Monday, November 03, 2008

EA Financials (Update)

Skip Key, whose analysis of earnings reports is always excellent and interesting, sent this to me over the weekend:
I wish I'd heard the conference call, because I suspect the analysts zeroed in on this a little later, but there are a few more interesting things. As for the short-term investments, it looks like at any given time they have about 10% of their cash on hand in bonds or treasuries or something that are coming due. They're probably doing 3-6 month treasuries or something.. This quarter they purchased $155m in short-term securities, and had $375m in them mature. If that's the case, look for that number to drop sharply next quarter (or whenever the ones bought this quarter come due)- in the recent financial troubles the T-Bill market went crazy, for awhile it was providing negative returns.

From what I remember on R&D, you get a tax writeoff for anything you can claim is R&D, so larger companies basically usually split their staff into guys working on new development, and guys doing maintenance on released products. That simplifies the accounting. So essentially the number is everything they spend on products before they are actually released.

Now, onto the operating loss. Here's the actual breakdown, and it's kinda interesting:
Three Months Ended September 302008 Net loss $ (310)

Change in deferred net revenue (packaged goods and digital content) 232
COGS amortization of intangibles 4
Amortization of intangibles 16
Stock-based compensation 53
Restructuring charges 3
Losses on strategic investments 34
Certain abandoned acquisition-related costs 21
Income tax adjustments (73)

The most interesting bit is highlighted in bold: $232m in 'Change in deferred net revenue.' If you look at the 6 month numbers, though, it's only $37m. So they'd booked some deferred revenue last quarter, and had to write off an enormous amount of it this quarter. Whatever could this be? Here's what the accompanying release has to say about this:
"Change in Deferred Net Revenue (Packaged Goods and Digital Content). Beginning in fiscal 2008, Electronic Arts was no longer able to objectively determine the fair value of the online service included in certain of its packaged goods games and online content. As a result, the Company began recognizing the revenue from the sale of these games and content over the estimated online service period. Although Electronic Arts defers the recognition of a significant portion of its net revenue as a result of this change, there has been no adverse impact to its operating cash flow. Internally, Electronic Arts' management excludes the impact of the change in deferred net revenue related to packaged goods games and digital content in its non-GAAP financial measures when evaluating the Company's operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of its management team. The Company believes that excluding the impact of the change in deferred net revenue from its operating results is important to facilitate comparisons to prior periods during which the Company was able to objectively determine the fair value of the online service and not delay the recognition of significant amounts of net revenue related to online-enabled packaged goods."

So I can't be 100% sure, but this almost certainly means that they've written off a ton of revenue they expected to get long term from Warhammer Online. It sold like gangbusters at release, but has been really poorly received since.

Thanks very much to Skip for taking the time to pour over the earnings statement. Forensic analysis of earnings statements is way, way out of my range, so while I can read one and note what's changed or what's new, I can't do the higher-level analysis that I'd like to. Skip always does that kind of analysis, and his contribution is greatly appreciated.

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