Electronic Arts 2007 Annual Report Download - page 105

companies, businesses, intellectual properties, and other assets, and (2) investments in new interactive
entertainment businesses, such as online and mobile games. In May 2007, we announced that we entered into
a licensing agreement with and expect to make a strategic equity investment in The9 Limited, a leading online
game operator in China, on or around May 29, 2007. The licensing agreement gives The9 exclusive publishing
rights for EA SPORTS FIFA Online in mainland China. In April 2007, we expanded our commercial
agreements with and made strategic equity investments in Neowiz Corporation and its online gaming
subsidiary, Neowiz Games. Based in Korea, Neowiz is an online media and gaming company with which we
partnered in 2006 to launch EA Sports FIFA Online in Korea. In October 2006, the remaining outstanding
shares of Digital Illusions C.E. (“DICE”) were purchased, thereby completing the acquisition of the remaining
minority interest of DICE. In July 2006, we acquired Mythic as part of our efforts to accelerate our growth in
the massively multiplayer online role-playing market. In fiscal 2007, we also acquired SingShot Media, a
San Francisco-based online karaoke community, as well as substantially all of the assets of Headgate Studios,
a Utah-based developer with which we had partnered since 2000 to develop certain EA franchises, and
Phenomic Game Development, a developer of Real Time Strategy games based in Germany. In fiscal 2006, we
acquired JAMDAT as part of our efforts to accelerate our growth in mobile gaming.
International Expansion. We expect international sales to remain a fundamental part of our business. As part
of our international expansion strategy, we may seek to partner with established local companies through
acquisitions, joint ventures, minority investments or other similar arrangements. We are planning to expand
our development and business activities internationally. We believe that in order to succeed internationally, it
is important to locally develop content that is specifically directed toward local cultures and consumers. As
such, we expect to continue to devote resources to hiring local development talent and expanding our
infrastructure.
Sales of “Hit” Titles. Sales of “hit” titles, several of which were top sellers in a number of countries,
contributed significantly to our net revenue in fiscal 2007. Our top-selling titles across all platforms worldwide
during the year ended March 31, 2007 were Madden NFL 07,Need for Speed Carbon,FIFA 07,The Sims 2
Pets and NCAA Football 07. Hit titles are important to our financial performance because they benefit 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.
Increasing Licensing Costs. We generate a significant portion of our net revenue and operating income from
games based on licensed content, such as FIFA Soccer. We have recently entered into new licenses and
renewed older licenses, some of which may contain higher royalty rates or guarantees than similar license
agreements we have entered into in the past. We believe these licenses, and the product franchises they
support, will continue to be important to our future operations, but the higher costs of these licenses will
negatively impact our gross margins.
Foreign Currency Exchange Impact. Net revenue from international sales accounted for approximately
46 percent of our total net revenue during both fiscal 2007 and 2006. Our international net revenue was
primarily driven by sales in Europe and, to a much lesser extent, in Asia. Year-over-year, foreign exchange
rates had a favorable impact on our net revenue of $53 million, or 2 percent, for the year ended March 31,
2007.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these Consolidated Financial Statements requires manage-
ment 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 judgment and estimates of matters that are inherently uncertain and unknown. As a result, actual results
may differ materially from our estimates.
Annual Report
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