Electronic Arts Inc. Q3 FY 2016 Results. January 28, 2016

Transcription

1 Electronic Arts Inc. Q3 FY 2016 January 28, 2016

2 Safe Harbor Statement Please review our risk factors on Form 10-K and Form 10-Q filed with the SEC. Some statements set forth in this document, including the information relating to EA s fiscal year 2016 guidance and title slate, contain forward-looking statements that are subject to change. Statements including words such as anticipate, believe, estimate or expect and statements in the future tense are forward-looking statements. These forward-looking statements are preliminary estimates and expectations based on current information and are subject to business and economic risks and uncertainties that could cause actual events or actual future results to differ materially from the expectations set forth in the forward-looking statements. Some of the factors which could cause the Company s results to differ materially from its expectations include the following: sales of the Company s titles; the Company s ability to manage expenses; the competition in the interactive entertainment industry; the effectiveness of the Company s sales and marketing programs; timely development and release of Electronic Arts products; the Company s ability to realize the anticipated benefits of acquisitions; the consumer demand for, and the availability of an adequate supply of console hardware units; the Company s ability to predict consumer preferences among competing platforms; the Company s ability to service and support digital product offerings, including managing online security; general economic conditions; and other factors described in the Company s Annual Report on Form 10-K for the fiscal year ended March 31, 2015 and Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, These forward-looking statements are valid as of January 28, 2016 only. The preliminary financial results set forth in this document are estimates based on information currently available to Electronic Arts. While Electronic Arts believes these estimates are meaningful, they could differ from the actual amounts that Electronic Arts ultimately reports in its Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, Electronic Arts assumes no obligation and does not intend to update these estimates prior to such filing. 2

3 EA Growth Trends $4,186 Net Revenue 1 ($ in Millions) $3,793 $4,021 $4,319 2,089 2,959 2,130 2,228 $4,517 2,038 Packaged 63.1% Gross Profit % 68.0% 71.0% 71.2% 1,227 1,663 1,793 2,230 2,479 Digital FY12 FY13 FY14 FY15 FY16E Operating Cash Flow ($ in Millions) 1, ,200 FY12 FY13 FY14 FY15 FY16E Diluted EPS 1 $3.04 $2.51 $1.69 $0.85 $0.84 FY12 FY13 FY14 FY15 FY16E FY12 FY13 FY14 FY15 FY16E 1 On a non- basis. FY16E non- tax rate is 22%. FY14 and FY15 non- tax rate was 25%. Through FY13, the non- tax rate was 28%. 3

4 Q3 FY16 Guidance vs. Actuals Non- Guidance Actuals Guidance Actuals Net Revenue $1,075 $1,070 $1,775 $1,803 Gross Profit Margin 51.8% 49.0% 71.5% 70.4% Operating Expense $587 $555 $540 $511 Tax Expense 1 $20 $15 $161 $168 Net Income (Loss) ($52) ($45) $572 $596 Diluted Earnings (Loss) Per Share ($0.17) ($0.14) $1.75 $1.83 Diluted Shares (Basic for Loss) In millions, except per share data. 1 FY16 non- tax rate is 22%, FY14 and FY15 non- tax rate was 25%. 4

5 Q3 FY16 Financial Summary Non- Q3 FY15 Q3 FY16 Q3 FY15 Q3 FY16 Net Revenue $1,126 $1,070 $1,428 $1,803 Gross Profit Margin 64.4% 49.0% 72.8% 70.4% Operating Expense $563 $555 $521 $511 Operating Income (Loss) $162 ($31) $519 $758 Operating Margin 14.4% (2.9%) 36.3% 42.0% Diluted Earnings (Loss) Per Share $0.44 ($0.14) $1.22 $1.83 Operating Cash Flow $682 $889 EBITDA $249 $56 $551 $789 In millions, except per share data. 1 FY16 non- tax rate is 22%, FY14 and FY15 non- tax rate was 25%. 5

6 EA Digital Net Revenue 1 by Platform PC & Other Console Mobile 2 YOY Quarterly Growth ($ in Millions) ($ in Millions) Trailing 12 Months YOY Growth % 2,421 2,178 1, % % 10% % 657 1,019 1,214 19% % % Q3 FY14 Q3 FY15 Q3 FY16 Q3 FY14 Q3 FY15 Q3 FY16 1 In millions, on a non- basis. 2 Mobile revenue reflects the sum total of revenue from Smart Phones and Feature Phones. Handheld revenue, previously grouped with Feature Phones through Q4 FY14, is captured in PC & Other. 6

7 EA Digital Net Revenue 1 by Type Full Game Downloads Extra Content Subs / Ads / Other Mobile 2 YOY Quarterly Growth ($ in Millions) ($ in Millions) Trailing 12 Months YOY Growth % 17% (10%) 15% 1, , , ,057 11% 10% (1%) 15% % % Q3 FY14 Q3 FY15 Q3 FY16 Q3 FY14 Q3 FY15 Q3 FY16 1 In millions, on a non- basis. 2 Handheld revenue is included within each respective category of Full Game Downloads, Extra Content and Subscriptions, Advertising and Other. Handheld revenue was previously grouped with Mobile and presented as Mobile and Handheld through Q4 FY14. 7

8 FY16 Announced Console/PC Titles Launch Title Platform(s) Q1 Console PC Console Q2 Console Console Console Q3 Console PC 1 Console PC Q4 Console Console Console PC PC Note: Represents publicly announced titles only. Titles above are shown in alphabetical order. All launch dates are subject to change. 1 PC version of Need for Speed expected to release in Spring

9 Select Live Services and Mobile 1 Console/PC Mobile Active Q Live services encompasses micro-transactions, subscriptions, and downloadable content. Includes announced titles only. 9

10 Guidance Q4 FY16 Ending March 31, 2016 Non- Net Revenue $1,275 $875 Gross Profit Margin 82.5% 76.0% Operating Expense $551 $500 Tax Expense $15 $37 Net Income $483 $130 Diluted Earnings Per Share $1.46 $0.40 Diluted Shares In millions, except per share data. FY16 non- tax rate is 22%. These forward-looking statements are valid as of January 28, 2016 only. Electronic Arts assumes no obligation to update these forward-looking statements. 10

11 Guidance Full Year FY16 Ending March 31, 2016 Non- Packaged Goods and Other $1,969 $2,038 Digital Net Revenue $2,394 $2,479 Total Net Revenue $4,363 $4,517 Gross Profit Margin 69.1% 71.2% Operating Expense $2,150 $1,962 Tax Expense $109 $279 Net Income $740 $987 Diluted Earnings Per Share $2.23 $3.04 Diluted Shares Operating Cash Flow $1,200 In millions, except per share data. FY16 non- tax rate is 22%. These forward-looking statements are valid as of January 28, 2016 only. Electronic Arts assumes no obligation to update these forward-looking statements. 11

12 Guidance Phasing FY16 Quarterly Revenue 1 Net Revenue Q1A Q2A Q3A Q4E Non- 15% 25% 40% 20% 28% 19% 25% 28% 1 These forward-looking statements are valid as January 28, 2016 only. Electronic Arts assumes no obligation to update these forward-looking statements. The difference in and non- quarterly phasing is due to the change in deferred net revenue (online enabled games). 12

13 Supplemental Financial Information

14 Currency Assumptions 1 Current FX assumptions 2 : USD/ FY16 Q3A FY16 Q4E EUR GBP CAD SEK Rule of thumb for FY16 Q4E If the U.S. dollar strengthens 10% against the Euro and British pound sterling: With hedging, total net revenue decreases 1.0% but impact to EPS is immaterial If the U.S. dollar strengthens 10% against the Canadian dollar and Swedish krona: With hedging, Company operating expenses decrease 0.7%, but impact to EPS is immaterial Note: Our financial guidance and the rule of thumb include the forecasted impact of the FX cash flow hedging program. 1 These forward-looking statements are valid as of January 28, 2016 only. Electronic Arts assumes no obligation to update these forward-looking statements. 2 For FY16 Q3A, FX rates are EA s weighted average actual P&L rates based on EA s monthly operating income. For FY16 Q4E, the same FX rates are used for all forecast periods. 14

15 Non- Financial Measures To supplement the Company s unaudited condensed consolidated financial statements presented in accordance with, Electronic Arts uses certain non- measures of financial performance. The presentation of these non- financial measures is not intended to be considered in isolation from, as a substitute for, or superior to, the financial information prepared and presented in accordance with, and may be different from non- financial measures used by other companies. In addition, these non- measures have limitations in that they do not reflect all of the amounts associated with the Company s results of operations as determined in accordance with. The non- financial measures used by Electronic Arts include: non- net revenue, non- gross profit, non- operating income (loss), non- net income (loss) and non- diluted earnings (loss) per share and non- diluted shares. These non- financial measures are adjusted for the items referenced below, as applicable in a given reporting period, from the Company s unaudited condensed consolidated statements of operations. The adjustments to the non- financial measures exclude the following items (other than shares from the Convertible Bond Hedge, which are included): Acquisition-related expenses Amortization of debt discount and loss on conversion of notes Change in deferred net revenue (online-enabled games) College football settlement expenses Income tax adjustments Loss on licensed intellectual property commitment (COGS) Restructuring and other Shares from convertible bond hedge Stock-based compensation The Company uses a fixed, long-term projected tax rate internally to evaluate its operating performance, to forecast, plan and analyze future periods, and to assess the performance of its management team. Accordingly, the Company applies the same tax rate to its non- financial results. During fiscal year 2016, the Company is applying a tax rate of 22 percent to its non- financial results. For fiscal years 2014 and 2015, a 25 percent tax rate was applied, and through fiscal year 2013, the Company applied a 28 percent tax rate. Electronic Arts may consider whether other significant non-recurring items that arise in the future should also be adjusted in calculating the non- financial measures it uses. Electronic Arts believes that these non- financial measures, when taken together with the corresponding financial measures, provide meaningful supplemental information regarding the Company s performance by adjusting for certain items that may not be indicative of the Company s core business, operating results or future outlook. Electronic Arts management uses, and believes that investors benefit from referring to, these non- financial measures in assessing the Company s operating results both as a consolidated entity and at the business unit level, as well as when planning, forecasting and analyzing future periods. The Company s management team is evaluated on the basis of non- financial measures and these measures also facilitate comparisons of the Company s performance to prior periods. In its earnings press release dated January 28, 2016 and in the following slides, Electronic Arts has provided a reconciliation of the most comparable financial measures to the non- financial measures. 15

16 Q3 FY16 Reconciliation to Non- Unaudited Condensed Consolidated Statement of Operations Three Months Ended December 31, 2015 Acquisitionrelated expenses Shares from Convertible Bond Hedge Amortization of debt discount and loss on conversion of notes Change in deferred net revenue (onlineenabled games) Stock-based compensation Income tax adjustments Non- Net revenue $ 1,070 $ - $ - $ - $ 733 $ - $ - $ 1,803 Cost of revenue 546 (12) Gross profit ,269 Operating expenses: Research and development (26) Marketing and sales (5) General and administrative (11) - 86 Amortization of intangibles 2 (2) Total operating expenses 555 (2) (42) Operating income (loss) (31) Interest and other income (expense), net Income (loss) before provision for income taxes (30) Provision for income taxes Net income (loss) $ (45) 14 $ (153) $ 596 Earnings (loss) per share Basic $ (0.14) $ 1.92 Diluted $ (0.14) $ 1.83 Number of shares used in computation Basic Diluted (6) Anti-dilutive shares excluded for loss position 1 Diluted Non- shares Diluted earnings per share reflects the potential dilution from common shares (calculated using the treasury stock method), issuable through stock-based compensation plans. When the company incurs a loss, shares issuable through stock-based compensation plans are excluded from the diluted loss per share calculation as inclusion would be anti-dilutive. In the three months ended December 31, 2015, EA incurred a loss but a non- profit; therefore 20 million shares related to the stock-based compensation plans are excluded from the diluted share count but are included in the non- diluted share count. In millions, except per share data. 16

17 Q3 FY15 Reconciliation to Non- Unaudited Condensed Consolidated Statement of Operations Three Months Ended December 31, 2014 Acquisitionrelated expenses Shares from Convertible Bond Hedge Amortization of debt discount Change in Deferred Net Revenue (Online-Enabled Games) Stock-based compensation Income tax adjustments Non- Net revenue $ 1,126 $ - $ - $ - $ 302 $ - $ - $ 1,428 Cost of revenue 401 (12) (1) Gross profit ,040 Operating expenses: Research and development (22) Marketing and sales (6) General and administrative (10) - 97 Acquisition-related contingent consideration Amortization of intangibles 4 (4) Restructuring and other Total operating expenses 563 (4) (38) Operating income Interest and other income (expense), net (6) (1) Income before provision for income taxes Provision for income taxes Net income $ 142 $ 16 $ - $ 5 $ 302 $ 39 $ (116) $ 388 Earnings per share Basic $ 0.46 $ 1.25 Diluted $ 0.44 $ 1.22 Number of shares used in computation Basic Diluted (4) In millions, except per share data. 17

18 TTM Q3 FY16 Reconciliation to Non- Unaudited Condensed Consolidated Statement of Operations Trailing Twelve Months Ended December 31, 2015 Acquisitionrelated expenses Amortization of debt discount and loss on conversion of notes Change in deferred net revenue (onlineenabled games) Stock-based compensation Income tax adjustments $ $ - - Non- Net revenue $ 4,273 $ - $ $ $ 4,538 Cost of revenue 1,362 (49) - - (1) - 1,312 Gross profit 2, ,226 Operating expenses: Research and development 1, (98) - 1,014 Marketing and sales (22) General and administrative (46) Acquisition-related contingent consideration (1) Amortization of intangibles 9 (9) Total operating expenses 2,149 (8) - - (166) - 1,975 Operating income ,251 Interest and other income (expense), net (14) Income before provision for income taxes ,265 Provision for income taxes Net income $ 652 $ 57 $ 28 $ 265 $ 167 $ (187) $ 982 In millions 18

19 TTM Q3 FY15 Reconciliation to Non- Unaudited Condensed Consolidated Statement of Operations Trailing Twelve Months Ended December 31, 2014 Change in Acquisitionrelated expenses Amortization of debt discount deferred net revenue (onlineenabled games) Loss on licensed intellectual property commitment (COGS) College football settlement expenses Restructuring and other Stock-based compensation Income tax adjustments Non- Net revenue $ 4,453 $ - $ - $ (116) $ - $ - $ - $ - $ - $ 4,337 Cost of revenue 1,418 (53) - - (122) - - (3) - 1,240 Gross profit 3, (116) ,097 Operating expenses: Research and development 1, (83) - 1,015 Marketing and sales (22) General and administrative (3) - (39) Acquisition-related contingent consideration Amortization of intangibles 15 (15) Restructuring and other (1) Total operating expenses 2,143 (15) (3) (1) (144) - 1,980 Operating income (116) ,117 Interest and other income (expense), net (27) (6) Income before provision for income taxes (116) ,111 Provision for income taxes Net income $ 847 $ 68 $ 21 $ (116) $ 122 $ 3 $ 1 $ 147 $ (260) $ 833 In millions 19

20 Q3 FY16 EBITDA Reconciliation The following table provides a reconciliation of the non- financial measures regarding Electronic Arts Earnings Before Interest, Taxes, Depreciation, Amortization and Stock-based Compensation ( EBITDA ) to the nearest comparable financial measures. Three Months Ended December 31, 2015 Acquisitionrelated expenses Amortization of debt discount and loss on conversion of notes Change in deferred net revenue (onlineenabled games) Stock-Based compensation Income tax adjustments Non- Net income (loss) $ (45) $ 14 $ 5 $ 733 $ 42 $ (153) $ 596 Adjustments: Stock-based compensation (42) - - Depreciation Amortization of acquisition-related intangibles 14 (14) Interest and other (income) expense, net (1) - (5) (6) Provision for income taxes Total adjustments 101 (14) (5) - (42) EBITDA $ 56 $ - $ - $ 733 $ - $ - $ 789 In millions 20

21 Q3 FY15 EBITDA Reconciliation The following table provides a reconciliation of the non- financial measures regarding Electronic Arts Earnings Before Interest, Taxes, Depreciation, Amortization and Stock-based Compensation ( EBITDA ) to the nearest comparable financial measures. Three Months Ended December 31, 2014 Change in Acquisitionrelated expenses Amortization of debt discount and loss on conversion of notes deferred net revenue (onlineenabled games) Stock-Based compensation Income tax adjustments Non- Net income (loss) $ 142 $ 16 $ 5 $ 302 $ 39 $ (116) $ 388 Adjustments: Stock-based compensation (39) - - Depreciation Amortization of acquisition-related intangibles 16 (16) Interest and other (income) expense, net 6 (5) 1 Provision for income taxes Total adjustments 107 (16) (5) - (39) EBITDA $ 249 $ - $ - $ 302 $ - $ - $ 551 In millions 21

22 Q4 FY16 Guidance Reconciliation The following table provides a reconciliation of the non- financial measures regarding Electronic Arts Q4 FY16 guidance to the nearest comparable financial measures. These are preliminary estimates and expectations based on current information as of January 28, 2016 and are subject to business and economic risks and uncertainties that could cause actual events or actual future results to differ materially from the expectations set forth herein. The reconciliation provided below reflects rounding and other approximations. Amortization of Guidance Acquisitionrelated expenses Debt Discount and Loss on Conversion of Notes Change in Deferred Net Revenue (onlineenabled games) Shares from Convertible Bond Hedge Stock-Based Compensation Tax Adjustments Non- Guidance Approximate Net Revenue $ 1, (400) $ 875 Approximate Gross Margin % 82.5% 1.0% - (7.5%) % Approximate Operating Expense $ 551 (2) (49) - $ 500 Approximate Tax Expense (Benefit) $ $ 37 Net Income (Loss) $ (400) - 49 (22) $ 130 Earnings (Loss) Per Share $ 1.46 $ 0.40 Number of shares used in computation Basic Diluted (5) In millions, except per share data. These forward-looking statements are valid as of January 28, 2016 only. Electronic Arts assumes no obligation to update these forward-looking statements. 22

23 FY16 Guidance Reconciliation The following table provides a reconciliation of the non- financial measures regarding Electronic Arts FY16 guidance to the nearest comparable financial measures. These are preliminary estimates and expectations based on current information as of January 28, 2016 and are subject to business and economic risks and uncertainties that could cause actual events or actual future results to differ materially from the expectations set forth herein. The reconciliation provided below reflects rounding and other approximations. Amortization of Guidance Acquisitionrelated expenses Debt Discount and Loss on Conversion of Notes Change in Deferred Net Revenue (onlineenabled games) Shares from Convertible Bond Hedge Stock-Based Compensation Tax Adjustments Non- Guidance Approximate Net Revenue $ 4, $ 4,517 Approximate Gross Margin % 69.1% 1.1% - 1.0% % Approximate Operating Expense $ 2,150 (8) (180) - $ 1,962 Approximate Tax Expense (Benefit) $ $ 279 Net Income $ (170) $ 987 Earnings Per Share $ 2.23 $ 3.04 Number of shares used in computation Basic Diluted (7) In millions, except per share data. These forward-looking statements are valid as of January 28, 2016 only. Electronic Arts assumes no obligation to update these forward-looking statements. 23