Published: 2021-08-10 00:00:00 ET

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(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Electronic Arts is a global leader in digital interactive entertainment. We develop, market, publish and deliver games, content and services that can be played and watched on game consoles, PCs, mobile phones and tablets. We believe that the breadth and depth of our portfolio, live services offerings, and our use of multiple business models and distribution channels provide us with strategic advantages. Our foundation is a collection of intellectual property from which we create innovative games and content that enables us to build on-going and meaningful relationships with a community of players, creators and viewers. Our portfolio includes brands that we either wholly own (such as Battlefield, The Sims, Apex Legends, Need for Speed and Plants vs. Zombies) or license from others (such as FIFA, Madden NFL, UFC, NHL, Formula 1 and Star Wars). Through our live services offerings, we offer our players high-quality experiences designed to provide value to players and extend and enhance gameplay. These live services include extra content, subscription offerings and other revenue generated outside of the sale of our base games. In addition, we are focused on reaching more players whenever and wherever they want to play. We believe that we can add value to our network by making it easier for players to connect to a world of play by offering choice of business model, distribution channel and device.

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, 2022 contains 52 weeks and ends on April 2, 2022. Our results of operations for the fiscal year ended March 31, 2021 contained 53 weeks and ended on April 3, 2021. Our results of operations for the three months ended June 30, 2021 contained 13 weeks and ended on July 3, 2021. Our results of operations for the three months ended June 30, 2020 contained 14 weeks and ended on July 4, 2020. For simplicity of disclosure, all fiscal periods are referred to as ending on a calendar month end.

The Condensed Consolidated Financial Statements are unaudited and reflect all adjustments (consisting only of normal recurring accruals unless otherwise indicated) that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The preparation of these Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the amounts reported in these Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates. The results of operations for the current interim periods are not necessarily indicative of results to be expected for the current year or any other period.

These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2021, as filed with the United States Securities and Exchange Commission (“SEC”) on May 26, 2021.

Recently Adopted Accounting Standards

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. We adopted ASU 2019-12 in the first quarter of fiscal year 2022. The adoption did not have a material impact on our Condensed Consolidated Financial Statements.

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(2) FAIR VALUE MEASUREMENTS

There are various valuation techniques used to estimate fair value, the primary one being the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability. We measure certain financial and nonfinancial assets and liabilities at fair value on a recurring and nonrecurring basis.

Fair Value Hierarchy

The three levels of inputs that may be used to measure fair value are as follows:

•Level 1. Quoted prices in active markets for identical assets or liabilities.

•Level 2. Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities.

•Level 3. Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of June 30, 2021 and March 31, 2021, our assets and liabilities that were measured and recorded at fair value on a recurring basis were as follows (in millions):

									Fair Value Measurements at Reporting Date Using
			As of June 30, 2021						Quoted Prices in Active Markets  for Identical Financial Instruments						Significant Other Observable Inputs						Significant Unobservable Inputs						Balance Sheet  Classification
									(Level 1)						(Level 2)						(Level 3)
Assets
Bank and time deposits			$	146					$	146					$	—					$	—					Cash equivalents
Money market funds			666						666						—						—						Cash equivalents
Available-for-sale securities:
Corporate bonds			335						—						335						—						Short-term investments
U.S. Treasury securities			200						200						—						—						Short-term investments
U.S. agency securities			3						—						3						—						Short-term investments
Commercial paper			126						—						126						—						Short-term investments
Foreign government securities			63						—						63						—						Short-term investments
Asset-backed securities			117						—						117						—						Short-term investments
Certificates of deposit			37						—						37						—						Short-term investments
Foreign currency derivatives			28						—						28						—						Other current assets and other assets
Deferred compensation plan assets (a)			21						21						—						—						Other assets
Total assets at fair value			$	1,742					$	1,033					$	709					$	—
Liabilities
Foreign currency derivatives			$	37					$	—					$	37					$	—					Accrued and other current liabilities and other liabilities
Deferred compensation plan liabilities (a)			22						22						—						—						Other liabilities
Total liabilities at fair value			$	59					$	22					$	37					$	—

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									Fair Value Measurements at Reporting Date Using
			As of March 31, 2021						Quoted Prices in Active Markets for Identical Financial Instruments						Significant Other Observable Inputs						Significant Unobservable Inputs						Balance Sheet  Classification
									(Level 1)						(Level 2)						(Level 3)
Assets
Bank and time deposits			$	157					$	157					$	—					$	—					Cash equivalents
Money market funds			2,100						2,100						—						—						Cash equivalents
Available-for-sale securities:
Corporate bonds			380						—						380						—						Short-term investments and cash equivalents
U.S. Treasury securities			437						437						—						—						Short-term investments and cash equivalents
U.S. agency securities			3						—						3						—						Short-term investments
Commercial paper			142						—						142						—						Short-term investments and cash equivalents
Foreign government securities			67						—						67						—						Short-term investments
Asset-backed securities			112						—						112						—						Short-term investments
Certificates of deposit			41						—						41						—						Short-term investments
Foreign currency derivatives			33						—						33						—						Other current assets and other assets
Deferred compensation plan assets (a)			18						18						—						—						Other assets
Total assets at fair value			$	3,490					$	2,712					$	778					$	—
Liabilities
Foreign currency derivatives			$	40					$	—					$	40					$	—					Accrued and other current liabilities and other liabilities
Deferred compensation plan liabilities (a)			19						19						—						—						Other liabilities
Total liabilities at fair value			$	59					$	19					$	40					$	—

(a)The Deferred Compensation Plan assets consist of various mutual funds. See Note 15 in our Annual Report on Form 10-K for the fiscal year ended March 31, 2021, for additional information regarding our Deferred Compensation Plan.

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(3) FINANCIAL INSTRUMENTS

Cash and Cash Equivalents

As of June 30, 2021 and March 31, 2021, our cash and cash equivalents were $2,838 million and $5,260 million, respectively. Cash equivalents were valued using quoted market prices or other readily available market information.

Short-Term Investments

Short-term investments consisted of the following as of June 30, 2021 and March 31, 2021 (in millions):

			As of June 30, 2021																								As of March 31, 2021
			Cost or Amortized Cost						Gross Unrealized												Fair Value						Cost or Amortized Cost						Gross Unrealized												Fair Value
									Gains						Losses																		Gains						Losses
Corporate bonds			$	335					$	—					$	—					$	335					$	372					$	—					$	—					$	372
U.S. Treasury securities			199						1						—						200						374						1						—						375
U.S. agency securities			3						—						—						3						3						—						—						3
Commercial paper			126						—						—						126						136						—						—						136
Foreign government securities			63						—						—						63						67						—						—						67
Asset-backed securities			117						—						—						117						112						—						—						112
Certificates of deposit			37						—						—						37						41						—						—						41
Short-term investments			$	880					$	1					$	—					$	881					$	1,105					$	1					$	—					$	1,106

The following table summarizes the amortized cost and fair value of our short-term investments, classified by stated maturity as of June 30, 2021 and March 31, 2021 (in millions):

			As of June 30, 2021												As of March 31, 2021
			Amortized Cost						Fair Value						Amortized Cost						Fair Value
Short-term investments
Due within 1 year			$	636					$	637					$	895					$	896
Due 1 year through 5 years			237						237						203						203
Due after 5 years			7						7						7						7
Short-term investments			$	880					$	881					$	1,105					$	1,106

(4) DERIVATIVE FINANCIAL INSTRUMENTS

Assets or liabilities associated with our derivative instruments and hedging activities are recorded at fair value in other current assets/other assets, or accrued and other current liabilities/other liabilities, respectively, on our Condensed Consolidated Balance Sheets. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on the use of the derivative instrument and whether it is designated and qualifies for hedge accounting.

We transact business in various foreign currencies and have significant international sales and expenses denominated in foreign currencies, subjecting us to foreign currency risk. We purchase foreign currency forward contracts, generally with maturities of 18 months or less, to reduce the volatility of cash flows primarily related to forecasted revenue and expenses denominated in certain foreign currencies. Our cash flow risks are primarily related to fluctuations in the Euro, British pound sterling, Canadian dollar, Swedish krona, Australian dollar, Japanese yen, Chinese yuan, South Korean won and Polish zloty. In addition, we utilize foreign currency forward contracts to mitigate foreign currency exchange risk associated with foreign-currency-denominated monetary assets and liabilities, primarily intercompany receivables and payables. The foreign currency forward contracts not designated as hedging instruments generally have a contractual term of approximately three months or less and are transacted near month-end. We do not use foreign currency forward contracts for speculative trading purposes.

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Cash Flow Hedging Activities

Certain of our forward contracts are designated and qualify as cash flow hedges. To qualify for hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedges and must be highly effective in offsetting changes to future cash flows on hedged transactions. The derivative assets or liabilities associated with our hedging activities are recorded at fair value in other current assets/other assets, or accrued and other current liabilities/other liabilities, respectively, on our Condensed Consolidated Balance Sheets. The gains or losses resulting from changes in the fair value of these hedges is initially reported, net of tax, as a component of accumulated other comprehensive income (loss) in stockholders’ equity. The gains or losses resulting from changes in the fair value of these hedges is subsequently reclassified into net revenue or research and development expenses, as appropriate, in the period when the forecasted transaction is recognized in our Condensed Consolidated Statements of Operations. In the event that the underlying forecasted transactions do not occur, or it becomes remote that they will occur, within the defined hedge period, the gains or losses on the related cash flow hedges are reclassified from accumulated other comprehensive income (loss) to net revenue or research and development expenses, in our Condensed Consolidated Statements of Operations.

Total gross notional amounts and fair values for currency derivatives with cash flow hedge accounting designation are as follows (in millions):

			As of June 30, 2021																		As of March 31, 2021
			Notional Amount						Fair Value												Notional Amount						Fair Value
									Asset						Liability												Asset						Liability
Forward contracts to purchase			$	264					$	11					$	—					$	370					$	14					$	1
Forward contracts to sell			$	1,557					$	10					$	30					$	1,840					$	15					$	35

The effects of cash flow hedge accounting in our Condensed Consolidated Statements of Operations for the three months ended June 30, 2021 and 2020 are as follows (in millions):

			Three Months Ended June 30,
			2021												2020
			Net revenue						Research and development						Net revenue						Research and development
Total amounts presented in our Condensed Consolidated Statements of Operations in which the effects of cash flow hedges are recorded			$	1,551					$	515					$	1,459					$	438
Gains (losses) on foreign currency forward contracts designated as cash flow hedges			$	(19)					$	8					$	11					$	(6)

Balance Sheet Hedging Activities

Our foreign currency forward contracts that are not designated as hedging instruments are accounted for as derivatives whereby the fair value of the contracts are reported as other current assets or accrued and other current liabilities on our Condensed Consolidated Balance Sheets, and gains and losses resulting from changes in the fair value are reported in interest and other income (expense), net, in our Condensed Consolidated Statements of Operations. The gains and losses on these foreign currency forward contracts generally offset the gains and losses in the underlying foreign-currency-denominated monetary assets and liabilities, which are also reported in interest and other income (expense), net, in our Condensed Consolidated Statements of Operations.

Total gross notional amounts and fair values for currency derivatives that are not designated as hedging instruments are accounted for as follows (in millions):

			As of June 30, 2021																		As of March 31, 2021
			Notional Amount						Fair Value												Notional Amount						Fair Value
									Asset						Liability												Asset						Liability
Forward contracts to purchase			$	673					$	—					$	7					$	599					$	—					$	4
Forward contracts to sell			$	435					$	7					$	—					$	450					$	4					$	—

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(5) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The changes in accumulated other comprehensive income (loss) by component, net of tax, for the three months ended June 30, 2021 and 2020 are as follows (in millions):

			Unrealized Net Gains (Losses) on Available-for-Sale Securities						Unrealized Net Gains (Losses) on Derivative Instruments						Foreign Currency Translation Adjustments						Total
Balances as of March 31, 2021			$	—					$	(29)					$	(21)					$	(50)
Other comprehensive income (loss) before reclassifications			—						(5)						9						4
Amounts reclassified from accumulated other comprehensive income (loss)			—						11						—						11
Total other comprehensive income (loss), net of tax			—						6						9						15
Balances as of June 30, 2021			$	—					$	(23)					$	(12)					$	(35)

			Unrealized Net Gains (Losses) on Available-for-Sale Securities						Unrealized Net Gains (Losses) on Derivative Instruments						Foreign Currency Translation Adjustments						Total
Balances as of March 31, 2020			$	(4)					$	39					$	(85)					$	(50)
Other comprehensive income (loss) before reclassifications			11						(32)						24						3
Amounts reclassified from accumulated other comprehensive income (loss)			—						(5)						—						(5)
Total other comprehensive income (loss), net of tax			11						(37)						24						(2)
Balances as of June 30, 2020			$	7					$	2					$	(61)					$	(52)

The effects on net income of amounts reclassified from accumulated other comprehensive income (loss) for the three months ended June 30, 2021 and 2020 were as follows (in millions):

						Amount Reclassified From Accumulated Other Comprehensive Income (Loss)
Statement of Operations Classification						Three Months Ended June 30, 2021						Three Months Ended June 30, 2020
(Gains) losses on foreign currency forward contracts designated as cash flow hedges
Net revenue						$	19					$	(11)
Research and development						(8)						6
Total net (gain) loss reclassified, net of tax						$	11					$	(5)

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(6) BUSINESS COMBINATIONS

Codemasters Group Holdings plc

On February 18, 2021, we completed our acquisition of 100% of the equity interests of Codemasters Group Holdings plc, a public limited company registered in England and Wales (“Codemasters”), for a total purchase price of $1.2 billion, net of cash acquired. The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions, and are considered preliminary as of the reporting date pending finalization of the valuation of deferred tax assets, tax liabilities, and payroll tax liabilities. We expect to finalize the valuation as soon as practicable, but not later than one year from the acquisition date. During the three months ended June 30, 2021, we recorded a $31 million decrease to the acquisition date fair values of certain deferred tax liabilities, which resulted in a reduction to goodwill.

Glu Mobile Inc.

On April 29, 2021, we completed the acquisition of 100% of the equity interests of Glu Mobile Inc., a leading global developer and publisher of mobile games (“Glu” and the “Glu acquisition”) for a total purchase price of $2.0 billion, net of cash acquired of $332 million. The acquisition of Glu is expected to accelerate our mobile growth by creating a combined organization with ongoing live services across multiple games and genres. We also believe that the acquisition will create value by adding Glu’s expertise in casual sports and lifestyle genres to new titles based on our intellectual property. The transaction costs associated with the acquisition totaled approximately $15 million and were recognized in general and administrative expense, of which $11 million were recognized during the three months ended June 30, 2021.

In addition, upon the closing of the Glu acquisition, we assumed all outstanding unvested options and unvested restricted stock units relating to Glu common stock and such awards were converted into corresponding awards relating to a number of shares of our common stock using an exchange ratio equal to 0.0880, with substantially identical terms and conditions as were applicable to the corresponding Glu awards immediately prior to the closing of the acquisition, except as such terms and conditions were modified in the acquisition agreements (“Replacement Awards”). The estimated fair value of the Replacement Awards was $133 million, of which $23 million related to awards for which services were rendered prior to the Glu acquisition and represented part of the purchase consideration transferred in the Glu acquisition. The remaining $110 million is attributable to services to be rendered after the Glu acquisition and will be recognized as stock-based compensation expense over their remaining vesting periods.

The following table summarizes the preliminary allocation of the purchase price to the fair value of the assets acquired and liabilities assumed:

(In millions)
Current assets			$	63
Property and equipment, net			14
Other assets			48
Intangible assets			657
Goodwill			1,406
Deferred tax liabilities			(69)
Current liabilities			(78)
Other liabilities			(39)
Purchase price, net of cash acquired			$	2,002

The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date and are considered preliminary pending finalization of the valuation analyses pertaining to assets acquired and liabilities assumed, which primarily relate to acquired intangible assets. We expect to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.

We recognized goodwill of $1,406 million, which consists largely of workforce and synergies with our existing business. The goodwill is not deductible for tax purposes.

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The results of operations of Glu and the preliminary fair value of the assets acquired have been included in our Condensed Consolidated Financial Statements since the date of acquisition. Pro forma results of operations have not been presented because the effect of the acquisition was not material to our Condensed Consolidated Statements of Operations.

During the three months ended June 30, 2021, we completed one other acquisition that was not material to our Condensed Consolidated Financial Statements.

Pending Acquisition of Playdemic

On June 23, 2021, we announced that we entered into a share purchase agreement to acquire Playdemic Limited, a private limited company incorporated in England and Wales (“Playdemic”), (the “Playdemic acquisition”) for $1.4 billion in cash, subject to customary purchase price adjustments. Under the terms of the agreement, the completion of the acquisition is subject to a customary closing condition regarding the receipt of applicable regulatory clearances. The acquisition of Playdemic is part of our mobile growth strategy and the acquisition will add to our mobile portfolio. The Playdemic acquisition is expected to close in fiscal year 2022. We intend to fund this acquisition with existing cash on hand.

(7) GOODWILL AND ACQUISITION-RELATED INTANGIBLES, NET

The changes in the carrying amount of goodwill for the three months ended June 30, 2021 are as follows (in millions):

			As of March 31, 2021						Activity						Effects of Foreign Currency Translation						As of June 30, 2021
Goodwill			$	3,236					$	1,386					$	2					$	4,624
Accumulated impairment			(368)						—						—						(368)
Total			$	2,868					$	1,386					$	2					$	4,256

Acquisition-related intangibles consisted of the following (in millions):

			As of June 30, 2021																		As of March 31, 2021
			Gross Carrying Amount						Accumulated Amortization						Acquisition- Related Intangibles, Net						Gross Carrying Amount						Accumulated Amortization						Acquisition- Related Intangibles, Net
Developed and core technology			$	989					$	(507)					$	482					$	691					$	(472)					$	219
Trade names and trademarks			436						(155)						281						188						(144)						44
Registered user base and other intangibles			18						(7)						11						5						(5)						—
Carrier contracts and related			85						(85)						—						85						(85)						—
In-process research and development			135						—						135						46						—						46
Total			$	1,663					$	(754)					$	909					$	1,015					$	(706)					$	309

The preliminary fair value of acquisition-related intangible assets acquired in the Glu acquisition was $657 million, of which $305 million was allocated to developed and core technology, $252 million was allocated to trade names and trademarks, $88 million was allocated to in-process research and development, and $12 million was allocated to registered user base and other intangibles. In-process research and development assets are considered indefinite-lived until complete. Excluding the in-process research and development assets, the weighted-average useful life of the Glu’s acquired intangible assets is currently estimated to be approximately 5.6 years.

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Amortization of intangibles for the three months ended June 30, 2021 and 2020 are classified in the Condensed Consolidated Statements of Operations as follows (in millions):

			Three Months Ended June 30,
			2021						2020
Cost of revenue			$	22					$	—
Operating expenses			40						5
Total			$	62					$	5

During the three months ended June 30, 2021, as part of the amortization of intangibles we recorded a $12 million impairment charge for acquisition-related intangible assets, which was recorded within operating expenses.

Acquisition-related intangible assets are generally amortized using the straight-line method over the lesser of their estimated useful lives or the agreement terms, currently from 1 to 8 years. As of June 30, 2021 and March 31, 2021, the weighted-average remaining useful life for acquisition-related intangible assets was approximately 4.9 and 3.5 years, respectively.

As of June 30, 2021, future amortization of finite-lived acquisition-related intangibles that will be recorded in the Condensed Consolidated Statements of Operations is estimated as follows (in millions):

Fiscal Year Ending March 31,
2022 (remaining nine months)			$	194
2023			228
2024			172
2025			100
2026			80
2027			62
2028 and thereafter			73
Total			$	909

(8) ROYALTIES AND LICENSES

Our royalty expenses consist of payments to (1) content licensors, (2) independent software developers, and (3) co-publishing and distribution affiliates. License royalties consist of payments made to celebrities, professional sports organizations, movie studios and other organizations for our use of their trademarks, copyrights, personal publicity rights, content and/or other intellectual property. Royalty payments to independent software developers are payments for the development of intellectual property related to our games. Co-publishing and distribution royalties are payments made to third parties for the delivery of products.

During the three months ended June 30, 2021 and 2020, we did not recognize any material losses or impairment charges on royalty-based commitments.

The current and long-term portions of prepaid royalties and minimum guaranteed royalty-related assets, included in other current assets and other assets, consisted of (in millions):

			As of June 30, 2021						As of March 31, 2021
Other current assets			$	76					$	24
Other assets			19						20
Royalty-related assets			$	95					$	44

At any given time, depending on the timing of our payments to our co-publishing and/or distribution affiliates, content licensors, and/or independent software developers, we classify any recognized unpaid royalty amounts due to these parties as accrued liabilities. As of June 30, 2021 and March 31, 2021, royalty-related liabilities were $175 million and $210 million, respectively, which were included in accrued and other current liabilities.

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(9) BALANCE SHEET DETAILS

Property and Equipment, Net

Property and equipment, net, as of June 30, 2021 and March 31, 2021 consisted of (in millions):

			As of June 30, 2021						As of March 31, 2021
Computer, equipment and software			$	829					$	808
Buildings			372						370
Leasehold improvements			184						172
Equipment, furniture and fixtures, and other			95						93
Land			67						66
Construction in progress			29						12
			1,576						1,521
Less: accumulated depreciation			(1,066)						(1,030)
Property and equipment, net			$	510					$	491

Depreciation expense associated with property and equipment was $40 million and $31 million for the three months ended June 30, 2021 and 2020, respectively.

Accrued and Other Current Liabilities

Accrued and other current liabilities as of June 30, 2021 and March 31, 2021 consisted of (in millions):

			As of June 30, 2021						As of March 31, 2021
Other accrued expenses			$	328					$	351
Accrued compensation and benefits			313						494
Accrued royalties			175						210
Sales returns and price protection reserves			88						115
Deferred net revenue (other)			113						95
Operating lease liabilities			76						76
Accrued and other current liabilities			$	1,093					$	1,341

Deferred net revenue (other) includes the deferral of subscription revenue, licensing arrangements, advertising revenue, and other revenue for which revenue recognition criteria has not been met.

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Deferred net revenue

Deferred net revenue as of June 30, 2021 and March 31, 2021 consisted of (in millions):

			As of June 30, 2021						As of March 31, 2021
Deferred net revenue (online-enabled games)			$	1,305					$	1,527
Deferred net revenue (other)			113						95
Deferred net revenue (noncurrent)			26						14
Total deferred net revenue			$	1,444					$	1,636

During the three months ended June 30, 2021 and 2020, we recognized $961 million and $742 million of revenue, respectively, that were included in the deferred net revenue balance at the beginning of the period.

Remaining Performance Obligations

As of June 30, 2021, revenue allocated to remaining performance obligations consists of our deferred revenue balance of $1,444 million. These balances exclude any estimates for future variable consideration as we have elected the optional exemption to exclude sales-based royalty revenue. We expect to recognize substantially all of these balances as revenue over the next 12 months.

(10) INCOME TAXES

The provision for income taxes for the three months ended June 30, 2021 is based on our projected annual effective tax rate for fiscal year 2022, adjusted for specific items that are required to be recognized in the period in which they are incurred.

Our effective tax rate for the three months ended June 30, 2021 was 34 percent, as compared to 22 percent for the same period in fiscal year 2021 and the 21 percent U.S. federal statutory rate. The higher effective tax rate was primarily due to our decision to capitalize for income tax purposes certain foreign expenses which increased the taxable income in our foreign entities that is subject to U.S. tax. In accordance with our existing accounting policy, we do not establish deferred tax assets to offset this charge, but we expect future deductions of the capitalized amounts.

We are subject to income tax examinations in various jurisdictions with respect to fiscal years after 2011. The timing and potential resolution of income tax examinations is highly uncertain. The total unrecognized tax benefits as of June 30, 2021 were $593 million.

While we continue to measure our uncertain tax positions, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued. In the period ended June 30, 2020, the Supreme Court of the United States denied the opinion of the Ninth Circuit Court of Appeals in Altera Corp. v Commissioner (the “Altera opinion”), resulting in a partial decrease of our unrecognized tax benefits. A complete resolution and settlement of the matters underlying the Altera opinion is reasonably possible within the next 12 months, which would result in an additional reduction of our gross unrecognized tax benefits. However, it is uncertain whether a complete resolution and settlement of such matters would also result in resolution of all related and unrelated U.S. positions for all applicable years. Therefore, it is not possible to provide a range of potential outcomes associated with a reversal of our gross unrecognized tax benefits.

It is also reasonably possible that an additional reduction of up to $5 million of unrecognized tax benefits may occur within the next 12 months, unrelated to the Altera opinion, a portion of which would impact our effective tax rate. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements and tax interpretations.

Each 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. During the three months ended June 30, 2021, we recognized an additional $13 million of valuation allowance against our deferred tax assets primarily due to the expected alignment of the recently acquired businesses with our global operating structure.

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(11) FINANCING ARRANGEMENTS

Senior Notes

In February 2021, we issued $750 million aggregate principal amount of 1.85% Senior Notes due February 15, 2031 (the “2031 Notes”) and $750 million aggregate principal amount of 2.95% Senior Notes due February 15, 2051 (the “2051 Notes”). Our proceeds were $1,478 million, net of discount of $6 million and issuance costs of $16 million. Both the discount and issuance costs are being amortized to interest expense over the respective terms of the 2031 Notes and the 2051 Notes using the effective interest rate method. The effective interest rate is 1.98% for the 2031 Notes and 3.04% for the 2051 Notes. Interest is payable semiannually in arrears, on February 15 and August 15 of each year.

In February 2016, we issued $400 million aggregate principal amount of 4.80% Senior Notes due March 1, 2026 (the “2026 Notes”). Our proceeds were $395 million, net of discount of $1 million and issuance costs of $4 million. Both the discount and issuance costs are being amortized to interest expense over the term of the 2026 Notes using the effective interest rate method. The effective interest rate was 4.97%. Interest is payable semiannually in arrears, on March 1 and September 1 of each year.

The carrying and fair values of the Senior Notes are as follows (in millions):

			As of June 30, 2021						As of March 31, 2021
Senior Notes:
4.80% Senior Notes due 2026			$	400					$	400
1.85% Senior Notes due 2031			750						750
2.95% Senior Notes due 2051			750						750
Total principal amount			$	1,900					$	1,900
Unaccreted discount			(7)						(7)
Unamortized debt issuance costs			(16)						(17)
Net carrying value of Senior Notes			$	1,877					$	1,876
Fair value of Senior Notes (Level 2)			$	1,928					$	1,873

As of June 30, 2021, the remaining life of the 2026 Notes, 2031 Notes and 2051 Notes is approximately 4.7 years, 9.6 years, and 29.6 years, respectively.

The Senior Notes are senior unsecured obligations and rank equally with all our other existing and future unsubordinated obligations and any indebtedness that we may incur from time to time under our Credit Facility.

The 2026 Notes, 2031 Notes and 2051 Notes are redeemable at our option at any time prior to December 1, 2025, November 15, 2030, and August 15, 2050, respectively, subject to a make-whole premium. After such dates, we may redeem each such series of Notes, respectively, at a redemption price equal to 100% of the aggregate principal amount plus accrued and unpaid interest. In addition, upon the occurrence of a change of control repurchase event, the holders of each such series of Notes may require us to repurchase all or a portion of these Notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. Each such series of Notes also include covenants that limit our ability to incur liens on assets and to enter into sale and leaseback transactions, subject to certain allowances.

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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. The Credit Facility contains an option to arrange with existing lenders and/or new lenders to provide up to an aggregate of $500 million in additional commitments for revolving loans. Proceeds of loans made under the Credit Facility may be used for general corporate purposes.

The credit agreement contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, incur subsidiary indebtedness, grant liens, and dispose of all or substantially all assets, in each case subject to customary exceptions for a credit facility of this size and type. We are also required to maintain compliance with a debt to EBITDA ratio. As of June 30, 2021, we were in compliance with the debt to EBITDA ratio.

As of June 30, 2021, no amounts were outstanding under the Credit Facility. $2 million of debt issuance costs that were paid in connection with obtaining this credit facility are being amortized to interest expense over the 5-year term of the Credit Facility.

Interest Expense

The following table summarizes our interest expense recognized for the three months ended June 30, 2021 and 2020 that is included in interest and other income (expense), net on our Condensed Consolidated Statements of Operations (in millions):

			Three Months Ended June 30,
			2021						2020
Amortization of debt issuance costs			$	—					$	(1)
Coupon interest expense			(14)						(10)
Total interest expense			$	(14)					$	(11)

(12) COMMITMENTS AND CONTINGENCIES

Development, Celebrity, League and Content Licenses: Payments and Commitments

The products we produce in our studios are designed and created by our employee designers, artists, software programmers and by non-employee software developers (“independent artists” or “third-party developers”). We typically advance development funds to the independent artists and third-party developers during development of our games, usually in installment payments made upon the completion of specified development milestones. Contractually, these payments are generally considered advances against subsequent royalties on the sales of the products. These terms are set forth in written agreements entered into with the independent artists and third-party developers.

In addition, we have certain celebrity, league and content license contracts that contain minimum guarantee payments and marketing commitments that may not be dependent on any deliverables. Celebrities and organizations with whom we have contracts include, but are not limited to: FIFA (Fédération Internationale de Football Association), FIFPRO Foundation, FAPL (Football Association Premier League Limited), DFL Deutsche Fußball Liga E.V. (German Soccer League), and Liga Nacional De Futbol Profesional (professional soccer); National Basketball Association and National Basketball Players Association (professional basketball); National Hockey League and NHL Players’ Association (professional hockey); NFL Properties LLC, NFL Players Association and NFL Players Inc. on behalf of OneTeam Partners, LLC (professional football); William Morris Endeavor Entertainment LLC (professional mixed martial arts); ESPN (content in EA SPORTS games); Disney Interactive (Star Wars); Formula One Digital Media Limited and Formula Motorsport Limited (professional racing); PGA Tour, Inc. (professional golf); MLB (Major League Baseball Players Association); and Kimsaprincess, Inc. (Kim Kardashian: Hollywood). These developer and content license commitments represent the sum of (1) the cash payments due under non-royalty-bearing licenses and services agreements and (2) the minimum guaranteed payments and advances against royalties due under royalty-bearing licenses and services agreements, the majority of which are conditional upon performance by the counterparty. These minimum guarantee payments and any related marketing commitments are included in the table below.

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The following table summarizes our minimum contractual obligations as of June 30, 2021 (in millions):

									Fiscal Years Ending March 31,
									2022
									(Remaining
			Total						nine mos.)						2023						2024						2025						2026						2027						Thereafter
Unrecognized commitments
Developer/licensor commitments			$	1,938					$	241					$	390					$	399					$	389					$	296					$	60					$	163
Marketing commitments			662						126						144						138						125						87						11						31
Senior Notes interest			877						35						55						55						55						54						36						587
Operating lease imputed interest			32						6						6						5						3						3						2						7
Operating leases not yet commenced (a)			166						6						7						9						8						14						13						109
Other purchase obligations			220						31						50						132						5						2						—						—
Total unrecognized commitments			3,895						445						652						738						585						456						122						897
Recognized commitments
Senior Notes principal and interest			1,920						20						—						—						—						400						—						1,500
Operating leases			323						57						58						49						40						34						22						63
Transition Tax and other taxes			44						24						3						4						6						7						—						—
Licensing commitments			21						21						—						—						—						—						—						—
Total recognized commitments			2,308						122						61						53						46						441						22						1,563
Total Commitments			$	6,203					$	567					$	713					$	791					$	631					$	897					$	144					$	2,460

(a)As of June 30, 2021, we have entered into four office leases and one equipment lease that have not yet commenced with aggregate future lease payments of approximately $166 million. These leases are expected to commence between fiscal year 2022 and fiscal year 2025, and will have lease terms ranging from 3 to 12 years.

The unrecognized amounts represented in the table above reflect our minimum cash obligations for the respective fiscal years, but do not necessarily represent the periods in which they will be recognized and expensed in our Condensed Consolidated Financial Statements. In addition, the amounts in the table above are presented based on the dates the amounts are contractually due as of June 30, 2021; however, certain payment obligations may be accelerated depending on the performance of our operating results.

In addition to what is included in the table above, as of June 30, 2021, we had a liability for unrecognized tax benefits and an accrual for the payment of related interest totaling $299 million, of which we are unable to make a reasonably reliable estimate of when cash settlement with a taxing authority will occur.

Subsequent to June 30, 2021, we entered into licensor and office lease agreements with third parties which are not included in the table above, and contingently commit us to pay an additional $280 million at various dates through fiscal year 2030.

Legal Proceedings

The Netherlands Gambling Authority (“NGA”) has asserted that the randomized selection of virtual items in the FIFA Ultimate Team mode of our FIFA franchise contravenes the Dutch Betting and Gaming Act. On October 15, 2020, the District Court of the Hague affirmed the NGA’s decision. We have appealed the District Court’s order, and the NGA’s decision is suspended through the appeals process. We do not believe that the operational or financial consequences from these proceedings will have a material adverse effect on our Condensed Consolidated Financial Statements. We do not believe that our products and services violate applicable gambling laws.

We are also subject to claims and litigation arising in the ordinary course of business. We do not believe that any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on our Condensed Consolidated Financial Statements.

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(13)  STOCK-BASED COMPENSATION

Valuation Assumptions

We recognize compensation cost for stock-based awards to employees based on the awards’ estimated grant-date fair value using a straight-line approach over the service period for which such awards are expected to vest. We account for forfeitures as they occur.

The estimation of the fair value of market-based restricted stock units, stock options and ESPP purchase rights is affected by assumptions regarding subjective and complex variables. Generally, our assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes. We estimate the fair value of our stock-based awards as follows:

•Restricted Stock Units and Performance-Based Restricted Stock Units. The fair value of restricted stock units and performance-based restricted stock units (other than market-based restricted stock units) is determined based on the quoted market price of our common stock on the date of grant.

•Market-Based Restricted Stock Units. Market-based restricted stock units consist of grants of performance-based restricted stock units to certain members of executive management that vest contingent upon the achievement of pre-determined market and service conditions (referred to herein as “market-based restricted stock units”). The fair value of our market-based restricted stock units is estimated using a Monte-Carlo simulation model. Key assumptions for the Monte-Carlo simulation model are the risk-free interest rate, expected volatility, expected dividends and correlation coefficient.

•Stock Options and Employee Stock Purchase Plan. The fair value of stock options and stock purchase rights granted pursuant to our equity incentive plans and our 2000 Employee Stock Purchase Plan, as amended (“ESPP”), respectively, is estimated using the Black-Scholes valuation model based on the multiple-award valuation method. Key assumptions of the Black-Scholes valuation model are the risk-free interest rate, expected volatility, expected term and expected dividends. The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant for the expected term of the option. Expected volatility is based on a combination of historical stock price volatility and implied volatility of publicly-traded options on our common stock. An expected term is estimated based on historical exercise behavior, post-vesting termination patterns, options outstanding and future expected exercise behavior.

There were no ESPP shares issued during the three months ended June 30, 2021 and 2020. There were an insignificant number of stock options granted during the three months ended June 30, 2021 and 2020.

The assumptions used in the Monte-Carlo simulation model to value our market-based restricted stock units were as follows:

			Three Months Ended June 30,
			2021						2020
Risk-free interest rate			0.4%						0.2%
Expected volatility			24 - 76%						23 - 63%
Weighted-average volatility			40%						37%
Expected dividends			None						None

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Stock Options

The following table summarizes our stock option activity for the three months ended June 30, 2021:

						Options (in thousands)						Weighted- Average Exercise Prices						Weighted- Average Remaining Contractual Term  (in years)						Aggregate Intrinsic Value (in millions)
Outstanding as of March 31, 2021						267						$	35.71
Assumed via acquisition						150						60.87
Granted						1						141.18
Exercised						(18)						42.62
Forfeited, cancelled or expired						(9)						63.26
Outstanding as of June 30, 2021						391						$	44.59					4.39						$	39
Vested and expected to vest						391						$	44.59					4.39						$	39
Exercisable as of June 30, 2021						273						$	36.78					3.23						$	29

The aggregate intrinsic value represents the total pre-tax intrinsic value based on our closing stock price as of June 30, 2021, which would have been received by the option holders had all the option holders exercised their options as of that date. We issue new common stock from our authorized shares upon the exercise of stock options.

Restricted Stock Units

The following table summarizes our restricted stock unit activity for the three months ended June 30, 2021:

			Restricted Stock Rights (in thousands)						Weighted- Average Grant Date Fair Values
Outstanding as of March 31, 2021			5,764						$	113.25
Assumed via acquisition			816						120.54
Granted			3,032						142.43
Vested			(1,503)						116.87
Forfeited or cancelled			(202)						120.27
Outstanding as of June 30, 2021			7,907						$	124.33

Performance-Based Restricted Stock Units

Our performance-based restricted stock units vest upon the achievement of pre-determined performance-based milestones as well as service conditions. If these performance-based milestones are not met but service conditions are met, the performance-based restricted stock units will not vest, in which case any compensation expense we have recognized to date will be reversed.

Each quarter, we update our assessment of the probability that the performance milestones will be achieved. We amortize the fair values of performance-based restricted stock units over the requisite service period. The performance-based restricted stock units contain threshold, target and maximum milestones for each performance-based milestone. The number of shares of common stock to be issued at vesting will range from zero to 200 percent of the target number of performance-based restricted stock units attributable to each performance-based milestone based on the company’s performance as compared to these threshold, target and maximum performance-based milestones. Each performance-based milestone is weighted evenly and the number of shares that vest based on each performance-based milestone is independent from the other.

In June 2017, performance-based restricted stock units were granted contingent upon the achievement of the non-GAAP net revenue and free cash flow performance milestones over a four-year performance period. During the three months ended June 30, 2021, approximately 266,000 of the 579,000 outstanding performance-based restricted stock units were earned and vested on May 26, 2021 and the remaining outstanding units were cancelled.

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In June 2021, performance-based restricted stock units were granted contingent upon the achievement of net bookings and operating income performance milestones over three annual measurement periods, with awards either vesting after each annual measurement period or cliff vesting after the completion of the three-year period.

The following table summarizes our performance-based restricted stock unit activity, presented with the maximum number of shares that could potentially vest, for the three months ended June 30, 2021:

			Performance- Based Restricted Stock Units (in thousands)						Weighted- Average Grant Date Fair Value
Outstanding as of March 31, 2021			579						$	110.51
Granted			219						142.60
Vested			(266)						110.51
Forfeited or cancelled			(313)						110.51
Outstanding as of June 30, 2021			219						$	142.60

Market-Based Restricted Stock Units

Our market-based restricted stock units vest contingent upon the achievement of pre-determined market and service conditions. If these market conditions are not met but service conditions are met, the market-based restricted stock units will not vest; however, any compensation expense we have recognized to date will not be reversed. The number of shares of common stock to be issued at vesting will range from zero to 200 percent of the target number of market-based restricted stock units based on our total stockholder return (“TSR”) relative to the performance of companies in the NASDAQ-100 Index for each measurement period, over either a one-year, two-year cumulative, and three-year cumulative period, a two-year and four-year cumulative period or a three-year period.

The following table summarizes our market-based restricted stock unit activity, presented with the maximum number of shares that could potentially vest, for the three months ended June 30, 2021:

			Market-Based Restricted  Stock Units (in thousands)						Weighted- Average  Grant Date Fair Value
Outstanding as of March 31, 2021			2,195						$	134.60
Granted			159						173.25
Vested			(176)						128.62
Forfeited or cancelled			(593)						154.50
Outstanding as of June 30, 2021			1,585						$	131.69

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense resulting from stock options, restricted stock units, market-based restricted stock units, performance-based restricted stock units, and the ESPP purchase rights included in our Condensed Consolidated Statements of Operations (in millions):

			Three Months Ended June 30,
			2021						2020
Cost of revenue			$	1					$	1
Research and development			85						66
Marketing and sales			12						11
General and administrative			27						24
Stock-based compensation expense			$	125					$	102

During the three months ended June 30, 2021 and 2020, we recognized $24 million and $22 million, respectively, of deferred income tax benefit related to our stock-based compensation expense.

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As of June 30, 2021, our total unrecognized compensation cost related to stock options, restricted stock units, market-based restricted stock units, and performance-based restricted stock units was $991 million and is expected to be recognized over a weighted-average service period of 2.1 years. Of the $991 million of unrecognized compensation cost, $884 million relates to restricted stock units, $79 million relates to market-based restricted stock units, $20 million relates to performance-based restricted stock units at an 129 percent average payout, and $8 million relates to stock options.

Stock Repurchase Program

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. We completed repurchases under the May 2018 program in April 2020.

In November 2020, our Board of Directors authorized a program to repurchase up to $2.6 billion of our common stock. This stock repurchase program expires on November 4, 2022. 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. We are actively repurchasing shares under this program.

The following table summarizes total shares repurchased during the three months ended June 30, 2021 and 2020:

																		May 2018 Program												November 2020 Program												Total
(In millions)																																				Shares						Amount						Shares						Amount						Shares						Amount
Three months ended June 30, 2021																																				—						$	—					2.3						$	325					2.3						$	325
Three months ended June 30, 2020																																				0.7						78						—						$	—					0.7						$	78

(14) EARNINGS PER SHARE

The following table summarizes the computations of basic earnings per share (“Basic EPS”) and diluted earnings per share (“Diluted EPS”). Basic EPS is computed as net income divided by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation plans including stock options, restricted stock, restricted stock units, and ESPP purchase rights using the treasury stock method.

			Three Months Ended June 30,
(In millions, except per share amounts)			2021						2020
Net income			$	204					$	365
Shares used to compute earnings per share:
Weighted-average common stock outstanding — basic			286						288
Dilutive potential common shares related to stock award plans and from assumed exercise of stock options			3						4
Weighted-average common stock outstanding — diluted			289						292
Earnings per share:
Basic			$	0.71					$	1.27
Diluted			$	0.71					$	1.25

For the three months ended June 30, 2021 and 2020, one million of stock options, restricted stock units and market-based restricted stock units were excluded from the treasury stock method computation of diluted shares, respectively, as their inclusion would have had an antidilutive effect.

Our performance-based restricted stock units, which are considered contingently issuable shares, are also excluded from the treasury stock method computation because the related performance-based milestones were not achieved as of the end of the three months ended June 30, 2021 and 2020.

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(15) SEGMENT AND REVENUE INFORMATION

Our reporting segment is based upon: our internal organizational structure; the manner in which our operations are managed; the criteria used by our Chief Executive Officer, our Chief Operating Decision Maker (“CODM”), to evaluate segment performance; the availability of separate financial information; and overall materiality considerations. Our CODM currently reviews total company operating results to assess overall performance and allocate resources. As of June 30, 2021, we have only one reportable segment, which represents our only operating segment.

Information about our total net revenue by timing of recognition for the three months ended June 30, 2021 and 2020 is presented below (in millions):

			Three Months Ended June 30,
			2021						2020
Net revenue by timing of recognition
Revenue recognized at a point in time			$	405					$	442
Revenue recognized over time			1,146						1,017
Net revenue			$	1,551					$	1,459

Generally, performance obligations that are recognized upfront upon transfer of control are classified as revenue recognized at a point in time, while performance obligations that are recognized over the estimated offering period or subscription period as the services are provided are classified as revenue recognized over time.

Revenue recognized at a point in time includes revenue allocated to the software license performance obligation. This also includes revenue from the licensing of software to third-parties.

Revenue recognized over time includes service revenue allocated to the future update rights and the online hosting performance obligations. This also includes service revenue allocated to the future update rights from the licensing of software to third-parties, online-only software services such as our Ultimate Team game mode, and subscription services.

Information about our total net revenue by composition for the three months ended June 30, 2021 and 2020 is presented below (in millions):

			Three Months Ended June 30,
			2021						2020
Net revenue by composition
Full game downloads			$	233					$	223
Packaged goods			89						136
Full game			322						359
Live services and other			1,229						1,100
Net revenue			$	1,551					$	1,459

Full game net revenue includes full game downloads and packaged goods. Full game downloads includes revenue from digital sales of full games on console, PC, and mobile phones and tablets. Packaged goods includes revenue from software that is sold physically. This includes (1) net revenue from game software sold physically through traditional channels such as brick and mortar retailers, and (2) software licensing revenue from third parties (for example, makers of console platforms, personal computers or computer accessories) who include certain of our full games for sale with their products (for example, OEM bundles).

Live services and other net revenue includes revenue from sales of extra content for console, PC and mobile games, licensing revenue from third-party publishing partners who distribute our games digitally, subscriptions, advertising, and non-software licensing.

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Information about our total net revenue by platform for the three months ended June 30, 2021 and 2020 is presented below (in millions):

			Three Months Ended June 30,
			2021						2020
Platform net revenue
Console			$	972					$	932
PC and other			361						325
Mobile			218						202
Net revenue			$	1,551					$	1,459

Information about our operations in North America and internationally for the three months ended June 30, 2021 and 2020 is presented below (in millions):

			Three Months Ended June 30,
			2021						2020
Net revenue from unaffiliated customers
North America			$	682					$	627
International			869						832
Net revenue			$	1,551					$	1,459

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