Electronic Arts 2014 Annual Report Download - page 66

About Non-GAAP Financial Measures
To supplement the Company’s consolidated financial statements presented in accordance with GAAP, we use
certain non-GAAP measures of financial performance. The presentation of these non-GAAP financial measures
is not intended to be considered in isolation from, as a substitute for, or superior to, the financial information
prepared and presented in accordance with GAAP, and may be different from non-GAAP financial measures
used by other companies. In addition, these non-GAAP measures have limitations in that they do not reflect all of
the amounts associated with the Company’s results of operations as determined in accordance with GAAP. These
non-GAAP financial measures exclude the following items, as applicable in a given reporting period, from the
Company’s consolidated statements of operations:
• Acquisition-related expenses
• Amortization of debt discount
• Change in deferred net revenue (online-enabled games)
• College football settlement expenses
• Restructuring charges
• Stock-based compensation
• Income tax adjustments
We believe that these non-GAAP financial measures, when taken together with the corresponding GAAP
financial measures, provide meaningful supplemental information regarding the Company’s performance by
excluding certain items that may not be indicative of the Company’s core business, operating results or future
outlook. Our management uses, and believes that investors benefit from referring to, these non-GAAP financial
measures in assessing the Company’s operating results both as a consolidated entity and at the business unit
level, as well as when planning, forecasting and analyzing future periods. These non-GAAP financial measures
also facilitate comparisons of the Company’s performance to prior periods.
In addition to the reasons stated above, which are generally applicable to each of the items we exclude from our
non-GAAP financial measures, we believe it is appropriate to exclude certain items for the following reasons:
Acquisition-Related Expenses. GAAP requires expenses to be recognized for various types of events associated
with a business acquisition. These events include, expensing acquired intangible assets, including acquired in-
process technology, post-closing adjustments associated with changes in the estimated amount of contingent
consideration to be paid in an acquisition, and the impairment of accounting goodwill created as a result of an
acquisition when future events indicate there has been a decline in its value. When analyzing the operating
performance of an acquired entity, Electronic Arts’ management focuses on the total return provided by the
investment (i.e., operating profit generated from the acquired entity as compared to the purchase price paid
including the final amounts paid for contingent consideration) without taking into consideration any allocations
made for accounting purposes. When analyzing the operating performance of an acquisition in subsequent
periods, the Company’s management excludes the GAAP impact of any adjustments to the fair value of these
acquisition-related balances to its financial results.
Amortization of Debt Discount on the Convertible Senior Notes. Under GAAP, certain convertible debt
instruments that may be settled in cash on conversion are required to be separately accounted for as liability
(debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-
convertible debt borrowing rate. Accordingly, for GAAP purposes, we are required to amortize as a debt discount
an amount equal to the fair value of the conversion option as interest expense on the Company’s $632.5 million
of 0.75% convertible senior notes that were issued in a private placement in July 2011 over the term of the notes.
Electronic Arts’ management excludes the effect of this amortization in its non-GAAP financial measures.
Change in Deferred Net Revenue (Online-enabled Games). The majority of our software games can be
connected to the Internet whereby a consumer may be able to download unspecified content or updates on a
when-and-if-available basis (“unspecified updates”) for use with the original game software. In addition, we may
also offer an online matchmaking service that permits consumers to play against each other via the Internet.
GAAP requires us to account for the consumer’s right to receive unspecified updates or the matchmaking service
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