Quarterly Report


Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2017
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from              to            
Commission File No. 000-17948
ELECTRONIC ARTS INC.
(Exact name of registrant as specified in its charter)
Delaware
94-2838567
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
209 Redwood Shores Parkway
Redwood City, California
94065
(Address of principal executive offices)
(Zip Code)
(650) 628-1500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   þ     NO   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES   þ     NO   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer                   
¨
Non-accelerated filer
¨
Smaller reporting company 
¨
Emerging growth company    
¨

(Do not check if a smaller reporting company)
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. ¨   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES   ¨     NO   þ
As of November 2, 2017 , there were 307,925,453 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

1

Table of Contents

ELECTRONIC ARTS INC.
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2017
Table of Contents
 
 
 
Page
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 6.

2

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.
Condensed Consolidated Financial Statements (Unaudited)
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS  
(Unaudited)
(In millions, except par value data)
September 30, 2017
 
March 31, 2017 (a)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,067

 
$
2,565

Short-term investments
2,288

 
1,967

Receivables, net of allowances of $116 and $145, respectively
812

 
359

Other current assets
248

 
308

Total current assets
5,415

 
5,199

Property and equipment, net
444

 
434

Goodwill
1,711

 
1,707

Acquisition-related intangibles, net
5

 
8

Deferred income taxes, net
248

 
286

Other assets
99

 
84

TOTAL ASSETS
$
7,922

 
$
7,718

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
187

 
$
87

Accrued and other current liabilities
969

 
789

Deferred net revenue (online-enabled games)
1,116

 
1,539

Total current liabilities
2,272

 
2,415

Senior notes, net
991

 
990

Income tax obligations
122

 
104

Deferred income taxes, net
1

 
1

Other liabilities
148

 
148

Total liabilities
3,534

 
3,658

Commitments and contingencies (See Note 11)

 

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value. 1,000 shares authorized; 308 and 308 shares issued and outstanding, respectively
3

 
3

Additional paid-in capital
817

 
1,049

Retained earnings
3,641

 
3,027

Accumulated other comprehensive loss
(73
)
 
(19
)
Total stockholders’ equity
4,388

 
4,060

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
7,922

 
$
7,718

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

3



ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
Three Months Ended
September 30,
 
Six Months Ended
September 30,
(In millions, except per share data)
2017

2016
 
2017
 
2016
Net revenue:
 
 
 
 
 
 
 
Product
$
454

 
$
420

 
$
1,282

 
$
1,104

Service and other
505

 
478

 
1,126

 
1,065

Total net revenue
959

 
898

 
2,408

 
2,169

Cost of revenue:
 
 
 
 
 
 
 
Product
300

 
317

 
364

 
407

Service and other
89

 
84

 
179

 
173

Total cost of revenue
389

 
401

 
543

 
580

Gross profit
570

 
497

 
1,865

 
1,589

Operating expenses:
 
 
 
 
 
 
 
Research and development
331

 
291

 
656

 
585

Marketing and sales
160

 
143

 
281

 
271

General and administrative
118

 
111

 
223

 
219

Amortization of intangibles
2

 
1

 
3

 
3

Total operating expenses
611

 
546

 
1,163

 
1,078

Operating income (loss)
(41
)
 
(49
)
 
702

 
511

Interest and other income (expense), net
3

 
(3
)
 
9

 
(11
)
Income (loss) before provision for (benefit from) income taxes
(38
)
 
(52
)
 
711

 
500

Provision for (benefit from) income taxes
(16
)
 
(14
)
 
89

 
98

Net income (loss)
$
(22
)
 
$
(38
)
 
$
622

 
$
402

Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.07
)
 
$
(0.13
)
 
$
2.01

 
$
1.34

Diluted
$
(0.07
)
 
$
(0.13
)
 
$
1.99

 
$
1.28

Number of shares used in computation:
 
 
 
 
 
 
 
Basic
309

 
301

 
309

 
301

Diluted
309

 
301

 
313

 
315

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


4


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

(Unaudited)
Three Months Ended
September 30,
 
Six Months Ended
September 30,
(In millions)
2017
 
2016
 
2017
 
2016
Net income (loss)
$
(22
)
 
$
(38
)
 
$
622

 
$
402

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Net losses on available-for-sale securities

 
(2
)
 

 

Net gains (losses) on derivative instruments
(34
)
 
(5
)
 
(90
)
 
17

Foreign currency translation adjustments
32

 
(6
)
 
36

 
(11
)
Total other comprehensive income (loss), net of tax
(2
)
 
(13
)
 
(54
)
 
6

Total comprehensive income (loss)
$
(24
)
 
$
(51
)
 
$
568

 
$
408


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

5


ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
September 30,
(In millions)
2017
 
2016
OPERATING ACTIVITIES
 
 
 
Net income
$
622

 
$
402

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization and accretion
63

 
91

Stock-based compensation
110

 
96

Change in assets and liabilities:
 
 
 
Receivables, net
(454
)
 
(493
)
Other assets
66

 
37

Accounts payable
104

 
133

Accrued and other liabilities
100

 
109

Deferred income taxes, net
40

 
20

Deferred net revenue (online-enabled games)
(423
)
 
(391
)
Net cash provided by operating activities
228

 
4

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(63
)
 
(69
)
Proceeds from maturities and sales of short-term investments
1,050

 
644

Purchase of short-term investments
(1,395
)
 
(824
)
Net cash used in investing activities
(408
)
 
(249
)
FINANCING ACTIVITIES
 
 
 
Payment of convertible notes

 
(163
)
Proceeds from issuance of common stock
57

 
31

Cash paid to taxing authorities for shares withheld from employees
(105
)
 
(106
)
Repurchase and retirement of common stock
(303
)
 
(256
)
Net cash used in financing activities
(351
)
 
(494
)
Effect of foreign exchange on cash and cash equivalents
33

 
(8
)
Decrease in cash and cash equivalents
(498
)
 
(747
)
Beginning cash and cash equivalents
2,565

 
2,493

Ending cash and cash equivalents
$
2,067

 
$
1,746

Supplemental cash flow information:
 
 
 
Cash paid during the period for income taxes, net
$
28

 
$
26

Cash paid during the period for interest
21

 
22

Non-cash investing activities:
 
 
 
Change in accrued capital expenditures
$
(6
)
 
$
(17
)

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

6


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

(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
We are a global leader in digital interactive entertainment. We develop, market, publish and deliver games, content and online services that can be played by consumers on a variety of platforms, which include game consoles, PCs, mobile phones and tablets. In our games, we use established brands that we either wholly own (such as Battlefield, Mass Effect, Need for Speed, The Sims and Plants v. Zombies) or license from others (such as FIFA, Madden NFL and Star Wars). We also publish and distribute games developed by third parties ( e.g. , Titanfall).
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, 2018 contains 52 weeks and ends on March 31, 2018. Our results of operations for the fiscal year ended March 31, 2017 contained 52 weeks and ended on April 1, 2017. Our results of operations for the three months ended September 30, 2017 and 2016 contained 13 weeks each and ended on September 30, 2017 and October 1, 2016, respectively. Our results of operations for the six months ended September 30, 2017 and 2016 contained 26 each and ended on September 30, 2017 and October 1, 2016, respectively. For simplicity of disclosure, all fiscal periods are referred to as ending on a calendar month end.
The Condensed Consolidated Financial Statements are unaudited and reflect all adjustments (consisting only of normal recurring accruals unless otherwise indicated) that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The preparation of these Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the amounts reported in these Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates. The results of operations for the current interim periods are not necessarily indicative of results to be expected for the current year or any other period.
These Condensed Consolidated Financial Statements should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017 , as filed with the United States Securities and Exchange Commission (“SEC”) on May 24, 2017 .
Reclassifications
Certain prior year amounts were reclassified to conform to current year presentation.
Recently Adopted Accounting Standards
As a result of the adoption of ASU 2016-09 at the beginning of fiscal year 2018, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting , excess tax benefits of $3 million and $42 million for the three and six months ended September 30, 2017 , respectively, were reflected in the Condensed Consolidated Statement of Income as a component of the provision for income taxes, whereas for the three and six months ended September 30, 2016 , they were recognized in additional paid-in-capital.

The pronouncement also resulted in two changes to our cash flow presentation, which we applied retrospectively for comparability. Excess tax benefits are now presented as operating activities rather than financing activities, and cash payments to tax authorities in connection with shares withheld to meet statutory tax withholding requirements are now presented as a financing activity. The net increase to our reported net cash provided by operating activities and corresponding increase to cash used in financing activities resulting from the adoption of ASU 2016-09 for the six months ended September 30, 2017 and 2016 are as follows:
 
Six months ended September 30,
(In millions):
2017
 
2016
Excess tax benefit from stock-based compensation
$
42

 
$
37

Cash paid to taxing authorities for shares withheld from employees
105

 
106

Increase to net cash provided by operating activities and net cash used in financing activities
$
147

 
$
143





7


(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, 2017 and March 31, 2017 , our assets and liabilities that were measured and recorded at fair value on a recurring basis were as follows (in millions):  
 
 
 
Fair Value Measurements at Reporting Date Using
 
   
 
 
 
Quoted Prices in
Active Markets 
for Identical
Financial
Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
As of
September 30,
2017
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Balance Sheet Classification
Assets
 
 
 
 
 
 
 
 
 
Bank and time deposits
$
304

 
$
304

 
$

 
$

 
Cash equivalents
Money market funds
93

 
93

 

 

 
Cash equivalents
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Corporate bonds
1,247

 

 
1,247

 

 
Short-term investments and cash equivalents
U.S. Treasury securities
453

 
453

 

 

 
Short-term investments and cash equivalents
U.S. agency securities
133

 

 
133

 

 
Short-term investments and cash equivalents
Commercial paper
320

 

 
320

 

 
Short-term investments and cash equivalents
Foreign government securities
101

 

 
101

 

 
Short-term investments
Asset-backed securities
119

 

 
119

 

 
Short-term investments
Certificates of deposit
26

 

 
26

 

 
Short-term investments
Foreign currency derivatives
9

 

 
9

 

 
Other current assets and other assets
Deferred compensation plan assets (a)
10

 
10

 

 

 
Other assets
Total assets at fair value
$
2,815

 
$
860

 
$
1,955

 
$

 
 
Liabilities
 
 
 
 
 
 
 
 
 
Foreign currency derivatives
48

 

 
48

 

 
Accrued and other current liabilities and other liabilities
Deferred compensation plan liabilities (a)
10

 
10

 

 

 
Other liabilities
Total liabilities at fair value
$
58

 
$
10

 
$
48

 
$

 
 
 



8


 
 
 
 
Fair Value Measurements at Reporting Date Using
 
   
 
 
 
Quoted Prices in
Active Markets 
for Identical
Financial
Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
As of
March 31,
2017
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Balance Sheet Classification
Assets
 
 
 
 
 
 
 
 
 
Bank and time deposits
$
233

 
$
233

 
$

 
$

 
Cash equivalents
Money market funds
405

 
405

 

 

 
Cash equivalents
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Corporate bonds
963

 

 
963

 

 
Short-term investments and cash equivalents
U.S. Treasury securities
460

 
460

 

 

 
Short-term investments and cash equivalents
U.S. agency securities
172

 

 
172

 

 
Short-term investments and cash equivalents
Commercial paper
270

 

 
270

 

 
Short-term investments and cash equivalents
Foreign government securities
113

 

 
113

 

 
Short-term investments
Asset-backed securities
135

 

 
135

 

 
Short-term investments
Foreign currency derivatives
19

 

 
19

 

 
Other current assets and other assets
Deferred compensation plan assets (a)
8

 
8

 

 

 
Other assets
Total assets at fair value
$
2,778

 
$
1,106

 
$
1,672

 
$

 
 
Liabilities
 
 
 
 
 
 
 
 
 
Foreign currency derivatives
8

 

 
8

 

 
Accrued and other current liabilities and other liabilities
Deferred compensation plan liabilities (a)
9

 
9

 

 

 
Other liabilities
Total liabilities at fair value
$
17

 
$
9

 
$
8

 
$

 
 

(a)
The Deferred Compensation Plan assets consist of various mutual funds. See Note 13 in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017 , for additional information regarding our Deferred Compensation Plan.

(3) FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
As of September 30, 2017 and March 31, 2017 , our cash and cash equivalents were $2,067 million and $2,565 million , respectively. Cash equivalents were valued using quoted market prices or other readily available market information.

9


Short-Term Investments
Short-term investments consisted of the following as of September 30, 2017 and March 31, 2017 (in millions):  
 
As of September 30, 2017
 
As of March 31, 2017
 
Cost or
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Cost or
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Gains
 
Losses
 
Gains
 
Losses
 
Corporate bonds
$
1,235

 
$

 
$
(1
)
 
$
1,234

 
$
944

 
$

 
$
(1
)
 
$
943

U.S. Treasury securities
410

 

 
(1
)
 
409

 
414

 

 
(1
)
 
413

U.S. agency securities
132

 

 
(1
)
 
131

 
152

 

 
(1
)
 
151

Commercial paper
268

 

 

 
268

 
212

 

 

 
212

Foreign government securities

101

 

 

 
101

 
113

 

 

 
113

Asset-backed securities
119

 

 

 
119

 
135

 

 

 
135

Certificates of deposit
26

 

 

 
26

 

 

 

 

Short-term investments
$
2,291

 
$

 
$
(3
)
 
$
2,288

 
$
1,970

 
$

 
$
(3
)
 
$
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, 2017 and March 31, 2017 (in millions):  
 
As of September 30, 2017
 
As of March 31, 2017
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Short-term investments
 
 
 
 
 
 
 
Due within 1 year
$
1,592

 
$
1,591

 
$
1,237

 
$
1,236

Due 1 year through 5 years
696

 
694

 
721

 
719

Due after 5 years
3

 
3

 
12

 
12

Short-term investments
$
2,291

 
$
2,288

 
$
1,970

 
$
1,967


(4) DERIVATIVE FINANCIAL INSTRUMENTS
The 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 and South Korean won. 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 3 months or less and are transacted near month-end. We do not use foreign currency forward contracts for speculative trading purposes.

10


Cash Flow Hedging Activities
Certain of our forward contracts are designated and qualify as cash flow hedges. The effectiveness of the cash flow hedge contracts, including time value, is assessed monthly using regression analysis, as well as other timing and probability criteria. To qualify for hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedges and must be highly effective in offsetting changes to future cash flows on hedged transactions. The derivative assets or liabilities associated with our hedging activities are recorded at fair value in other current assets/other assets, or accrued and other current liabilities/other liabilities, respectively, on our Condensed Consolidated Balance Sheets. The effective portion of gains or losses resulting from changes in the fair value of these hedges is initially reported, net of tax, as a component of accumulated other comprehensive income (loss) in stockholders’ equity. The gross amount of the effective portion of gains or losses resulting from changes in the fair value of these hedges is subsequently reclassified into net revenue or research and development expenses, as appropriate, in the period when the forecasted transaction is recognized in our Condensed Consolidated Statements of Operations. In the event that the gains or losses in accumulated other comprehensive income (loss) are deemed to be ineffective, the ineffective portion of gains or losses resulting from changes in fair value, if any, is reclassified to interest and other income (expense), net, 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 interest and other income (expense), net, in our Condensed Consolidated Statements of Operations.
Total gross notional amounts and fair values for currency derivatives with cash flow hedge accounting designation are as follows (in millions):
 
As of September 30, 2017
 
As of March 31, 2017
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
 
 
Asset
 
Liability
 
 
Asset
 
Liability
Forward contracts to purchase
$
167

 
$
8

 
$

 
$
185

 
$

 
$
5

Forward contracts to sell
$
1,146

 
$
1

 
$
48

 
$
840

 
$
19

 
$
3

The net impact of the effective portion of gains and losses from our cash flow hedging activities in our Condensed Consolidated Statements of Operations was a gain of $5 million for the three months ended September 30, 2017 and a gain of $5 million for the three months ended September 30, 2016 .
The net impact of the effective portion of gains and losses from our cash flow hedging activities in our Condensed Consolidated Statements of Operations was a gain of $22 million for the six months ended September 30, 2017 and a gain of $11 million for the six months ended September 30, 2016 .

The amount excluded from the assessment of hedge effectiveness during the three months ended September 30, 2017 and 2016  and recognized in interest and other income (expense), net, was immaterial.
The amount excluded from the assessment of hedge effectiveness was a gain of $5 million for the six months ended September 30, 2017 and recognized in interest and other income (expense), net. The amount excluded from the assessment of hedge effectiveness was immaterial for the six months ended September 30, 2016 .
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.

11


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, 2017
 
As of March 31, 2017
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
 
 
Asset
 
Liability
 
 
Asset
 
Liability
Forward contracts to purchase
$
139

 
$

 
$

 
$
87

 
$

 
$

Forward contracts to sell
$
425

 
$

 
$

 
$
166

 
$

 
$


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, 2017 and 2016 , was as follows (in millions):
 
Statement of Operations Classification
 
Amount of Gain (Loss) Recognized in the Statement of Operations
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Foreign currency forward contracts not designated as hedging instruments
Interest and other income (expense), net
 
$
(3
)
 
$
3

 
$
(9
)
 
$
1



12


(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, 2017 and 2016  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, 2017
$
(3
)
 
$
(24
)
 
$
(44
)
 
$
(71
)
Other comprehensive income (loss) before reclassifications

 
(29
)
 
32

 
3

Amounts reclassified from accumulated other comprehensive income (loss)

 
(5
)
 

 
(5
)
Total other comprehensive income (loss), net of tax


 
(34
)
 
32

 
(2
)
Balance as of September 30, 2017
$
(3
)
 
$
(58
)
 
$
(12
)
 
$
(73
)
 
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, 2016
$
3

 
$
36

 
$
(36
)
 
$
3

Other comprehensive income (loss) before reclassifications
(1
)
 
(1
)
 
(6
)
 
(8
)
Amounts reclassified from accumulated other comprehensive income (loss)
(1
)
 
(4
)
 

 
(5
)
Total other comprehensive income (loss), net of tax

(2
)
 
(5
)
 
(6
)
 
(13
)
Balance as of September 30, 2016
$
1

 
$
31

 
$
(42
)
 
$
(10
)

The changes in accumulated other comprehensive income (loss) by component, net of tax, for the six months ended September 30, 2017 and 2016  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, 2017
$
(3
)
 
$
32

 
$
(48
)
 
$
(19
)
Other comprehensive income (loss) before reclassifications

 
(68
)
 
46

 
(22
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
(22
)
 
(10
)
 
(32
)
Total other comprehensive income (loss), net of tax


 
(90
)
 
36

 
(54
)
Balance as of September 30, 2017
$
(3
)
 
$
(58
)
 
$
(12
)
 
$
(73
)
 
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, 2016
$
1

 
$
14

 
$
(31
)
 
$
(16
)
Other comprehensive income (loss) before reclassifications
1

 
27

 
(11
)
 
17

Amounts reclassified from accumulated other comprehensive income (loss)
(1
)
 
(10
)
 

 
(11
)
Total other comprehensive income (loss), net of tax


 
17

 
(11
)
 
6

Balance as of September 30, 2016
$
1

 
$
31

 
$
(42
)
 
$
(10
)


13



The effects on net income of amounts reclassified from accumulated other comprehensive income (loss) for the three and six months ended September 30, 2017 were as follows (in millions):
 

Amount Reclassified From Accumulated Other Comprehensive Income (Loss)
Statement of Operations Classification

Three Months Ended
September 30, 2017

Six Months Ended
September 30, 2017
(Gains) losses on cash flow hedges from forward contracts
 
 
 
 
Net revenue

$
(3
)

$
(22
)
Research and development

(2
)


Total, net of tax
 
$
(5
)
 
$
(22
)
 
 
 
 
 
(Gains) losses on foreign currency translation
 
 
 
 
Interest and other income (expense), net
 
$

 
$
(10
)
Total, net of tax
 
$

 
$
(10
)
 
 
 
 
 
Total net (gain) loss reclassified, net of tax
 
$
(5
)
 
$
(32
)

The effects on net income of amounts reclassified from accumulated other comprehensive income (loss) for the three and six months ended September 30, 2016 were as follows (in millions):
 
 
Amount Reclassified From Accumulated Other Comprehensive Income (Loss)
Statement of Operations Classification
 
Three Months Ended
September 30, 2016
 
Six Months Ended
September 30, 2016
(Gains) losses on available-for-sale securities
 
 
 
 
Interest and other income (expense), net
 
$
(1
)
 
$
(1
)
Total, net of tax
 
$
(1
)
 
$
(1
)
 
 
 
 
 
(Gains) losses on cash flow hedges from forward contracts
 
 
 
 
Net revenue
 
$
(4
)
 
$
(9
)
Research and development
 

 
(1
)
Total, net of tax
 
$
(4
)
 
$
(10
)
 
 
 
 
 
Total net (gain) loss reclassified, net of tax
 
$
(5
)
 
$
(11
)


(6) GOODWILL AND ACQUISITION-RELATED INTANGIBLES, NET
The changes in the carrying amount of goodwill for the six months ended September 30, 2017 are as follows (in millions):
 
As of
March 31, 2017
 
Activity
 
Effects of Foreign Currency Translation
 
As of
September 30, 2017
Goodwill
$
2,075

 
$

 
$
4

 
$
2,079

Accumulated impairment
(368
)
 

 

 
(368
)
Total
$
1,707

 
$

 
$
4

 
$
1,711

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

14


Acquisition-related intangibles consisted of the following (in millions):
 
As of September 30, 2017
 
As of March 31, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Acquisition-
Related
Intangibles, Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Acquisition-
Related
Intangibles, Net
Developed and core technology
$
412

 
$
(412
)
 
$

 
$
412

 
$
(412
)
 
$

Trade names and trademarks
106

 
(101
)
 
5

 
106

 
(98
)
 
8

Registered user base and other intangibles
5

 
(5
)
 

 
5

 
(5
)
 

Carrier contracts and related
85

 
(85
)
 

 
85

 
(85
)
 

Total
$
608

 
$
(603
)
 
$
5

 
$
608

 
$
(600
)
 
$
8

Amortization of intangibles for the three and six months ended September 30, 2017 and 2016 are classified in the Condensed Consolidated Statement of Operations as follows (in millions):
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Cost of service and other
$

 
$
8

 
$

 
$
16

Cost of product

 
4

 

 
9

Operating expenses
2

 
1

 
3

 
3

Total
$
2

 
$
13

 
$
3

 
$
28

Acquisition-related intangible assets are amortized using the straight-line method over the lesser of their estimated useful lives or the agreement terms, typically from 2 to 14 years . As of September 30, 2017 and March 31, 2017 , the weighted-average remaining useful life for acquisition-related intangible assets was approximately 0.9 years and 1.4 years , respectively.
As of September 30, 2017 , future amortization of acquisition-related intangibles that will be recorded in the Condensed Consolidated Statement of Operations is estimated as follows (in millions):  
Fiscal Year Ending March 31,
 
2018 (remaining six months)
$
3

2019
2

Total
$
5


(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.
Royalty-based obligations with content licensors and distribution affiliates are either paid in advance and capitalized as prepaid royalties or are accrued as incurred and subsequently paid. These royalty-based obligations are generally expensed to cost of revenue at the greater of the contractual rate or an effective royalty rate based on the total projected net revenue for contracts with guaranteed minimums. Prepayments made to thinly capitalized independent software developers and co-publishing affiliates are generally made in connection with the development of a particular product, and therefore, we are generally subject to development risk prior to the release of the product. Accordingly, payments that are due prior to completion of a product are generally expensed to research and development over the development period as the services are incurred. Payments due after completion of the product (primarily royalty-based in nature) are generally expensed as cost of revenue.

Our contracts with some licensors include minimum guaranteed royalty payments, which are initially recorded as an asset and as a liability at the contractual amount when no performance remains with the licensor. When performance remains with the licensor, we record guarantee payments as an asset when actually paid and as a liability when incurred, rather than recording the asset and liability upon execution of the contract.

15


Each quarter, we also evaluate the expected future realization of our royalty-based assets, as well as any unrecognized minimum commitments not yet paid to determine amounts we deem unlikely to be realized through product and service sales. Any impairments or losses determined before the launch of a product are generally charged to research and development expense. Impairments or losses determined post-launch are charged to cost of revenue. We evaluate long-lived royalty-based assets for impairment using undiscounted cash flows when impairment indicators exist. If an impairment exists, then the assets are written down to fair value. Unrecognized minimum royalty-based commitments are accounted for as executory contracts, and therefore, any losses on these commitments are recognized when the underlying intellectual property is abandoned ( i.e. , cease use) or the contractual rights to use the intellectual property are terminated.

During the  three and six months ended September 30, 2017 and 2016 , 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, 2017
 
As of
March 31, 2017
Other current assets
$
47

 
$
79

Other assets
38

 
39

Royalty-related assets
$
85

 
$
118

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, 2017
 
As of
March 31, 2017
Accrued royalties
$
183

 
$
165

Other liabilities
85

 
97

Royalty-related liabilities
$
268

 
$
262

As of September 30, 2017 , we were committed to pay approximately $1,061 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, 2017 and March 31, 2017 consisted of (in millions):  
 
As of
September 30, 2017
 
As of
March 31, 2017
Computer, equipment and software
$
726

 
$
723

Buildings
327

 
316

Leasehold improvements
136

 
126

Equipment, furniture and fixtures, and other
80

 
82

Land
61

 
61

Construction in progress
6

 
7

 
1,336

 
1,315

Less: accumulated depreciation
(892
)
 
(881
)
Property and equipment, net
$
444

 
$
434

During the three and six months ended September 30, 2017 , depreciation expense associated with property and equipment was $30 million and $59 million , respectively.

16


During the three and six months ended September 30, 2016 , depreciation expense associated with property and equipment was $28 million and $57 million , respectively.
Accrued and Other Current Liabilities
Accrued and other current liabilities as of September 30, 2017 and March 31, 2017 consisted of (in millions):  
 
As of
September 30, 2017
 
As of
March 31, 2017
Other accrued expenses
$
374

 
$
210

Accrued compensation and benefits
186

 
267

Accrued royalties
183

 
165

Deferred net revenue (other)
226

 
147

Accrued and other current liabilities
$
969

 
$
789

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 (Online-Enabled Games)
Deferred net revenue (online-enabled games) was $1,116 million and $1,539 million as of September 30, 2017 and March 31, 2017 , respectively. Deferred net revenue (online-enabled games) generally includes the unrecognized revenue from bundled sales of online-enabled games for which we do not have VSOE for the obligation to provide unspecified updates. We recognize revenue from the sale of online-enabled games for which we do not have vendor-specific objective evidence of fair value (“VSOE”) for the unspecified updates on a straight-line basis, generally over an estimated nine-month period beginning in the month after shipment for physical games sold through retail and an estimated six-month period for digitally-distributed games. However, we expense the cost of revenue related to these transactions generally during the period in which the product is delivered (rather than on a deferred basis).

(9) INCOME TAXES
The provision for income taxes for the three and six months ended September 30, 2017 is based on our projected annual effective tax rate for fiscal year 2018 , adjusted for specific items that are required to be recognized in the period in which they are incurred. Our effective tax rate for the three and six months ended September 30, 2017 was 42.1 percent and 12.5 percent , respectively, as compared to 26.9 percent and 19.6 percent , respectively, for the same period in fiscal year 2017 . The effective tax rate for the three and six months ended September 30, 2017 , as compared to the three and six months ended September 30, 2016, benefited primarily due to the impact of the adoption of ASU 2016-09, which required us to recognize during the three and six months ended September 30, 2017 , $3 million and $42 million , respectively, of excess tax benefits as a component of the provision for income taxes (previously excess tax benefits and tax deficiencies were recognized in additional paid-in-capital). Although the $3 million of excess tax benefits for the three months ended September 30, 2017 reduced tax expense, the effective tax rate for the three months ended September 30, 2017 increased due to the pre-tax book loss for the three months ended September 30, 2017.
When compared to the statutory rate of 35.0 percent , the effective tax rate for the three and six months ended September 30, 2017 benefited primarily due to earnings realized in countries that have lower statutory tax rates and the recognition of excess tax benefits from stock-based compensation. We anticipate that the impact of excess tax benefits and tax deficiencies may result in significant fluctuations to our effective tax rate in the future. Excluding excess tax benefits, our effective tax rate would have been 34.2 percent and 18.4 percent , respectively, for the three and six months ended September 30, 2017 .
We file income tax returns and are subject to income tax examinations in various jurisdictions with respect to fiscal years after 2008. The timing and potential resolution of income tax examinations is highly uncertain. 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. It is reasonably possible that a reduction of up to $55 million of unrecognized tax benefits may occur within the next 12 months, a portion of which would impact our effective tax rate. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements.


17


(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, 2017
 
As of
March 31, 2017
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
(2
)
 
(2
)
Unamortized debt issuance costs
(7
)
 
(8
)
Net carrying value of Senior Notes
$
991

 
$
990

 
 
 
 
Fair value of Senior Notes (Level 2)
$
1,069

 
$
1,054


As of September 30, 2017 , the remaining life of the 2021 Notes and 2026 Notes is approximately 3.4 years and 8.4 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
In March 2015 , we entered into a $500 million senior unsecured revolving credit facility (“Credit Facility”) with a syndicate of banks. The Credit Facility terminates on March 19, 2020 . The Credit Facility contains an option to arrange with existing lenders and/or new lenders to provide up to an aggregate of $250 million in additional commitments for revolving loans. Proceeds of loans made under the Credit Facility may be used for general corporate purposes.

The loans bear interest, at our option, at the base rate plus an applicable spread or an adjusted LIBOR rate plus an applicable spread, in each case with such spread being determined based on our consolidated leverage ratio for the preceding fiscal quarter. We are also obligated to pay other customary fees for a credit facility of this size and type. Interest is due and payable in arrears quarterly for loans bearing interest at the base rate and at the end of an interest period (or at each three month interval in the case of loans with interest periods greater than three months) in the case of loans bearing interest at the adjusted LIBOR rate. Principal, together with all accrued and unpaid interest, is due and payable on March 19, 2020 .

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, dispose of all or substantially all assets and pay dividends or make distributions, 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 capitalization ratio and maintain a minimum level of total liquidity.


18


The credit agreement contains customary events of default, including among others, non-payment defaults, covenant defaults, cross-defaults to material indebtedness, bankruptcy and insolvency defaults, material judgment defaults and a change of control default, in each case, subject to customary exceptions for a credit facility of this size and type. The occurrence of an event of default could result in the acceleration of the obligations under the credit facility, an obligation by any guarantors to repay the obligations in full and an increase in the applicable interest rate.

As of September 30, 2017 , 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, 2017 and 2016 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,
 
2017
 
2016
 
2017
 
2016
Amortization of debt discount
$

 
$
(1
)
 
$

 
$
(2
)
Amortization of debt issuance costs

 

 
(1
)
 
(1
)
Coupon interest expense
(11
)
 
(10
)
 
(21
)
 
(21
)
Total interest expense
$
(11
)
 
$
(11
)
 
$
(22
)
 
$
(24
)

(11) COMMITMENTS AND CONTINGENCIES
Lease Commitments
As of September 30, 2017 , we leased certain facilities, furniture and equipment under non-cancelable operating lease agreements. We were required to pay property taxes, insurance and normal maintenance costs for certain of these facilities and any increases over the base year of these expenses on the remainder of our facilities.
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), and DFL Deutsche Fußball Liga E.V. (German Soccer League) (professional soccer); Dr. Ing. h.c. F. Porsche AG, Ferrari S.p.A. (Need For Speed and Real Racing games); National Basketball Association (professional basketball); PGA TOUR (professional golf); National Hockey League and NHL Players’ Association (professional hockey); National Football League Properties and PLAYERS Inc. (professional football); Zuffa, LLC (Ultimate Fighting Championship); ESPN (content in EA SPORTS games); Disney Interactive (Star Wars); Fox Digital Entertainment, Inc. (The Simpsons); and Respawn. 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.

19



The following table summarizes our minimum contractual obligations as of September 30, 2017 (in millions): 
 
 
 
Fiscal Years Ending March 31,
 
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Remaining
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
six mos.)
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
Unrecognized commitments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Developer/licensor commitments
$
1,061

 
$
78

 
$
296

 
$
243

 
$
206

 
$
194

 
$
43

 
$
1

Marketing commitments
422

 
26

 
115

 
103

 
77

 
74

 
27

 

Operating leases
231

 
18

 
41

 
37

 
37

 
30

 
22

 
46

Senior Notes interest
237

 
17

 
41

 
41

 
41

 
20

 
19

 
58

Other purchase obligations
97

 
14

 
28

 
22

 
10

 
5

 
4

 
14

Total unrecognized commitments
2,048

 
153

 
521

 
446

 
371

 
323

 
115

 
119

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recognized commitments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Notes principal and interest
1,003

 
3

 

 

 
600

 

 

 
400

Licensing obligations
114

 
12

 
24

 
25

 
26

 
27

 

 

Total recognized commitments
1,117

 
15

 
24

 
25

 
626

 
27

 

 
400

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total commitments
$
3,165

 
$
168

 
$
545

 
$
471

 
$
997

 
$
350

 
$
115

 
$
519

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, 2017 ; however, certain payment obligations may be accelerated depending on the performance of our operating results. Furthermore, up to $32 million of the unrecognized amounts in the table above may be payable, at the licensor’s election, in shares of our common stock, subject to a $10 million maximum during any fiscal year. The number of shares to be issued will be based on their fair market value at the time of issuance.
In addition to what is included in the table above, as of September 30, 2017 , we had a liability for unrecognized tax benefits and an accrual for the payment of related interest totaling $122 million , of which we are unable to make a reasonably reliable estimate of when cash settlement with a taxing authority will occur.
Legal Proceedings
On July 29, 2010, Michael Davis, a former NFL running back, filed a putative class action in the United States District Court for the Northern District of California against the Company, alleging that certain past versions of Madden NFL included the images of certain retired NFL players without their permission. In March 2012, the trial court denied the Company’s request to dismiss the complaint on First Amendment grounds. In January 2015, that trial court decision was affirmed by the Ninth Circuit Court of Appeals and the case was remanded back to the United States District Court for the Northern District of California, where the case is pending.
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 estimate the fair value of stock-based awards on the date of grant. We recognize compensation costs for stock-based awards to employees based on the grant-date fair value using a straight-line approach over the service period for which such awards are expected to vest.

The determination 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

20


judgment is required to determine if historical trends may be indicators of future outcomes. We determine 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 determined 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 determined 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. Expected term is determined 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, 2017 and 2016 .
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,
 
 
2017
 
2016
Risk-free interest rate
 
1.13 - 1.24%

 
0.5 - 0.6%

Expected volatility
 
28
%
 
29 - 32%

Weighted-average volatility
 
28
%
 
31
%
Expected term
 
6 - 12 months

 
6 - 12 months

Expected dividends
 
None

 
None


There were no market-based restricted stock units granted during the three months ended September 30, 2017 and 2016.

Stock-Based Compensation Expense
Employee stock-based compensation expense recognized during the three and six months ended September 30, 2016 was calculated based on awards ultimately expected to vest and was reduced for estimated forfeitures. We adopted ASU 2016-09 at the beginning of fiscal year 2018 and elected to account for forfeitures as they occur. The adoption resulted in a cumulative-effect adjustment of $8 million , net of tax, decrease to retained earnings.


21


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,
 
2017
 
2016
 
2017
 
2016
Cost of revenue
$
1

 
$
1

 
$
2

 
$
2

Research and development
36

 
27

 
64

 
54

Marketing and sales
9

 
8

 
16

 
15

General and administrative
16

 
12

 
28

 
25

Stock-based compensation expense
$
62

 
$
48

 
$
110

 
$
96


During the three months ended September 30, 2017 , we recognized a $12 million deferred income tax benefit related to our stock-based compensation expense. During the three months ended September 30, 2016 , we recognized a $9 million deferred income tax benefit related to our stock-based compensation expense.

During the six months ended September 30, 2017 , we recognized a $22 million deferred income tax benefit related to our stock-based compensation expense. During the six months ended September 30, 2016 , we recognized an $18 million deferred income tax benefit related to our stock-based compensation expense.
As of September 30, 2017 , our total unrecognized compensation cost related to restricted stock units, market-based restricted stock units, performance-based restricted stock units, and stock options was $429 million and is expected to be recognized over a weighted-average service period of 2.0 years . Of the $429 million of unrecognized compensation cost, $320 million relates to restricted stock units, $67 million relates to market-based restricted stock units, $41 million relates to performance-based restricted stock units at target, and $1 million relates to stock options.
Stock Options
The following table summarizes our stock option activity for the six months ended September 30, 2017 :  
 
 
Options
(in thousands)
 
Weighted-
Average
Exercise Prices
 
Weighted-
Average
Remaining
Contractual
Term  (in years)
 
Aggregate
Intrinsic Value
(in millions)
Outstanding as of March 31, 2017
 
2,377

 
$
33.35

 
 
 
 
Granted
 
2

 
105.99

 
 
 
 
Exercised
 
(744
)
 
40.47

 
 
 
 
Forfeited, cancelled or expired
 
(2
)
 
46.31

 
 
 
 
Outstanding as of September 30, 2017
 
1,633

 
$
30.19

 
5.91
 
$
143

Vested and expected to vest
 
1,633

 
$
30.19

 
5.91
 
$
143

Exercisable as of September 30, 2017
 
1,553

 
$
30.40

 
5.90
 
$
136

The aggregate intrinsic value represents the total pre-tax intrinsic value based on our closing stock price as of September 30, 2017 , 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, 2017 :  
 
 
Restricted
Stock Rights
(in thousands)
 
Weighted-
Average Grant
Date Fair Values
Outstanding as of March 31, 2017
 
5,153