Electronic Arts 2004 Annual Report Download - page 36

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Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
The following overview is a top-level discussion of our operating results as well as the trends and drivers of our
business. Management believes that an understanding of these trends and drivers is important in order to
understand our results for Ñscal 2004, 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-K, including in ""Business'', the remainder of ""Management's Discussion and Analysis of
Financial Condition and Results of Operations'', ""Risk Factors'' or the consolidated Ñnancial statements and
related notes.
About Electronic Arts
We develop, market, publish and distribute interactive software games that are playable by consumers on
home videogame machines (such as the Sony PlayStation 2@, Microsoft Xbox@ and Nintendo GameCube
TM
consoles), personal computers, hand-held game machines (such as the Game Boy@ Advance) and online,
over the Internet and other proprietary online networks. Many of our games are based on content that we
license from others (e.g., Madden NFL Football, Harry Potter
TM
and FIFA Soccer), and many of our games
are based on our own wholly-owned intellectual property (e.g., The Sims
TM
, Medal of Honor
TM
). Our goal is
to develop titles which appeal to the mass markets and, as a result, we develop, market, publish and distribute
our games in over 100 countries, often translating and localizing them for sale in non-English speaking
countries. Our goal is to create software game ""franchises'' that allow us to publish new titles on a recurring
basis that are based on the same property. Examples of this are the annual iterations of our sports-based
franchises (e.g., NCAA Football and FIFA Soccer), titles based on long-lived movie properties (e.g., James
Bond
TM
and Harry Potter) and wholly-owned properties that can be successfully sequeled (e.g., The Sims
and Medal of Honor).
Overview of Fiscal 2004 Financial Results
Net revenue for Ñscal 2004 was $2,957.1 million, up 19.1 percent as compared with $2,482.2 million for Ñscal
2003. We had 27 platinum titles (over one million units sold) in Ñscal 2004 as compared to 22 platinum titles
in 2003. In Ñscal 2004, six franchises sold more than Ñve million units: The Sims, Need for Speed
TM
, Medal
of Honor, FIFA Soccer, The Lord of the Rings
TM
and Madden NFL Football.
Net income for Ñscal 2004 was $577.3 million, an 82.1 percent increase over Ñscal 2003. Diluted earnings per
share increased 73.1 percent to $1.87 as compared with $1.08 for Ñscal 2003. The growth in earnings was
primarily driven by higher sales volume and increased gross margin.
Operating cash Öow was $669.3 million as compared with $714.5 million for Ñscal 2003. The decline was
primarily a result of the timing of sales during the fourth quarter.
Management's Overview of Historical and Prospective Business Trends
Sales of ""Hit'' Titles. During Ñscal 2004, sales of a number of ""hit'' titles contributed to our revenue growth,
several of which were top sellers across a number of international markets. Our top-Ñve-selling titles across all
platforms worldwide in Ñscal 2004 were Need for Speed
TM
Underground, Madden NFL 2004, The Lord of the
Rings
TM
; The Return of the King
TM
, Medal of Honor
TM
Rising Sun and FIFA Soccer 2004. Hit titles are
important to our Ñnancial performance because they beneÑt from overall economies of scale. We have
developed, and it is our objective to continue to develop, many of our hit titles to become franchise titles that
can be regularly iterated.
Increased Console Installed Base. As consumers purchase the current generation of consoles, either as Ñrst
time buyers or by upgrading from a previous generation, the console installed base increases. As the installed
base for a particular console increases, we are generally able to increase our unit volume; however, as
consumers anticipate the next generation of consoles, unit volumes often decrease. In the U.S. and Europe,
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