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The Henry Fund Henry B. Tippie College of Business Cooper LaRue [[email protected]]

Electronic Arts (EA) April 14, 2020 Communication Services – Video Games Stock Rating Buy Investment Thesis Target Price $120-130 Henry Fund DCF $125 is a dominate video developer and publisher throughout Henry Fund DDM $79 the world with its iconic game franchises such as FIFA, Madden NFL, NHL, NBA Relative Multiple $113 Live, Sims, and many more. We believe their business will be driven Price Data by user growth from increasing popularity of games as well as the overall Current Price $110 “gaming community” expanding. We have a price target of $120-$130 which implies an 8%-18% upside within the next twelve months. Therefore, we 52wk Range $85 – 113 recommend a BUY on Electronic Arts. Consensus 1yr Target $119 Key Statistics Drivers of Thesis Market Cap (B) $31,661 • Recent moves into shooter and action games with and Shares Outstanding (M) 289.7 Anthem open the door to players who do not play sports games and drove Institutional Ownership 92% revenue by $240 million last year Five Year Beta 1.05 • Increased popularity in live eSports competitions and streaming present a Dividend Yield 0% new opportunity to drive revenue and draw attention to games Est. 5yr Growth 11% • Live Services were up 27% in Q4 of 2019 driven by in game purchases and Price/Earnings (TTM) 11.5 EA’s Ultimate Team which we forecast will grow by 12% in the next year Price/Earnings (FY1) 21.9 • COVID-19 has given people more time at home leading to increases time Price/Sales (TTM) 6.0 and money spent playing video games. 43% of people ages 18-29 surveyed Price/Book (mrq) 4.4 said they will be spending more time playing video games as a result of Profitability COVID-1910 Operating Margin 72.2% Risks to Thesis Profit Margin 21.4% Return on Assets (TTM) 14.0% • Heavy competition and low barriers to entry, especially within mobile games Return on Equity (TTM) 27.7% • Low exposure to the mobile games industry which has been the fastest growing sector of online gaming EA ATVI Industry 30 • Constantly competing with streaming services and other forms of FactSet entertainment for user attention 27.7 27.7 20 23.5 24.3 21.3 21.0 20.4 19.1 Earnings Estimates 10 Year 2018 2019 2020 2021E 2022E 2023E 11.1 EPS $3.39 $3.36 $9.94 $4.25 $4.54 $4.89 Growth 6.1% -.69% 195.5% -57.2% 6.9% 7.6% 0 Consensus $3.39 $3.36 $9.94 $4.69 $5.74 $6.50 P/E ROE EV/EBITDA EPS 12 Month Performance Company Description EA S&P 500 20% Electronic Arts (EA) is a digital entertainment company which develops and publishes video 10% game content for consoles, PC, tablets and mobile devices. Best known for sports games such as 0% FIFA, Madden NFL and NBA Live. EA also publishes a number of action and simulation games such as -10% Apex Legends, Anthem and Sims. EA has a strong presence around the world with 39% of revenue -20% coming from North America and the rest -30% internationally. EA is the second largest publisher in the industry behind Blizzard. A M J J A S O N D J F M Yahoo Finance Important disclosures appear on the last page of this report.

EXECUTIVE SUMMARY Electronic Arts operates internationally with most revenue coming from the U.S., Japan and China. EA does not Electronic Arts Inc. is a stable and growing provide an in-depth breakdown of revenue by region but developer and publisher which has been in business since what is released is shown below. 1983 when published Archon: The Light and the Dark for . Since then, EA has found its niche developing Revenue by Region primarily sporting games, and more recently moving into North America 39% action and shooter games. EA has exclusive licensing to International 59% produce franchised games such as Madden NFL, FIFA, Source: EA 10k UFC, NHL, NASCAR, Star Wars and PGA, which is a major competitive advantage. We believe EA will continue to Electronic Arts sells their games through a wide range of leverage this advantage to grow those game franchises distribution channels to cover both retail and online while also moving into more action and shooter games marketplaces. They provide a breakdown of sales by such as Apex Legends and Anthem which were brand new channel that we have provided below with further detail games released in 2019. We forecast this will lead to an about each following. 8.27% revenue growth next year and EPS growth of 6.9%.

We believe EA is positioned to benefit from a growing 2019 Revenue Decomposition user base as video gaming has been increasing in popularity over the past decade as well as since the 13.74% outbreak of COVID-19. They are the second largest publisher of video games in the industry only behind who generates much of their revenue 16.44% 44.77% from the singular franchise . We believe EA will be a more diversified company going forward in terms of game types to generate consistent revenue in this boom or bust industry. While we believe their 25.05% traditional console games will remain strong, EA has limited exposure to mobile gaming which has been where Live services Packaged Goods much of the video game growth has been in recent years. Mobile Game Downloads Overall, we recommend a buy for Electronic Arts. COMPANY DESCRIPTION Source: FactSet Electronic Arts develops and publishes video game content Live Services: for PC/computer, console, tablet and mobile devices. Their library of games includes FIFA, Madden NFL, UFC, NBA Electronic Arts live services include revenue from in game Live, NASCAR, PGA, , Apex Legends, purchases, gaming subscriptions and revenue from Battlefield, Star Wars, Sims and many more. While most eSports competitions. This makes up the largest percent of people perceive them as just a company who creates sport revenue at just over 44% and has been what is driving games, they also have shooter, strategy and simulation revenue for EA. Live services grew 27% in Q3 (Oct-Dec.) games. EA’s fiscal year ends Mar 31, so by taking the three over the previous year’s Q3 revenue2. This was driven by reported quarters and making an annual adjustment, EA’s EA’s free to play game Apex Legends which launched in revenue for fiscal 2020 is $5.52 billion which is up 11.5% February 2019. Apex Legends was EA’s response to the from 2019. This growth was completely organic driven by popular , . EA has in game the release of Apex Legends and Anthem. Of this revenue purchases in all of its games which range from helping the largest percentage is comprised of live services and players get achievements faster, look better by buying games sales through traditional consoles like and accessories for their characters, or create better teams. PlayStation. EA’s most lucrative way to grow in game purchases has been through “Ultimate Team”, a game type across FIFA,

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Madden and NHL that allows users to purchase players to Mobile add to their teams. This represented 28%, 21%, and 16% of total net revenue during fiscal 2019, 2018, and 2017 Mobile sales are the third highest percentage of revenue respectively1. We expect Ultimate Team and other in game with 16%. This revenue is derived from the mobile versions purchases to grow by 12% in 2021 and 5% in our of many of their popular console games. FIFA, Madden NFL continuing value forecasted year in 2029. and Sims 4 are their highest selling mobile games. These games are distributed through Apple and Google app Live eSports have become very popular in recent years and stores. In the last year EA has seen a 13% decrease in we expect them to be a key driver of revenue going mobile, which they attributed to aging game titles in the forward. EA has very good turnout at their tournaments, mobile space. We think this is somewhere EA needs to especially for FIFA and Madden NFL. In these tournaments start developing games specifically for mobile. First person players from all over the world go head to head while an shooter and sport games are difficult to create a great user audience of often millions watch online. In these experience on mobile. That is just the nature of the games tournaments, EA makes money from sponsors advertising which require using many different buttons and having a throughout the tournament. We do not think this is a broad range of view that you just can’t get on a small major driver of revenue per say, but the excitement mobile screen. around these tournaments is a great marketing tool to sell more games and get people interested in playing. Fortunately for EA, they have one very popular game that is great on mobile which is Sims 4. Sims 4 was originally The final component of live services is EA Access which is released in 2014 and continues to grow. In 2019 Sims 4 their subscription offer. EA Access is just $5 a month and added 4.8 million new players and surpassed $1 billion in 7 gives players access to a library of games . Typically, EA will lifetime revenue17. We expect total mobile revenue to add games to this library once they are one or two-years- grow by 6% in 2021 and 4% in our continuing value year in old, but the subscription also has other perks such as 10% 2029. off all newly released games. We do not think this currently is, or in the future will be a significant driver of Full Game Downloads revenue. Full game downloads include all games sold through digital Packaged Goods mediums such as consoles, computers or tablets. 45% of full game downloads are sold through Xbox and Sony Packaged goods account for the second largest percentage console marketplaces1. This allows users to easily of revenue at 25%. This includes all video games sold on a download the game onto their console, and never have to physical disc through retailers or ordered online. EA itself worry about losing or damaging the game disc. Many sells very few of their games and instead relies on large consumers prefer this method of delivery and we expect it retailers like Wal-Mart, GameStop and many small niche to continue to become more popular as physically sold electronic stores to sell their games. There are many copies of games slows. Last year full game downloads grew gamers who prefer to have the physical copy of the game by 8% and we expect this growth to remain constant for while others prefer to save the trip to the store and the forseeable future. download it directly from their online marketplace. The industry has seen this become more common, and we Company Analysis expect this revenue to slowly decline with those sales shifting to be counted as “full game downloads” instead. Electronic Arts creates a wide range of games, but it is best This change does not drive revenue, but does help known for creating sports games. They own the content margins. Eliminating the production, distribution and rights to create FIFA, Madden NFL, NHL, PGA, NASCAR, inventory of these games increases margins and is a UFC and NBA. They have the rights to exclusively develop positive for EA. We forecast a decline in packaged goods of the games for these professional leagues with the 3% each year as more consumers switch to digital. This is exception of the NBA. There is another competitor that actually a positive as EA makes more money selling its creates NBA to compete with EA’s NBA Live as the NBA games digitally than through retailers. would not give EA exclusive rights, but the other leagues have.

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This is a huge advantage for EA as no other developers can games for consoles. This is something they create sport games using the player’s real names, faces, do very little of right now. We expect the rest of their teams, logos and everything else that makes people operating expenses to be very similar to historical. Below attracted to the games. is a waterfall chart showing how EA’s revenue is spent down to its operating income. After operating income EA Platforms then has an effective tax rate of 16% it pays on its operating income to reach their net income. Electronic Arts primarily derives revenue from selling games made for console which includes Xbox, PlayStation and Nintendo. This is by far the largest percentage of their revenue, as you can see in the chart below. PC and mobile sales are about equal in terms of sales and these sections have not been growing for EA. Tying in with the previous point about much of their coming from sport games, this does somewhat hinder mobile growth. Many of these games are not compatible with mobile devices as it is hard to play these types of games on mobile and still be enjoyable. You can see the revenue breakdown by platform below.

Revenue by Platform Source: EA 10Q 0.26% 16.65% Capital Structure

EA’s capital structure is very healthy for a company of their size. EA has $995 million in debt they took out as senior 15.76% notes to buy back shares over the past five years. $600 million of this debt comes due next year in 2021 and EA 67.33% will not have any trouble paying it as they have over $3.6 billion in cash and equivalents right now. The remaining $400 comes due in 2026. Below we have provided a snapshot of their current capital structure and after they Console PC / Browser Mobile Other pay the $600 million in 2021 their debt percentage will go down by another 2%. Source: FactSet EA's Current Capital Structure Cost Structure 10.4% Electronic Arts has a healthy gross profit margin at 76% consistently over the past five years. We forecast this to be the same going forward. Roughly half of all revenue is spent on operating expenses with the largest by far being research and development expense. In 2020 R&D expense 89.6% was 27.8% of revenue which is slightly higher than its average over the past 5 years. In 2020 we are forecasting R&D expense to be 28% of revenue with gradual .25% Equity Debt increases over time. We believe they will need to start investing more in developing mobile games, and possibly Source: EA 10Q

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RECENT DEVELOPMENTS - Net bookings of $1.98B vs street estimate of $1.97B Apex Legends - GAAP EPS $1.05 vs street estimate of $1.09 Apex Legends is a first-person shooter game which was - Operating income up 29% YOY released in February 2019 after seeing the success of The earnings call was mixed with some big wins and some Fortnite. It is a Battle Royale game which means the goal disappointments. Revenue and EPS were roughly in line of each game is just to be the last person alive by outlasting with estimates and they gave a positive report on Live the other 99 players in each match. This release was Services. Live Services were up 27% in Q3 over Q2 and they unique because EA and the developer did not do any prior provided optimistic guidance going forward for this announcement or marketing for the game pre-release. The revenue stream. Revenue was driven by Apex Legends, game was a hit and is still very popular today. Updates are FIFA and Madden NFL. Going forward, EA does not have done every four to six months to give players new any big releases coming out for the rest of calendar year experiences and introduce new in game items to purchase. 2020. However, they did point to the new Battlefield 5 We believe this game will remain popular for the next few which is expected to come out early-mid 2021 and has years with consistent updates. historically done very well. In the years Battlefields have been released, they have always been in the top ten games Anthem sold in that year. Anthem was another new game EA published last year which was developed by BioWare. Most of the games EA INDUSTRY TRENDS releases are just the most recent versions of their sporting The has constantly been evolving games and they come out at the same time annually. since Atari created the first game in 1971. Since then, the Anthem on the other hand, is an action game which could industry has gone through just a few of what we would be the start of a new franchise. consider revolutionary changes. The most recent of which Leading up to its release in February 2019 there was a lot was online gaming. A change that allowed gamers to play of excitement about the game, but the reviews were not with others on seperate devices. This led to the community of 700 million active online players we have what they had hoped. Many users were frustrated as they 4 felt the game had been rushed to release. It was light on today . Current trends leading to the expansion of this content, and many players found problems that suggested community include subscription gaming services, live the game was not adequately tested before release. EA eSports competitions, and free to play games. and the developer have been fixing the game for a while now with updates and more content, but the interest Subscription Gaming Services seems to have faded. Even with all this negativity, Anthem Much like T.V. and movies, video games are slowly still managed to be the tenth most sold game in 2019 with transitioning to haveing more players opt to buy a total approximately $100 million in revenue, but its reputation 18 game pass. This option gives gamers access to all the was tarnished in the process . available games in the service’s library, rather than buy We do not think this really effects EA’s reputation as most each game individually. Some of the offerings are from the consumers are not even aware of who the game publisher console producers such as and Sony, while is. That loss of reputation is more on BioWare who others are directly from the game publishers like EA and developed the game and the game title. Activision Blizzard. They each offer different games and varying access to games. Microsoft’s is Q3 Earnings Report the most popular service at $10 a month which gives you access to hundreds of games6. However, most of the Electronic Art’s Q3 earnings which covered October to games available are not the most popular ones such as Call December 2019 highlights are as follows. EA’s fiscal year of Duty, Madden NFL and NBA 2k. end is March 31. EA’s subscription service called EA Access is just $5 a month and gives players access to a library of games7. EA

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Access currently has 3.5 million subscribers which and viewership into these online events. Going forward, generates roughley $17.5 million in revenue each month7. EA will need to figure out a more profitable way to Typically, EA will add games to this library once they are monetize these events other than just through about two years old. The subscription also has other perks sponsorship as most events are currently free to watch. such as 10% off all newly released games. This is really just a way to gain extra revenue from players who may want to Free to Play Games go back and play the same games they did years ago. It does not cannibalize much of new sales, as games are not The free to play gaming model has become very popular in put into the EA Access library for at least two years after the last five years. These types of games make money from release. selling in game purchases such as extra content, skins or experiences. These purchases allow players to progress In our opinion this is the most unknown part of the through the game more quickly or with more style. This industry. We see many companies releasing subscriptions has always been a popular revenue model for mobile to their content, but most are just for out of date games or games, but has recently become a legitimate revenue limited access. We believe this way of distribution will model for traditional console games. The game Fortnite is become more popular in the future, but the definite leader known for using this model very successfully. It is free to is yet to emerge. For EA, we see it most likely they will play, but then you have the opportunity to buy game packs eventually license their content to a console provider like each season which give you a better gaming experience. Microsoft or Sony to then distribute the games. Electronic Arts does not generally drive revenue this way. Live eSports Competitions Instead they sell their games for around $70 each, and then also offer in game purchases for some games. The The excitement and attention surrounding live eSports has one exception to this is Apex Legends, a very popular EA drawn eyes from around the world. Last summer, a 16- game that is free to play. We do not think their sporting year-old boy made headlines after winning the Fortnite games would be successful under the free to play model. world championship tournament, bagging the prize trophy EA has been criticized in the past for perceived price and $3 million dollars. In 2017, the League of Legends main gauging customers, even after they bought the $70 game. event drew 106 million viewers along with a multimillion- If the industry continues to head in this direction for 8 dollar prize pool . For reference, the 2019 Super Bowl had console games, we do not think EA will have an advantage 100 million viewers. in terms of pricing. The rise of eSports has become incredibly popular with VIDEO GAME MARKET services like , which allows people to follow their favorite gamers and watch them live and in tournaments. The video game industry has seen 13.1% annual growth Twitch was acquired by in 2014 for $970 million from 2014-2019. Its future expected growth is 4.4% each and seems to have been one of Amazon’s best acquisitions year from now until 202415. We are not as pessimistic on 19 yet . Today, kids view many of these professional gamers the industry as we see gamers today continuing to play as just like previous generations idolized pro athletes. In they age instead of video games just being for the younger countries such as South Korea, eSports are even more population. popular than traditional sports. It used to be that video games were played primarily by We believe this trend will drive EA, as well as the entire kids under the age of 18, but that is not the case anymore. industry. EA has many games that are unique because they People who started playing in the late 2000s when console are the only available true sport version of reality. For games became popular have continued to play into their example, with games such as FIFA, Madden NFL, NHL, etc. early to late 30s. Below is a graphic showing the that are replicas of current teams and players. This creates breakdown of the industry by age and gender. It may be a more exciting viewer experience. EA’s most popular surprising to see that people under 18 is not the largest tournament is their FIFA eWorld Cup. Last year the age ban. Males aged 18-35 make up the largest percentage tourneyment drew in 29 million viewers, a 400% increase with females in the same age category in second. from the prior year9. We see strong growth in popularity

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COMPETITION

The video game industry is primarily dominated by four main publishers. Electronic Arts, Activision Blizzard, Take- Two Interactive, and publish a majority of games with Microsoft (Xbox), Sony (PlayStation) and Nintendo (/Switch) also publishing some games, but they are primarily the delivery methods of the main publisher’s games.

The market is very competitive as players do not make purchasing decisions based on the publisher, rather the Source: IBIS World content of the game. Most consumers do not even know who the game publisher is when buying, which takes out We believe video games will continue to be a source of most of what would be brand loyalty like in so many other entertainment for these player as they age. Video games industries. This is another reason why the industry is so will also continue to be a primary form of entertainment competitive. for kids under 18 as they grow up. With players continuing to remain customers longer into their lives it increases the One aspect of this industry which is hard to forecast is lifetime value of a player which is good for the entire which games will be chosen for so called “crowding.” This industry. is when a game grows in popularity due to the sole fact that players’ peers are playing it and they want to play The other important sector breakdown is what types of together. It creates a demand for the game much like games are most popular. The segmentation is broken when everyone is talking about a movie or T.V. show so down into Action Games, Shooter Games, Sports Games, you then feel inclined to watch it for yourself. This is how Casual Games and other. Fortnite became such a popular game in 2019, even though it had no prior market share. Peer Comparisons

Electronic Arts main competitors are Activision Blizzard, Take-Two Interactive and Ubisoft. These three publishers released seven of the top ten video games in 201917. Electronic Arts had three of those spots with Madden NFL 20, Star Wars Jedi: Fallen Order, and Anthem. There are also other competitors such as Microsoft, Sony and Nintendo, who create some games, but that is not their main focus of business. Below is the list of the top 10 games by revenue sold in 2019.

Source: IBIS World

Electronic Arts has exposure to all of these segments but is most known for sports games. This is just 5% of the market and we do not expect that to change. This is why EA also has games like Apex Legends, Battlefield, Anthem and Sims that do well in their respective segments.

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Activision Blizzard (ATVI)

Activision Blizzard is the only publisher larger than Electronic Arts mostly in part to their top game franchise Call of Duty. Call of Duty includes the Black Ops and Modern Warfare games which alternate being released every other year. These games are consistently the number one games sold worldwide almost every year. They also publish games such as Overwatch and one of the bestselling mobile games ever, Candy Crush. In comparison they have a very similar valuation to EA but

worse margins and ROE. Source: Business Insider Take-Two Interactive (TTWO) In the chart above you can see how EA and its peers heavily dominate the top part of the list. While EA does not have Take-Two Interactive is the third largest game publisher of the top game, it does have the most top ten games out of EA’s peers. They are known for publishing games for any publisher in 2019. It is important to note that this list Rockstar, which develops the Grand Theft Auto franchise, is based off of game sales, not total revenue generated and 2K who develops the NBA 2K franchise. They are a from the game. This list would exclude games like Fortnite growth play that is yet to be determined if they will live up which generates all their revenue from in game purchases. to their high valuation. Take-Two’s P/E is 40 compared to It would also not include EA’s game Apex Legends or all EA and Activision whose are half that. Currently, Take-Two their Ultimate Team revenue from Madden NFL and FIFA. isn’t making any money as their COGS is 60% of sales compared to EA’s COGS which is just 26% of sales3. We do Perhaps it is better to look at total revenue for each peer think Take-Two Interactive will remain a competitor, but it to get a better overall sense of who is collecting revenue is unclear when they will start turning a profit. including games sales, live services, free to play games, etc. EA is second only to Activision Blizzard who has been Ubisoft (UBI-FR) the industry leader for many years. We do not see EA surpassing them as long as their Call of Duty franchise Ubisoft is a French company best known for its Tom continues to be popular. Clancy, Assassins Creed, and Farcry franchises. They have relatively small sales compared to EA and Activision and Trailing Twelve Months Revenue (B) we do not believe they are a major threat. Ubisoft does publish a fair amount of quality games each year, but none of them are top ten or even top twenty games. We do not Ubisoft think their current game franchises are strong enough to compete with companies like EA and Activision. Take-Two Int. Competition Valuation Metrics Activision Blizzard Electronic Arts has a number of competitors which fight for Electronic Arts market share with every new game published. We believe they are the best investment to make, based on potential $- $2,000 $4,000 $6,000 $8,000 growth given current valuation levels. For a fuller picture of their competitors, the graph below shows some key Source: Yahoo Finance metrics we believe show that EA is undervalued when compared to its peers.

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do not think their spending habits change dramatically. Overall we think COVID-19 will help drive revenue for Electronic Arts and the entire gaming industry. China

Similar to the U.S., we have seen China take major hits to its economy in 2020. However, China seems to be on the Source: FactSet upswing from COVID-19, whereas the U.S. is still in the middle of its peak. China lost six million jobs to COVID-19, In this chart we included Microsoft and Sony as they do and many millions more were still employed, but not compete in the same space, but they are also partners with working as their factories were shut down. This caused EA to deliver games through their consoles. As you can see, their unemployment to spike to 6.2% in February, which is Electronic Arts has the highest ROE and Net Margin of its the highest in a few years14. peers without the equity premium. This supports why we believe Electronic Arts is the best buy in the video game China also saw a steep decline in their Consumer industry. Confidence data as it fell from 126.4 to 118.9 in February13. We believe China is on the upswing regarding recovery ECONOMIC OUTLOOK from COVID-19 and while it will remain an issue for likely all of 2020, business will get back to normal within the next Electronic Arts operates all over the world with much of few months. This is a positive for EA as many players in their revenue coming from the U.S., China and Japan. We China are under strict lockdowns leading to increased have decided to focus on the U.S. and Chinese economies gaming. to provide the most relevant data that affects Electronic Arts. We believe the most two important economic CATALYSTS FOR GROWTH indicators that affect EA are consumer confidence and unemployment data. The video game industry has been increasing in popularity for years and we expect this to continue. In 2019, user United States growth was up 7.2% YOY to 2.6 billion gamers worldwide5. This growing customer base provides opportunity for a We have seen dramatic changes in both the consumer company like Electronic Arts to grow sales. Currently, 29% confidence, and unemployment rates in the U.S. in the last of people worldwide regularly playing video games.This is month. These changes must be considered when also an opportiunity as the majority of people do not forecasting a one-year price target. In March, the currently play video games. User growth and COVID-19 unemployment rate rose to 4.4% as 701,000 jobs were contributed to our 8.2% revenue growth forecast for next lost11. A lot has happened since this data was released as year. We also see the potential for EA’s black swan to come the March data represents jobless claims in the previous to fruition in the next few years which is the revitalization month. Many economists now estimate U.S. of NCAA games. unemployment is between 10% - 18% after 6.9 million 12 people filed for unemployment in March . Consumer COVID-19 Confidence was also on an uptrend until March where it 13 dropped from 132.6 to 120 . The global pandemic has had negative effects on nearly every economic industry in the world, but we do not think It is difficult to decipher how this will affect EA as low the video gaming industry is one of them. It may make consumer confidence leads to less discretionary spending, creating the games more difficult for developers, but that but the high unemployment likely leads to many of those negative is outweighed by people staying home and people playing video games during their unemployment. turning to video games for entertainment. According to a We predict unemployment will peak at 18% and remain survey done by Statista in March, 43% of people aged 18- flat until the social distancing restrictions are lifted. This 29 said they were going to play more video games as a will drive video game sales as government stimulus filled result of the crisis10. Across all age bands, an increase in much of the gap these workers were making anyway. We

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play time was answered leading to increased sales. The VALUATION results from the survey are below with the age of respondents on the x-axis and percent who answered yes In our model we calculated Electronic Arts share price on the y-axis. using the discounted cash flow, economic profit, dividend discount and relative valuation methods. Each of these Increased Time Spent Playing models are only as good as the inputs one provides, which is why it is important to first forecast the income Video Games Due To COVID-19 statement, balance sheet and cash flow statement. We 50% have also tested the sensitivity of our stock price to key 40% assumptions such as beta, equity risk premium, CV ROIC Growth, CV NOPLAT Growth and others. These can be 30% found in the appendix along with forecasted financial 20% statements and models. 10% 0% 18-29 30-44 45-54 55-64 65+ Revenue Forecast

The revenue forecast is the most important assumption for Source: Statista, March Survey the valuation of a company. In 2021 we are predicting 8.27% revenue growth and 6.66% revenue growth in 2022. NCAA Games This growth then slows to 3.44% in the continuing value year in 2029. Electronic Arts income statement revenue is This possibility is somewhat the black swan for Electronic broken down to just products and services on quarterly Arts as a company. Up until 2014 EA had the exclusive reports so this is what we used to forecast from. However, rights to create NCAA Football and NCAA , but each of the revenue segments such as packaged goods, these games were discontinued after a lawsuit where live services, full game downloads and mobile sales were hundreds of players sued the NCAA for using their likeness taken into account and are included as part of either the to drive NCAA revenue. This then forced the NCAA to end products or services segments. We are projecting 5% its licensing agreements with EA. EA could not make a deal product growth and 10% service growth in 2021. This with the players to be in games going forward because it is growth then slows down to 2% and 4% respectively in the illegal for NCAA players to get paid based on their likeness last forecasted year in 2029. or at all while in college. This was the end of new NCAA games even though NCAA Football 2014 still has hundreds of thousands of active players. Operating Expenses

In 2019 passed the Fair Pay to Play Act which In our financial model, operating expense assumptions allows players to be able to make money from their make the biggest difference in the final share price result. likeness such as being in advertisements or selling their Roughly 52% of Electronic Arts revenue goes into gear. It is planned to go into effect on January 1, 2023 and operating expenses as they spend a large percentage of could open the door for NCAA games to be brought back sales on R&D and marketing expenses. Just a 1% change in to life. While we did not forecast this new game revenue these operating expense assumptions can change a model in our DCF forecast, we believe the base is there to make target price by 10% so it is important to go through the NCAA games successful again. We believe this would cause thought behind each. In the model we forecasted R&D, some cannibalization of other professional games such as M&S and G&A as a percentage of sales. We first found a Madden NFL and NBA Live, but we think NCAA games baseline using the past three year’s data and then made would also bring in new players who do not usually play necessary adjustments accordingly, based on trends and sporting games. our outlook.

Research and development expenses have historically been between 24%-29% of sales for Electronic Arts which is average for the industry. Going forward we have

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forecasted 2021 R&D at 28% of revenue with .25% Electronic Arts capital structure is 89.6% equity and 10.4% increases every two years until the continuing value year debt which computes an overall WACC of 6.67%. This at 19.25% of sales. We have also forecasted the increasing calculation can also be found in the appendix. R&D expense as we believe changes in gamer preferences to virtual reality will force developers and publishers to Valuation Models invest heavily in creating new versions of games specifically for VR. We also think EA needs to spend more Our discounted cash flow and economic profit models money developing mobile games which they currently compute a stock price of $125.37. The current price as of have low exposure too. today is $110.80. We believe our DCF and EP models most accurately reflect the true value of Electronic Arts and Marketing and Sales expense have on average been 13.5% therefore these models were given the most weighting percent of revenue over the last three years. This does when deciding on a target price range. vary each year based on what new releases EA has as they generally will spend a lot of money to get pre-release We also found Electronic Arts value using an adjusted excitement around a game just like movie studios do. In dividend discount model which uses forecasted EPS to 2019 EA’s M&S expense was over 14% of sales, due to the calculate the implied dividend EA could pay in the future. new release Anthem, a brand new game to the market. We This is because EA does not currently pay any dividend and have forecasted 13.5% M&S expense going forward which therefore this model is not a very good method to use. We is in line with historical. did not forecast EA paying dividends in the future as they are better off reinvesting FCF back into themselves. We The final key operating expense EA has is their General and calculated a price of $78.78 using this model, however, we Administrative expense. This is primarily legal, personnel put no emphasis on this model when deciding on a price and IT security expenses. We do not forecast that this target. expense will change as a percentage of sales, so we used the average of the last three years which was 9%. The final valuation model we calculated was using a relative P/E method to see if EA was appropriately valued WACC Assumptions when compared to their peers. We compared them to Activision Blizzard, Take-Two Interactive- Microsoft, and In a DCF model the WACC used can drastically change a Ubisoft. Using this model, we found an implied target price company’s share price valuation. We have computed a of $112.80. We put moderate weight into this model when WACC for EA of 6.67% using our assumptions and data deciding on a price target for Electronic Arts. All valuation from EA’s financial statements. To find the cost of equity models and financial forecasts can be found in the we used a risk-free rate of .6%, which is the current 10- appendix. year yield. We used a beta of 1.05 which is EA five year historical and an equity risk premium of 6.16%. The equity INVESTMENT POSITIVES risk premium is the single biggest assumption in a WACC calculation. The Henry Fund team has decided to use and • Recent moves into shooter and action games with equity risk premium of 6.16% which is in line with Apex Legends and Anthem open the door to players Damodaran's March calculation. While this equity risk who do not play sports games and drove revenue by premium is high compared to historical, we believe it $240 million last year accurately reflects the uncertainty in the market as of • Increased popularity in live eSports competitions and today. As a result, we calculated EA’S cost of equity to be streaming present a new opportunity to drive revenue 7.07% and draw attention to games • Live Services were up 27% in Q4 of 2019 driven by in The next component is our cost of debt. We again used a game purchases and EA’s Ultimate Team which we risk-free rate of .6%, and then found their average interest forecast will grow by 12% in the next twelve months rate on outstanding debt by taking a weighted average of • COVID-19 has given people more time at home leading their current outstanding senior notes which has 4.14%. to increases time and money spent playing video Including the tax shield of 20% from their marginal tax rate games. 43% of people ages 18-29 surveyed said they and EA’s after tax cost of debt is 3.31%.

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will be spending more time playing video games as a are from publicly available sources. This report is not a result of COVID-1910 complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its INVESTMENT NEGATIVES faculty, staff, students, or the Henry Fund may hold an investment position in the companies mentioned in this • Heavy competition and low barriers to entry, report. especially within mobile games • Low exposure to the mobile games industry which has been the fastest growing sector of online gaming • Constantly competing with streaming services and other forms of entertainment for user attention REFERENCES

1. EA 10k 2019 2. EA 10Q Q3 3. FactSet 4. IBIS World 5. VentureBeat: Video Games 6. Xbox Webside: Games Pass 7. EA Website: EA Access 8. Lineups Betting: Biggest eSports Live Events in History 9. FIFA eWorld Cup 2019 10. Statista: Video Games Worldwide 11. Bureau of Labor Statistics 12. Washington Post: 6.6 Million Americans File for Unemployment 13. Ceicdata: China Consumer Confidence Index 14. CNBC: China Economy 15. IBIS World: Video Games Software Developers 16. Business Insider: Top 10 Games of 2019 17. SIMS CIP: EA Earnings 18. Forbes: Anthem’s Surprise $100 Million 19. Business Insider: Amazon Acquires Twitch IMPORTANT DISCLAIMER

Henry Fund reports are created by graduate students enrolled in the Applied Securities Management program at the University of Iowa’s Tippie College of Business. These reports provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of our students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report

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Electronic Arts Inc. Revenue Decomposition In Millions Fiscal Years Ending Mar. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Revenue: Product 2,586 1,593 1,909 2,004 2,084 2,168 2,233 2,300 2,368 2,440 2,513 2,563 % Change YOY -2.05% -38.40% 19.81% 5.00% 4.00% 4.00% 3.00% 3.00% 3.00% 3.00% 3.00% 2.00% Service and other 2,564 3,357 3,611 3,972 4,290 4,633 5,004 5,404 5,782 6,129 6,436 6,693 % Change YOY 16.28% 30.93% 7.56% 10.00% 8.00% 8.00% 8.00% 8.00% 7.00% 6.00% 5.00% 4.00% Total 5,150 4,950 5,520 5,976 6,374 6,800 7,236 7,703 8,151 8,569 8,948 9,256 % Change YOY 6.30% -3.88% 11.51% 8.27% 6.66% 6.69% 6.41% 6.46% 5.81% 5.13% 4.43% 3.44% Electronic Arts Inc. Income Statement In Millions Fiscal Years Ending Mar. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Revenue 5,150 4,950 5,520 5,976 6,374 6,800 7,236 7,703 8,151 8,569 8,948 9,256 Product 2,586 1,593 1,909 2,004 2,084 2,168 2,233 2,300 2,368 2,440 2,513 2,563 Service and other 2,564 3,357 3,611 3,972 4,290 4,633 5,004 5,404 5,782 6,129 6,436 6,693 Total cost of revenue (1,141) (1,177) (1,315) (1,428) (1,520) (1,617) (1,715) (1,819) (1,919) (2,011) (2,094) (2,158) Product (822) (517) (591) (641) (667) (694) (714) (736) (758) (781) (804) (820) Service and other (455) (805) (872) (914) (987) (1,066) (1,151) (1,243) (1,330) (1,410) (1,480) (1,539) Gross profit 4,009 3,773 4,204 4,548 4,854 5,183 5,521 5,884 6,232 6,558 6,854 7,098 Total operating expenses (2,575) (2,777) (2,816) (3,157) (3,372) (3,593) (3,841) (4,088) (4,346) (4,571) (4,798) (4,991) Research and development (1,320) (1,433) (1,539) (1,673) (1,801) (1,921) (2,062) (2,195) (2,343) (2,463) (2,595) (2,707) Marketing and sales (641) (702) (617) (807) (860) (918) (977) (1,040) (1,100) (1,157) (1,208) (1,250) General and administrative (469) (460) (484) (538) (574) (612) (651) (693) (734) (771) (805) (833) Acquisition-related contingent consideration - (14) (7) ------Amortization of intangibles (9) (23) (21) (12) (3) ------Operating income 1,434 996 1,389 1,391 1,482 1,590 1,680 1,796 1,886 1,987 2,056 2,106 Interest and other income / expense, net 15 83 67 76 88 101 116 134 154 177 203 234 Income before income taxes 1,449 1,079 1,455 1,467 1,570 1,691 1,797 1,930 2,039 2,164 2,259 2,340 Provision for / benefit from income taxes (406) (60) 1,467 (235) (251) (271) (287) (309) (326) (346) (361) (374) Net Income 1,043 1,019 2,922 1,233 1,319 1,421 1,509 1,621 1,713 1,818 1,898 1,966

Basic EPS 3.39 3.36 9.94 4.25 4.54 4.89 5.19 5.57 5.89 6.25 6.52 6.76 EPS Growth Rate 6.11% -0.69% 195.53% -57.23% 6.90% 7.60% 6.14% 7.38% 5.69% 6.10% 4.41% 3.60% Shares Outstanding 308 303 294 290 290 291 291 291 291 291 291 291 Dividends Paid ------Electronic Arts Inc. Balance Sheet In Millions Fiscal Years Ending Mar. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Total assets 8,584 8,957 11,161 12,312 12,716 13,571 14,536 15,368 16,299 16,666 17,496 18,365 Total current assets 6,004 6,381 6,629 7,889 8,355 9,268 10,280 11,148 12,113 12,514 13,379 14,282 Cash and cash equivalents 4,258 4,708 3,603 4,830 5,183 5,979 6,869 7,609 8,450 8,729 9,478 10,277 Short-term investments 1,073 737 1,999 2,043 2,088 2,134 2,181 2,229 2,278 2,328 2,379 2,431 Receivables, net of allowances 385 623 798 717 765 816 868 924 978 1,028 1,074 1,111 Deferred income taxes, net ------Other current assets 288 313 229 299 319 340 362 385 408 428 447 463 Property and equipment, net 453 448 439 451 478 507 537 570 604 640 679 719 Goodwill 1,883 1,892 1,892 1,892 1,892 1,892 1,892 1,892 1,892 1,892 1,892 1,892 Acquisition-related intangibles, net 71 87 62 44 26 8 ------Deferred income taxes, net 84 35 1,828 1,737 1,646 1,555 1,464 1,373 1,282 1,191 1,100 1,009 Other LT assets 89 114 311 299 319 340 362 385 408 428 447 463

Total liabilities 3,989 3,626 3,924 4,034 3,610 3,785 3,982 4,192 4,410 4,209 4,392 4,545 Total current liabilities 2,491 2,265 2,338 2,435 2,577 2,721 2,886 3,062 3,246 3,411 3,561 3,682 Accounts payable 48 113 61 90 96 102 109 116 122 129 134 139 Operating leases - - 50 74 59 35 28 19 26 26 26 26 Accrued and other current liabilities 821 1,052 1,154 1,195 1,275 1,360 1,447 1,541 1,630 1,714 1,790 1,851 Deferred net revenue (online-enabled games) 1,622 1,100 1,073 1,076 1,147 1,224 1,303 1,387 1,467 1,542 1,611 1,666 Senior notes, net 992 994 995 995 400 400 400 400 400 - - - Income tax obligations 250 233 352 364 376 390 404 420 436 453 471 490 Deferred income taxes, net 1 2 2 1 2 2 2 2 2 2 2 2 Other liabilities 255 132 237 239 255 272 289 308 326 343 358 370

Total stockholders' equity 4,595 5,331 7,237 8,279 9,106 9,786 10,554 11,176 11,889 12,457 13,104 13,820 Common Stock and APIC 660 3 3 12 21 29 38 40 40 40 40 40 Retained earnings 4,062 5,358 7,267 8,300 9,119 9,789 10,549 11,170 11,883 12,450 13,098 13,814 Accumulated other comprehensive income / loss (127) (30) (33) (33) (33) (33) (33) (33) (33) (33) (33) (33)

Total liabilities and stockholders' equity 8,584 8,957 11,161 12,312 12,716 13,571 14,536 15,368 16,299 16,666 17,496 18,365 Electronic Arts Inc. Forecasted Cash Flow Statement In millions Fiscal Years Ending Mar. 31 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Cash Flow from Operating Activities: 1,617 1,682 1,802 1,902 2,034 2,131 2,237 2,316 2,374 Net Income 1,233 1,319 1,421 1,509 1,621 1,713 1,818 1,898 1,966 Depreciation and amortization 126 134 142 150 160 169 179 190 201 Change in account receivables 81 (48) (51) (52) (56) (54) (50) (46) (37) Change in accounts payable 29 6 6 7 7 7 6 6 5 Change in deferred revenue and deposits 3 72 77 78 84 81 75 68 55 Change in deferred income taxes, net 90 91 91 91 91 91 91 91 91 Change in income tax obligations 12 13 14 14 15 16 17 18 19 Change in accrued and other current liabilities 41 80 85 87 93 89 84 76 62 Change in other non-current liabilities 2 16 17 17 19 18 17 15 12

Cash Flow From Investing Activities: (222) (228) (241) (263) (286) (297) (307) (318) (325) Change in short-term investments (44) (45) (46) (47) (48) (49) (50) (51) (52) Change in capital expenditures (139) (161) (171) (181) (192) (203) (215) (228) (242) Change in other assets (58) (40) (43) (44) (47) (45) (42) (38) (31) Change in acquisition-related intangibles, net 18 18 18 8 - - - - -

Cash Flow From Financing Activities: (167) (1,101) (765) (748) (1,008) (993) (1,650) (1,250) (1,250) Change in Senior notes, net - (595) - - - - (400) - - Change in common stock and APIC 9 9 9 9 1 - - - - Change in operating leases 24 (15) (24) (7) (9) 7 - - - Change in shares purchased (200) (500) (750) (750) (1,000) (1,000) (1,250) (1,250) (1,250)

Net Increase in Cash 1,227 353 795 891 740 841 280 749 799 Beginning Cash 2020 3,603 4,830 5,183 5,979 6,869 7,609 8,450 8,729 9,478 Ending Cash 2021 4,830 5,183 5,979 6,869 7,609 8,450 8,729 9,478 10,277 Electronic Arts Inc. Common Size Income Statement As % of Revenue Fiscal Years Ending Mar. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Product 50.21% 32.18% 34.58% 33.53% 32.70% 31.87% 30.85% 29.85% 29.06% 28.47% 28.08% 27.69% Service and other 49.79% 67.82% 65.42% 66.47% 67.30% 68.13% 69.15% 70.15% 70.94% 71.53% 71.92% 72.31% Total cost of revenue -22.16% -23.78% -23.83% -23.90% -23.84% -23.78% -23.70% -23.62% -23.54% -23.47% -23.40% -23.32% Product -31.79% -32.45% -30.94% -32.00% -32.00% -32.00% -32.00% -32.00% -32.00% -32.00% -32.00% -32.00% Service and other -17.75% -23.98% -24.16% -23.00% -23.00% -23.00% -23.00% -23.00% -23.00% -23.00% -23.00% -23.00% Gross profit 77.84% 76.22% 76.17% 76.10% 76.16% 76.22% 76.30% 76.38% 76.46% 76.53% 76.60% 76.68% Total operating expenses -50.00% -56.10% -51.01% -52.82% -52.90% -52.84% -53.08% -53.07% -53.32% -53.34% -53.62% -53.93% Research and development -25.63% -28.95% -27.88% -28.00% -28.25% -28.25% -28.50% -28.50% -28.75% -28.75% -29.00% -29.25% Marketing and sales -12.45% -14.18% -11.18% -13.50% -13.50% -13.50% -13.50% -13.50% -13.50% -13.50% -13.50% -13.50% General and administrative -9.11% -9.29% -8.77% -9.00% -9.00% -9.00% -9.00% -9.00% -9.00% -9.00% -9.00% -9.00% Acquisition-related contingent consideration 0.00% -0.28% -0.12% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Amortization of intangibles -0.17% -0.46% -0.39% -0.21% -0.05% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Operating income 27.84% 20.12% 25.16% 23.28% 23.26% 23.38% 23.22% 23.31% 23.13% 23.19% 22.97% 22.76% Interest and other income / expense, net 0.29% 1.68% 1.20% 1.28% 1.38% 1.49% 1.61% 1.74% 1.89% 2.06% 2.27% 2.53% Income before income taxes 28.14% 21.80% 26.36% 24.56% 24.64% 24.87% 24.83% 25.05% 25.02% 25.25% 25.25% 25.29% Provision for / benefit from income taxes -7.88% -1.21% 26.58% -3.93% -3.94% -3.98% -3.97% -4.01% -4.00% -4.04% -4.04% -4.05% Net Income 20.25% 20.59% 52.94% 20.63% 20.69% 20.89% 20.86% 21.04% 21.02% 21.21% 21.21% 21.24% Electronic Arts Inc. Common Size Balance Sheet As % of Revenue Fiscal Years Ending Mar. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Total assets 166.68% 180.95% 202.21% 206.03% 199.50% 199.55% 200.87% 199.49% 199.97% 194.49% 195.53% 198.41% Total current assets 116.58% 128.91% 120.10% 132.02% 131.08% 136.29% 142.07% 144.71% 148.62% 146.04% 149.51% 154.30% Cash and cash equivalents 82.68% 95.11% 65.28% 80.83% 81.32% 87.91% 94.93% 98.78% 103.67% 101.88% 105.92% 111.03% Short-term investments 20.83% 14.89% 36.22% 34.19% 32.76% 31.38% 30.14% 28.93% 27.95% 27.17% 26.59% 26.27% Receivables, net of allowances 7.48% 12.59% 14.46% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% Deferred income taxes, net 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other current assets 5.59% 6.32% 4.15% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Property and equipment, gross 26.72% 27.45% 25.71% 25.17% 25.01% 24.85% 24.76% 24.65% 24.70% 24.90% 25.27% 25.90% Accumulated Depreciation 10.75% 10.17% 8.78% 8.55% 8.78% 8.72% 8.63% 8.65% 8.64% 8.96% 9.05% 9.14% Property and equipment, net 8.80% 9.05% 7.95% 7.55% 7.50% 7.46% 7.43% 7.40% 7.41% 7.47% 7.58% 7.77% Goodwill 36.56% 38.22% 34.28% 31.66% 29.68% 27.82% 26.15% 24.56% 23.21% 22.08% 21.14% 20.44% Acquisition-related intangibles, net 1.38% 1.76% 1.12% 0.74% 0.41% 0.12% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Deferred income taxes, net 1.63% 0.71% 33.12% 29.07% 25.82% 22.87% 20.23% 17.82% 15.73% 13.90% 12.29% 10.90% Other LT assets 1.73% 2.30% 5.63% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total liabilities 77.46% 73.25% 71.09% 67.50% 56.63% 55.65% 55.03% 54.41% 54.10% 49.12% 49.08% 49.10% Total current liabilities 48.37% 45.76% 42.36% 40.74% 40.43% 40.01% 39.89% 39.75% 39.82% 39.80% 39.79% 39.78% Accounts payable 0.93% 2.28% 1.11% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% Accrued and other current liabilities 15.94% 21.25% 20.91% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 0.75% Convertible senior notes due 2016, net 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Deferred net revenue (online-enabled games) 31.50% 22.22% 19.44% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% Senior notes, net 19.26% 20.08% 18.03% 16.65% 6.28% 5.88% 5.53% 5.19% 4.91% 0.00% 0.00% 0.00% Income tax obligations 4.85% 4.71% 6.38% 6.09% 5.90% 5.73% 5.59% 5.45% 5.35% 5.29% 5.27% 5.29% Deferred income taxes, net 0.02% 0.04% 0.04% 0.03% 0.03% 0.03% 0.03% 0.03% 0.03% 0.03% 0.03% 0.03% Other liabilities 4.95% 2.67% 4.29% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total stockholders' equity 89.22% 107.70% 131.12% 138.53% 142.87% 143.90% 145.85% 145.08% 145.87% 145.38% 146.45% 149.31% Common stock 12.82% 0.06% 0.05% 0.20% 0.32% 0.43% 0.53% 0.51% 0.48% 0.46% 0.44% 0.43% Additional paid-in capital 12.82% 0.06% 0.05% 0.20% 0.32% 0.43% 0.53% 0.51% 0.48% 0.46% 0.44% 0.43% Retained earnings / accumulated deficit 78.87% 108.24% 131.66% 138.88% 143.06% 143.95% 145.78% 144.99% 145.79% 145.30% 146.37% 149.24% Accumulated other comprehensive income / loss -2.47% -0.61% -0.60% -0.55% -0.52% -0.49% -0.46% -0.43% -0.40% -0.39% -0.37% -0.36%

Total liabilities and stockholders' equity 166.68% 180.95% 202.21% 206.03% 199.50% 199.55% 200.87% 199.49% 199.97% 194.49% 195.53% 198.41% Electronic Arts Inc. Value Driver Estimation In Millions Fiscal Years Ending Mar. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E

NOPLAT: Revenue 5,150 4,950 5,520 5,976 6,374 6,800 7,236 7,703 8,151 8,569 8,948 9,256 Cost of revenue (1,141) (1,177) (1,315) (1,428) (1,520) (1,617) (1,715) (1,819) (1,919) (2,011) (2,094) (2,158) Research and development (1,320) (1,433) (1,539) (1,673) (1,801) (1,921) (2,062) (2,195) (2,343) (2,463) (2,595) (2,707) Marketing and sales (641) (702) (617) (807) (860) (918) (977) (1,040) (1,100) (1,157) (1,208) (1,250) Depreciation & Amortization (136) (145) (148) (126) (134) (142) (150) (160) (169) (179) (190) (201) General and administrative (469) (460) (484) (538) (574) (612) (651) (693) (734) (771) (805) (833) Amortization of intangibles (9) (23) (21) (12) (3) ------Implied operating lease interest 8 9 10 10 10 11 11 12 12 13 13 14 EBITA: 1,442 1,019 1,405 1,401 1,493 1,601 1,692 1,808 1,898 2,000 2,069 2,120 Adjusted Taxes: Marginal Tax Rate (Statutory-State) 28% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% Provision for income taxes 406 60 (1,467) 235 251 271 287 309 326 346 361 374 Tax on Lease Interest 2 2 2 2 2 2 2 2 2 3 3 3 Tax on Other Income (4) (17) (13) (15) (18) (20) (23) (27) (31) (35) (41) (47) Adjusted Taxes: 404 45 (1,478) 221 236 253 266 284 298 313 323 330

Change In Deferred Income Taxes 202 50 (1,793) 90 91 91 91 91 91 91 91 91

NOPLAT 1,240 1,024 1,090 1,270 1,348 1,439 1,516 1,614 1,691 1,777 1,837 1,881 NOPLAT Growth Rate 14.64% -17.42% 6.49% 16.50% 6.15% 6.78% 5.34% 6.47% 4.74% 5.11% 3.33% 2.41%

Invested Capital (IC): Operating WC: Normal cash 1,648 1,584 1,766 1,912 2,040 2,176 2,316 2,465 2,608 2,742 2,863 2,962 Accounts receivable 385 623 798 717 765 816 868 924 978 1,028 1,074 1,111 Other current assets 288 313 229 299 319 340 362 385 408 428 447 463 Operating WC: 2,321 2,520 2,793 2,928 3,123 3,332 3,546 3,775 3,994 4,199 4,385 4,535

Non-Interest CL: Accounts payable 48 113 61 90 96 102 109 116 122 129 134 139 Accrued expenses 821 1,052 1,154 1,195 1,275 1,360 1,447 1,541 1,630 1,714 1,790 1,851 Deferred revenue 1,622 1,100 1,073 1,076 1,147 1,224 1,303 1,387 1,467 1,542 1,611 1,666 Income tax payable 251 235 354 365 378 392 406 422 438 455 474 492 Non-Interest CL: 2,742 2,500 2,642 2,726 2,896 3,078 3,264 3,464 3,658 3,840 4,008 4,148

Other LT Operating Assets: Property and equipment, net 453 448 439 451 478 507 537 570 604 640 679 719 Acquisition-related intangibles, net 71 87 62 44 26 8 ------Other LT assets 89 114 311 299 319 340 362 385 408 428 447 463 PV of operating leases 207 231 216 222 235 249 264 280 297 315 334 354 Other LT Operating Assets: 820 880 1,028 1,016 1,058 1,105 1,164 1,235 1,309 1,383 1,460 1,536

Other LT Operating Assets: Other liabilities 255 132 237 239 255 272 289 308 326 343 358 370 Other LT Operating Assets: 255 132 237 239 255 272 289 308 326 343 358 370

Invested Capital (IC) 144 768 942 980 1,031 1,087 1,156 1,237 1,319 1,399 1,478 1,553

Free Cash Flow (FCF): NOPLAT 1,240 1,024 1,090 1,270 1,348 1,439 1,516 1,614 1,691 1,777 1,837 1,881 Change in IC (113) 624 175 37 52 56 69 82 82 81 79 74 FCF 1,353 399 916 1,233 1,297 1,383 1,448 1,533 1,609 1,697 1,758 1,807

Return on Invested Capital (ROIC): NOPLAT 1,240 1,024 1,090 1,270 1,348 1,439 1,516 1,614 1,691 1,777 1,837 1,881 Beg. IC 257 144 768 942 980 1,031 1,087 1,156 1,237 1,319 1,399 1,478 ROIC 483% 713% 142% 135% 138% 140% 139% 140% 137% 135% 131% 127%

Economic Profit (EP): Beg. IC 257 144 768 942 980 1,031 1,087 1,156 1,237 1,319 1,399 1,478 x (ROIC - WACC) 483% 713% 142% 128% 131% 133% 133% 133% 130% 128% 125% 121% EP 1,240 1,024 1,090 1,207 1,283 1,371 1,444 1,537 1,608 1,689 1,743 1,782 Electronic Arts Inc. Key Management Ratios

Fiscal Years Ending Mar. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E

Liquidity Ratios: Current Ratio (CA/CL) 2.41 2.82 2.84 3.24 3.24 3.41 3.56 3.64 3.73 3.67 3.76 3.88 Cash Ratio (Cash+Marketable Securities)/(CL) 2.14 2.40 2.40 2.82 2.82 2.98 3.14 3.21 3.31 3.24 3.33 3.45 Quick Ratio (Cash+Marketable Securities+ AR)/CL 2.29 2.68 2.74 3.12 3.12 3.28 3.44 3.52 3.61 3.54 3.63 3.75

Asset-Management Ratios: Account Receivable Turnover (Revenue)/(Avg Accounts Receivable) 13.84 9.82 7.77 7.89 8.60 8.60 8.59 8.59 8.57 8.54 8.51 8.47 Total Assets Turnover (Revenue)/(Avg Total Assets) 0.59 0.49 0.47 0.48 0.48 0.48 0.48 0.49 0.49 0.50 0.50 0.50 Net Working Capital Turnover (Revenue/ NWC) 1.47 1.20 1.29 1.10 1.10 1.04 0.98 0.95 0.92 0.94 0.91 0.87

Financial Leverage Ratios: Debt Ratio (TL/TA) 0.46 0.40 0.35 0.33 0.28 0.28 0.27 0.27 0.27 0.25 0.25 0.25 Equity Ratio (Common Equity/TA) 0.54 0.60 0.65 0.67 0.72 0.72 0.73 0.73 0.73 0.75 0.75 0.75 Debt to Equity (TL/Common Equity) 0.87 0.68 0.54 0.49 0.40 0.39 0.38 0.38 0.37 0.34 0.34 0.33

Profitability Ratios: Profit Margin (Net Income/ Net Sales) 20.25% 20.59% 52.94% 20.63% 20.69% 20.89% 20.86% 21.04% 21.02% 21.21% 21.21% 21.24% Gross Margin (Sales-Cost of Revenue)/ Revenue 77.84% 76.22% 76.17% 76.10% 76.16% 76.22% 76.30% 76.38% 76.46% 76.53% 76.60% 76.68% EBITDA Margin (EBITDA/ Net Sales) 27.99% 20.58% 25.45% 23.44% 23.42% 23.54% 23.38% 23.47% 23.28% 23.34% 23.12% 22.91% ROE (Net Income/ TA) 12.15% 11.38% 26.18% 10.01% 10.37% 10.47% 10.38% 10.55% 10.51% 10.91% 10.85% 10.70%

Payout Policy Ratios: Total Payout Ratio ((Divs. + Repurchases)/NI) 0.07% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Electronic Arts Inc. Weighted Average Cost of Capital (WACC) Estimation

Cost of Equity: ASSUMPTIONS: Risk-Free Rate 0.60% 10 year treasury Beta 1.05 Beta from yahoo finance Equity Risk Premium 6.16% Henry Fund Estimate Cost of Equity 7.07%

Cost of Debt: Risk-Free Rate 0.60% 10 year treasury Implied Default Premium 3.54% Pre-tax COD-risk free rate Pre-Tax Cost of Debt 4.14% Weighted average of current senior note rates Marginal Tax Rate 20% After-Tax Cost of Debt 3.31%

Market Value of Common Equity: MV Weights Total Shares Outstanding 289.674 Current Stock Price $105.51 MV of Equity 30,564 89.60%

Market Value of Debt: Short-Term Debt 2338 Current Portion of LTD 0 Long-Term Debt 995 PV of Operating Leases 216 MV of Total Debt 3,549 10.40%

Market Value of the Firm 34,113 100.00%

Estimated WACC 6.677% Electronic Arts Inc. Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth of NOPLAT 2.41% CV Year ROIC 127% WACC 6.68% Cost of Equity 7.07%

Fiscal Years Ending Mar. 31 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E CV

DCF Model: Free Cash Flow (FCF) 1,233 1,297 1,383 1,448 1,533 1,609 1,697 1,758 Continuing Value (CV) 43,267 PV of FCF 1,156 1,139 1,140 1,118 1,109 1,092 1,079 26,846

Value of Operating Assets: 34,679 Non-Operating Adjustments: Normal cash 1,912 Less: PV of operating leases (216) Less: PV ESOP (85)

Value of Equity 36,290 Shares Outstanding 289.67 Intrinsic Value of Last FYE $ 125.28 Implied Price as of Today $ 125.37

EP Model: Economic Profit (EP) 1,207 1,283 1,371 1,444 1,537 1,608 1,689 1,743 Continuing Value (CV) 41,789 PV of EP 1,131 1,127 1,129 1,115 1,113 1,091 1,074 25,956

Total PV of EP 33,737 Invested Capital (last FYE) 942 Value of Operating Assets: 34,679 Non-Operating Adjustments: Normal cash 1,912 Less: PV of operating leases (216) Less: PV ESOP (85)

Value of Equity 36,290 Shares Outstanding 289.67 Intrinsic Value of Last FYE $ 125.28 Implied Price as of Today $ 125.37 Electronic Arts Inc. Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Mar. 31 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E

EPS $ 4.25 $ 4.54 $ 4.89 $ 5.19 $ 5.57 $ 5.89 $ 6.25 $ 6.52 $ 6.76

Key Assumptions CV growth of EPS 3.60% CV Year ROE 14.22% Cost of Equity 7.07%

Future Cash Flows P/E Multiple (CV Year) 21.53 EPS (CV Year) $ 6.76 Future Stock Price Dividends Per Share $ - $ - $ - $ - $ - $ - $ - $ - $ 145.55 Discounted Cash Flows $ 78.72

Intrinsic Value as of Last FYE $ 78.72 Implied Price as of Today $ 78.78 Electronic Arts Inc. Relative Valuation Models

EPS EPS Ticker Company Price 2020E 2021E P/E 20 P/E 21 ATVI Activision Blizzard $61.60 $1.83 $2.12 24.90 21.80 TTWO Take-Two Interactive $118.49 $3.67 $3.01 25.30 27.30 MSFT Microsoft $165.27 $5.61 $6.19 29.40 26.60 SNE Sony Corporation $60.87 $4.36 $4.45 13.60 13.60 UBSFY Ubisoft Entertainment $76.60 $0.26 $3.76 279.70 19.90 Average 26.53 25.23

EA Electronic Arts Inc. $105.51 4.25 4.54 24.8 23.2

Implied Relative Value: P/E (EPS20) $ 112.80 P/E (EPS21) $ 114.67 Electronic Arts Inc. Effects of ESOP Exercise and Share Repurchases on Common Stock Account and Number of Shares Outstanding In Thousands

Number of Options Outstanding (shares): 1,183 Shares Outstanding 289,674,000 Average Time to Maturity (years): 4.14 Expected Annual Number of Options Exercised: 286

Current Average Strike Price: $ 30.86 Cost of Equity: 7.07% Current Stock Price: $102.00

Fiscal Years Ending Mar. 31 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Increase in Shares Outstanding: 286 286 286 286 40 Average Strike Price: $ 30.86 $ 30.86 $ 30.86 $ 30.86 $ 30.86 Increase in Common Stock Account: 8,818 8,818 8,818 8,818 1,235 - - - -

Change in Treasury Stock 0 0 0 0 0 0 0 0 0 Expected Price of Repurchased Shares: $ 102.00 $ 109.21 $ 116.93 $ 125.19 $ 134.04 $ 143.52 $ 153.66 $ 164.52 $ 176.15 Number of Shares Repurchased: ------

Shares Outstanding (beginning of the year) 289,674 289,960 290,245 290,531 290,817 290,857 290,857 290,857 290,857 Plus: Shares Issued Through ESOP 286 286 286 286 40 0 0 0 0 Less: Shares Repurchased in Treasury ------Shares Outstanding (end of the year) 289,960 290,245 290,531 290,817 290,857 290,857 290,857 290,857 290,857 Electronic Arts Inc. Present Value of Operating Lease Obligations In Millions Fiscal Years Ending Mar. 31 2014 2015 2016 2017 2018 2019 2020 Year 1 46.0 41.0 36.0 35.0 40.0 52.0 74.0 Year 2 39.0 32.0 32.0 34.0 40.0 54.0 59.0 Year 3 23.0 23.0 28.0 31.0 40.0 44.0 35.0 Year 4 17.0 19.0 27.0 29.0 33.0 36.0 28.0 Year 5 13.0 17.0 24.0 22.0 26.0 28.0 19.0 Thereafter 10.0 49.0 72.0 61.0 61.0 50.0 26.0 Total Minimum Payments 148.0 181.0 219.0 212.0 240.0 264.0 241.0 Less: Cumulative Interest 14.6 24.7 33.4 30.8 33.5 33.3 25.0 PV of Minimum Payments 133.4 156.3 185.6 181.2 206.5 230.7 216.0

Implied Interest in Year 1 Payment 0.0 5.5 6.5 7.7 7.5 8.6 9.6

Pre-Tax Cost of Debt 4.14% 4.14% 4.14% 4.14% 4.14% 4.14% 4.14% Years Implied by Year 6 Payment 1.0 2.9 3.0 2.8 2.3 1.8 1.4 Expected Obligation in Year 6 & Beyond 10 17 24 22 26 28 19 Electronic Arts Inc. Sensitivity Tables

Beta CV Product Revenue Growth $ 125.37 0.90 0.95 1.00 1.05 1.10 1.15 1.20 $ 125.37 2.19% 2.43% 2.70% 2.00% 3.30% 3.63% 3.99% 0.30% 167.99 154.71 143.39 133.65 125.17 117.72 111.12 30.50% 190.79 193.97 197.67 188.42 206.55 211.85 218.08 0.40% 163.43 150.84 140.07 130.77 122.64 115.49 109.14 31.00% 160.94 162.96 165.27 159.44 170.72 173.93 177.63 0.50% 159.11 147.16 136.91 128.01 120.22 113.35 107.23 31.50% 140.72 142.09 143.66 139.69 147.31 149.42 151.85 0.60% 155.02 143.67 133.88 125.37 117.90 111.28 105.39 32.00% 126.12 127.10 128.22 125.37 130.81 132.29 133.98 0.70% 151.14 140.33 130.99 122.84 115.66 109.30 103.61 32.50% 115.07 115.81 116.64 114.51 118.55 119.64 120.87 Risk-free Rate

0.80% 147.45 137.15 128.23 120.41 113.51 107.38 101.89 COGS CV Product 33.00% 106.43 106.99 107.63 106.00 109.09 109.91 110.85 0.90% 143.94 134.12 125.58 118.08 111.44 105.53 100.23 33.50% 99.48 99.92 100.42 99.14 101.56 102.20 102.93

CV NOPLAT Growth CV Marketing & Sales Expense $ 125.37 1.76% 1.95% 2.17% 2.41% 2.65% 2.57% 2.82% $ 125.37 13.75% 13.80% 13.90% 13.50% 14.10% 14.20% 14.30% 4.49% 166.82 174.57 184.39 197.16 212.45 206.64 225.18 28.50% 213.93 197.92 173.22 387.23 141.09 130.07 121.12 4.99% 146.43 152.12 159.21 168.22 178.72 174.77 187.24 28.75% 155.04 147.63 135.28 213.93 117.26 110.49 104.75 5.54% 128.97 133.16 138.30 144.72 152.05 149.31 157.87 29.00% 125.37 121.12 113.73 155.04 102.20 97.63 93.64 6.16% 113.93 117.02 120.76 125.37 130.53 128.62 134.57 29.25% 107.51 104.75 99.83 125.37 91.83 88.53 85.60 6.78% 102.08 104.42 107.24 110.66 114.45 113.05 117.37 29.50% 95.56 93.64 90.13 107.51 84.25 81.76 79.51

7.45% 91.64 93.42 95.54 98.09 100.88 99.85 103.00 CV R&D Expense 29.75% 87.02 85.60 82.97 95.56 78.47 76.52 74.74 Equity Risk Premium 8.20% 82.42 83.77 85.36 87.27 89.32 88.57 90.88 30.00% 80.61 79.51 77.47 87.02 73.91 72.35 70.91

CV Service Revenue Growth CV Year ROIC $ 125.37 2.92% 3.24% 3.60% 4.00% 4.40% 4.84% 5.32% $ 125.37 109% 115% 121% 127% 133% 140% 147% 22.50% 143.26 151.26 161.67 175.68 193.18 218.29 257.11 4.88% 214.74 214.94 215.13 215.32 215.48 215.63 215.78 23.00% 111.08 114.85 119.51 125.37 132.11 140.80 152.37 5.42% 176.42 176.58 176.73 176.87 177.00 177.12 177.24 23.50% 93.70 95.87 98.47 101.64 105.14 109.46 114.86 6.02% 147.36 147.48 147.60 147.72 147.82 147.91 148.01 23.00% 111.08 114.85 119.51 125.37 132.11 140.80 152.37 6.69% 124.68 124.78 124.87 124.97 125.05 125.12 125.20 WACC 23.50% 93.70 95.87 98.47 101.64 105.14 109.46 114.86 7.36% 108.15 108.23 108.31 108.39 108.45 108.52 108.58

CV Service COGS 24.00% 82.82 84.21 85.86 87.82 89.95 92.49 95.58 8.10% 94.48 94.55 94.61 94.68 94.73 94.78 94.83 24.50% 75.37 76.33 77.46 78.78 80.19 81.86 83.84 8.91% 83.04 83.09 83.15 83.20 83.24 83.29 83.33