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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Electronic Arts Inc.    EA

ELECTRONIC ARTS INC.

(EA)
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ELECTRONIC ARTS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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02/04/2020 | 04:22pm EDT

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS


This Quarterly Report contains forward-looking statements. We use words such as
"anticipate," "believe," "expect," "intend," "estimate", "plan", "predict",
"seek", "goal", "will", "may", "likely", "should", "could" (and the negative of
any of these terms), "future" and similar expressions to identify
forward-looking statements. In addition, any statements that refer to
projections of our future financial performance, trends in our business,
projections of markets relevant to our business, uncertain events and
assumptions and other characterizations of future events or circumstances are
forward-looking statements. Forward-looking statements consist of, among other
things, statements related to industry prospects, our future financial
performance, and our business plans and objectives, and may include certain
assumptions that underlie the forward-looking statements. These forward-looking
statements are not guarantees of future performance and reflect management's
current expectations. Our actual results could differ materially from those
discussed in the forward-looking statements. Factors that might cause or
contribute to such differences include those discussed in Part II, Item 1A of
this Quarterly Report under the heading "Risk Factors" in, as well as in other
documents we have filed with the Securities and Exchange Commission ("SEC"),
including our Annual Report on Form 10-K for the fiscal year ended March 31,
2019. We assume no obligation to revise or update any forward-looking statement
for any reason, except as required by law.

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 provides important
context for our results for the three months ended December 31, 2019, 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 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, 2019 as filed
with the SEC on May 24, 2019 and in other documents we have filed with the SEC.
About Electronic Arts
We are a global leader in digital interactive entertainment, with a mission to
inspire the world to play. We develop, market, publish and deliver games and
services that can be played and watched 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, The Sims, Apex Legends,
Anthem, Need for Speed and Plants v. Zombies) 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, and offer our games and services through diverse business models
and distribution channels, such as retail, download, subscription and
free-to-play. We believe that the breadth and depth of our portfolio and our
flexibility in business models and distribution channels provide us with
strategic advantages.
Financial Results
Our key financial results for our fiscal quarter ended December 31, 2019 were as
follows:

• Total net revenue was $1,593 million, up 24 percent year-over-year. On a

constant currency basis, we estimate

total net revenue would have been $1,616 million, up 25 percent year-over-year. • Digital net revenue was $1,124 million, up 24 percent year-over-year.

• Gross margin was 68.1 percent, remaining relatively consistent year-over-year.

• Operating expenses were $724 million, up 14 percent year-over-year. On a

       constant currency basis, we estimate that operating expenses would have
       been $733 million, up 16 percent year over year.

• Operating income was $361 million, up 49 percent year-over-year.

• Net income was $346 million with diluted earnings per share of $1.18.

• Operating cash flow was $1,104 million, up 16 percent year-over-year.

• Total cash, cash equivalents and short-term investments were $5,602 million.

• We repurchased 3.1 million shares of our common stock for $305 million.




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From time to time, we make comparisons of current periods to prior periods with
reference to constant currency. Constant currency comparisons are based on
translating local currency amounts in the current period at actual foreign
exchange rates from the prior comparable period. We evaluate our financial
performance on a constant currency basis in order to facilitate period-to-period
comparisons without regard to the impact of changing foreign currency exchange
rates.

Trends in Our Business

Digital Business. Players increasingly purchase our games as digital downloads,
as opposed to purchasing physical discs, and engage with the live services that
we provide on an ongoing basis. Our live services provide additional depth and
engagement opportunities for our players and include extra content,
subscriptions, and esports. Our net revenue attributable to live services for
the console and PC platforms was $2,216 million, $2,083 million and $1,589
million during fiscal years 2019, 2018 and 2017, respectively, and we expect
that live services net revenue will continue to be material to our business.
Within live services, net revenue attributable to extra content was $1,631
million, $1,476 million and $1,204 million during fiscal years 2019, 2018 and
2017, respectively. Net revenue attributable to extra content has increased as
players engage with our games and services over longer periods of time, and
purchase additional content designed to enhance the overall gameplay experience.
Our most popular live service is the extra content purchased for the Ultimate
Team mode associated with our sports franchises. Ultimate Team allows players to
collect current and former professional players in order to build and compete as
a personalized team. Net revenue from extra content sales for Ultimate Team was
$1,369 million, $1,180 million and $867 million during fiscal years 2019, 2018
and 2017, respectively, a substantial portion of which was derived from FIFA
Ultimate Team. Our digital transformation also is creating opportunities in
platforms, content models and the way in which players engage with our games and
services. For example, we have leveraged brands and assets from franchises
historically associated traditional gaming, such as FIFA, Madden NFL, The Sims,
SimCity and Star Wars, to create free-to-play games that are monetized through
live services provided with the game. We also offer subscription services, such
as EA Access, Origin Access and Origin Access Premier, as we look to build
deeper relationships with our players and offer increased choice and flexibility
for our players to try new games. The portion of our revenue attributable to our
digital business has significantly increased from 59 percent in fiscal year 2017
to 67 percent in fiscal year 2018 and 75 percent during fiscal year 2019. We
expect this portion of our business to continue to increase during fiscal year
2020 relative to packaged goods revenue as we continue to focus on developing
and monetizing products and services that can be delivered digitally.

Technological Infrastructure. As our digital business has grown, our games and
services increasingly depend on the reliability, availability and security of
our technological infrastructure. We are investing and expect to continue to
invest in technology, hardware and software to support our games and services,
including with respect to security protections. Our industry is prone to, and
our systems and networks are subject to, cyber-attacks, computer viruses, worms,
phishing attacks, malicious software programs, and other information security
incidents that seek to exploit, disable, damage, disrupt or gain access to our
networks, our products and services, supporting technological infrastructure,
intellectual property and other assets. We expect these threats to our systems
and networks to continue.

Rapidly Changing Industry. We operate in a dynamic industry that regularly
experiences periods of rapid, fundamental change. In order to remain successful,
we are required to anticipate, sometimes years in advance, the ways in which our
products and services will compete in the market. We adapt our business by
investing in creative and technical talent and new technologies, evolving our
business strategies and distribution methods and developing new and engaging
products and services. In fiscal 2019, we launched two new intellectual
properties (Anthem and Apex Legends), brought Apex Legends to market as our
first free-to-play console product, added frontline titles to our Origin Access
Premier subscription service, and invested in more ways to reach our players now
and in the future, such as cloud gaming and esports. We expect to continue to
invest in our business to remain competitive, including investments in, among
other things, technology to connect our players to each other and to the games
they love and the infrastructure to power our games and services. We are
adopting consistent, cross-company methodologies to better understand our
players' needs and continue to invest in technology that enables us to deliver
content that will resonate with players, and provide more choice in the way that
players connect with their games, with each other, and with new types of
content, including esports broadcasts. This connection also allows us to market
and deliver content and services for popular franchises like FIFA, Battlefield
and Star Wars to our players more efficiently.

Free-to-Play Games. The global adoption of mobile devices and a business model
for those devices that allows consumers to try new games with no up-front cost,
and that are monetized through the live service associated with the game,
particularly extra content, has led to significant growth in the mobile gaming
industry. Similarly, sales of extra content are the primary driver of our mobile
business. We expect the mobile gaming industry to continue to grow during our
2020 fiscal year. Likewise, the consumer acceptance of free-to-play, live
service-based, online PC games has broadened our consumer base, and this
free-to-play, live service business model is beginning to gain consumer
acceptance with respect to console games. We expect extra content revenue
generated from mobile, PC and console free-to-play games to remain an important
part of our business.


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Concentration of Sales Among the Most Popular Games. In all major segments of
our industry, we see a large portion of games sales concentrated on the most
popular titles. Similarly, a significant portion of our revenue historically has
been derived from games based on a few popular franchises, several of which we
have released on an annual or bi-annual basis. In particular, we have
historically derived a significant portion of our net revenue from our largest
and most popular game, FIFA, the annualized version of which is consistently one
of the best-selling games in the marketplace.

Recurring Revenue Sources. Our business model includes revenue that we deem
recurring in nature, such as revenue from our annualized sports franchises
(e.g., FIFA, Madden NFL), our console, PC and mobile catalog titles (i.e.,
titles that did not launch in the current fiscal year), the associated extra
content and other live services and our subscriptions business. We have been
able to forecast the revenue from these areas of our business with greater
relative confidence than for new games, services and business models. As we
continue to incorporate new business models and modalities of play into our
games, our goal is to continue to look for opportunities to expand the recurring
portion of our business.

Net Bookings. In order to improve transparency into our business, we disclose an
operating performance metric, net bookings. Net bookings is defined as the net
amount of products and services sold digitally or sold-in physically in the
period. Net bookings is calculated by adding total net revenue to the change in
deferred net revenue for online-enabled games and mobile platform fees.

The following is a calculation of our total net bookings for the periods
presented:
                                            Three Months Ended              Nine Months Ended
                                               December 31,                    December 31,
(In millions)                               2019            2018           2019            2018
Total net revenue                      $     1,593$    1,289$     4,150$    3,712
Change in deferred net revenue
(online-enabled games)                         428             368             (34 )            9
Mobile platform fees                           (43 )           (48 )          (118 )         (141 )
Net bookings                           $     1,978$    1,609$     3,998$    3,580



Net bookings were $1,978 million for the three months ended December 31, 2019
driven by sales related to FIFA 20, Star Wars Jedi: Fallen Order and Madden NFL
20. Net bookings increased $369 million or 23 percent as compared to the three
months ended December 31, 2018 due primarily to Star Wars Jedi: Fallen Order,
Need for Speed Heat and Apex Legends, partially offset by Battlefield V. Digital
net bookings were $1,444 million for the three months ended December 31, 2019,
an increase of $245 million or 20 percent as compared to three months ended
December 31, 2018. The increase in digital net bookings was primarily driven by
our live services which grew $209 million or 27 percent year-over-year,
primarily due to sales of extra content for Apex Legends, FIFA Ultimate Team and
Madden Ultimate Team; and full game downloads which grew $44 million or 16
percent due to net bookings associated with Star Wars Jedi: Fallen Order and
Need for Speed Heat, partially offset by Battlefield V. These increases were
partially offset by a decrease of $8 million or 6 percent in our mobile
business.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES


Our Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in the United States ("U.S. GAAP"). The
preparation of these 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
We derive revenue principally from sales of our games, and related extra-content
and services that can be played by customers on a variety of platforms which
include game consoles, PCs, mobile phones and tablets. Our product and service
offerings include, but are not limited to, the following:


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• full games with both online and offline functionality ("Games with

Services"), which generally includes (1) the initial game delivered

digitally or via physical disc at the time of sale and typically provide

access to offline core game content ("software license"); (2) updates on a

when-and-if-available basis, such as software patches or updates, and/or

additional free content to be delivered in the future ("future update

rights"); and (3) a hosted connection for online playability ("online

       hosting");


• full games with online-only functionality which require an Internet

       connection to access all gameplay and functionality ("Online-Hosted
       Service Games");


• extra content related to Games with Services and Online-Hosted Service

       Games which provides access to additional in-game content;


• subscriptions, such as Origin Access, Origin Access Premier and EA Access,

that generally offers access to a selection of full games, in-game

content, online services and other benefits typically for a recurring

monthly or annual fee; and

• licensing to third parties to distribute and host our games and content.

We evaluate revenue recognition based on the criteria set forth in ASC 606, Revenue from Contracts with Customers.

We evaluate and recognize revenue by:

• identifying the contract(s) with the customer;

• identifying the performance obligations in the contract;

• determining the transaction price;



•      allocating the transaction price to performance obligations in the
       contract; and


• recognizing revenue as each performance obligation is satisfied through

the transfer of a promised good or service to a customer (i.e., "transfer

       of control").



Certain of our full game and/or extra content are sold to resellers with a
contingency that the full game and/or extra content cannot be resold prior to a
specific date ("Street Date Contingency"). We recognize revenue for transactions
that have a Street Date Contingency when the Street Date Contingency is removed
and the full game and/or extra content can be resold by the reseller. For
digital full game and/or extra content downloads sold to customers, we recognize
revenue when the full game and/or extra content is made available for download
to the customer.

Online-Enabled Games

Games with Services. Our sales of Games with Services are evaluated to determine
whether the software license, future update rights and the online hosting are
distinct and separable. Sales of Games with Services are generally determined to
have three distinct performance obligations: software license, future update
rights, and the online hosting.

Since we do not sell the performance obligations on a stand-alone basis, we
consider market conditions and other observable inputs to estimate the
stand-alone selling price for each performance obligation. For Games with
Services, generally 75 percent of the sales price is allocated to the software
license performance obligation and recognized at a point in time when control of
the license has been transferred to the customer (which is usually at or near
the same time as the booking of the transaction). The remaining 25 percent is
allocated to the future update rights and the online hosting performance
obligations and recognized ratably as the service is provided (over the
Estimated Offering Period).

Online-Hosted Service Games. Sales of our Online-Hosted Service Games are determined to have one distinct performance obligation: the online hosting. We recognize revenue from these arrangements as the service is provided.


Extra Content. Revenue received from sales of downloadable content are derived
primarily from the sale of virtual currencies and digital in-game content that
enhance players' game experience. Sales of extra content are accounted for in a
manner consistent with the treatment for our Games with Services and
Online-Hosted Service Games as discussed above, depending upon whether or not
the extra content has offline functionality. That is, if the extra content has
offline functionality, then the

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extra content is accounted for similarly to Games with Services (generally
determined to have three distinct performance obligations: software license,
future update rights, and the online hosting). If the extra content does not
have offline functionality, then the extra content is determined to have one
distinct performance obligation: the online-hosted service offering.

Subscriptions


Sales of our subscriptions are deemed to be one performance obligation and we
recognize revenue from these arrangements ratably over the subscription term as
the performance obligation is satisfied.

Licensing Revenue


In certain countries, we utilize third-party licensees to distribute and host
our games and content in accordance with license agreements, for which the
licensees typically pay us a fixed minimum guarantee and/or sales-based
royalties. These arrangements typically include multiple performance
obligations, such as a time-based license of software and future update rights.
We recognize as revenue a portion of the minimum guarantee when we transfer
control of the license of software (generally upon commercial launch) and the
remaining portion ratably over the contractual term in which we provide the
licensee with future update rights. Any sales-based royalties are generally
recognized as the related sales occur by the licensee.

Revenue Classification


We classify our revenue as either product revenue or service and other revenue.
Generally, performance obligations that are recognized upfront upon transfer of
control are classified as product revenue, while performance obligations that
are recognized over the Estimated Offering Period or subscription period as the
services are provided are classified as service revenue.

Product revenue. Our product revenue includes revenue allocated to the software
license performance obligation. Product revenue also includes revenue from the
licensing of software to third-parties.

Service and other revenue. Our service revenue includes revenue allocated to the
future update rights and the online hosting performance obligations. This also
includes revenue allocated to the future update rights from the licensing of
software to third-parties, software that offers an online-only service such as
our Ultimate Team game mode, and subscription services.

Significant Judgments around Revenue Arrangements


Identifying performance obligations. Performance obligations promised in a
contract are identified based on the goods and services that will be transferred
to the customer that are both capable of being distinct, (i.e., the customer can
benefit from the goods or services either on its own or together with other
resources that are readily available), and are distinct in the context of the
contract (i.e., it is separately identifiable from other goods or services in
the contract). To the extent a contract includes multiple promises, we must
apply judgment to determine whether those promises are separate and distinct
performance obligations. If these criteria are not met, the promises are
accounted for as a combined performance obligation.

Determining the transaction price. The transaction price is determined based on
the consideration that we will be entitled to receive in exchange for
transferring our goods and services to the customer. Determining the transaction
price often requires significant judgment, based on an assessment of contractual
terms and business practices. It further includes review of variable
consideration such as discounts, sales returns, price protection, and rebates,
which is estimated at the time of the transaction. See below for additional
information regarding our sales returns and price protection reserves. In
addition, the transaction price does not include an estimate of the variable
consideration related to sales-based royalties. Sales-based royalties are
recognized as the sales occur.

Allocating the transaction price. Allocating the transaction price requires that
we determine an estimate of the relative stand-alone selling price for each
distinct performance obligation. Determining the relative stand-alone selling
price is inherently subjective, especially in situations where we do not sell
the performance obligation on a stand-alone basis (which occurs in the majority
of our transactions). In those situations, we determine the relative stand-alone
selling price based on various observable inputs using all information that is
reasonably available. Examples of observable inputs and information include:
historical internal pricing data, cost plus margin analyses, third-party
external pricing of similar or same products and services such as software
licenses and maintenance support within the enterprise software industry. The
results of our analysis resulted in a specific percentage of the transaction
price being allocated to each performance obligation.


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Determining the Estimated Offering Period. The offering period is the period in
which we offer to provide the future update rights and/or online hosting for the
game and related extra content sold. Because the offering period is not an
explicitly defined period, we must make an estimate of the offering period for
the service related performance obligations (i.e., future update rights and
online hosting). Determining the Estimated Offering Period is inherently
subjective and is subject to regular revision. Generally, we consider the
average period of time customers are online when estimating the offering period.
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 the customer
(i.e., time in channel). Based on these two factors, we then consider the method
of distribution. For example, games sold at retail would have a composite
offering period equal to the online gameplay period plus time in channel as
opposed to digitally-distributed software licenses which are delivered
immediately via digital download and therefore, the offering period is estimated
to be only the online gameplay period.

Additionally, we consider results from prior analyses, known and expected online
gameplay trends, as well as disclosed service periods for competitors' games in
determining the Estimated Offering Period for future sales. We believe this
provides a reasonable depiction of the transfer of future update rights and
online hosting to our customers, as it is the best representation of the time
period during which our games are played. We recognize revenue for future update
rights and online hosting performance obligations ratably on a straight-line
basis over this period as there is a consistent pattern of delivery for these
performance obligations. These performance obligations are generally recognized
over an estimated nine-month period beginning in the month after shipment for
software licenses sold through retail and an estimated six-month period for
digitally-distributed software licenses beginning in the month of sale.

Deferred Net Revenue


Because the majority of our sales transactions include future update rights and
online hosting performance obligations, which are subject to a recognition
period of generally six to nine months, our deferred net revenue balance is
material. This balance increases from period to period by the revenue being
deferred for current sales with these service obligations and is reduced by the
recognition of revenue from prior sales that were deferred. Generally, revenue
is recognized as the services are provided.

Principal Agent Considerations


We evaluate sales to end customers of our full games and related content via
third-party storefronts, including digital storefronts such as Microsoft's Xbox
Store, Sony's PlayStation Store, Apple App Store, and Google Play Store, in
order to determine whether or not we are acting as the principal in the sale to
the end customer, which we consider in determining if revenue should be reported
gross or net of fees retained by the third-party storefront. An entity is the
principal if it controls a good or service before it is transferred to the end
customer. Key indicators that we evaluate in determining gross versus net
treatment include but are not limited to the following:

• the underlying contract terms and conditions between the various

          parties to the transaction;


•         which party is primarily responsible for fulfilling the promise to
          provide the specified good or service to the end customer;

• which party has inventory risk before the specified good or service has

been transferred to the end customer; and

• which party has discretion in establishing the price for the specified

good or service.




Based on an evaluation of the above indicators, except as discussed below, we
have determined that generally the third party is considered the principal to
end customers for the sale of our full games and related content. We therefore
report revenue related to these arrangements net of the fees retained by the
storefront. However, for sales arrangements via Apple App Store and Google Play
Store, EA is considered the principal to the end customer and thus, we report
revenue on a gross basis and mobile platform fees are reported within cost of
revenue.

Payment Terms

Substantially all of our transactions have payment terms, whether customary or on an extended basis, of less than one year; therefore, we generally do not adjust the transaction price for the effects of any potential financing components that may exist.

Sales and Value-Added Taxes


Revenue is recorded net of taxes assessed by governmental authorities that are
imposed at the time of the specific revenue-producing transaction between us and
our customer, such as sales and value-added taxes.


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Sales Returns and Price Protection Reserves


Sales returns and price protection are considered variable consideration under
ASC 606. We reduce revenue 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 game unit that they
have not resold to customers. The amount of the price protection for permanent
markdowns is the difference between the old wholesale price and the new reduced
wholesale price. Credits are also given for short-term promotions that
temporarily reduce the wholesale price. In certain countries we also have a
practice for allowing channel partners to return older products in the channel
in exchange for a credit allowance.

When evaluating the adequacy of sales returns and price protection reserves, we
analyze the following: historical credit allowances, current sell-through of our
channel partners' inventory of our products, current trends in retail and the
video game industry, changes in customer demand, acceptance of our 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 products in the distribution channels are exposed to rapid
changes in customer preferences, market conditions or technological obsolescence
due to new platforms, product updates or competing 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 reserves would change and would impact the transaction price
and thus, the total net revenue and related balance sheet accounts that we
report.
Income Taxes

We recognize deferred tax assets and liabilities for both (1) the expected
impact of differences between the financial statement amount and the tax basis
of assets and liabilities and (2) 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. 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 carryback 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 and; this evaluation may involve 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.

During the three months ended June 30, 2019, we completed the Swiss intra-entity
sale. The transaction did not result in a taxable gain. Under U.S. GAAP, any
profit resulting from this intercompany transaction will be eliminated upon
consolidation. However, the transaction resulted in a step-up of the Swiss
tax-deductible basis in the transferred intellectual property rights and,
accordingly, created a temporary difference between the book basis and the tax
basis of such intellectual property rights. The Swiss Deferred Tax Asset and the
one-time tax benefit was measured and will be periodically remeasured based on
the Swiss tax rate in effect for the years the asset will be recovered. As a
result, we recognized a $1.17 billion net Swiss Deferred Tax Asset, which is net
of the impact of the Altera opinion and a valuation allowance. Separately,
during the three months ended September 30, 2019, Switzerland enacted a new
statutory tax rate. As a result of the enactment, we remeasured our Swiss
deferred taxes and recognized an additional net tax benefit of $630 million
through continuing operations.

Every quarter, we perform a realizability analysis to evaluate whether it is
more likely than not that all or a portion of our deferred tax assets will not
be realized. Our Swiss Deferred Tax Asset realizability analysis relies upon
future taxable income as the primary source of taxable income but considers all
available sources of income based on the positive and negative evidence. We give
more weight to evidence that can be objectively verified. However, there is
significant judgment involved in estimating future taxable income over the
20-year period over which the Swiss Deferred Tax Asset will reverse,
specifically related to assumptions about expected growth rates of future Swiss
taxable income. Actual results that differ materially from those estimates could
have a material impact on our valuation allowance assessment. Switzerland has a
seven-year carryforward period and does not permit the carry back of losses. We
will not recognize any deferred taxes related to the U.S. taxes on

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foreign earnings associated with this transfer due to our policy election to recognize these taxes as a period cost. We do not expect the transaction to impact our cash taxes or our operating cash flow in fiscal year 2020.


As a result of our analysis as of September 30, 2019, we increased the valuation
allowance from $0.1 billion to $0.2 billion due to the enactment of a new
statutory tax rate in Switzerland, resulting in a net Swiss Deferred Tax Asset
of $1.8 billion. There was no material change to the valuation allowance during
the three months ended December 31, 2019.

During the three months ended June 30, 2019, the Altera opinion was issued
which requires related parties in an intercompany cost-sharing arrangement to
share stock-based compensation expenses. This opinion reversed the prior United
States Tax Court decision, and resulted in a reduction of the Swiss Deferred Tax
Asset. We also recognized a liability for approximately $90 million of
unrecognized tax benefits related to U.S. uncertain tax positions.

Our foreign subsidiaries will generally be subject to U.S. tax and to the extent
earnings from these subsidiaries can be repatriated without a material tax cost,
they will not be indefinitely reinvested. Any earnings in excess of these
amounts are indefinitely reinvested. As of December 31, 2019, we have $1.5
billion that is indefinitely reinvested, which consists of both prior and
current year earnings.

As part of the process of preparing our Consolidated Financial Statements, we
are required to estimate our income taxes in each jurisdiction 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
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 tax rate.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS The information under the subheading "Other Recently Issued Accounting Standards" in Note 1 - Description of Business and Basis of Presentation

to

the Condensed Consolidated Financial Statements in this Form 10-Q is incorporated by reference into this Item 2.


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 year ending March 31,
2020 contains 52 weeks and ends on March 28, 2020. Our results of operations for
the fiscal year ended March 31, 2019 contained 52 weeks and ended on March 30,
2019. Our results of operations for the three months ended December 31, 2019 and
2018 contained 13 weeks each and ended on December 28, 2019 and December 29,
2018, respectively. For simplicity of disclosure, all fiscal periods are
referred to as ending on a calendar month end.
Net Revenue

Net revenue consists of sales generated from (1) full games sold as digital
downloads or as packaged goods and designed for play on game consoles and PCs,
(2) full games for mobile phones and tablets, (3) live services associated with
these games, such as extra-content, (4) subscriptions that generally offer
access to a selection of full games, in-game content, online services and other
benefits, and (5) licensing our games to third parties to distribute and host
our games.

We provide two different measures of our Net Revenue: (1) Net Revenue by Product
revenue and Service and other revenue, and (2) Net Revenue by Composition, which
is primarily based on method of distribution. Management places a greater
emphasis and focus on assessing our business through a review of the Net Revenue
by Composition (Digital, and Packaged goods and other) than by Net Revenue by
Product revenue and Service and other revenue.

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Net Revenue Quarterly Analysis

Net Revenue


For the three months ended December 31, 2019, net revenue was $1,593 million, an
increase of $304 million, or 24 percent, as compared to the three months ended
December 31, 2018. This increase was driven by a $523 million increase in
revenue primarily from Star Wars Jedi: Fallen Order and Need for Speed Heat
which were launched during the three months ended December 31, 2019. This
increase was partially offset by a $219 million decrease in revenue primarily
from the Battlefield franchise.

Net Revenue by Product Revenue and Service and Other Revenue

Our Net Revenue by Product revenue and Service and other revenue for the three months ended December 31, 2019 and 2018 was as follows (in millions):

                               Three Months Ended December 31,
                          2019              2018      $ Change     % Change
Net revenue:
Product           $       701$   552$     149        27 %
Service and other         892                 737          155        21 %
Total net revenue $     1,593$ 1,289$     304        24 %



Product Revenue

For the three months ended December 31, 2019, Product net revenue was $701
million, primarily driven by Star Wars Jedi: Fallen Order, FIFA 20 and Need for
Speed Heat. Product net revenue for the three months ended December 31, 2019
increased $149 million, or 27 percent, as compared to the three months ended
December 31, 2018. This increase in revenue was driven by a $347 million
increase in revenue primarily from Star Wars Jedi: Fallen Order and Need for
Speed Heat. This increase in revenue was partially offset by a $198 million
decrease in revenue primarily from the Battlefield franchise.

Service and Other Revenue


For the three months ended December 31, 2019, Service and other net revenue was
$892 million, primarily driven by extra content sales for FIFA Ultimate Team and
Apex Legends. Service and other net revenue for the three months ended December
31, 2019 increased $155 million, or 21 percent, as compared to the three months
ended December 31, 2018. This increase in revenue was driven by a $181 million
increase in revenue primarily from extra content sales for Apex Legends and the
FIFA franchise. This increase in revenue was partially offset by a $26 million
decrease in revenue primarily from the Battlefield, The Simpsons and UFC
franchises.
Supplemental Net Revenue by Composition
As we continue to evolve our business and more of our products are delivered to
consumers digitally, we place a significant emphasis and focus on assessing our
business performance through a review of net revenue by composition.


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Our net revenue by composition for the three months ended December 31, 2019 and 2018 was as follows (in millions):

                                    Three Months Ended December 31,
                               2019            2018      $ Change     % Change
Net revenue:
Full game downloads      $      286$   247$     39        16  %
Live services                   677              480         197        41  %
Mobile                          161              181         (20 )     (11 )%
Total Digital            $    1,124$   908$    216        24  %

Packaged goods and other $      469$   381$     88        23  %
Total net revenue        $    1,593$ 1,289$    304        24  %



Digital Net Revenue

Digital net revenue includes full-game downloads, live services, and mobile
revenue. Full game download includes revenue from digital sales of full games on
console and PC. Live services includes revenue from sales of extra content for
console, PC, browser games, game software licensed to our third-party publishing
partners who distribute our games digitally, subscriptions, and advertising.
Mobile primarily includes revenue from the sale of extra content for our mobile
games. It also includes revenue from the sale of full games and advertising on
mobile phones and tablets.

For the three months ended December 31, 2019, digital net revenue was $1,124
million primarily driven by FIFA Ultimate Team, Star Wars Jedi: Fallen Order and
The Sims 4. Digital net revenue for the three months ended December 31, 2019
increased $216 million, or 24 percent, as compared to the three months ended
December 31, 2018. This increase is due to a $197 million increase in live
services revenue primarily driven by sales of extra content for Apex Legends and
Ultimate Team, primarily FIFA Ultimate Team and Madden Ultimate Team, and a $39
million increase in full-game downloads revenue primarily driven by Star Wars
Jedi: Fallen Order, partially offset by a $20 million decrease in mobile revenue
primarily driven by lower extra content sales for Star Wars: Galaxy of Heroes
and Madden Mobile.

Packaged Goods and Other Net Revenue


Packaged goods net revenue includes revenue from software that is distributed
physically. This includes (1) net revenue from game software distributed
physically through traditional channels such as brick and mortar retailers, and
(2) our software licensing revenue from third parties (for example, makers of
console platforms, personal computers or computer accessories) who include
certain of our products for sale with their products (for example, OEM bundles).
Other net revenue includes our non-software licensing revenue.

For the three months ended December 31, 2019, packaged goods and other net
revenue was $469 million, primarily driven by Star Wars Jedi: Fallen Order, FIFA
20, Madden NFL 20, and Need for Speed Heat. Packaged goods and other net revenue
for the three months ended December 31, 2019 increased $88 million, or 23
percent, as compared to the three months ended December 31, 2018. This increase
in revenue was driven by a $231 million increase in revenue primarily from Star
Wars Jedi: Fallen Order and Need for Speed Heat, partially offset by a $143
million decrease in revenue primarily from the Battlefield franchise.

Net Revenue Year-to-Date Analysis

Net Revenue


For the nine months ended December 31, 2019, net revenue was $4,150 million and
increased $438 million, or 12 percent, as compared to the nine months ended
December 31, 2018. This increase in revenue was driven by a $724 million
increase in revenue primarily from Apex Legends and Star Wars Jedi: Fallen
Order. This increase in revenue was partially offset by a $286 million decrease
in revenue primarily from the Battlefield franchise.


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Net Revenue by Product Revenue and Service and Other Revenue

Our Net Revenue by Product revenue and Service and other revenue for the nine months ended December 31, 2019 and 2018 was as follows (in millions):

                               Nine Months Ended December 31,
                         2019             2018      $ Change     % Change
Net revenue:
Product           $    1,435$ 1,377$      58         4 %
Service and other      2,715              2,335          380        16 %
Total net revenue $    4,150$ 3,712$     438        12 %



Product Revenue


For the nine months ended December 31, 2019, Product net revenue was $1,435
million, primarily driven by FIFA 20, Star Wars Jedi: Fallen Order, The Sims 4
and Madden NFL 20. Product net revenue for the nine months ended December 31,
2019 increased $58 million, or 4 percent, as compared to the nine months ended
December 31, 2018. This increase in revenue was driven by a $370 million
increase in revenue primarily from Star Wars Jedi: Fallen Order and Need for
Speed Heat. This increase in revenue was partially offset by a $312 million
decrease in revenue primarily from the Battlefield franchise and the FIFA
franchise, primarily due to lower retail packaged goods sales of FIFA 20 versus
FIFA 19 and due to higher catalog sales in the first quarter of fiscal 2019 due
to the FIFA World Cup.

Service and Other Revenue

For the nine months ended December 31, 2019, Service and other net revenue was
$2,715 million, primarily driven by FIFA Ultimate Team, Apex Legends and Anthem.
Service and other net revenue for the nine months ended December 31, 2019
increased $380 million, or 16 percent, as compared to the nine months ended
December 31, 2018. This increase in revenue was driven by a $578 million
increase in revenue primarily from sales of extra content for Apex Legends, and
Anthem. This increase in revenue was partially offset by a $198 million decrease
in revenue primarily from the Star Wars, Need for Speed and Battlefield
franchises.
Supplemental Net Revenue by Composition

Our net revenue by composition for the nine months ended December 31, 2019 and 2018 was as follows (in millions):

                                    Nine Months Ended December 31,
                              2019           2018      $ Change     % Change
Net revenue:
Full game downloads      $     598$   511$     87        17  %
Live services                1,981           1,502         479        32  %
Mobile                         516             632        (116 )     (18 )%
Total Digital            $   3,095$ 2,645$    450        17  %

Packaged goods and other $   1,055$ 1,067$    (12 )      (1 )%
Total net revenue        $   4,150$ 3,712$    438        12  %



Digital Net Revenue

For the nine months ended December 31, 2019, digital net revenue was $3,095
million primarily driven by FIFA Ultimate Team, Apex Legends and The Sims 4.
Digital net revenue for the nine months ended December 31, 2019 increased $450
million, or 17 percent, as compared to the nine months ended December 31, 2018.
This increase is due to a $479 million increase in live services revenue
primarily driven by Apex Legends and FIFA Ultimate Team extra content sales, and
an $87 million increase in full-game downloads revenue primarily driven by Star
Wars Jedi: Fallen Order and Anthem, partially offset by Battlefield V. These
increases were partially offset by a $116 million decrease in mobile revenue
primarily driven by lower extra content sales for Star Wars: Galaxy of Heroes
and Madden Mobile.

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Packaged Goods and Other Net Revenue


For the nine months ended December 31, 2019, packaged goods and other net
revenue was $1,055 million, primarily driven by FIFA 20, Star Wars Jedi: Fallen
Order and Madden NFL 20. Packaged goods and other net revenue remained
relatively consistent in the nine months ended December 31, 2019, as compared to
the nine months ended December 31, 2018.

Cost of Revenue Quarterly Analysis


Cost of revenue for the three months ended December 31, 2019 and 2018 was as
follows (in millions):
                                                                                                          Change as a
                                               % of                               % of                       % of
                         December 31,        Related        December 31,        Related                     Related
                             2019           Net Revenue         2018           Net Revenue    % Change    Net Revenue
Cost of revenue:
Product                 $         216           30.8 %     $         175           31.7 %        23.4 %       (0.9 )%
Service and other                 292           32.7 %               238           32.3 %        22.7 %        0.4  %
Total cost of revenue   $         508           31.9 %     $         413           32.0 %        23.0 %       (0.1 )%



Cost of Product Revenue
Cost of product revenue consists of (1) manufacturing royalties, net of volume
discounts and other vendor reimbursements, (2) certain royalty expenses for
celebrities, professional sports leagues, movie studios and other organizations,
and independent software developers, (3) inventory costs, (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 $41 million, or 23.4 percent during the
three months ended December 31, 2019, as compared to the three months ended
December 31, 2018. This increase was primarily due to royalty and inventory
costs associated with Star Wars Jedi: Fallen Order which was launched during the
three months ended December 31, 2019, partially offset by a decrease in
inventory costs associated with Battlefield V.

Cost of Service and Other Revenue


Cost of service and other revenue consists primarily of (1) royalty costs,
(2) data center, bandwidth and server costs associated with hosting our online
games and websites, (3) inventory costs, (4) payment processing fees and (5)
mobile platform fees associated with our mobile revenue (for transactions in
which we are acting as the principal in the sale to the end customer).

Cost of service and other revenue increased by $54 million, or 22.7 percent
during the three months ended December 31, 2019, as compared to the three months
ended December 31, 2018. This increase was primarily due to an increase in
royalty costs driven by a higher royalty rate associated with the FIFA
franchise, higher sales associated with the Madden franchise, and royalty costs
associated with Star Wars Jedi: Fallen Order.

Cost of Revenue Year-to-Date Analysis


Cost of revenue for the nine months ended December 31, 2019 and 2018 was as
follows (in millions):
                                                                                                       Change as a
                                             % of                             % of                        % of
                        December 31,       Related       December 31,       Related                      Related
                            2019          Net Revenue        2018          Net Revenue     % Change    Net Revenue
Cost of revenue:
Product                 $       444           30.9 %     $       465           33.8 %        (4.5 )%       (2.9 )%
Service and other               656           24.2 %             581           24.9 %        12.9  %       (0.7 )%
Total cost of revenue   $     1,100           26.5 %     $     1,046           28.2 %         5.2  %       (1.7 )%




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Cost of Product Revenue


Cost of product revenue decreased by $21 million, or 4.5 percent during the nine
months ended December 31, 2019, as compared to the nine months ended December
31, 2018. This decrease was primarily due to a decrease in inventory costs
associated with Battlefield V and the FIFA franchise, partially offset by an
increase in inventory and royalty costs associated with Star Wars Jedi: Fallen
Order.

Cost of Service and Other Revenue


Cost of service and other revenue increased by $75 million, or 12.9 percent
during the nine months ended December 31, 2019, as compared to the nine months
ended December 31, 2018. This increase was primarily due to an increase in
royalty costs driven by a higher royalty rate associated with the FIFA
franchise, higher sales associated with Madden franchise, royalty costs
associated with Star Wars Jedi: Fallen Order, and an increase in costs
associated with Apex Legends and Anthem, which launched as online-only titles
during fiscal year 2019.

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
our digital platform, software licenses and maintenance, and management
overhead.
Research and development expenses for the three and nine months ended December
31, 2019 and 2018 were as follows (in millions):
                    December 31,       % of Net       December 31,       % 

of Net

                        2019            Revenue           2018            Revenue        $ Change        % Change
Three months ended $         389            24 %     $         334            26 %     $        55            16 %
Nine months ended  $       1,157            28 %     $       1,035            28 %     $       122            12 %


Research and development expenses increased by $55 million, or 16 percent, during the three months ended December 31, 2019, as compared to the three months ended December 31, 2018. This increase was primarily due to a $41 million increase in personnel-related costs primarily resulting from an increase in variable compensation and related expenses, and a $11 million increase in stock-based compensation.

Research and development expenses increased by $122 million, or 12 percent, during the nine months ended December 31, 2019, as compared to the nine months ended December 31, 2018. This increase was primarily due to a $68 million increase in personnel-related costs primarily resulting from an increase in variable compensation and related expenses, a $35 million increase in stock-based compensation, a $11 million increase in third-party development expense, and an $8 million increase in contracted services.

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 and nine months ended December 31, 2019 and 2018 were as follows (in millions):

                    December 31,       % of Net       December 31,       % 

of Net

                        2019            Revenue           2018            Revenue         $ Change         % Change
Three months ended $         202            13 %     $         187            15 %     $        15              8  %
Nine months ended  $         464            11 %     $         473            13 %     $        (9 )           (2 )%



Marketing and sales expenses increased by $15 million, or 8 percent, during the
three months ended December 31, 2019, as compared to the three months ended
December 31, 2018. This increase was primarily due to an $8 million increase in
advertising and promotional spending on Star Wars Jedi: Fallen Order and Apex
Legends, and a $5 million increase in personnel-related costs primarily
resulting from an increase in variable compensation and related expenses.

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Marketing and sales expenses decreased by $9 million, or 2 percent, during the
nine months ended December 31, 2019, as compared to the nine months ended
December 31, 2018. This decrease was primarily due to a decrease in advertising
and promotional spending primarily on the FIFA franchise and Star Wars: Galaxy
of Heroes during the nine months ended December 31, 2019.

General and Administrative


General and administrative expenses consist of personnel and related expenses of
executive and administrative staff, corporate functions such as finance, legal,
human resources, and information technology, related overhead costs, fees for
professional services such as legal and accounting, and allowances for doubtful
accounts.
General and administrative expenses for the three and nine months ended December
31, 2019 and 2018 were as follows (in millions):
                    December 31,        % of Net       December 31,        

% of Net

                        2019            Revenue            2018            Revenue          $ Change        % Change
Three months ended $         126             8 %      $         106             8 %      $         20            19 %
Nine months ended  $         364             9 %      $         337             9 %      $         27             8 %


General and administrative expenses increased by $20 million, or 19 percent,
during the three months ended December 31, 2019, as compared to the three months
ended December 31, 2018. This increase was primarily due to a $16 million
increase in personnel-related costs which was driven by an increase in variable
compensation and related expenses, and a $3 million increase in stock-based
compensation.
General and administrative expenses increased by $27 million, or 8 percent,
during the nine months ended December 31, 2019, as compared to the nine months
ended December 31, 2018. This increase was primarily due to an $18 million
increase in personnel-related costs which was driven by an increase in variable
compensation and related expenses and a $7 million increase in stock-based
compensation.

Income Taxes
Provision for (benefit from) income taxes for the three and nine months ended
December 31, 2019 and 2018 were as follows (in millions):
                       December 31, 2019        Effective Tax Rate     December 31, 2018     Effective Tax Rate
Three months ended $                28                    7.5  %                      3                1.1 %
Nine months ended               (1,527 )               (139.6 )%                     50                5.8 %



The provision for income taxes for the three and nine months ended December 31,
2019 is based on our projected annual effective tax rate for fiscal year 2020,
adjusted for specific items that are required to be recognized in the period in
which they are incurred.
During the three months ended June 30, 2019, we completed the Swiss intra-entity
sale. The transaction resulted in the recognition of a $1.17 billion net Swiss
Deferred Tax Asset as of June 30, 2019. During the three months ended September
30, 2019, Switzerland enacted a new statutory tax rate. As a result of the
enactment, we remeasured our Swiss deferred taxes and recognized an additional
net tax benefit of $630 million through continuing operations. The new statutory
tax rate in Switzerland also resulted in a $0.1 billion increase to our
valuation allowance recognized against the Swiss Deferred Tax Asset. As of
September 30, 2019, our Swiss Deferred Tax Asset was $1.8 billion, net of a $0.2
billion valuation allowance and a $0.4 billion reduction due to the Altera
opinion. There was no material change to the valuation allowance during the
three months ended December 31, 2019.
The Altera opinion requires related parties in an intercompany cost-sharing
arrangement to share stock-based compensation expenses. The Altera opinion
resulted in the recognition of $90 million of unrecognized tax benefits related
to U.S. uncertain tax positions during the three months ended June 30, 2019.

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Our effective tax rates for the three and nine months ended December 31,
2019 were 7.5 percent and negative 139.6 percent, respectively, as compared to
1.1 percent and 5.8 percent, for the same periods in fiscal year 2019. Excluding
the impacts of the Swiss rate change benefit, the Swiss Deferred Tax Asset, and
Altera opinion, our effective tax rates for the three and nine months ended
December 31, 2019 would have been 15.8 percent and 14.4 percent, respectively,
which was higher than the same periods in fiscal year 2019 primarily due to an
increase in US taxes on foreign earnings in fiscal year 2020.
When compared to the statutory rate of 21 percent, the effective tax rates for
the three and nine months ended December 31, 2019 were significantly lower
primarily due to the recognition of the Swiss rate change benefit, the Swiss
Deferred Tax Asset and earnings realized in countries that have lower statutory
tax rates, partially offset by the unrecognized tax benefits associated with the
Altera opinion.



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LIQUIDITY AND CAPITAL RESOURCES


                                  As of               As of
(In millions)               December 31, 2019     March 31, 2019     Increase/(Decrease)
Cash and cash equivalents  $           3,603     $       4,708      $            (1,105 )
Short-term investments                 1,999               737                    1,262
Total                      $           5,602     $       5,445      $               157
Percentage of total assets                50 %              61 %


                                         Nine Months Ended December 31,
(In millions)                              2019                  2018               Change
Net cash provided by operating
activities                          $         1,299       $           948      $           351
Net cash used in investing
activities                                   (1,346 )                (331 )             (1,015 )
Net cash used in financing
activities                                   (1,058 )                (971 )                (87 )
Effect of foreign exchange on cash
and cash equivalents                              -                   (17 )                 17
Net decrease in cash and cash
equivalents                         $        (1,105 )     $          (371 )    $          (734 )


Changes in Cash Flow
Operating Activities. Net cash provided by operating activities increased by
$351 million during the nine months ended December 31, 2019 as compared to the
nine months ended December 31, 2018 primarily driven by business performance
related to the sales of Star Wars Jedi: Fallen Order, Need for Speed Heat, and
Apex Legends and improved collections during the nine months ended December 31,
2019. This increase was partially offset by marketing and advertising payments
for new titles, particularly Apex Legends and Anthem and higher cash payments
for income taxes.
Investing Activities. Net cash used in investing activities increased by $1,015
million during the nine months ended December 31, 2019 as compared to the nine
months ended December 31, 2018 primarily driven by a $1,477 million increase in
the purchase of short-term investments. This increase was partially offset by a
$420 million increase in proceeds from the sales and maturities of short-term
investments during the nine months ended December 31, 2019 as compared to the
nine months ended December 31, 2018 and the payment of $58 million in connection
with mergers and acquisitions activity during the nine months ended December 31,
2018.
Financing Activities. Net cash used in financing activities increased by $87
million during the nine months ended December 31, 2019 as compared to the nine
months ended December 31, 2018 primarily driven by the payment of $90 million of
contingent consideration in connection with our acquisition of Respawn and a $25
million increase in the repurchase and retirement of our common stock during the
nine months ended December 31, 2019 as compared to the nine months ended
December 31, 2018. These increases were partially offset by a $30 million
decrease in cash paid to taxing authorities in connection with withholding taxes
for stock-based compensation.
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
December 31, 2019, our short-term investments had gross unrealized losses of
less than $1 million, or less than 1 percent of the total in short-term
investments, and gross unrealized gains of $2 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.
Senior Notes
In February 2016, we issued $600 million aggregate principal amount of the 2021
Notes and $400 million aggregate principal amount of the 2026 Notes. We used the
net proceeds of $989 million for general corporate purposes, including the
payment of our formerly outstanding convertible notes and repurchases of our
common stock. The effective interest rate is 3.94% for the 2021 Notes and 4.97%
for the 2026 Notes. Interest is payable semiannually in arrears, on March 1 and
September 1 of each year. See   Note 10 - Financing Arrangements   to the
Condensed Consolidated Financial Statements in this Form 10-Q as it relates to
our Senior Notes, which is incorporated by reference into this Item 2.

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Credit Facility
On August 29, 2019, we entered into a $500 million unsecured revolving credit
facility ("Credit Facility") with a syndicate of banks. The Credit Facility
terminates on August 29, 2024 unless the maturity is extended in accordance with
its terms. As of December 31, 2019, no amounts were outstanding under the Credit
Facility. See   Note 10 - Financing Arrangements   to the Condensed Consolidated
Financial Statements in this Form 10-Q as it relates to the Credit Facility,
which is incorporated by reference into this Item 2.
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, debt repayment obligations,
and potentially, future acquisitions, stock repurchases, or strategic
investments. We may choose at any time to raise additional capital to repay
debt, 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 December 31, 2019, approximately $4.2 billion of our cash, cash
equivalents, and short-term investments were domiciled in foreign tax
jurisdictions, of which approximately $2.7 billion is available for
repatriation. The remaining $1.5 billion is considered to be indefinitely
reinvested.
In May 2018, a Special Committee of our Board of Directors, on behalf of the
full Board of Directors, authorized a program to repurchase up to $2.4 billion
of our common stock. This stock repurchase program expires on May 31, 2020.
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 a
specific number of shares under this program and it may be modified, suspended
or discontinued at any time. During the three and nine months ended December 31,
2019, we repurchased approximately 3.1 million and 9.6 million shares for
approximately $305 million and $916 million, respectively, under this program.
We are actively repurchasing shares under this program.
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, which may include funding 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.
Contractual Obligations and Commercial Commitments

Note 12 - Commitments and Contingencies to the Condensed Consolidated Financial Statements in this Form 10-Q as it relates to our contractual obligations and commercial commitments, which is incorporated by reference into this Item 2.



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OFF-BALANCE SHEET COMMITMENTS
As of December 31, 2019, we did not have any off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that
have or are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues and expenses,
results of operations, liquidity, capital expenditures, or capital resources
that are material to investors.




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