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ELECTRONIC ARTS INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[August 05, 2014]

ELECTRONIC ARTS INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, made in this Quarterly Report are forward looking. Examples of forward-looking statements include statements related to industry prospects, our future economic performance including anticipated revenues and expenditures, results of operations or financial position, and other financial items, our business plans and objectives, including our intended product releases, and may include certain assumptions that underlie the forward-looking statements. We use words such as "anticipate," "believe," "expect," "intend," "estimate" (and the negative of any of these terms), "future" and similar expressions to help identify forward-looking statements.

These forward-looking statements are subject to business and economic risk and reflect management's current expectations, and involve subjects that are inherently uncertain and difficult to predict. Our actual results could differ materially from those in the forward-looking statements. We will not necessarily update information if any forward-looking statement later turns out to be inaccurate. Risks and uncertainties that may affect our future results include, but are not limited to, those discussed in this report under the heading "Risk Factors" in Part II, Item 1A, as well as in our Annual Report on Form 10-K for the fiscal year ended March 31, 2014 as filed with the Securities and Exchange Commission ("SEC") on May 21, 2014 and in other documents we have filed with the SEC.

OVERVIEW The following overview is a high-level discussion of our operating results, as well as some of the trends and drivers that affect our business. Management believes that an understanding of these trends and drivers is important in order to understand our results for the three months ended June 30, 2014, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Form 10-Q, including in the remainder of "Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")," "Risk Factors," and the Condensed Consolidated Financial Statements and related Notes. Additional information can be found in the "Business" section of our Annual Report on Form 10-K for the fiscal year ended March 31, 2014 as filed with the SEC on May 21, 2014 and in other documents we have filed with the SEC.

About Electronic Arts We develop, market, publish and distribute game software content and services that can be played by consumers on a variety of platforms, including video game consoles (such as PlayStation 3 and 4 from Sony and Xbox 360 and Xbox One from Microsoft), personal computers, mobile phones and tablets. Our ability to deliver games and services across multiple platforms, through multiple distribution channels, and directly to consumers (online and wirelessly) has been, and will continue to be, a cornerstone of our product strategy. We have adopted new business models and alternative revenue streams (such as subscription, micro-transactions, and advertising) in connection with our online and wireless product and service offerings. Some of our games are based on our wholly-owned intellectual property (e.g., Battlefield, Mass Effect, Need for Speed, Dragon Age, The Sims, Bejeweled, and Plants vs. Zombies), and some of our games are based on content that we license from others (e.g., FIFA, Madden NFL and Star Wars). Our goal is to turn our intellectual properties into year-round businesses available on a range of platforms. Our products and services may be purchased through physical and online retailers, platform providers such as console manufacturers and mobile carriers via digital downloads, as well as directly through our own distribution platform, including online portals such as Origin.

Financial Results Total net revenue for the three months ended June 30, 2014 was $1,214 million, an increase of $265 million, or 28 percent, as compared to the three months ended June 30, 2013. At June 30, 2014, deferred net revenue associated with sales of online-enabled games decreased by $439 million as compared to March 31, 2014, directly increasing the amount of reported net revenue during the three months ended June 30, 2014. At June 30, 2013, deferred net revenue associated with sales of online-enabled games decreased by $454 million as compared to March 31, 2013, directly increasing the amount of reported net revenue during the three months ended June 30, 2013. Disregarding the impact of the deferred net revenue, reported net revenue would have increased by approximately $280 million, or 57 percent, during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. Net revenue for the three months ended June 30, 2014 was driven by FIFA 2014, Battlefield 4, and Madden NFL 25.

Net income for the three months ended June 30, 2014 was $335 million as compared to $222 million for the three months ended June 30, 2013. Diluted earnings per share for the three months ended June 30, 2014 was $1.04 as compared to a diluted 31-------------------------------------------------------------------------------- Table of Contents earnings per share of $0.71 for the three months ended June 30, 2013. Net income increased for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 primarily as a result of a $92 million increase in gross profit and a $37 million decrease in operating expenses primarily due to personnel-related costs, resulting from a decrease in headcount and continued cost discipline.

Trends in Our Business Console System Transition. In November 2013, the PlayStation 4 from Sony and Xbox One from Microsoft were released. EA delivered five major products for each of these new-generation console systems around the time of their launch, and we are continuing to make significant investments in products and services for these new consoles. We also expect to continue to develop and market products and services for the Microsoft Xbox 360 and the Sony PlayStation 3. Industry sales of major games for these legacy consoles declined significantly during our 2014 fiscal year. This sales decline trend is likely to continue and may accelerate. The success of our products and services for the new-generation consoles depends in part on the commercial success and adequate supply of, as well as our ability to develop commercially successful products and services for, these consoles.

Digital Transformation. Our business continues to transform from a traditional packaged goods business model to one in which our games and services are sold and delivered via a network connection, with digitally-delivered content, features and services helping to extend the life of the respective game offering. For example, many of our products that traditionally have been sold only as packaged goods products can now also be purchased and downloaded via a network connection. We also include digitally-delivered content, features and services as part of the product offering, either made available for free or at additional cost. Additionally, our mobile and PC free-to-play games are available solely via digital delivery and are typically monetized through a micro-transaction business model through which we sell incremental content and/or features in discrete transactions.

We significantly increased the digital revenue that we derive from wireless, Internet-derived and advertising products and services from $1,159 million in fiscal year 2012 to $1,440 million in fiscal year 2013. During fiscal year 2014, digital revenue was $1,833 million and we expect this portion of our business to continue to grow in fiscal 2015 and beyond.

Mobile and PC Free-to-Play Games. The proliferation of mobile phones and tablets has significantly increased the consumer base for mobile games. The broad consumer acceptance of free-to-play business models, which allow consumers to try new games with no up-front cost and pay for additional content or in-game items through micro-transactions, has led to growth in the mobile gaming industry. Likewise, the mass introduction and wide consumer acceptance of free-to-play, micro-transaction-based PC games played over the Internet has also broadened our consumer base. We expect revenue generated from mobile and PC free-to-play games to remain an important part of our business.

Concentration of Sales Among the Most Popular Games. In all major segments of our industry, we see a larger portion of games sales concentrated on the most popular titles, and many of those titles are sequels of prior games. We have responded to this trend by significantly reducing the number of games that we produce to provide greater focus on our most promising intellectual properties.

For example, in fiscal year 2011, we published over 30 titles for consoles and PC, while in fiscal year 2014 we published 11; in fiscal year 2015, we expect to release 10 titles for console and PC. We have similarly reduced the number of major mobile titles that we publish.

Recent Developments In May 2014, a special committee of our Board of Directors, on behalf of the full Board of Directors, authorized a new program to repurchase up to $750 million of our common stock. This new stock repurchase program, which expires on May 31, 2016, supersedes and replaces the stock repurchase authorization approved by our Board of Directors in July 2012. Under this program, we may purchase stock in the open market or through privately-negotiated transactions in accordance with applicable securities laws, including pursuant to pre-arranged stock trading plans. The timing and actual amount of the stock repurchases will depend on several factors including price, capital availability, regulatory requirements, alternative investment opportunities and other market conditions. We are not obligated to repurchase any specific number of shares under this program and it may be modified, suspended or discontinued at any time.

During the three months ended June 30, 2014, we repurchased and retired approximately 1.4 million shares of our common stock for approximately $50 million. We continue to actively repurchase shares under this program.

32-------------------------------------------------------------------------------- Table of Contents CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S.

GAAP"). The preparation of these Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, and revenue and expenses during the reporting periods. The policies discussed below are considered by management to be critical because they are not only important to the portrayal of our financial condition and results of operations, but also because application and interpretation of these policies requires both management judgment and estimates of matters that are inherently uncertain and unknown. As a result, actual results may differ materially from our estimates.

Revenue Recognition, Sales Returns and Allowances, and Bad Debt Reserves We derive revenue principally from sales of interactive software games, and related content and services on (1) video game consoles (such as Playstation 3 and 4 from Sony and Xbox 360 and Xbox One from Microsoft) and PCs, and (2) mobile phones and tablets. We evaluate revenue recognition based on the criteria set forth in FASB Accounting Standards Codification ("ASC") 605, Revenue Recognition and ASC 985-605, Software: Revenue Recognition. We classify our revenue as either product revenue or service and other revenue.

Product revenue. Our product revenue includes revenue associated with the sale of software games or related content, whether delivered via a physical disc (e.g., packaged goods) or delivered digitally via the Internet (e.g., full-game downloads, micro-transactions), and licensing of game software to third-parties.

Product revenue also includes revenue from mobile full game downloads that do not require our hosting support, and sales of tangible products such as hardware, peripherals, or collectors' items.

Service and other revenue. Our service revenue includes revenue recognized from time-based subscriptions and games or related content that requires our hosting support in order to utilize the game or related content (i.e., can only be played with an Internet connection). This includes (1) entitlements to content that are accessed through hosting services (e.g., micro-transactions for Internet-based, social network and mobile games), (2) massively multi-player online ("MMO") games (both software game and subscription sales), (3) subscriptions for our Battlefield Premium and Pogo-branded online game services, and (4) allocated service revenue from sales of software games with an online service element (i.e., "matchmaking" service). Our other revenue includes advertising and non-software licensing revenue.

With respect to the allocated service revenue from sales of software games with a matchmaking service mentioned above, our allocation of proceeds between product and service revenue for presentation purposes is based on management's best estimate of the selling price of the matchmaking service with the residual value allocated to product revenue. Our estimate of the selling price of the matchmaking service is comprised of several factors including, but not limited to, prior selling prices for the matchmaking service, prices charged separately by other third-party vendors for similar service offerings, and a cost-plus-margin approach. We review the estimated selling price of the online matchmaking service on a regular basis and use this methodology consistently to allocate revenue between product and service for software game sales with a matchmaking service.

We evaluate and recognize revenue when all four of the following criteria are met: • Evidence of an arrangement. Evidence of an agreement with the customer that reflects the terms and conditions to deliver the related products or services must be present.

• Fixed or determinable fee. If a portion of the arrangement fee is not fixed or determinable, we recognize revenue as the amount becomes fixed or determinable.

• Collection is deemed probable. Collection is deemed probable if we expect the customer to be able to pay amounts under the arrangement as those amounts become due. If we determine that collection is not probable as the amounts become due, we generally conclude that collection becomes probable upon cash collection.

• Delivery. For packaged goods, delivery is considered to occur when a product is shipped and the risk of loss and rewards of ownership have transferred to the customer. For digital downloads, delivery is considered to occur when the software is made available to the customer for download.

For services and other, delivery is generally considered to occur as the service is delivered, which is determined based on the underlying service obligation.

33-------------------------------------------------------------------------------- Table of Contents Online-Enabled Games The majority of our software games can be connected to the Internet whereby a consumer may be able to download unspecified content or updates on a when-and-if-available basis ("unspecified updates") for use with the original game software. In addition, we may also offer an online matchmaking service that permits consumers to play against each other via the Internet without a separate fee. U.S. GAAP requires us to account for the consumer's right to receive unspecified updates or the matchmaking service for no additional fee as a "bundled" sale, or multiple-element arrangement.

We have an established historical pattern of providing unspecified updates to online-enabled games (e.g., player roster updates to Madden NFL 25) at no additional charge to the consumer. We do not have vendor-specific objective evidence of fair value ("VSOE") for these unspecified updates, and thus, as required by U.S. GAAP, we recognize revenue from the sale of these online-enabled games over the period we expect to offer the unspecified updates to the consumer ("estimated offering period").

Estimated Offering Period Because the offering period is not an explicitly defined period, we must make an estimate of the offering period. Determining the estimated offering period is inherently subjective and is subject to regular revision based on historical online usage. For example, in determining the estimated offering period for unspecified updates associated with our online-enabled games, we consider the period of time consumers are online as online connectivity is required. On an annual basis, we review consumers' online gameplay of all online-enabled games that have been released 12 to 24 months prior to the evaluation date. For example, if our evaluation date is April 1, 2013, we evaluate all online-enabled games released between April 1, 2011 and March 31, 2012. Based on this population of games, for all players that register the game online within the first six months of release of the game to the general public, we compute the weighted-average number of days for each online-enabled game, based on when a player initially registers the game online to when that player last plays the game online. We then compute the weighted-average number of days for all online-enabled games by multiplying the weighted-average number of days for each online-enabled game by its relative percentage of total units sold from these online-enabled games (i.e., a game with more units sold will have a higher weighting to the overall computation than a game with fewer units sold). Under a similar computation, we also consider the estimated period of time between the date a game unit is sold to a reseller and the date the reseller sells the game unit to an end consumer (i.e., time in channel). Based on these two calculations we then consider the method of distribution. For example, physical software games sold at retail would have a composite offering period equal to the online gameplay plus time in channel as opposed to digitally distributed software games which are delivered immediately via digital download and thus have no concept of channel. Additionally, we consider results from prior years, known online gameplay trends, as well as disclosed service periods for competitors' games in determining the estimated offering period for future sales.

While we consistently apply this methodology, inherent assumptions used in this methodology include which online-enabled games to sample, whether to use only units that have registered online, whether to weight the number of days for each game, whether to weight the days based on the units sold of each game, determining the period of time between the date of sale to reseller and the date of sale to the consumer and assessing online gameplay trends.

Prior to July 1, 2013, for most sales, we estimated the offering period to be six months and recognized revenue over this period in the month after delivery.

During the three months ended September 30, 2013, we completed our annual evaluation of the estimated offering period and noted that generally, consumers were playing our games online over a longer period of time. Based on this, we concluded that for physical software sales made after June 30, 2013, the estimated offering period should be increased to nine months, resulting in revenue being recognized over a longer period of time. This change in estimate resulted in an estimated decrease to net revenue and net income of $474 million and a decrease of $1.50 of diluted earnings per share for fiscal year 2014. The estimated offering period for digitally distributed software games is six months. We have not yet completed our fiscal year 2015 evaluation of our estimated offering period.

Other Multiple-Element Arrangements In some of our multiple-element arrangements, we sell tangible products with software and/or software-related offerings. These tangible products are generally either peripherals or ancillary collectors' items, such as figurines and comic books. Revenue for these arrangements is allocated to each separate unit of accounting for each deliverable using the relative selling prices of each deliverable in the arrangement based on the selling price hierarchy described below. If the arrangement contains more than one software deliverable, the arrangement consideration is allocated to the software deliverables as a group and then allocated to each software deliverable in accordance with ASC 985-605.

We determine the selling price for a tangible product deliverable based on the following selling price hierarchy: VSOE (i.e., the price we charge when the tangible product is sold separately) if available, third-party evidence ("TPE") of fair value (i.e., the 34-------------------------------------------------------------------------------- Table of Contents price charged by others for similar tangible products) if VSOE is not available, or our best estimate of selling price ("BESP") if neither VSOE nor TPE is available. Determining the BESP is a subjective process that is based on multiple factors including, but not limited to, recent selling prices and related discounts, market conditions, customer classes, sales channels and other factors. In accordance with ASC 605, provided the other three revenue recognition criteria other than delivery have been met, we recognize revenue upon delivery to the customer as we have no further obligations.

We must make assumptions and judgments in order to (1) determine whether and when each element is delivered, (2) determine whether VSOE exists for each undelivered element, and (3) allocate the total price among the various elements, as applicable. Changes to any of these assumptions and judgments, or changes to the elements in the arrangement, could cause a material increase or decrease in the amount of revenue that we report in a particular period.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for annual reporting periods beginning after December 15, 2016. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its Condensed Consolidated Financial Statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

We expect to adopt this new standard in the first quarter of fiscal year 2018.

Principal Agent Considerations In accordance with ASC 605-45, Revenue Recognition: Principal Agent Considerations, we evaluate sales of our interactive software games via third party storefronts, including digital storefronts such as Xbox Live Marketplace, Sony PSN, Apple AppStore, Google Play, in order to determine whether or not we are acting as the principal or as an agent, which we consider in determining if revenue should be reported gross or net of fees retained by the storefront. Key indicators that we evaluate in determining gross versus net treatment include but are not limited to the following: • The party responsible for delivery/fulfillment of the product or service to the end consumer • The party responsible for the billing, collection of fees and refunds to the consumer • The storefront and Terms of Sale that govern the consumer's purchase of the product or service • The party that sets the pricing with the consumer and has credit risk Based on the evaluation of the above indicators, we have determined that we are generally acting as an agent and are not considered the primary obligor to consumers for our interactive software games distributed through third party digital storefronts. We therefore recognize revenue related to these arrangements on a net basis.

Sales Returns and Allowances and Bad Debt Reserves We reduce revenue primarily for estimated future returns and price protection which may occur with our distributors and retailers ("channel partners"). Price protection represents our practice to provide our channel partners with a credit allowance to lower their wholesale price on a particular product in the channel.

The amount of the price protection is generally the difference between the old wholesale price and the new reduced wholesale price. In certain countries for our PC and console packaged goods software products, we also have a practice of allowing channel partners to return older software products in the channel in exchange for a credit allowance. As a general practice, we do not give cash refunds.

When evaluating the adequacy of sales returns and price protection allowances, we analyze the following: historical credit allowances, current sell-through of our channel partners' inventory of our software products, current trends in retail and the video game industry, changes in customer demand, acceptance of our software products, and other related factors. In addition, we monitor the volume of sales to our channel partners and their inventories, as substantial overstocking in the distribution channel could result in high returns or higher price protection in subsequent periods.

In the future, actual returns and price protections may materially exceed our estimates as unsold software products in the distribution channels are exposed to rapid changes in consumer preferences, market conditions or technological obsolescence due to new platforms, product updates or competing software products. While we believe we can make reliable estimates regarding these matters, these estimates are inherently subjective. Accordingly, if our estimates change, our returns and price protection allowances would change and would impact the total net revenue, accounts receivable and deferred net revenue that we report.

35-------------------------------------------------------------------------------- Table of Contents We determine our allowance for doubtful accounts by evaluating the following: customer creditworthiness, current economic trends, historical experience, age of current accounts receivable balances, changes in financial condition or payment terms of our customers. Significant management judgment is required to estimate our allowance for doubtful accounts in any accounting period. The amount and timing of our bad debt expense and cash collection could change significantly as a result of a change in any of the evaluation factors mentioned above.

Fair Value Estimates The preparation of financial statements in conformity with U.S. GAAP often requires us to determine the fair value of a particular item in order to fairly present our financial statements. Without an independent market or another representative transaction, determining the fair value of a particular item requires us to make several assumptions that are inherently difficult to predict and can have a material impact on the accounting.

There are various valuation techniques used to estimate fair value. These include (1) the market approach where market transactions for identical or comparable assets or liabilities are used to determine the fair value, (2) the income approach, which uses valuation techniques to convert future amounts (for example, future cash flows or future earnings) to a single present value amount, and (3) the cost approach, which is based on the amount that would be required to replace an asset. For many of our fair value estimates, including our estimates of the fair value of acquired intangible assets, we use the income approach. Using the income approach requires the use of financial models, which require us to make various estimates including, but not limited to (1) the potential future cash flows for the asset or liability being measured, (2) the timing of receipt or payment of those future cash flows, (3) the time value of money associated with the expected receipt or payment of such cash flows, and (4) the inherent risk associated with the cash flows (risk premium). Making these cash flow estimates is inherently difficult and subjective, and if any of the estimates used to determine the fair value using the income approach turns out to be inaccurate, our financial results may be negatively impacted.

Furthermore, relatively small changes in many of these estimates can have a significant impact to the estimated fair value resulting from the financial models or the related accounting conclusion reached. For example, a relatively small change in the estimated fair value of an asset may change a conclusion as to whether an asset is impaired.

While we are required to make certain fair value assessments associated with the accounting for several types of transactions, the following areas are the most sensitive to these assessments: Business Combinations. We must estimate the fair value of assets acquired, liabilities and contingencies assumed, acquired in-process technology, and contingent consideration issued in a business combination. Our assessment of the estimated fair value of each of these can have a material effect on our reported results as intangible assets are amortized over various estimated useful lives.

Furthermore, the estimated fair value assigned to an acquired asset or liability has a direct impact on the amount we recognize as goodwill, which is an asset that is not amortized. Determining the fair value of assets acquired requires an assessment of the highest and best use or the expected price to sell the asset and the related expected future cash flows. Determining the fair value of acquired in-process technology also requires an assessment of our expectations related to the use of that technology. Determining the fair value of an assumed liability requires an assessment of the expected cost to transfer the liability.

Determining the fair value of contingent consideration requires an assessment of the probability-weighted expected future cash flows over the period in which the obligation is expected to be settled, and applying a discount rate that appropriately captures the risk associated with the obligation. The significant unobservable inputs used in the fair value measurement of the contingent consideration payable are forecasted earnings. Significant changes in forecasted earnings would result in significantly higher or lower fair value measurement.

This fair value assessment is also required in periods subsequent to a business combination. Such estimates are inherently difficult and subjective and can have a material impact on our Condensed Consolidated Financial Statements.

Assessment of Impairment of Goodwill, Intangibles, and Other Long-Lived Assets.

Current accounting standards require that we assess the recoverability of our finite lived acquisition-related intangible assets and other long-lived assets whenever events or changes in circumstances indicate the remaining value of the assets recorded on our Condensed Consolidated Balance Sheets is potentially impaired. In order to determine if a potential impairment has occurred, management must make various assumptions about the estimated fair value of the asset by evaluating future business prospects and estimated future cash flows.

For some assets, our estimated fair value is dependent upon predicting which of our products will be successful. This success is dependent upon several factors, such as which operating platforms will be successful in the marketplace. Also, our revenue and earnings are dependent on our ability to meet our product release schedules. Judgments and assumptions about future cash flows and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including but not limited to, significant negative industry or economic trends, significant changes in the manner of our use of the assets or the strategy of our overall business and significant under-performance relative to projected future operating results. When we 36-------------------------------------------------------------------------------- Table of Contents consider such assets to be impaired, the amount of impairment we recognize is measured by the amount by which the carrying amount of the asset exceeds its fair value.

In assessing impairment on our goodwill, we first analyze qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The qualitative factors we assess include long-term prospects of our performance, share price trends and market capitalization, and Company specific events. If we conclude it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, we do not need to perform the two-step impairment test. If based on that assessment, we believe it is more likely than not that the fair value of the reporting unit is less than its carrying value, a two-step goodwill impairment test will be performed. The first step measures for impairment by applying fair value-based tests at the reporting unit level. The second step (if necessary) measures the amount of impairment by applying fair value-based tests to the individual assets and liabilities within each reporting unit. Reporting units are determined by the components of operating segments that constitute a business for which (1) discrete financial information is available, (2) segment management regularly reviews the operating results of that component, and (3) whether the component has dissimilar economic characteristics to other components.

As of our last annual assessment of goodwill in the fourth quarter of fiscal year 2014, we determined that it was more likely than not that the fair value of our reporting unit exceeded its carrying amount and, as such, we did not need to perform the two-step impairment test. We have not identified any indicators of impairment since that assessment.

Our business consists of developing, marketing and distributing video game software content and services using both established and emerging intellectual properties and our forecasts for emerging intellectual properties are based upon internal estimates and external sources rather than historical information and have an inherently higher risk of inaccuracy. If future forecasts are revised, they may indicate or require future impairment charges. We base our fair value estimates on assumptions we believe to be reasonable, but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.

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 generally at the greater of the contractual rate or an effective royalty rate based on the total projected net revenue for contracts with guaranteed minimums. Significant judgment is required to estimate the effective royalty rate for a particular contract. Because the computation of effective royalty rates requires us to project future revenue, it is inherently subjective as our future revenue projections must anticipate a number of factors, including (1) the total number of titles subject to the contract, (2) the timing of the release of these titles, (3) the number of software units we expect to sell, which can be impacted by a number of variables, including product quality, number of platforms we release on, the timing of the title's release and competition, and (4) future pricing. Determining the effective royalty rate for our titles is particularly challenging due to the inherent difficulty in predicting the popularity of entertainment products. Furthermore, if we conclude that we are unable to make a reasonably reliable forecast of projected net revenue, we recognize royalty expense at the greater of contract rate or on a straight-line basis over the term of the contract. Accordingly, if our future revenue projections change, our effective royalty rates would change, which could impact the amount and timing of royalty expense we recognize.

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 37-------------------------------------------------------------------------------- Table of Contents asset and liability upon execution of the contract. Royalty liabilities are classified as current liabilities to the extent such royalty payments are contractually due within the next 12 months.

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 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 generally using undiscounted cash flows when impairment indicators exist. 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.

Income Taxes We recognize deferred tax assets and liabilities for both the expected impact of differences between the financial statement amount and the tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards. We record a valuation allowance against deferred tax assets when it is considered more likely than not that all or a portion of our deferred tax assets will not be realized. In making this determination, we are required to give significant weight to evidence that can be objectively verified. It is generally difficult to conclude that a valuation allowance is not needed when there is significant negative evidence, such as cumulative losses in recent years. Forecasts of future taxable income are considered to be less objective than past results, particularly in light of the economic environment. Therefore, cumulative losses weigh heavily in the overall assessment.

In addition to considering forecasts of future taxable income, we are also required to evaluate and quantify other possible sources of taxable income in order to assess the realization of our deferred tax assets, namely the reversal of existing deferred tax liabilities, the carry back of losses and credits as allowed under current tax law, and the implementation of tax planning strategies. Evaluating and quantifying these amounts involves significant judgments. Each source of income must be evaluated based on all positive and negative evidence; this evaluation involves assumptions about future activity.

Certain taxable temporary differences that are not expected to reverse during the carry forward periods permitted by tax law cannot be considered as a source of future taxable income that may be available to realize the benefit of deferred tax assets.

Based on the assumptions and requirements noted above, we have recorded a valuation allowance against most of our U.S. deferred tax assets. In addition, we expect to provide a valuation allowance on future U.S. tax benefits until we can sustain a level of profitability in the U.S., or until other significant positive evidence arises that suggest that these benefits are more likely than not to be realized.

In the ordinary course of our business, there are many transactions and calculations where the tax law and ultimate tax determination is uncertain. As part of the process of preparing our Condensed Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate prior to the completion and filing of tax returns for such periods. This process requires estimating both our geographic mix of income and our uncertain tax positions in each jurisdiction where we operate. These estimates involve complex issues and require us to make judgments about the likely application of the tax law to our situation, as well as with respect to other matters, such as anticipating the positions that we will take on tax returns prior to our actually preparing the returns and the outcomes of disputes with tax authorities. The ultimate resolution of these issues may take extended periods of time due to examinations by tax authorities and statutes of limitations. In addition, changes in our business, including acquisitions, changes in our international corporate structure, changes in the geographic location of business functions or assets, changes in the geographic mix and amount of income, as well as changes in our agreements with tax authorities, valuation allowances, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in the estimated and actual level of annual pre-tax income can affect the overall effective income tax rate.

RESULTS OF OPERATIONS Our fiscal year is reported on a 52- or 53-week period that ends on the Saturday nearest March 31. Our results of operations for the fiscal years ending or ended, as the case may be, March 31, 2015 and 2014 contain 52 weeks each and ends or ended, as the case may be, on March 28, 2015 and March 29, 2014, respectively. Our results of operations for the three months ended June 30, 2014 and 2013 contained 13 weeks each and ended on June 28, 2014 and June 29, 2013, respectively. For simplicity of disclosure, all fiscal periods are referred to as ending on a calendar month end.

38-------------------------------------------------------------------------------- Table of Contents Net Revenue Net revenue consists of sales generated from (1) video games sold as packaged goods or as digital downloads and designed for play on video game consoles (such as the PlayStation 3 and 4 from Sony and Xbox 360 and One from Microsoft) and PCs, (2) video games for mobile phones and tablets, (3) separate software products and content and online game services associated with these products, (4) licensing our game software to third parties, (5) allowing other companies to manufacture and sell our products in conjunction with other products, and (6) advertisements on our online web pages and in our games.

We provide three different measures of our Net Revenue. Two of these measures are presented in accordance with U.S. GAAP - (1) Net Revenue by Product revenue and Service and other revenue and (2) Net Revenue by Geography. The third measure is a non-GAAP financial measure - Net Revenue before Revenue Deferral by Revenue Composition, which is primarily based on method of distribution. We use this third non-GAAP financial measure internally to evaluate our operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of our management team.

Management places a greater emphasis and focus on assessing our business through a review of the Net Revenue before Revenue Deferral by Revenue Composition than by Net Revenue by Product revenue and Service and other revenue. These two measures differ as (1) Net Revenue by Product revenue and Service and other revenue reflects the deferral and recognition of revenue in periods subsequent to the date of sale due to U.S. GAAP while Net Revenue before Revenue Deferral by Revenue Composition does not, and (2) both measures contain a different aggregation of sales from one another. For instance, Service and other revenue does not include a portion of our full-game digital download and mobile sales that are fully included in our Digital revenue. Further, Service and other revenue includes all of our revenue associated with MMO games while software sales associated with our MMOs are included in either Digital revenue or Packaged goods and other revenue depending on whether the sale was a full-game digital download or a packaged goods sale.

Net Revenue Quarterly Analysis Net Revenue For the three months ended June 30, 2014, net revenue was $1,214 million and increased $265 million, or 28 percent, as compared to the three months ended June 30, 2013. This increase was driven by a $517 million increase in revenue primarily from the FIFA and Battlefield franchises, and Titanfall. This increase was partially offset by a $252 million decrease in revenue primarily from the Crysis, Dead Space, SimCity, The Sims franchises, and Star Wars: The Old Republic.

Net Revenue by Product Revenue and Service and Other Revenue Our total net revenue by product revenue and service and other revenue for the three months ended June 30, 2014 and 2013 was as follows (in millions): Three Months Ended June 30, 2014 2013 $ Change % Change Net revenue: Product $ 757 $ 543 $ 214 39 % Service and other 457 406 51 13 % Total net revenue $ 1,214 $ 949 $ 265 28 % Product Revenue For the three months ended June 30, 2014, product revenue was $757 million, primarily driven by FIFA 14, Battlefield 4, and Madden NFL 25. Product revenue for the three months ended June 30, 2014 increased $214 million, or 39 percent, as compared to the three months ended June 30, 2013. This increase was driven by a $413 million increase primarily from the Battlefield, FIFA, and Madden NFL franchises. This increase was partially offset by a $199 million decrease primarily from the Crysis, Dead Space, and The Sims franchises.

39-------------------------------------------------------------------------------- Table of Contents Service and Other Revenue For the three months ended June 30, 2014, service and other revenue was $457 million, primarily driven by FIFA Ultimate Team, Titanfall, and Battlefield 4 Premium. Service and other revenue for the three months ended June 30, 2014 increased $51 million, or 13 percent, as compared to the three months ended June 30, 2013. This increase was driven by a $153 million increase primarily from Titanfall and the FIFA and Plants vs Zombies franchises. This increase was partially offset by a $102 million decrease primarily from the Battlefield and SimCity franchises and Star Wars: The Old Republic.

Net Revenue by Geography We attribute net revenue from external customers to individual countries based on the location of the legal entity that sells the products and/or services.

Note that revenue attributed to the legal entity that makes the sale is often not the country where the consumer resides. For example, revenue generated by our Swiss legal entities includes digital revenue from consumers who reside outside of Switzerland, including consumers who reside outside of Europe.

Revenue generated by our Swiss legal entities during three months ended June 30, 2014 represented $440 million, or 36 percent, of our total net revenue. Revenue generated by our Swiss legal entities during three months ended June 30, 2013 represented $403 million, or 43 percent, of our total net revenue. Revenue generated in the United States represents over 99 percent of our total North America net revenue. No other country represented greater than 10 percent of total net revenue.

Three Months Ended June 30, (In millions) 2014 2013 $ Change % Change North America $ 522 $ 395 $ 127 32 % International 692 554 138 25 % Total net revenue $ 1,214 $ 949 $ 265 28 % Net revenue in North America was $522 million, or 43 percent of total net revenue for the three months ended June 30, 2014, compared to $395 million, or 42 percent of total net revenue for the three months ended June 30, 2013, an increase of $127 million, or 32 percent. Net revenue in North America increased primarily due to increased revenue in our Battlefield and Madden NFL franchises and Titanfall, partially offset by decreased revenue in our Dead Space, Crysis, and SimCity franchises. International net revenue was $692 million, or 57 percent of total net revenue during the three months ended June 30, 2014, compared to $554 million, or 58 percent of total net revenue during the three months ended June 30, 2013, an increase of $138 million, or 25 percent. We estimate that foreign exchange rates (primarily due to the British pound sterling and Euro) increased reported International net revenue by approximately $11 million, or 2 percent, for the three months ended June 30, 2014 as compared to the exchange rates in effect for the three months ended June 30, 2013.

Excluding the effect of foreign exchange rates from International net revenue, we estimate that International net revenue increased by approximately $127 million, or 23 percent for three months ended June 30, 2014 as compared to three months ended June 30, 2013. This increase is primarily due to our FIFA and Battlefield franchises, and Titanfall, partially offset by decreased revenue in our Crysis, SimCity, and The Sims franchises.

Supplemental Net Revenue by Revenue Composition As we continue to evolve our business and more of our products are delivered to consumers digitally via the Internet, we place a greater emphasis and focus on assessing our business through a review of net revenue by revenue composition.

Net Revenue before Revenue Deferral, a non-GAAP financial measure, is provided in this section of MD&A, including a discussion of the components of this measure: (1) packaged goods and other and (2) digital. See "Non-GAAP Financial Measures" below for an explanation of our use of this non-GAAP financial measure. A reconciliation to the corresponding measure calculated in accordance with U.S. GAAP is provided in the discussion below.

"Revenue Deferral" in this "Net Revenue" section generally includes the unrecognized revenue from bundled sales of certain online-enabled games for which we do not have VSOE for the unspecified updates. Fluctuations in the Revenue Deferral are largely dependent upon the amounts of products that we sell with the online features and services previously discussed, while the Recognition of Revenue Deferral for a period is also dependent upon (1) the amount deferred, (2) the period of time the software-related offerings are to be provided, and (3) the timing of the sale. For example, most Revenue Deferrals incurred in the first quarter of a fiscal year are recognized within the same fiscal year; however, substantially all of the Revenue Deferrals incurred in the last month of a fiscal year will be recognized in the subsequent fiscal year.

40-------------------------------------------------------------------------------- Table of Contents Our total net revenue by revenue composition for the three months ended June 30, 2014 and 2013 was as follows (in millions): Three Months Ended June 30, 2014 2013 $ Change % Change Packaged goods and other $ 293 $ 117 $ 176 150 % Digital 482 378 104 28 % Net Revenue before Revenue Deferral 775 495 280 57 % Revenue Deferral (623 ) (355 ) (268 ) (75 )% Recognition of Revenue Deferral 1,062 809 253 31 % Total net revenue $ 1,214 $ 949 $ 265 28 % Net Revenue before Revenue Deferral Packaged Goods and Other Revenue Packaged goods revenue (previously disclosed as "publishing revenue") includes sales of software that is distributed physically. This includes (1) sales of our internally-developed and co-published game software distributed physically through traditional channels such as brick and mortar retailers, (2) our software licensing revenue from third parties (for example, makers of personal computers or computer accessories) who include certain of our products for sale with their products ("OEM bundles"), and (3) sales through our Switzerland distribution business. Other revenue includes our non-software licensing revenue.

For the three months ended June 30, 2014, packaged goods and other Net Revenue before Revenue Deferral was $293 million, primarily driven by Titanfall, FIFA World Cup 2014, FIFA 14, and EA SPORTS UFC. Packaged goods and other Net Revenue before Revenue Deferral for the three months ended June 30, 2014 increased $176 million, or 150 percent, as compared to the three months ended June 30, 2013.

This increase was driven by a $221 million increase in sales primarily from Titanfall and the UFC and FIFA World Cup franchises. This increase was partially offset by a $45 million decrease in sales primarily from the The Sims franchise and Fuse.

Digital Revenue Digital revenue (previously disclosed as "wireless, Internet-derived, and advertising (digital) revenue") includes sales of software distributed through direct download via the Internet. This includes internally-developed and co-published game software distributed through our direct-to-consumer platform Origin, distributed wirelessly through mobile carriers, or licensed to our third-party publishing partners who distribute our games digitally. Digital revenue also includes our full-game downloads, mobile and tablet revenue (each of which are generally classified as product revenue with the exception of our MMO game downloads and freemium mobile games, which are classified as service revenue), as well as subscription services, micro-transactions, and advertising revenues (each of which is generally classified as service and other revenue).

For the three months ended June 30, 2014, digital Net Revenue before Revenue Deferral was $482 million, an increase of $104 million, or 28 percent, as compared to the three months ended June 30, 2013. This increase is due to (1) a $34 million or 33 percent increase in extra content and free-to-play sales primarily driven by FIFA Ultimate Team and Madden Ultimate Team, (2) a $33 million or 32 percent increase in full-game download sales primarily driven by Titanfall, FIFA 14, and Battlefield 4, (3) a $19 million or 19 percent increase in subscription sales primarily driven by Battlefield 4 Premium, and (4) an $18 million or 17 percent increase in mobile revenue primarily driven by Plant vs.

Zombies 2 and FIFA 14.

Revenue Deferral Revenue Deferral for the three months ended June 30, 2014 increased $268 million, or 75 percent, as compared to the three months ended June 30, 2013.

Substantially all of this increase was due to a $280 million increase in Net Revenue before Revenue Deferral related to our packaged goods and other and digital sales during the three months ended June 30, 2014 as compared to three months ended June 30, 2013.

41-------------------------------------------------------------------------------- Table of Contents Recognition of Revenue Deferral Our sales are generally deferred and recognized 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, and therefore, the related revenue recognized during the fiscal quarter ended June 30 is primarily due to sales that occurred during the preceding six-month period for digitally distributed games and the preceding nine-month period for physical games sold through retail. The Recognition of Revenue Deferral for the three months ended June 30, 2014 increased $253 million, or 31 percent, as compared to the three months ended June 30, 2013. This increase was primarily due to (1) an increase in digital and physical games sold through retail during the preceding six and nine-month period, and (2) the increase in our estimated offering period, which was implemented during the second quarter of fiscal 2014 for physical games sold through retail from six to nine months. This change in estimate resulted in an estimated increase to net revenue and net income of $105 million and an increase of $0.33 of diluted earnings per share for the three months ended June 30, 2014.

Non-GAAP Financial Measures Net Revenue before Revenue Deferral is a non-GAAP financial measure that excludes the impact of Revenue Deferral and the Recognition of Revenue Deferral on Net Revenue related to sales of games and digital content.

We believe that excluding the impact of Revenue Deferral and the Recognition of Revenue Deferral related to games and digital content from our operating results is important to facilitate comparisons between periods in understanding our underlying sales performance for the period, and understanding our operations because all related costs of revenues are expensed as incurred instead of deferred and recognized ratably. We use this non-GAAP financial measure internally to evaluate our operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of our management team. While we believe that this non-GAAP financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant to be considered in isolation from or as a substitute for the related financial information prepared in accordance with GAAP. In addition, this non-GAAP financial measure may not be the same as non-GAAP financial measures presented by other companies.

Product Revenue and Service and Other Revenue by Revenue Composition Our product and service and other revenue by revenue composition for the three months ended June 30, 2014 and 2013 was as follows (in millions): Three Months Ended June 30, 2014 2013 Product revenue: Packaged goods and other $ 598 $ 409 Digital 159 134 Total product revenue 757 543 Service and other revenue: Packaged goods and other 80 58 Digital 377 348 Total service and other revenue 457 406 Total net revenue $ 1,214 $ 949 42-------------------------------------------------------------------------------- Table of Contents Cost of Revenue Total cost of revenue for the three months ended June 30, 2014 and 2013 was as follows (in millions): % of % of Change as a Related Related % of Related June 30, 2014 Net Revenue June 30, 2013 Net Revenue % Change Net Revenue Cost of revenue: Product $ 252 33.3 % $ 130 23.9 % 94 % 9.4 % Service and other 115 25.2 % 64 15.8 % 80 % 9.4 % Total cost of revenue $ 367 30.2 % $ 194 20.4 % 89 % 9.8 % Cost of Product Revenue Cost of product revenue consists of (1) product costs, (2) certain royalty expenses for celebrities, professional sports and other organizations, and independent software developers, (3) manufacturing royalties, net of volume discounts and other vendor reimbursements, (4) expenses for defective products, (5) write-offs of post launch prepaid royalty costs and losses on previously unrecognized licensed intellectual property commitments, (6) amortization of certain intangible assets, (7) personnel-related costs, and (8) warehousing and distribution costs. We generally recognize volume discounts when they are earned from the manufacturer (typically in connection with the achievement of unit-based milestones); whereas other vendor reimbursements are generally recognized as the related revenue is recognized.

Cost of product revenue increased by $122 million, or 93.8 percent in the three months ended June 30, 2014, as compared to the three months ended June 30, 2013.

Cost of product revenue increased primarily due to a loss of $122 million on a previously unrecognized licensed intellectual property commitment during the three months ended June 30, 2014.

Cost of Service and Other Revenue Cost of service and other revenue consists primarily of (1) data center and bandwidth costs associated with hosting our online games and websites, (2) associated royalty costs, (3) credit card fees associated with our service revenue, (4) server costs related to our website advertising business, and (5) platform processing fees from operating our website-based games on third party platforms.

Cost of service and other revenue increased by $51 million, or 79.7 percent in the three months ended June 30, 2014, as compared to the three months ended June 30, 2013. The increase was primarily due to an increase in product and royalty-related costs due to Titanfall, which launched in the fourth quarter of fiscal year 2014.

Total Cost of Revenue as a Percentage of Total Net Revenue During the three months ended June 30, 2014, total cost of revenue as a percentage of total net revenue increased by 9.8 percent as compared to the three months ended June 30, 2013. This increase as a percentage of net revenue was primarily due to a loss of $122 million on a previously unrecognized licensed intellectual property commitment during the three months ended June 30, 2014. Excluding the effect of the loss, total cost of revenue as a percentage of total net revenue remained relatively consistent.

Research and Development Research and development expenses consist of expenses incurred by our production studios for personnel-related costs, related overhead costs, contracted services, depreciation and any impairment of prepaid royalties for pre-launch products. Research and development expenses for our online products include expenses incurred by our studios consisting of direct development and related overhead costs in connection with the development and production of our online games. Research and development expenses also include expenses associated with the development of network infrastructure, software licenses and maintenance, and management overhead.

Research and development expenses for the three months ended June 30, 2014 and 2013 were as follows (in millions): June 30, % of Net June 30, % of Net 2014 Revenue 2013 Revenue $ Change % Change Three months ended 265 22 % 278 29 % (13 ) (5 )% Research and development expenses decreased by $13 million, or 5 percent, during the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, primarily due to (1) an $11 million decrease in contracted services as a 43-------------------------------------------------------------------------------- Table of Contents result of higher development advances in fiscal year 2014 due to Titanfall, (2) an $8 million decrease in personnel-related costs resulting from a decrease in headcount. This was partially offset by a $6 million increase in facility-related costs related to higher rent and depreciation expenses.

Marketing and Sales Marketing and sales expenses consist of personnel-related costs, related overhead costs, advertising, marketing and promotional expenses, net of qualified advertising cost reimbursements from third parties.

Marketing and sales expenses for the three months ended June 30, 2014 and 2013 were as follows (in millions): June 30, % of Net June 30, % of Net 2014 Revenue 2013 Revenue $ Change % Change Three months ended 130 11 % 147 15 % (17 ) (12 )% Marketing and sales expenses decreased by $17 million, or 12 percent, during the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, primarily due to (1) a $15 million decrease in personnel-related costs resulting from a decrease in headcount, (2) a $5 million decrease in facility-related costs, and (3) a $5 million decrease in contracted services.

This was partially offset by an $8 million increase in advertising and promotional spending due to three title launches during the first quarter of 2015 as compared to only one during the same period in the prior year.

General and Administrative General and administrative expenses consist of personnel and related expenses of executive and administrative staff, corporate functions such as finance and human resources, related overhead costs, fees for professional services such as legal and accounting, and allowances for doubtful accounts.

General and administrative expenses for the three months ended June 30, 2014 and 2013 were as follows (in millions): June 30, % of Net June 30, % of Net 2014 Revenue 2013 Revenue $ Change % Change Three months ended $ 88 7 % 85 9 % 3 4 % During the three months ended June 30, 2014, general and administrative expenses, remained relatively consistent, as compared to the three months ended June 30, 2013.

Acquisition-Related Contingent Consideration Acquisition-related contingent consideration for the three months ended June 30, 2014 were as follows (in millions): June 30, % of Net June 30, % of Net 2014 Revenue 2013 Revenue $ Change % Change Three months ended (1 ) - % 7 1 % (8 ) (114 )% During the three months ended June 30, 2014, acquisition-related contingent consideration decreased by $8 million, or 114 percent, as compared to the three months ended June 30, 2013, primarily resulting from changes in the fair market value of the acquisition-related contingent consideration of our PopCap acquisition during the prior year. The PopCap earn-out expired on December 31, 2013. No payments were made under this earn-out.

Amortization of Intangibles Amortization of intangibles for the three months ended June 30, 2014 were as follows (in millions): June 30, % of Net June 30, % of Net 2014 Revenue 2013 Revenue $ Change % Change Three months ended $ 3 - % $ 4 - % (1 ) (25 )% During the three months ended June 30, 2014, amortization of intangibles, remained relatively consistent, as compared to the three months ended June 30, 2013.

44 -------------------------------------------------------------------------------- Table of Contents Restructuring and Other Charges Restructuring and other charges for the three months ended June 30, 2014 were as follows (in millions): June 30, % of Net June 30, % of Net 2014 Revenue 2013 Revenue $ Change % Change Three months ended $ - - % $ 1 - % (1 ) (100 )% During the three months ended June 30, 2014, restructuring and other charges, remained relatively consistent, as compared to the three months ended June 30, 2013.

Interest and Other Income (Expense), Net Interest and other income (expense), net, for the three months ended June 30, 2014 were as follows (in millions): June 30, % of Net June 30, % of Net 2014 Revenue 2013 Revenue $ Change % Change Three months ended $ (8 ) (1 )% $ (5 ) (1 )% $ (3 ) (60 )% During the three months ended June 30, 2014, interest and other expense, net, remained relatively consistent, as compared to the three months ended June 30, 2013.

Income Taxes Provision for income taxes for the three months ended June 30, 2014 and 2013 were as follows (in millions): June 30, 2014 Effective Tax Rate June 30, 2013 Effective Tax Rate Three months ended $ 19 5.4 % $ 6 2.6 % Our effective tax rate for three months ended June 30, 2014 was 5.4 percent as compared to 2.6 percent for the same period of fiscal year 2014. The effective tax rate for the three months ended June 30, 2014 and June 30, 2013 differs from the statutory rate of 35.0 percent primarily due to the utilization of U.S.

deferred tax assets, which were subject to a valuation allowance and non-U.S.

profits subject to a reduced or zero tax rate. The effective tax rate for the three months ended June 30, 2014 differs from the same period in fiscal year 2014 primarily due to a discrete expense of $12 million recorded in the three months ended June 30, 2014 for excess tax benefits from stock-based compensation deductions.

Our effective income tax rates for fiscal year 2015 and future periods will depend on a variety of factors, including changes in the deferred tax valuation allowance, changes in our business such as acquisitions and intercompany transactions, changes in our international structure, changes in the geographic location of business functions or assets, changes in the geographic mix of income, changes in or termination of our agreements with tax authorities, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in our annual pre-tax income or loss. We incur certain tax expenses that do not decline proportionately with declines in our pre-tax consolidated income or loss. As a result, in absolute dollar terms, our tax expense will have a greater influence on our effective tax rate at lower levels of pre-tax income or loss than at higher levels. In addition, at lower levels of pre-tax income or loss, our effective tax rate will be more volatile.

Certain taxable temporary differences that are not expected to reverse during the carry forward periods permitted by tax law have not been considered as a source of future taxable income that is available to realize the benefit of deferred tax assets.

Historically, we have considered undistributed earnings of our foreign subsidiaries to be indefinitely reinvested outside of the United States and, accordingly, no U.S. taxes have been provided thereon. In connection with a review of our cash position including potential future cash needs for stock repurchases and debt retirement, we made a one-time repatriation of $700 million from certain of our wholly-owned subsidiaries during the three months ended March 31, 2014. This repatriation did not have a material impact on our effective tax rate for fiscal 2014 due to the deferred tax valuation allowance.

We currently intend to continue to indefinitely reinvest the undistributed earnings of our foreign subsidiaries outside of the United States.

45-------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES As of As of (In millions) June 30, 2014 March 31, 2014 Increase/(Decrease) Cash and cash equivalents $ 1,554 $ 1,782 $ (228 ) Short-term investments 762 583 179 Total $ 2,316 $ 2,365 $ (49 ) Percentage of total assets 42 % 41 % Three Months Ended June 30, (In millions) 2014 2013 Change Cash provided by (used in) operating activities $ 4 $ (248 ) $ 252 Cash used in investing activities (207 ) (2 ) (205 ) Cash provided by (used in) financing activities (33 ) 21 (54 ) Effect of foreign exchange on cash and cash equivalents 8 (7 ) 15 Net decrease in cash and cash equivalents $ (228 ) $ (236 ) $ 8 Changes in Cash Flow Operating Activities. Cash provided by operating activities increased $252 million during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The change is primarily due to a $280 million increase in Net Revenue before Revenue Deferral during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. This was partially offset by an increase in incentive-based compensation payments.

Investing Activities. Cash used in investing activities increased $205 million during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 primarily driven by a $234 million increase in purchases of short-term investments during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013.

Financing Activities. Cash used in financing activities increased $54 million during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 primarily due to (1) $50 million used to repurchase and retire common stock during the three months ended June 30, 2014 as compared to no stock repurchases during the three months ended June 30, 2013, and (2) a decrease of $17 million in proceeds received from the exercise of stock options during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. This was offset by a $12 million excess tax benefit from stock compensation recognized during the three months ended June 30, 2014 compared to no benefit recognized during the three months ended June 30, 2013.

Short-term Investments Due to our mix of fixed and variable rate securities, our short-term investment portfolio is susceptible to changes in short-term interest rates. As of June 30, 2014, our short-term investments had gross unrealized gains of less than $1 million, or less than 1 percent of the total in short-term investments, and gross unrealized losses of less than $1 million, or less than 1 percent of the total in short-term investments. From time to time, we may liquidate some or all of our short-term investments to fund operational needs or other activities, such as capital expenditures, business acquisitions or stock repurchase programs. Depending on which short-term investments we liquidate to fund these activities, we could recognize a portion, or all, of the gross unrealized gains or losses.

Fiscal 2011 Restructuring In connection with our fiscal 2011 restructuring plan, we expect to incur cash expenditures through December 2015 of approximately $22 million during the remainder of fiscal year 2015 and $18 million in fiscal year 2016.

46-------------------------------------------------------------------------------- Table of Contents Financing Arrangement In July 2011, we issued $632.5 million aggregate principal amount of 0.75% Convertible Senior Notes due 2016 (the "Notes"). The Notes are senior unsecured obligations which pay interest semiannually in arrears at a rate of 0.75 percent per annum on January 15 and July 15 of each year, beginning on January 15, 2012 and will mature on July 15, 2016, unless purchased earlier or converted in accordance with their terms prior to such date. The Notes are convertible into cash and shares of our common stock based on an initial conversion value of 31.5075 shares of our common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $31.74 per share).

Upon conversion of the Notes, holders will receive cash up to the principal amount of each Note, and any excess conversion value will be delivered in shares of our common stock. We used the net proceeds of the Notes to finance the cash consideration of our acquisition of PopCap, which closed in August 2011.

Prior to April 15, 2016, the Notes will be convertible only upon the occurrence of certain events and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the Notes. The Notes do not contain any financial covenants.

The conversion rate is subject to customary anti-dilution adjustments, but will not be adjusted for any accrued and unpaid interest. Following certain corporate events described in the indenture governing the notes (the "Indenture") that occur prior to the maturity date, the conversion rate will be increased for a holder who elects to convert its Notes in connection with such corporate event in certain circumstances. The Notes are not redeemable prior to maturity, and no sinking fund is provided for the Notes.

If we undergo a "fundamental change," as defined in the Indenture, subject to certain conditions, holders may require us to purchase for cash all or any portion of their Notes. The fundamental change purchase price will be 100 percent of the principal amount of the Notes to be purchased plus any accrued and unpaid interest up to but excluding the fundamental change purchase date.

The Indenture contains customary terms and covenants, including that upon certain events of default occurring and continuing, either the trustee or the holders of at least 25 percent in principal amount of the outstanding Notes may declare 100 percent of the principal and accrued and unpaid interest on all the Notes to be due and payable.

In addition, in July 2011, we entered into privately negotiated convertible note hedge transactions (the "Convertible Note Hedge") with certain counterparties to reduce the potential dilution with respect to our common stock upon conversion of the Notes. The Convertible Note Hedge, subject to customary anti-dilution adjustments, provides us with the option to acquire, on a net settlement basis, approximately 19.9 million shares of our common stock at a strike price of $31.74, which corresponds to the conversion price of the Notes and is equal to the number of shares of our common stock that notionally underlie the Notes. As of June 30, 2014, we have not purchased any shares under the Convertible Note Hedge. We paid $107 million for the Convertible Note Hedge. Separately, we have also entered into privately negotiated warrant transactions with certain counterparties whereby we sold to independent third parties warrants (the "Warrants") to acquire, subject to customary anti-dilution adjustments that are substantially the same as the anti-dilution provisions contained in the Notes, up to 19.9 million shares of our common stock (which is also equal to the number of shares of our common stock that notionally underlie the Notes), with a strike price of $41.14. The Warrants could have a dilutive effect with respect to our common stock to the extent that the market price per share of our common stock exceeds $41.14 on or prior to the expiration date of the Warrants. We received proceeds of $65 million from the sale of the Warrants.

See Note 12 to the Condensed Consolidated Financial Statements for additional information related to our 0.75% Convertible Senior Notes due 2016.

Credit Facility On August 30, 2012, we entered into a $500 million senior unsecured revolving credit facility with a syndicate of banks. The credit facility terminates on February 29, 2016 and contains an option to arrange with existing lenders and/or new lenders for them 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 February 29, 2016.

47-------------------------------------------------------------------------------- Table of Contents 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 and a minimum level of domestic liquidity.

The credit agreement contains customary events of default, including among others, non-payment defaults, covenant defaults, bankruptcy and insolvency 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 agreement, an obligation by any guarantors to repay the obligations in full and an increase in the applicable interest rate.

As of June 30, 2014, no amounts were outstanding under the credit facility.

Financial Condition We believe that our cash, cash equivalents, short-term investments, cash generated from operations and available financing facilities will be sufficient to meet our operating requirements for at least the next 12 months, including working capital requirements, capital expenditures, and potentially, future acquisitions, stock repurchases, or strategic investments. We may choose at any time to raise additional capital to strengthen our financial position, facilitate expansion, repurchase our stock, pursue strategic acquisitions and investments, and/or to take advantage of business opportunities as they arise.

There can be no assurance, however, that such additional capital will be available to us on favorable terms, if at all, or that it will not result in substantial dilution to our existing stockholders.

As of June 30, 2014, approximately $738 million of our cash, cash equivalents, and short-term investments were domiciled in foreign tax jurisdictions. While we have no plans to repatriate these funds to the United States in the short term, if we choose to do so, we may be required to accrue and pay additional taxes on any portion of the repatriation where no United States income tax had been previously provided. We made a one-time repatriation of $700 million from certain of our wholly-owned subsidiaries during the three months ended March 31, 2014. This repatriation did not have a material impact on our effective tax rate for fiscal year 2014 due to the deferred tax valuation allowance.

In May 2014, a special committee of our Board of Directors, on behalf of the full Board of Directors, authorized a new program to repurchase up to $750 million of our common stock. This new stock repurchase program, which expires on May 31, 2016, supersedes and replaces the stock repurchase authorization approved by our Board of Directors in July 2012. Under this program, we may purchase stock in the open market or through privately-negotiated transactions in accordance with applicable securities laws, including pursuant to pre-arranged stock trading plans. The timing and actual amount of the stock repurchases will depend on several factors including price, capital availability, regulatory requirements, alternative investment opportunities and other market conditions. We are not obligated to repurchase any specific number of shares under this program and it may be modified, suspended or discontinued at any time. During the three months ended June 30, 2014, we repurchased approximately 1.4 million shares of our common stock for approximately $50 million.

We have a "shelf" registration statement on Form S-3 on file with the SEC. This shelf registration statement, which includes a base prospectus, allows us at any time to offer any combination of securities described in the prospectus in one or more offerings. Unless otherwise specified in a prospectus supplement accompanying the base prospectus, we would use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes, including for working capital, financing capital expenditures, research and development, marketing and distribution efforts, and if opportunities arise, for acquisitions or strategic alliances. Pending such uses, we may invest the net proceeds in interest-bearing securities. In addition, we may conduct concurrent or other financings at any time.

Our ability to maintain sufficient liquidity could be affected by various risks and uncertainties including, but not limited to, those related to customer demand and acceptance of our products, our ability to collect our accounts receivable as they become due, successfully achieving our product release schedules and attaining our forecasted sales objectives, the impact of acquisitions and other strategic transactions in which we may engage, the impact of competition, economic conditions in the United States and abroad, the seasonal and cyclical nature of our business and operating results, risks of product returns and the other risks described in the "Risk Factors" section, included in Part II, Item 1A of this report.

48-------------------------------------------------------------------------------- Table of Contents Contractual Obligations and Commercial Commitments 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 GmbH (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, PLAYERS Inc., and Red Bear Inc. (professional football); Collegiate Licensing Company (collegiate football); Zuffa, LLC (Ultimate Fighting Championship); ESPN (content in EA SPORTS games); Hasbro, Inc. (certain of Hasbro's board game intellectual properties); 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 June 30, 2014, and the effect we expect them to have on our liquidity and cash flow in future fiscal periods ending March 31 (in millions): Fiscal Years Ending March 31, 2015 (Remaining Total nine mos.) 2016 2017 2018 2019 2020 Thereafter Unrecognized commitments Developer/licensor commitments $ 1,092 $ 126 $ 258 $ 248 $ 137 $ 104 $ 76 $ 143 Marketing commitments 245 38 39 62 21 21 21 43 Operating leases 175 34 46 31 21 16 8 19 0.75% Convertible Senior Notes due 2016 interest (a) 12 5 5 2 - - - - Other purchase obligations 94 18 30 20 13 12 1 - Total unrecognized commitments 1,618 221 378 363 192 153 106 205 Recognized commitments 0.75% Convertible Senior Notes due 2016 principal (a) 633 - - 633 - - - - Licensing and lease obligations (b) 186 16 22 23 23 24 25 53 Total recognized commitments 819 16 22 656 23 24 25 53 Total commitments $ 2,437 $ 237 $ 400 $ 1,019 $ 215 $ 177 $ 131 $ 258 (a) Included in the $12 million coupon interest on the 0.75% Convertible Senior Notes due 2016 is $2 million of accrued interest recognized as of June 30, 2014. We will be obligated to pay the $632.5 million principal amount of the 0.75% Convertible Senior Notes due 2016 in cash and any excess conversion value in shares of our common stock upon redemption of the Notes at maturity on July 15, 2016 or upon earlier redemption. The $632.5 million principal amount excludes $47 million of unamortized discount of the liability component. See Note 12 for additional information regarding our 0.75% Convertible Senior Notes due 2016.

(b) See Note 8 for additional information regarding recognized commitments resulting from our restructuring plans. Lease commitments have not been reduced for approximately $7 million due in the future from third parties under non-cancelable sub-leases. See Note 9 for additional information regarding recognized obligations from our licensing-related commitments.

49 -------------------------------------------------------------------------------- Table of Contents 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 June 30, 2014; however, certain payment obligations may be accelerated depending on the performance of our operating results.

In addition to what is included in the table above, as of June 30, 2014, we had a liability for unrecognized tax benefits and an accrual for the payment of related interest totaling $89 million, of which we are unable to make a reasonably reliable estimate of when cash settlement with a taxing authority will occur.

Also, in addition to what is included in the table above as of June 30, 2014, in connection with our KlickNation acquisition, we may be required to pay an additional $3 million of cash consideration based upon the achievement of certain performance milestones through March 31, 2015. As of June 30, 2014, we have accrued $2 million of contingent consideration on our Condensed Consolidated Balance Sheet representing the estimated fair value of the contingent consideration.

OFF-BALANCE SHEET COMMITMENTS Lease Commitments As of June 30, 2014, 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.

Director Indemnity Agreements We entered into indemnification agreements with each of the members of our Board of Directors at the time they joined the Board to indemnify them to the extent permitted by law against any and all liabilities, costs, expenses, amounts paid in settlement and damages incurred by the directors as a result of any lawsuit, or any judicial, administrative or investigative proceeding in which the directors are sued or charged as a result of their service as members of our Board of Directors.

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