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 December 31, 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 February 2, 2018 , there were 306,727,995 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 DECEMBER 31, 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)
December 31, 2017
 
March 31, 2017 (a)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,566

 
$
2,565

Short-term investments
2,318

 
1,967

Receivables, net of allowances of $231 and $145, respectively
886

 
359

Other current assets
196

 
308

Total current assets
5,966

 
5,199

Property and equipment, net
447

 
434

Goodwill
1,879

 
1,707

Acquisition-related intangibles, net
81

 
8

Deferred income taxes, net
159

 
286

Other assets
110

 
84

TOTAL ASSETS
$
8,642

 
$
7,718

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
91

 
$
87

Accrued and other current liabilities
1,070

 
789

Deferred net revenue (online-enabled games)
1,946

 
1,539

Total current liabilities
3,107

 
2,415

Senior notes, net
992

 
990

Income tax obligations
194

 
104

Deferred income taxes, net
2

 
1

Other liabilities
261

 
148

Total liabilities
4,556

 
3,658

Commitments and contingencies (See Note 12)

 

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value. 1,000 shares authorized; 307 and 308 shares issued and outstanding, respectively
3

 
3

Additional paid-in capital
723

 
1,049

Retained earnings
3,455

 
3,027

Accumulated other comprehensive loss
(95
)
 
(19
)
Total stockholders’ equity
4,086

 
4,060

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
8,642

 
$
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
December 31,
 
Nine Months Ended
December 31,
(In millions, except per share data)
2017

2016
 
2017
 
2016
Net revenue:
 
 
 
 
 
 
 
Product
$
547

 
$
649

 
$
1,829

 
$
1,753

Service and other
613

 
500

 
1,739

 
1,565

Total net revenue
1,160

 
1,149

 
3,568

 
3,318

Cost of revenue:
 
 
 
 
 
 
 
Product
352

 
389

 
716

 
796

Service and other
149

 
127

 
328

 
300

Total cost of revenue
501

 
516

 
1,044

 
1,096

Gross profit
659

 
633

 
2,524

 
2,222

Operating expenses:
 
 
 
 
 
 
 
Research and development
329

 
285

 
985

 
870

Marketing and sales
230

 
240

 
511

 
511

General and administrative
120

 
110

 
343

 
329

Amortization of intangibles
1

 
2

 
4

 
5

Total operating expenses
680

 
637

 
1,843

 
1,715

Operating income (loss)
(21
)
 
(4
)
 
681

 
507

Interest and other income (expense), net
5

 
(2
)
 
14

 
(13
)
Income (loss) before provision for (benefit from) income taxes
(16
)
 
(6
)
 
695

 
494

Provision for (benefit from) income taxes
170

 
(5
)
 
259

 
93

Net income (loss)
$
(186
)
 
$
(1
)
 
$
436

 
$
401

Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.60
)
 
$ (
0.00)

 
$
1.41

 
$
1.33

Diluted
$
(0.60
)
 
$ (
0.00)

 
$
1.40

 
$
1.28

Number of shares used in computation:
 
 
 
 
 
 
 
Basic
308

 
303

 
309

 
302

Diluted
308

 
303

 
312

 
314

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
December 31,
 
Nine Months Ended
December 31,
(In millions)
2017
 
2016
 
2017
 
2016
Net income (loss)
$
(186
)
 
$
(1
)
 
$
436

 
$
401

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Net losses on available-for-sale securities
(4
)
 
(5
)
 
(4
)
 
(5
)
Net gains (losses) on derivative instruments
(6
)
 
31

 
(96
)
 
48

Foreign currency translation adjustments
(12
)
 
(17
)
 
24

 
(28
)
Total other comprehensive income (loss), net of tax
(22
)
 
9

 
(76
)
 
15

Total comprehensive income (loss)
$
(208
)
 
$
8

 
$
360

 
$
416


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

5


ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
December 31,
(In millions)
2017
 
2016
OPERATING ACTIVITIES
 
 
 
Net income
$
436

 
$
401

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization and accretion
97

 
140

Stock-based compensation
173

 
144

Change in assets and liabilities:
 
 
 
Receivables, net
(527
)
 
(367
)
Other assets
79

 
40

Accounts payable
16

 
(6
)
Accrued and other liabilities
265

 
276

Deferred income taxes, net
130

 

Deferred net revenue (online-enabled games)
408

 
513

Net cash provided by operating activities
1,077

 
1,141

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(87
)
 
(94
)
Proceeds from maturities and sales of short-term investments
1,656

 
968

Purchase of short-term investments
(2,012
)
 
(1,372
)
Acquisition, net of cash acquired
(150
)
 

Net cash used in investing activities
(593
)
 
(498
)
FINANCING ACTIVITIES
 
 
 
Payment of convertible notes

 
(163
)
Proceeds from issuance of common stock
57

 
33

Cash paid to taxing authorities for shares withheld from employees
(112
)
 
(112
)
Repurchase and retirement of common stock
(453
)
 
(383
)
Net cash used in financing activities
(508
)
 
(625
)
Effect of foreign exchange on cash and cash equivalents
25

 
(28
)
Increase (decrease) in cash and cash equivalents
1

 
(10
)
Beginning cash and cash equivalents
2,565

 
2,493

Ending cash and cash equivalents
$
2,566

 
$
2,483

Supplemental cash flow information:
 
 
 
Cash paid during the period for income taxes, net
$
46

 
$
51

Cash paid during the period for interest
21

 
23

Non-cash investing activities:
 
 
 
Change in accrued capital expenditures
$
(13
)
 
$
(16
)

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.
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 December 31, 2017 and 2016 contained 13 weeks each and ended on December 30, 2017 and December 31, 2016, respectively. Our results of operations for the nine months ended December 31, 2017 and 2016 contained 39 weeks each and ended on December 30, 2017 and December 31, 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
We adopted Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting , at the beginning of fiscal year 2018. We reflected excess tax benefits of $40 million for the nine months ended December 31, 2017 in the Condensed Consolidated Statement of Income as a component of the provision for income taxes, whereas for the three and nine months ended December 31, 2016 they were recognized in additional paid-in-capital in the Condensed Consolidated Balance Sheets. The impact was immaterial for the three months ended December 31, 2017.

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 instead of an operating 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 nine months ended December 31, 2017 and 2016 are as follows:
 
Nine months ended December 31,
(In millions):
2017
 
2016
Excess tax benefits from stock-based compensation
$
40

 
$
53

Cash paid to taxing authorities for shares withheld from employees
112

 
112

Increase to net cash provided by operating activities and net cash used in financing activities
$
152

 
$
165


7


Impact of Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09,  Revenue from Contracts with Customers  (Topic 606), (the “New Revenue Standard”), which will replace existing guidance under U.S. GAAP, including industry-specific requirements, and will provide companies with a single principles-based revenue recognition model for recognizing revenue from contracts with customers. The core principle of the New Revenue Standard is that a company should recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. In addition, the FASB has issued several amendments to the New Revenue Standard, including principal versus agent considerations, clarifications on identification of performance obligations, and accounting for licenses of intellectual property. The amendments are intended to address implementation issues that were raised by stakeholders and provide additional practical expedients to reduce the cost and complexity of adoption.
The New Revenue Standard is effective for us beginning in the first quarter of fiscal year 2019 and permits the use of either the full retrospective or modified retrospective transition methods. We anticipate adopting the New Revenue Standard on April 1, 2018 using the modified retrospective method, which recognizes the cumulative effect of initially applying the New Revenue Standard as an adjustment to retained earnings at the adoption date. We have reached conclusions on several key accounting assessments related to the New Revenue Standard and have identified certain impacts to our Condensed Consolidated Financial Statements.
The New Revenue Standard will have a significant impact on our Condensed Consolidated Financial Statements and related disclosures as it relates to the accounting for substantially all of our transactions with multiple elements or “bundled” arrangements. For example, for sales of online-enabled games, as currently reported we do not have vendor-specific objective evidence of fair value (“VSOE”) for unspecified future updates, and thus, revenue from the entire sales price is recognized ratably over the estimated offering period. However, under the New Revenue Standard, the VSOE requirement for undelivered elements is eliminated, allowing us to essentially “break-apart” our online-enabled games and account for the various promised goods or services identified as separate performance obligations.
For example, for the sale of an online-enabled game, we usually have multiple distinct performance obligations such as software, future update rights, and an online service. The software performance obligation represents the initial game delivered digitally or via physical disc. The future update rights performance obligation may include software patches or updates, maintenance, and/or additional free content to be delivered in the future. And lastly, the online service performance obligation consists of providing the customer with a service of online activities (e.g., online playability). Under current software revenue recognition rules, we recognize as revenue the entire sales price over the estimated offering period. However, under the New Revenue Standard, we currently estimate that a significant portion of the sales price will be allocated to the software performance obligation and recognized upon delivery, and the remaining portion will be allocated to the future update rights and the online service performance obligations and recognized ratably over the estimated offering period. As a result, we expect a significant portion of our annual revenue, and thereby annual profit, will shift from the first and fourth fiscal quarters to the second and third fiscal quarters which is historically when a significant portion of our annual bookings and software deliveries have been made. Further, we expect the net cumulative effect adjustment upon adoption to result in a pre-tax increase to retained earnings in the range of $600 million to $800 million . The range is based on our actual results through the third quarter of fiscal 2018 and our forecast of sales activity during the fourth quarter of fiscal 2018. These initial estimates will continue to be refined as we approach the adoption of the New Revenue Standard.
In addition, both portions of sales price allocated to future update rights and online services will be classified as service revenue under the New Revenue Standard (currently, future update rights are generally presented as product revenue). Therefore, upon adoption, an increased portion of our sales from online-enabled games will be presented as service revenue than is currently reported today. Also, upon adoption of the New Revenue Standard, a substantial majority of our sales returns and price protection reserves will be classified as liabilities (currently, these allowances are classified as contra-assets within receivables on our Condensed Consolidated Balance Sheets).

We expect to further refine our estimate of the impact to our consolidated financial statements during the fourth quarter of fiscal year 2018. We will continue to monitor additional changes, modifications, clarifications or interpretations by the SEC, which may impact current expectations. It is possible that during the fourth quarter of fiscal year 2018, we could identify items that result in additional material changes to our Condensed Consolidated Financial Statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments (Topic 825-10), which requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. The ASU also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The requirements will be effective for us beginning in the first quarter of fiscal year 2019. We do not expect the adoption to have a material impact on our Condensed Consolidated Financial Statements.

8


In March 2016, the FASB issued ASU 2016-04, Liabilities – Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products . The amendments in the ASU are designed to provide guidance and eliminate diversity in the accounting for derecognition of prepaid stored-value product liabilities. Typically, a prepaid stored-value product liability is to be derecognized when it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. This is when the likelihood of the product holder exercising its remaining rights becomes remote. This estimate shall be updated at the end of each period. The amendments in this ASU are effective for us beginning in the first quarter of fiscal year 2019. Early adoption is permitted. We do not expect the adoption to have a material impact on our Condensed Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This update is intended to reduce the existing diversity in practice in how certain transactions are classified in the statement of cash flows. This update is effective for us beginning in the first quarter of fiscal year 2019. Early adoption is permitted, provided that all of the amendments are adopted in the same period. We do not expect the adoption to have a material impact on our Condensed Consolidated Financial Statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) , which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows. This update is effective for us beginning in the first quarter of fiscal year 2019. Early adoption is permitted. We do not expect the adoption to have a material impact on our Condensed Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this standard to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. We anticipate adopting this standard beginning in the first quarter of fiscal year 2020, when the updated guidance is effective for us. We are currently evaluating the impact of this new standard on our Condensed Consolidated Financial Statements and related disclosures.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities . This update is intended to make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. This update is effective for us beginning in the first quarter of fiscal year 2020. Early adoption is permitted. We are currently evaluating the timing of adoption and impact of this new standard on our Condensed Consolidated Financial Statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). The standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for us beginning in the first quarter of fiscal year 2021. Early adoption is permitted beginning in the first quarter of fiscal year 2020. We are currently evaluating the timing of adoption and impact of this new standard on our Condensed Consolidated Financial Statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350). The standard simplifies the goodwill impairment test. This update removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This update is effective for us beginning in the first quarter of fiscal year 2021. Early adoption is permitted for any impairment tests performed after January 1, 2017. We anticipate early adopting ASU 2017-04 during the fourth quarter of fiscal year 2018. We do not expect the adoption to have a material impact on our Condensed Consolidated Financial Statements.


9


(2) FAIR VALUE MEASUREMENTS
There are various valuation techniques used to estimate fair value, the primary one being the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability. We measure certain financial and nonfinancial assets and liabilities at fair value on a recurring and nonrecurring basis.
Fair Value Hierarchy
The three levels of inputs that may be used to measure fair value are as follows:
Level 1 . Quoted prices in active markets for identical assets or liabilities.
Level 2 . Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities.
Level 3 . Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of December 31, 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
December 31,
2017
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Balance Sheet Classification
Assets
 
 
 
 
 
 
 
 
 
Bank and time deposits
$
299

 
$
299

 
$

 
$

 
Cash equivalents
Money market funds
563

 
563

 

 

 
Cash equivalents
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Corporate bonds
1,258

 

 
1,258

 

 
Short-term investments and cash equivalents
U.S. Treasury securities
446

 
446

 

 

 
Short-term investments
U.S. agency securities
118

 

 
118

 

 
Short-term investments and cash equivalents
Commercial paper
341

 

 
341

 

 
Short-term investments and cash equivalents
Foreign government securities
100

 

 
100

 

 
Short-term investments and cash equivalents
Asset-backed securities
134

 

 
134

 

 
Short-term investments
Certificates of deposit
22

 

 
22

 

 
Short-term investments
Foreign currency derivatives
8

 

 
8

 

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

 
10

 

 

 
Other assets
Total assets at fair value
$
3,299

 
$
1,318

 
$
1,981

 
$

 
 
Liabilities
 
 
 
 
 
 
 
 
 
Contingent consideration (b)
$
122

 
$

 
$

 
$
122

 
Other liabilities
Foreign currency derivatives
41

 

 
41

 

 
Accrued and other current liabilities and other liabilities
Deferred compensation plan liabilities (a)
11

 
11

 

 

 
Other liabilities
Total liabilities at fair value
$
174

 
$
11

 
$
41

 
$
122

 
 

10


 
 
 
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
 
 
 
 
 
 
 
 
 
Contingent
Consideration
 
 
Balance as of March 31, 2017
 
 
 
 
 
 
$

 
 
Additions
 
 
 
 
 
 
122

 
 
Balance as of December 31, 2017
 
 
 
 
 
 
$
122

 
 

 
 
 
 
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.

(b)
The contingent consideration represents the estimated fair value of the additional variable cash consideration payable in connection with our acquisition of Respawn Entertainment, LLC (“Respawn”) that is contingent upon the achievement of certain performance milestones. We estimated the fair value using a probability-weighted income approach combined with a real options methodology, and applied a discount rate that appropriately captures the risk associated with the obligation. The discount rates used ranged from 2.7 percent to 3.3 percent. See Note 6 for additional information regarding the Respawn acquisition.

(3) FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
As of December 31, 2017 and March 31, 2017 , our cash and cash equivalents were $2,566 million and $2,565 million , respectively. Cash equivalents were valued using quoted market prices or other readily available market information.

11


Short-Term Investments
Short-term investments consisted of the following as of December 31, 2017 and March 31, 2017 (in millions):  
 
As of December 31, 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
$
1,212

 
$

 
$
(3
)
 
$
1,209

 
$
944

 
$

 
$
(1
)
 
$
943

U.S. Treasury securities
448

 

 
(2
)
 
446

 
414

 

 
(1
)
 
413

U.S. agency securities
117

 

 
(2
)
 
115

 
152

 

 
(1
)
 
151

Commercial paper
294

 

 

 
294

 
212

 

 

 
212

Foreign government securities

98

 

 

 
98

 
113

 

 

 
113

Asset-backed securities
135

 

 
(1
)
 
134

 
135

 

 

 
135

Certificates of deposit
22

 

 

 
22

 

 

 

 

Short-term investments
$
2,326

 
$

 
$
(8
)
 
$
2,318

 
$
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 December 31, 2017 and March 31, 2017 (in millions):  
 
As of December 31, 2017
 
As of March 31, 2017
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Short-term investments
 
 
 
 
 
 
 
Due within 1 year
$
1,598

 
$
1,596

 
$
1,237

 
$
1,236

Due 1 year through 5 years
725

 
719

 
721

 
719

Due after 5 years
3

 
3

 
12

 
12

Short-term investments
$
2,326

 
$
2,318

 
$
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 three months or less and are transacted near month-end. We do not use foreign currency forward contracts for speculative trading purposes.

12


Cash Flow Hedging Activities
Certain of our forward contracts are designated and qualify as cash flow hedges. The effectiveness of the cash flow hedge contracts, including time value, is assessed monthly using regression analysis, as well as other timing and probability criteria. To qualify for hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedges and must be highly effective in offsetting changes to future cash flows on hedged transactions. The derivative assets or liabilities associated with our hedging activities are recorded at fair value in other current assets/other assets, or accrued and other current liabilities/other liabilities, respectively, on our Condensed Consolidated Balance Sheets. The 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 December 31, 2017
 
As of March 31, 2017
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
 
 
Asset
 
Liability
 
 
Asset
 
Liability
Forward contracts to purchase
$
209

 
$
5

 
$
1

 
$
185

 
$

 
$
5

Forward contracts to sell
$
985

 
$
1

 
$
33

 
$
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 loss of $8 million for the three months ended December 31, 2017 and a gain of $8 million for the three months ended December 31, 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 $14 million for the nine months ended December 31, 2017 and a gain of $18 million for the nine months ended December 31, 2016 .

The amount excluded from the assessment of hedge effectiveness during the three months ended December 31, 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 $7 million for the nine months ended December 31, 2017 and recognized in interest and other income (expense), net. The amount excluded from the assessment of hedge effectiveness was immaterial for the nine months ended December 31, 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.

13


Total gross notional amounts and fair values for currency derivatives that are not designated as hedging instruments are accounted for as follows (in millions):
 
As of December 31, 2017
 
As of March 31, 2017
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
 
 
Asset
 
Liability
 
 
Asset
 
Liability
Forward contracts to purchase
$
354

 
$
1

 
$

 
$
87

 
$

 
$

Forward contracts to sell
$
785

 
$
1

 
$
7

 
$
166

 
$

 
$


The effect of foreign currency forward contracts not designated as hedging instruments in our Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 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
December 31,
 
Nine Months Ended
December 31,
 
2017
 
2016
 
2017
 
2016
Foreign currency forward contracts not designated as hedging instruments
Interest and other income (expense), net
 
$
(4
)
 
$
49

 
$
(13
)
 
$
50



14


(5) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The changes in accumulated other comprehensive income (loss) by component, net of tax, for the three months ended December 31, 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 September 30, 2017
$
(3
)
 
$
(58
)
 
$
(12
)
 
$
(73
)
Other comprehensive income (loss) before reclassifications
(4
)
 
(14
)
 
(12
)
 
(30
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
8

 

 
8

Total other comprehensive income (loss), net of tax

(4
)
 
(6
)
 
(12
)
 
(22
)
Balance as of December 31, 2017
$
(7
)
 
$
(64
)
 
$
(24
)
 
$
(95
)
 
Unrealized Net Gains (Losses) on Available-for-Sale Securities
 
Unrealized Net Gains (Losses) on Derivative Instruments
 
Foreign Currency Translation Adjustments
 
Total
Balances as of September 30, 2016
$
1

 
$
31

 
$
(42
)
 
$
(10
)
Other comprehensive income (loss) before reclassifications
(5
)
 
39

 
(17
)
 
17

Amounts reclassified from accumulated other comprehensive income (loss)

 
(8
)
 

 
(8
)
Total other comprehensive income (loss), net of tax

(5
)
 
31

 
(17
)
 
9

Balance as of December 31, 2016
$
(4
)
 
$
62

 
$
(59
)
 
$
(1
)

The changes in accumulated other comprehensive income (loss) by component, net of tax, for the nine months ended December 31, 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
(4
)
 
(82
)
 
34

 
(52
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
(14
)
 
(10
)
 
(24
)
Total other comprehensive income (loss), net of tax

(4
)
 
(96
)
 
24

 
(76
)
Balance as of December 31, 2017
$
(7
)
 
$
(64
)
 
$
(24
)
 
$
(95
)
 
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
(4
)
 
66

 
(28
)
 
34

Amounts reclassified from accumulated other comprehensive income (loss)
(1
)
 
(18
)
 

 
(19
)
Total other comprehensive income (loss), net of tax

(5
)
 
48

 
(28
)
 
15

Balance as of December 31, 2016
$
(4
)
 
$
62

 
$
(59
)
 
$
(1
)


15



The effects on net income of amounts reclassified from accumulated other comprehensive income (loss) for the three and nine months ended December 31, 2017 were as follows (in millions):
 

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

Three Months Ended
December 31, 2017

Nine Months Ended
December 31, 2017
(Gains) losses on cash flow hedges from forward contracts
 
 
 
 
Net revenue

$
9


$
(13
)
Research and development

(1
)

(1
)
Total, net of tax
 
$
8

 
$
(14
)
 
 
 
 
 
(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
 
$
8

 
$
(24
)

The effects on net income of amounts reclassified from accumulated other comprehensive income (loss) for the three and nine months ended December 31, 2016 were as follows (in millions):
 
 
Amount Reclassified From Accumulated Other Comprehensive Income (Loss)
Statement of Operations Classification
 
Three Months Ended
December 31, 2016
 
Nine Months Ended
December 31, 2016
(Gains) losses on available-for-sale securities
 
 
 
 
Interest and other income (expense), net
 
$

 
$
(1
)
Total, net of tax
 
$

 
$
(1
)
 
 
 
 
 
(Gains) losses on cash flow hedges from forward contracts
 
 
 
 
Net revenue
 
$
(9
)
 
$
(18
)
Research and development
 
1

 

Total, net of tax
 
$
(8
)
 
$
(18
)
 
 
 
 
 
Total net (gain) loss reclassified, net of tax
 
$
(8
)
 
$
(19
)


(6)  BUSINESS COMBINATIONS
Respawn Entertainment, LLC
On December 1, 2017 , we completed our acquisition of Respawn Entertainment, LLC (“Respawn”), a leading game development studio and creators of games including the critically-acclaimed Titanfall franchise. The total purchase price was $273 million , which consisted of $151 million in cash and the acquisition date fair value of contingent consideration of $122 million . The purchase price was preliminarily allocated to Respawn’s net tangible and intangible assets based upon their estimated fair values as of December 1, 2017 , resulting in $167 million being preliminarily allocated to goodwill that consists largely of workforce and synergies with our existing business, all of which is expected to be deductible for tax purposes. $78 million was preliminarily allocated to intangible assets acquired; and $28 million was preliminarily allocated to net tangible assets acquired. The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date and are considered preliminary pending finalization of the valuation analyses pertaining to assets acquired and liabilities assumed, valuation of the contingent consideration as well as the calculation of any deferred tax assets and liabilities. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
The payment of the contingent consideration is based on the achievement of certain performance milestones through the end of calendar year 2022 at the latest. The maximum amount of contingent consideration we may be required to pay is $140 million . The fair value of the contingent consideration is included in other liabilities on our Condensed Consolidated Balance Sheet. As

16


of December 31, 2017, there were no significant changes in the range of expected outcomes for the contingent consideration from the acquisition date.
Subsequent to the acquisition, we also granted an aggregate of $167 million of restricted stock unit awards of our common stock to Respawn employees that will be recognized over a four year period as stock-based compensation expense. The fair value of these equity awards was based on the quoted market price of our common stock on the date of grant.
The results of operations of Respawn and the preliminary fair value of the assets acquired and liabilities assumed have been included in our Consolidated Financial Statements since the date of acquisition. Pro forma results of operations have not been presented because the effect of the acquisition was not material to our Consolidated Statements of Operations.

During the three and nine months ended December 31, 2016, there were no acquisitions.

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

 
$
167

 
$
5

 
$
2,247

Accumulated impairment
(368
)
 

 

 
(368
)
Total
$
1,707

 
$
167

 
$
5

 
$
1,879

Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets.
During the three months ended December 31, 2017, we estimated, on a preliminary basis, goodwill acquired in our acquisition of Respawn. The Company expects to finalize the valuation of the Respawn acquisition as soon as practicable, but not later than one year from the acquisition date. Once completed, there may be material adjustments to our goodwill amounts.
Acquisition-related intangibles consisted of the following (in millions):
 
As of December 31, 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
$
419

 
$
(412
)
 
$
7

 
$
412

 
$
(412
)
 
$

Trade names and trademarks
153

 
(103
)
 
50

 
106

 
(98
)
 
8

Registered user base and other intangibles
5

 
(5
)
 

 
5

 
(5
)
 

Carrier contracts and related
85

 
(85
)
 

 
85

 
(85
)
 

In-process research and development
24

 

 
24

 

 

 

Total
$
686

 
$
(605
)
 
$
81

 
$
608

 
$
(600
)
 
$
8

During the three months ended December 31, 2017, we estimated, on a preliminary basis, the fair value of acquisition-related intangible assets of $78 million in connection with the Respawn acquisition, of which $47 million was allocated to trade names and trademarks, $24 million are allocated to in-process research and development, and $7 million was allocated to developed and core technology. Excluding the in-process research and development assets, the weighted-average useful life of the Respawn acquired intangible assets was approximately 7.1 years .

17


Amortization of intangibles for the three and nine months ended December 31, 2017 and 2016 are classified in the Condensed Consolidated Statement of Operations as follows (in millions):
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
2017
 
2016
 
2017
 
2016
Cost of service and other
$

 
$

 
$

 
$
16

Cost of product
1

 
18

 
1

 
27

Operating expenses
1

 
2

 
4

 
5

Total
$
2

 
$
20

 
$
5

 
$
48

Acquisition-related intangible assets are amortized using the straight-line method over the lesser of their estimated useful lives or the agreement terms, ranging from 1 to 14 years . As of December 31, 2017 and March 31, 2017 , the weighted-average remaining useful life for acquisition-related intangible assets was approximately 6.7 years and 1.4 years , respectively.
As of December 31, 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 three months)
$
5

2019
13

2020
6

2021
6

2022
6

2023
6

Thereafter
15

Total
$
57


(8) 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.
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 nine months ended December 31, 2017, we did not recognize any material losses or impairment charges on royalty-based commitments.

During the three and nine months ended December 31, 2016, we determined that the carrying value of one of our royalty-based assets and previously unrecognized minimum royalty-based commitments were not recoverable. We recognized an impairment charge of $12 million on the asset and a loss of $10 million on the previously unrecognized minimum royalty-based commitment. Of the total $22 million loss, $10 million was included in cost of service revenue and $12 million was included in research and development expenses in our Condensed Consolidated Statements of Operations.

18


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
December 31, 2017
 
As of
March 31, 2017
Other current assets
$
20

 
$
79

Other assets
34

 
39

Royalty-related assets
$
54

 
$
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
December 31, 2017
 
As of
March 31, 2017
Accrued royalties
$
260

 
$
165

Other liabilities
80

 
97

Royalty-related liabilities
$
340

 
$
262

As of December 31, 2017 , we were committed to pay approximately $987 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 12 for further information on our developer and licensor commitments.

(9) BALANCE SHEET DETAILS
Property and Equipment, Net
Property and equipment, net, as of December 31, 2017 and March 31, 2017 consisted of (in millions):  
 
As of
December 31, 2017
 
As of
March 31, 2017
Computer, equipment and software
$
724

 
$
723

Buildings
336

 
316

Leasehold improvements
137

 
126

Equipment, furniture and fixtures, and other
81

 
82

Land
66

 
61

Construction in progress
7

 
7

 
1,351

 
1,315

Less: accumulated depreciation
(904
)
 
(881
)
Property and equipment, net
$
447

 
$
434

During the three and nine months ended December 31, 2017 , depreciation expense associated with property and equipment was $30 million and $89 million , respectively.

19


During the three and nine months ended December 31, 2016 , depreciation expense associated with property and equipment was $29 million and $86 million , respectively.
Accrued and Other Current Liabilities
Accrued and other current liabilities as of December 31, 2017 and March 31, 2017 consisted of (in millions):  
 
As of
December 31, 2017
 
As of
March 31, 2017
Other accrued expenses
$
346

 
$
210

Accrued compensation and benefits
249

 
267

Accrued royalties
260

 
165

Deferred net revenue (other)
215

 
147

Accrued and other current liabilities
$
1,070

 
$
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 $1,946 million and $1,539 million as of December 31, 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).

(10) INCOME TAXES
The provision for income taxes for the three and nine months ended December 31, 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 and resulting provision for income taxes for the three and nine months ended December 31, 2017 was significantly impacted by the U.S. Tax Cuts and Jobs Act (the “U.S. Tax Act”), enacted on December 22, 2017. The U.S. Tax Act significantly revised the U.S. corporate income tax system by, among other things, lowering the U.S. corporate income tax rates, generally implementing a territorial tax system and imposing a one-time transition tax on the deemed repatriation of undistributed earnings of foreign subsidiaries (the “Transition Tax”).
Our effective tax rate for the three and nine months ended December 31, 2017 was negative 1,062.5 percent and positive 37.3 percent , respectively, as compared to 83.3 percent and 18.8 percent , respectively for the same periods in fiscal year 2017. The effective tax rate for the three and nine months ended December 31, 2017 was negatively impacted by the provisional income tax effects of the U.S. Tax Act, offset by earnings realized in countries that have lower statutory tax rates and the recognition of excess tax benefits from stock-based compensation. Without the provisional tax charge of the U.S. Tax Act, our effective tax rate for the three and nine months ended December 31, 2017 would have been 37.5 percent and 11.9 percent , respectively.
We have a March 31 fiscal year-end; therefore, the lower corporate tax rate enacted by the U.S. Tax Act will be phased in, resulting in a U.S. statutory federal rate of 31.6 percent for our fiscal year ending March 31, 2018, and 21.0 percent for subsequent fiscal years. When compared to the statutory rate of 31.6 percent , the effective tax rate for the three and nine months ended December 31, 2017 was higher primarily due to the income tax impacts of the U.S. Tax Act, offset by 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 negative 1,075.0 percent and positive 43.6 percent , respectively, for the three and nine months ended December 31, 2017.
We recorded a provision for income taxes of $170 million and $259 million for the three and nine months ended December 31, 2017, respectively, including $176 million which is a reasonable estimate of the impacts of the U.S. Tax Act. We recorded a reasonable estimate of $151 million related to the Transition Tax. The final calculations of the Transition Tax may differ from our estimates, potentially materially, due to, among other things, changes in interpretations of the U.S. Tax Act, our analysis of the U.S. Tax Act, or any updates or changes to estimates that we have utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and assertions.

20


In addition, we provisionally recorded a tax charge related to the remeasurement of U.S. deferred tax assets and liabilities as a result of the reduction of the U.S. corporate tax rate and a tax benefit related to the deferred tax impacts of global intangible income. The impact of these, as well as certain other charges and benefits, were not material individually, or in the aggregate, and are provisional for the same reasons as stated above.
Reasonable estimates of the impacts of the U.S. Tax Act are provided in accordance with SEC guidance that allows for a measurement period of up to one year after the enactment date of the U.S. Tax Act to finalize the recording of the related tax impacts. We expect to complete the accounting under the U.S. Tax Act as soon as practicable, but in no event later than one year from the enactment date of the U.S. Tax Act.
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 $45 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.

(11) 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
December 31, 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
(6
)
 
(8
)
Net carrying value of Senior Notes
$
992

 
$
990

 
 
 
 
Fair value of Senior Notes (Level 2)
$
1,059

 
$
1,054


As of December 31, 2017 , the remaining life of the 2021 Notes and 2026 Notes is approximately 3.2 years and 8.2 years , respectively.

21



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.

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 December 31, 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 nine months ended December 31, 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
December 31,
 
Nine Months Ended
December 31,
 
2017
 
2016
 
2017
 
2016
Amortization of debt discount
$

 
$

 
$

 
$
(2
)
Amortization of debt issuance costs

 
(1
)
 
(1
)
 
(2
)
Coupon interest expense
(10
)
 
(10
)
 
(31
)
 
(31
)
Other interest expense

 
(1
)
 

 
(1
)
Total interest expense
$
(10
)
 
$
(12
)
 
$
(32
)
 
$
(36
)


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(12) COMMITMENTS AND CONTINGENCIES
Lease Commitments
As of December 31, 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. and Automobili Lamborghini S.p.A (Need For Speed and Real Racing games); National Basketball 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 December 31, 2017 (in millions): 
 
 
 
Fiscal Years Ending March 31,
 
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Remaining
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
three mos.)
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
Unrecognized commitments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Developer/licensor commitments
$
987

 
$
26

 
$
224

 
$
229

 
$
205

 
$
222

 
$
80

 
$
1

Marketing commitments
355

 
9

 
86

 
83

 
77

 
73

 
27

 

Operating leases
249

 
8

 
43

 
39

 
39

 
32

 
25

 
63

Senior Notes interest
227

 
7

 
41

 
41

 
41

 
20

 
19

 
58

Other purchase obligations
109

 
9

 
30

 
27

 
14

 
9

 
6

 
14

Total unrecognized commitments
1,927

 
59

 
424

 
419

 
376

 
356

 
157

 
136

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recognized commitments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Notes principal and interest
1,013

 
13

 

 

 
600

 

 

 
400

Licensing obligations
107

 
6

 
23

 
25

 
26

 
27

 

 

Total recognized commitments
1,120

 
19

 
23

 
25

 
626

 
27

 

 
400

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total commitments
$
3,047

 
$
78

 
$
447

 
$
444

 
$
1,002

 
$
383

 
$
157

 
$
536

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 December 31, 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

23


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 December 31, 2017 , we had a liability for unrecognized tax benefits and an accrual for the payment of related interest totaling $98 million , of which we are unable to make a reasonably reliable estimate of when cash settlement with a taxing authority will occur. Furthermore, we had a $104 million income tax payable recorded during the three months ended December 31, 2017 related to the provisional Transition Tax, which we expect to pay in installments over the next 8 years. Of the $104 million , $8 million is included in accrued and other current liabilities and the remaining $96 million is included in income tax obligations on our Condensed Consolidated Balance Sheet.
In addition to what is included in the table above, as of  December 31, 2017 , we may be required to pay up to $140 million  of cash consideration in connection with the Respawn acquisition based on the achievement of certain performance milestones through the end of calendar year 2022 at the latest. As of  December 31, 2017 , we have recorded  $122 million  of contingent consideration on our Condensed Consolidated Balance Sheet representing the estimated fair value.
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.

(13)  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 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.

24


There were an insignificant number of stock options granted during the three and nine months ended December 31, 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
December 31,
 
 
2017
 
2016
Risk-free interest rate
 
1.13 - 1.24%

 
0.5 - 0.6%

Expected volatility
 
28
%
 
29 - 32%

Weighted-average volatility
 
28
%