Electronic Arts 2006 Annual Report Download - page 95

necessary to voluntarily recall a product, and/or scrap defective inventory, which could signiÑcantly harm
our business and operating results.
If we do not continue to attract and retain key personnel, we will be unable to eÅectively conduct our
business. In addition, compensation-related changes in accounting requirements, as well as evolving legal
and operational factors, could have a signiÑcant impact on our expenses and operating results.
The market for technical, creative, marketing and other personnel essential to the development and
marketing of our products and management of our businesses is extremely competitive. Our leading
position within the interactive entertainment industry makes us a prime target for recruiting of executives
and key creative talent. If we cannot successfully recruit and retain the employees we need, or replace key
employees following their departure, our ability to develop and manage our businesses will be impaired.
We annually review and evaluate with the Compensation Committee of our Board of Directors the
compensation and beneÑts that we oÅer our employees to ensure that we are able to attract and retain our
talent. Within our regular review, we have considered recent changes in the accounting treatment of stock
options, the competitive market for technical, creative, marketing and other personnel, and the evolving
nature of job functions within our studios, marketing organizations and other areas of the business. Any
changes we make to our compensation programs could result in increased expenses and have a signiÑcant
impact on our operating results.
Our platform licensors are our chief competitors and frequently control the manufacturing of and/or
access to our video game products. If they do not approve our products, we will be unable to ship to our
customers.
Our agreements with hardware licensors (such as Sony for the PlayStation 2, Microsoft for the Xbox and
Nintendo for the Nintendo GameCube) typically give signiÑcant control to the licensor over the approval
and manufacturing of our products, which could, in certain circumstances, leave us unable to get our
products approved, manufactured and shipped to customers. These hardware licensors are also our chief
competitors. In most events, control of the approval and manufacturing process by the platform licensors
increases both our manufacturing lead times and costs as compared to those we can achieve independently.
While we believe that our relationships with our hardware licensors are currently good, the potential for
these licensors to delay or refuse to approve or manufacture our products exists. Such occurrences would
harm our business and our Ñnancial performance.
We also require compatibility code and the consent of Microsoft and Sony in order to include online
capabilities in our products for their respective platforms. As online capabilities for video game platforms
Annual Report
become more signiÑcant, Microsoft and Sony could restrict our ability to provide online capabilities for our
console platform products. If Microsoft or Sony refused to approve our products with online capabilities or
signiÑcantly impacted the Ñnancial terms on which these services are oÅered to our customers, our
business could be harmed.
Our international net revenue is subject to currency Öuctuations.
For the Ñscal year ended March 31, 2006, international net revenue comprised 46 percent of our total net
revenue. We expect foreign sales to continue to account for a signiÑcant portion of our total net revenue.
Such sales may be subject to unexpected regulatory requirements, tariÅs and other barriers. Additionally,
foreign sales are primarily made in local currencies, which may Öuctuate against the U.S. dollar. While we
utilize foreign exchange forward contracts to mitigate some foreign currency risk associated with foreign
currency denominated assets and liabilities (primarily certain intercompany receivables and payables) and,
from time to time, foreign currency option contracts to hedge foreign currency forecasted transactions
(primarily related to a portion of the revenue and expenses denominated in foreign currency generated by
our operational subsidiaries), our results of operations, including our reported net revenue and net income,
and Ñnancial condition would be adversely aÅected by unfavorable foreign currency Öuctuations,
particularly the Euro, British pound sterling and Canadian dollar.
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