Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2018 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to Commission File No. 000-17948 ELECTRONIC ARTS INC. (Exact name of registrant as specified in its charter) Delaware 94-2838567 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 209 Redwood Shores Parkway Redwood City, California 94065 (Address of principal executive offices) (Zip Code) (650) 628-1500 (Registrant’s telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES þ NO ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ Emerging growth company ¨ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO þ As of November 2, 2018 , there were 302,128,696 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding. 1 Table of Contents ELECTRONIC ARTS INC. FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2018 Table of Contents Page Part I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of September 30, 2018 and March 31, 2018 3 Condensed Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2018 and 2017 4 Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended September 30, 2018 and 2017 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2018 and 2017 6 Notes to Condensed Consolidated Financial Statements 7 Report of Independent Registered Public Accounting Firm 37 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 38 Item 3. Quantitative and Qualitative Disclosures About Market Risk 58 Item 4. Controls and Procedures 60 Part II - OTHER INFORMATION Item 1. Legal Proceedings 61 Item 1A. Risk Factors 61 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 71 Item 3. Defaults Upon Senior Securities 71 Item 4. Mine Safety Disclosures 71 Item 6. Exhibits 71 Exhibit Index 72 Signature 72 2 Table of Contents PART I – FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) ELECTRONIC ARTS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In millions, except par value data) September 30, 2018 March 31, 2018 (a) ASSETS Current assets: Cash and cash equivalents $ 2,881 $ 4,258 Short-term investments 1,664 1,073 Receivables, net of allowances of $10 and $165, respectively 966 385 Other current assets 292 288 Total current assets 5,803 6,004 Property and equipment, net 440 453 Goodwill 1,894 1,883 Acquisition-related intangibles, net 100 71 Deferred income taxes, net 112 84 Other assets 101 89 TOTAL ASSETS $ 8,450 $ 8,584 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 168 $ 48 Accrued and other current liabilities 907 821 Deferred net revenue (online-enabled games) 574 1,622 Total current liabilities 1,649 2,491 Senior notes, net 993 992 Income tax obligations 273 250 Deferred income taxes, net 1 1 Other liabilities 217 255 Total liabilities 3,133 3,989 Commitments and contingencies (See Note 13) Stockholders’ equity: Common stock, $0.01 par value. 1,000 shares authorized; 304 and 306 shares issued and outstanding, respectively 3 3 Additional paid-in capital 134 657 Retained earnings 5,199 4,062 Accumulated other comprehensive loss (19) (127) Total stockholders’ equity 5,317 4,595 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 8,450 $ 8,584 See accompanying Notes to Condensed Consolidated Financial Statements (unaudited). (a) Derived from audited Consolidated Financial Statements. 3 Table of Contents ELECTRONIC ARTS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended Six Months Ended (Unaudited) September 30, September 30, (In millions, except per share data) 2018 2017 2018 2017 Net revenue: Product $ 623 $ 454 $ 825 $ 1,282 Service and other 663 505 1,598 1,126 Total net revenue 1,286 959 2,423 2,408 Cost of revenue: Product 222 300 290 364 Service and other 196 89 343 179 Total cost of revenue 418 389 633 543 Gross profit 868 570 1,790 1,865 Operating expenses: Research and development 339 331 701 656 Marketing and sales 146 160 286 281 General and administrative 117 118 231 223 Acquisition-related contingent consideration 2 — 2 — Amortization of intangibles 6 2 12 3 Total operating expenses 610 611 1,232 1,163 Operating income (loss) 258 (41) 558 702 Interest and other income (expense), net 18 3 37 9 Income (loss) before provision for (benefit from) income taxes 276 (38) 595 711 Provision for (benefit from) income taxes 21 (16) 47 89 Net income (loss) $ 255 $ (22) $ 548 $ 622 Earnings (loss) per share: Basic $ 0.84 $ (0.07) $ 1.80 $ 2.01 Diluted $ 0.83 $ (0.07) $ 1.77 $ 1.99 Number of shares used in computation: Basic 305 309 305 309 Diluted 307 309 309 313 See accompanying Notes to Condensed Consolidated Financial Statements (unaudited). 4 Table of Contents ELECTRONIC ARTS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Three Months Ended Six Months Ended (Unaudited) September 30, September 30, (In millions) 2018 2017 2018 2017 Net income (loss) $ 255 $ (22) $ 548 $ 622 Other comprehensive income (loss), net of tax: Net gains on available-for-sale securities 1 — 1 — Net gains (losses) on derivative instruments 3 (34) 96 (90) Foreign currency translation adjustments 3 32 (12) 36 Total other comprehensive income (loss), net of tax 7 (2) 85 (54) Total comprehensive income (loss) $ 262 $ (24) $ 633 $ 568 See accompanying Notes to Condensed Consolidated Financial Statements (unaudited). 5 Table of Contents ELECTRONIC ARTS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended (Unaudited) September 30, (In millions) 2018 2017 OPERATING ACTIVITIES Net income $ 548 $ 622 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation, amortization and accretion 74 63 Stock-based compensation 136 110 Change in assets and liabilities: Receivables, net (422) (454) Other assets 20 66 Accounts payable 132 104 Accrued and other liabilities (25) 100 Deferred income taxes, net (94) 40 Deferred net revenue (online-enabled games) (375) (423) Net cash provided by (used in) operating activities (6) 228 INVESTING ACTIVITIES Capital expenditures (63) (63) Proceeds from maturities and sales of short-term investments 446 1,050 Purchase of short-term investments (1,029) (1,395) Acquisition, net of cash acquired (58) — Net cash used in investing activities (704) (408) FINANCING ACTIVITIES Proceeds from issuance of common stock 36 57 Cash paid to taxing authorities for shares withheld from employees (96) (105) Repurchase and retirement of common stock (599) (303) Net cash used in financing activities (659) (351) Effect of foreign exchange on cash and cash equivalents (8) 33 Decrease in cash and cash equivalents (1,377) (498) Beginning cash and cash equivalents 4,258 2,565 Ending cash and cash equivalents $ 2,881 $ 2,067 Supplemental cash flow information: Cash paid during the period for income taxes, net $ 78 $ 28 Cash paid during the period for interest 21 21 See accompanying Notes to Condensed Consolidated Financial Statements (unaudited). 6 Table of Contents ELECTRONIC ARTS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION We are a global leader in digital interactive entertainment, with a mission to inspire the world to play. We develop, market, publish and distribute games, content and services that can be played on a variety of platforms including game consoles, PCs, mobile phones and tablets. In our games and services, we use brands that we either wholly own (such as Battlefield, Mass Effect, Need for Speed, The Sims, Plants v. Zombies and Titanfall) or license from others (such as FIFA, Madden NFL and Star Wars). We develop and publish games and services across diverse genres such as sports, first-person shooter, action, role-playing and simulation. Our fiscal year is reported on a 52 - or 53 -week period that ends on the Saturday nearest March 31. Our results of operations for the fiscal year ending March 31, 2019 contains 52 weeks and ends on March 30, 2019.