Evaluating and quantifying these amounts involves significant judgments. Each source of income must be evaluated based on all positive and negative evidence and; this evaluation may involve assumptions about future activity. Certain taxable temporary differences that are not expected to reverse during the carry forward periods permitted by tax law cannot be considered as a source of future taxable income that may be available to realize the benefit of deferred tax assets.
Every quarter, we perform a realizability analysis to evaluate whether it is more likely than not that all or a portion of our deferred tax assets will not be realized. Our Swiss deferred tax assets realizability analysis relies upon future Swiss taxable income as the primary source of taxable income but considers all available sources of Swiss income based on the positive and negative evidence. We give more weight to evidence that can be objectively verified. However, there is significant judgment involved in estimating future Swiss taxable income over the 20-year period over which the Swiss deferred tax assets will reverse, specifically related to assumptions about expected growth rates of future Swiss taxable income, which are based primarily on third party market and industry growth data. Actual results that differ materially from those estimates could have a material impact on our valuation allowance assessment. Although objectively verifiable, Swiss interest rates have an impact on the valuation allowance and are based on published Swiss guidance. Any significant changes to such interest rates could result in a material impact to the valuation allowance. Switzerland has a seven-year carryforward period and does not permit the carry back of losses. We do not recognize any deferred taxes related to the U.S. taxes on foreign earnings as we recognize these taxes as a period cost.
As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each jurisdiction in which we operate prior to the completion and filing of tax returns for such periods. This process requires estimating both our geographic mix of income and our uncertain tax positions in each jurisdiction where we operate. These estimates involve complex issues and require us to make judgments about the likely application of the tax law to our situation, as well as with respect to other matters, such as anticipating the positions that we will take on tax returns prior to our preparing the returns and the outcomes of disputes with tax authorities. The ultimate resolution of these issues may take extended periods of time due to examinations by tax authorities and statutes of limitations. In addition, changes in our business, including
acquisitions, changes in our international corporate structure, changes in the geographic location of business functions or assets, changes in the geographic mix and amount of income, as well as changes in our agreements with tax authorities, valuation allowances, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in the estimated and actual level of annual pre-tax income can affect the overall effective tax rate.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
RESULTS OF OPERATIONS
Our fiscal year is reported on a 52- or 53-week period that ends on the Saturday nearest March 31. Our results of operations for the fiscal year ending March 31, 2021 contains 53 weeks and ends on April 3, 2021. Our results of operations for the fiscal year ended March 31, 2020 contained 52 weeks and ended on March 28, 2020. Our results of operations for the three and six months ended September 30, 2020 contained 13 weeks and 27 weeks, respectively, and ended on October 3, 2020. Our results of operations for the three and six months ended September 30, 2019 contained 13 weeks and 26 weeks, respectively, and ended on September 28, 2019. For simplicity of disclosure, all fiscal periods are referred to as ending on a calendar month end.
Net Revenue
Net revenue consists of sales generated from (1) full games sold as digital downloads or as packaged goods and designed for play on game consoles, PCs and mobile phones and tablets (2) live services associated with these games, such as extra-content, (3) subscriptions that generally offer access to a selection of full games, in-game content, online services and other benefits, and (4) licensing our games to third parties to distribute and host our games.
Net Revenue Quarterly Analysis
Net Revenue
Net revenue for the three months ended September 30, 2020 was $1,151 million, primarily driven by FIFA 20, Apex Legends, The Sims 4, and Madden NFL 21. Net revenue for the three months ended September 30, 2020 decreased $197 million, as compared to the three months ended September 30, 2019. This decrease was driven by a $370 million decrease in net revenue primarily due to year-over-year change in the launch date of our FIFA console title from the second quarter in fiscal year 2020 to the third quarter in fiscal year 2021 and Anthem, partially offset by a $173 million increase in net revenue primarily from the Star Wars franchise, UFC 4, and Need for Speed Heat.
Net Revenue by Composition
As our business has evolved and management focuses less on the differentiation between our packaged goods business and our digital business and more on our full game sales and live services that extend and enhance gameplay, we have updated our presentation of net revenue by composition to align with this management view.
Our net revenue by composition for the three months ended September 30, 2020 and 2019 was as follows (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2020
|
|
2019
|
|
$ Change
|
|
% Change
|
Net revenue:
|
|
|
|
|
|
|
|
Full game downloads
|
$
|
163
|
|
|
$
|
181
|
|
|
$
|
(18)
|
|
|
(10)
|
%
|
Packaged goods
|
119
|
|
|
399
|
|
|
(280)
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|
|
(70)
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%
|
Full game
|
$
|
282
|
|
|
$
|
580
|
|
|
$
|
(298)
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|
|
(51)
|
%
|
|
|
|
|
|
|
|
|
Live services and other
|
$
|
869
|
|
|
$
|
768
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|
|
$
|
101
|
|
|
13
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%
|
Total net revenue
|
$
|
1,151
|
|
|
$
|
1,348
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|
|
$
|
(197)
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|
|
(15)
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%
|
Full Game Net Revenue
Full game net revenue includes full game downloads and packaged goods. Full game downloads includes revenue from digital sales of full games on console, PC, and mobile. Packaged goods includes revenue from software that is sold physically. This includes (1) net revenue from game software sold physically through traditional channels such as brick and mortar retailers, and (2) software licensing revenue from third parties (for example, makers of console platforms, personal computers or computer accessories) who include certain of our full games for sale with their products (for example, OEM bundles).
For the three months ended September 30, 2020, full game net revenue was $282 million, primarily driven by Madden NFL 21, UFC 4, FIFA 20, Star Wars Jedi: Fallen Order, and Star Wars: Squadrons. Full game net revenue for the three months ended September 30, 2020 decreased $298 million, or 51 percent, as compared to the three months ended September 30, 2019. This decrease was driven by a $280 million decrease in packaged goods net revenue and an $18 million decrease in full game downloads net revenue, each primarily driven by year-over-year change in the launch date of our FIFA console title from the second quarter in fiscal year 2020 to the third quarter in fiscal year 2021.
Live Services and Other Net Revenue
Live services and other net revenue includes revenue from sales of extra content for console, PC and mobile games, licensing revenue from third-party publishing partners who distribute our games digitally, subscriptions, advertising, and non-software licensing.
For the three months ended September 30, 2020, live services and other net revenue was $869 million primarily driven by sales of extra content for FIFA Ultimate Team, Apex Legends, The Sims 4, and Madden Ultimate Team. Live services and other net revenue for the three months ended September 30, 2020 increased $101 million, or 13 percent, as compared to the three months ended September 30, 2019. This increase was driven by sales of extra content for FIFA Ultimate Team, Madden Ultimate Team, and The Sims 4.
Net Revenue Year-to-Date Analysis
Net Revenue
Net revenue for the six months ended September 30, 2020 was $2,610 million, primarily driven by FIFA 20, The Sims 4, Apex Legends, and Madden NFL 20. Net revenue for the six months ended September 30, 2020 increased $53 million, as compared to the six months ended September 30, 2019. This increase was driven by a $461 million increase in net revenue primarily from the Star Wars, The Sims, and Madden franchises. This increase was partially offset by a $408 million decrease in net revenue primarily due to year-over-year change in the launch date of our FIFA console title from the second quarter in fiscal year 2020 to the third quarter in fiscal year 2021 and Anthem.
Net Revenue by Composition
Our net revenue by composition for the six months ended September 30, 2020 and 2019 was as follows (in millions):
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|
|
|
Six Months Ended September 30,
|
|
2020
|
|
2019
|
|
$ Change
|
|
% Change
|
Net revenue:
|
|
|
|
|
|
|
|
Full game downloads
|
$
|
386
|
|
|
$
|
314
|
|
|
$
|
72
|
|
|
23
|
%
|
Packaged goods
|
255
|
|
|
528
|
|
|
(273)
|
|
|
(52)
|
%
|
Full game
|
$
|
641
|
|
|
$
|
842
|
|
|
$
|
(201)
|
|
|
(24)
|
%
|
|
|
|
|
|
|
|
|
Live services and other
|
$
|
1,969
|
|
|
$
|
1,715
|
|
|
$
|
254
|
|
|
15
|
%
|
Total net revenue
|
$
|
2,610
|
|
|
$
|
2,557
|
|
|
$
|
53
|
|
|
2
|
%
|
Full Game Net Revenue
For the six months ended September 30, 2020, full game net revenue was $641 million, primarily driven by FIFA 20, Star Wars Jedi: Fallen Order, Madden NFL 21, Need for Speed Heat, and The Sims 4. Full game net revenue for the six months ended September 30, 2020 decreased $201 million, or 24 percent, as compared to the six months ended September 30, 2019. This decrease was driven by a $273 million decrease in packaged goods net revenue primarily driven by year-over-year change in the launch date of our FIFA console title from the second quarter in fiscal year 2020 to the third quarter in fiscal year 2021 and Anthem, partially offset by the Star Wars franchise. This decrease was partially offset by a $72 million increase in full game downloads net revenue primarily driven by the Star Wars franchise, Need for Speed Heat, and UFC 4, partially offset by Anthem.
Live Services and Other Net Revenue
For the six months ended September 30, 2020, live services and other net revenue was $1,969 million primarily driven by sales of extra content for FIFA Ultimate Team, The Sims 4, Apex Legends, and Madden Ultimate Team. Live services and other net revenue for the six months ended September 30, 2020 increased $254 million, or 15 percent, as compared to the six months ended September 30, 2019. This increase was driven by sales of extra content for FIFA Ultimate Team, The Sims 4, and Madden Ultimate Team.
Cost of Revenue Quarterly Analysis
Cost of revenue consists of (1) manufacturing royalties, net of volume discounts and other vendor reimbursements, (2) certain royalty expenses for celebrities, professional sports leagues, movie studios and other organizations, and independent software developers, (3) data center, bandwidth and server costs associated with hosting our online games and websites, (4) inventory costs, (5) payment processing fees, (6) mobile platform fees associated with our mobile revenue (for transactions in which we are acting as the principal in the sale to the end customer), (7) expenses for defective products, (8) write-offs of post launch prepaid royalty costs and losses on previously unrecognized licensed intellectual property commitments, (9) amortization of certain intangible assets, (10) personnel-related costs, and (11) warehousing and distribution costs. We generally recognize volume discounts when they are earned from the manufacturer (typically in connection with the achievement of unit-based milestones); whereas other vendor reimbursements are generally recognized as the related revenue is recognized.
Cost of revenue for the three months ended September 30, 2020 and 2019 was as follows (in millions):
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|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2020
|
|
|
|
% of Net Revenue
|
|
September 30,
2019
|
|
% of Net Revenue
|
|
% Change
|
|
Change as a % of Net Revenue
|
$
|
286
|
|
|
|
|
25
|
%
|
|
$
|
405
|
|
|
30
|
%
|
|
(29)
|
%
|
|
(5)
|
%
|
Cost of Revenue
Cost of revenue decreased by $119 million, or 29 percent during the three months ended September 30, 2020, as compared to the three months ended September 30, 2019. This decrease was primarily due to a decrease in inventory and royalty costs driven by year-over-year change in the launch date of our FIFA console title from the second quarter in fiscal year 2020 to the third quarter in fiscal year 2021, partially offset by an increase in royalty and inventory costs driven by UFC 4 and Star Wars: Squadrons.
Cost of revenue as a percentage of total net revenue decreased by 5 percent during the three months ended September 30, 2020, as compared to the three months ended September 30, 2019. This decrease was primarily due to an increase in the recognition of deferred net revenue, partially offset by an increase in royalty costs due to product mix.
Cost of Revenue Year-to-Date Analysis
Cost of revenue for the six months ended September 30, 2020 and 2019 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2020
|
|
|
|
% of Net Revenue
|
|
September 30,
2019
|
|
% of Net Revenue
|
|
% Change
|
|
Change as a % of Net Revenue
|
$
|
574
|
|
|
|
|
22
|
%
|
|
$
|
592
|
|
|
23
|
%
|
|
(3)
|
%
|
|
(1)
|
%
|
Cost of Revenue
Cost of revenue decreased by $18 million, or 3 percent during the six months ended September 30, 2020, as compared to the six months ended September 30, 2019. This decrease was primarily due to a decrease in inventory and royalty costs driven by year-over-year change in the launch date of our FIFA console title from the second quarter in fiscal year 2020 to the third quarter in fiscal year 2021, partially offset by an increase in royalty costs driven by higher sales associated with Madden and Star War franchises and an increase in platform fees driven by higher sales of Star Wars: Galaxy of Heroes, FIFA Mobile, and The Sims Free Play.
Cost of revenue as a percentage of total net revenue remained relatively consistent during the six months ended September 30, 2020, as compared to the six months ended September 30, 2019.
Research and Development
Research and development expenses consist of expenses incurred by our production studios for personnel-related costs, related overhead costs, external third-party development costs, contracted services, depreciation and any impairment of prepaid royalties for pre-launch products. Research and development expenses for our online products include expenses incurred by our studios consisting of direct development and related overhead costs in connection with the development and production of our online games. Research and development expenses also include expenses associated with our digital platform, software licenses and maintenance, and management overhead.
Research and development expenses for the three and six months ended September 30, 2020 and 2019 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2020
|
|
% of Net
Revenue
|
|
September 30,
2019
|
|
% of Net
Revenue
|
|
$ Change
|
|
% Change
|
Three months ended
|
$
|
421
|
|
|
37
|
%
|
|
$
|
387
|
|
|
29
|
%
|
|
$
|
34
|
|
|
9
|
%
|
Six months ended
|
$
|
859
|
|
|
33
|
%
|
|
$
|
768
|
|
|
30
|
%
|
|
$
|
91
|
|
|
12
|
%
|
Research and development expenses increased by $34 million, or 9 percent, during the three months ended September 30, 2020, as compared to the three months ended September 30, 2019. This increase was primarily due to a $24 million increase in personnel-related costs primarily resulting from an increase in variable compensation and related expenses, and a $13 million increase in stock-based compensation.
Research and development expenses increased by $91 million, or 12 percent, during the six months ended September 30, 2020, as compared to the six months ended September 30, 2019. This increase was primarily due to a $60 million increase in personnel-related costs primarily resulting from an increase in variable compensation and related expenses, and a $30 million increase in stock-based compensation.
Marketing and Sales
Marketing and sales expenses consist of personnel-related costs, related overhead costs, advertising, marketing and promotional expenses, net of qualified advertising cost reimbursements from third parties.
Marketing and sales expenses for the three and six months ended September 30, 2020 and 2019 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2020
|
|
% of Net
Revenue
|
|
September 30,
2019
|
|
% of Net
Revenue
|
|
$ Change
|
|
% Change
|
Three months ended
|
$
|
156
|
|
|
14
|
%
|
|
$
|
152
|
|
|
11
|
%
|
|
$
|
4
|
|
|
3
|
%
|
Six months ended
|
$
|
277
|
|
|
11
|
%
|
|
$
|
262
|
|
|
10
|
%
|
|
$
|
15
|
|
|
6
|
%
|
Marketing and sales expenses remained relatively consistent during the three months ended September 30, 2020, as compared to the three months ended September 30, 2019.
Marketing and sales expenses increased by $15 million, or 6 percent, during the six months ended September 30, 2020, as compared to the six months ended September 30, 2019. This increase was primarily due to a $9 million increase in personnel-related costs primarily resulting from an increase in variable compensation and related expenses, and a $6 million increase in stock-based compensation.
General and Administrative
General and administrative expenses consist of personnel and related expenses of executive and administrative staff, corporate functions such as finance, legal, human resources, and information technology, related overhead costs, fees for professional services such as legal and accounting, and allowances for doubtful accounts.
General and administrative expenses for the three and six months ended September 30, 2020 and 2019 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2020
|
|
% of Net
Revenue
|
|
September 30,
2019
|
|
% of Net
Revenue
|
|
$ Change
|
|
% Change
|
Three months ended
|
$
|
133
|
|
|
12
|
%
|
|
$
|
128
|
|
|
9
|
%
|
|
$
|
5
|
|
|
4
|
%
|
Six months ended
|
$
|
269
|
|
|
10
|
%
|
|
$
|
238
|
|
|
9
|
%
|
|
$
|
31
|
|
|
13
|
%
|
General and administrative expenses increased by $5 million, or 4 percent, during the three months ended September 30, 2020, as compared to the three months ended September 30, 2019. This increase was primarily due to a $7 million increase in personnel-related costs driven by an increase in variable compensation and related expenses, and a $5 million increase in stock-based compensation. These increases were partially offset by a $7 million decrease in bad debt expense.
General and administrative expenses increased by $31 million, or 13 percent, during the six months ended September 30, 2020, as compared to the six months ended September 30, 2019. This increase was primarily due to a $17 million increase in personnel-related costs driven by an increase in variable compensation and related expenses, and a $13 million increase in stock-based compensation.
Income Taxes
Provision for (benefit from) income taxes for the three months ended September 30, 2020 and 2019 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
Effective Tax Rate
|
|
September 30, 2019
|
|
Effective Tax Rate
|
Three months ended
|
$
|
(46)
|
|
|
(33)
|
%
|
|
$
|
(570)
|
|
|
(201)
|
%
|
Six months ended
|
$
|
57
|
|
|
9
|
%
|
|
$
|
(1,555)
|
|
|
(216)
|
%
|
|
|
|
|
|
|
|
|
The provision for income taxes for the three months ended September 30, 2020 is based on our projected annual effective tax rate for fiscal year 2021, adjusted for specific items that are required to be recognized in the period in which they are incurred.
Our effective tax rates for the three and six months ended September 30, 2020 were negative 33 percent and positive 9 percent, respectively, as compared to negative 201 percent and negative 216 percent, respectively, for the same periods in fiscal year 2020. During the three months ended June 30, 2019, we completed an intra-entity sale of some of our intellectual property rights to our Swiss subsidiary, where our international business is headquartered (the “Swiss intra-entity sale”), resulting in the recognition of a $1.17 billion net Swiss deferred tax asset, which will reverse over a 20-year period. Separately, during the three months ended September 30, 2019, Switzerland enacted a new statutory tax rate. As a result of the enactment, we remeasured our Swiss deferred tax asset and recognized an additional net tax benefit of $630 million through continuing operations (“Swiss rate change benefit”). In addition, the opinion of the Ninth Circuit Court of Appeals in Altera Corp. v Commissioner (the “Altera opinion”) resulted in the recognition of $90 million of unrecognized tax benefits related to U.S. uncertain tax positions during the three months ended June 30, 2019. Excluding the Swiss intra-entity sale, Swiss rate change benefit and Altera opinion, the effective tax rate for the three and six months ended September 30, 2020 and 2019 would have been 13 percent and 14 percent, respectively.
When compared to the statutory rate of 21 percent, the effective tax rates for the three and six months ended September 30, 2020 were lower primarily due to the decreases in unrecognized tax benefits related to prior year tax positions, net of a partial valuation allowance.
Every quarter, we perform a realizability analysis to evaluate whether it is more likely than not that all or a portion of our deferred tax assets will not be realized. During the three and six months ended September 30, 2020, we recognized an additional $41 million of valuation allowance against our deferred tax assets primarily due to the recognition of previously unrecognized tax benefits related to prior year tax positions and a change in current year estimated ordinary income.
LIQUIDITY AND CAPITAL RESOURCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
As of
September 30, 2020
|
|
As of
March 31, 2020
|
|
Increase/(Decrease)
|
Cash and cash equivalents
|
$
|
4,059
|
|
|
$
|
3,768
|
|
|
$
|
291
|
|
Short-term investments
|
1,972
|
|
|
1,967
|
|
|
5
|
|
Total
|
$
|
6,031
|
|
|
$
|
5,735
|
|
|
$
|
296
|
|
Percentage of total assets
|
53
|
%
|
|
52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 30,
|
|
|
(In millions)
|
2020
|
|
2019
|
|
Change
|
Net cash provided by operating activities
|
$
|
439
|
|
|
$
|
195
|
|
|
$
|
244
|
|
Net cash used in investing activities
|
(61)
|
|
|
(1,263)
|
|
|
1,202
|
|
Net cash used in financing activities
|
(112)
|
|
|
(697)
|
|
|
585
|
|
Effect of foreign exchange on cash and cash equivalents
|
25
|
|
|
(3)
|
|
|
28
|
|
Net increase (decrease) in cash and cash equivalents
|
$
|
291
|
|
|
$
|
(1,768)
|
|
|
$
|
2,059
|
|
Changes in Cash Flow
Operating Activities. Net cash provided by operating activities increased by $244 million during the six months ended September 30, 2020, as compared to the six months ended September 30, 2019, primarily driven by higher collections due to improved performance as we saw extraordinary levels of engagement during the three months ended June 30, 2020 as players spent more time at home as a result of the COVID-19 pandemic. This increase is partially offset by higher cash payments for income taxes, higher variable compensation payments related to fiscal year 2020 performance and higher cash payments for royalties.
Investing Activities. Net cash used in investing activities decreased by $1,202 million during the six months ended September 30, 2020, as compared to the six months ended September 30, 2019, primarily driven by a $625 million increase in proceeds from maturities and sales of short-term investments and a $568 million decrease in the purchase of short-term investments.
Financing Activities. Net cash used in financing activities decreased by $585 million during the six months ended September 30, 2020, as compared to the six months ended September 30, 2019, primarily driven by a $533 million decrease in the repurchase and retirement of our common stock and a $64 million of contingent consideration payment in connection with our acquisition of Respawn Entertainment, LLC during the six months ended September 30, 2019. These decreases were partially offset by a $22 million increase in cash paid to taxing authorities in connection with withholding taxes for stock-based compensation.
Short-term Investments
Due to our mix of fixed and variable rate securities, our short-term investment portfolio is susceptible to changes in short-term interest rates. As of September 30, 2020, our short-term investments had gross unrealized gains of $5 million, or less than 1 percent of the total in short-term investments. From time to time, we may liquidate some or all of our short-term investments to fund operational needs or other activities, such as capital expenditures, business acquisitions or stock repurchase programs.
Senior Notes
In February 2016, we issued $600 million aggregate principal amount of the 2021 Notes and $400 million aggregate principal amount of the 2026 Notes. The effective interest rate is 3.94% for the 2021 Notes and 4.97% for the 2026 Notes. Interest is payable semiannually in arrears, on March 1 and September 1 of each year. The 2021 Notes are due on March 1, 2021, and we will either re-pay the aggregate principal of the 2021 Notes upon such maturity date or refinance the 2021 Notes prior to maturity. See Note 10 — Financing Arrangements to the Condensed Consolidated Financial Statements in this Form 10-Q as it relates to our Senior Notes, which is incorporated by reference into this Item 2.
Credit Facility
On August 29, 2019, we entered into a $500 million unsecured revolving credit facility (“Credit Facility”) with a syndicate of banks. The Credit Facility terminates on August 29, 2024 unless the maturity is extended in accordance with its terms. As of September 30, 2020, no amounts were outstanding under the Credit Facility. See Note 10 — Financing Arrangements to the Condensed Consolidated Financial Statements in this Form 10-Q as it relates to our Credit Facility, which is incorporated by reference into this Item 2.
Return of Capital Program
In November 2020, our Board of Directors authorized a program to repurchase up to $2.6 billion of our common stock. This stock repurchase program expires on November 4, 2022. Under this program, we may purchase stock in the open market or through privately negotiated transactions in accordance with applicable securities laws, including pursuant to pre-arranged stock trading plans. The timing and actual amount of the stock repurchases will depend on several factors including price, capital availability, regulatory requirements, alternative investment opportunities and other market conditions. We are not obligated to repurchase a specific number of shares under this program and it may be modified, suspended or discontinued at any time. We are actively repurchasing shares under this program.
In November 2020, our Board of Directors initiated a quarterly cash dividend on the Company’s common stock and declared a cash dividend of $0.17 per share of common stock.
Financial Condition
We believe that our cash, cash equivalents, short-term investments, cash generated from operations and available financing facilities will be sufficient to meet our operating requirements for at least the next 12 months, including working capital requirements, capital expenditures, debt repayment obligations, dividends, and potentially, future acquisitions, stock repurchases, or strategic investments. We may choose at any time to raise additional capital to repay debt, strengthen our financial position, facilitate expansion, repurchase our stock, pursue strategic acquisitions and investments, and/or to take advantage of business opportunities as they arise. There can be no assurance, however, that such additional capital will be available to us on favorable terms, if at all, or that it will not result in substantial dilution to our existing stockholders.
Our foreign subsidiaries will generally be subject to U.S. tax, and to the extent earnings from these subsidiaries can be repatriated without a material tax cost, such earnings will not be indefinitely reinvested. As of September 30, 2020, approximately $2.6 billion of our cash, cash equivalents, and short-term investments were domiciled in foreign tax jurisdictions. All of our foreign cash is available for repatriation without a material tax cost.
Our ability to maintain sufficient liquidity could be affected by various risks and uncertainties including, but not limited to, customer demand and acceptance of our products, our ability to collect our accounts receivable as they become due, successfully achieving our product release schedules and attaining our forecasted sales objectives, economic conditions in the United States and abroad, the impact of acquisitions and other strategic transactions in which we may engage, the impact of competition, the seasonal and cyclical nature of our business and operating results, and the other risks described in the “Risk Factors” section, included in Part II, Item 1A of this report.
Contractual Obligations and Commercial Commitments
Note 11 — Commitments and Contingencies to the Condensed Consolidated Financial Statements in this Form 10-Q as it relates to our contractual obligations and commercial commitments, which is incorporated by reference into this Item 2.
OFF-BALANCE SHEET COMMITMENTS
As of September 30, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues and expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.