Electronic Arts 2015 Annual Report Download - page 67

Proxy Statement
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
for no additional fee as a “bundled” sale, or multiple-element arrangement. Electronic Arts is not able to
objectively determine the fair value of these unspecified updates or online service included in certain of its
online-enabled games. As a result, the Company recognizes the revenue from the sale of these online-enabled
games on a straight-line basis over the estimated offering period. Electronic Arts’ management excludes the
impact of the change in deferred net revenue related to online-enabled games in its non-GAAP financial
measures for the reasons stated above and also to facilitate an understanding of our operations because all related
costs of revenue are expensed as incurred instead of deferred and recognized ratably.
College Football Settlement Expenses. During fiscal 2014, Electronic Arts recognized a $48 million charge for
expected litigation settlement and license expenses related to our college football business. This expense is
excluded from our non-GAAP financial measures.
Income Tax Adjustments. The Company uses a fixed, long-term projected tax rate internally to evaluate its
operating performance, to forecast, plan and analyze future periods, and to assess the performance of its
management team. Prior to April 1, 2013, a 28 percent tax rate was applied, and from April 1, 2013 until
March 31, 2015, a 25 percent tax rate was applied to its non-GAAP financial results. Based on a re-evaluation of
its fixed, long-term projected tax rate, beginning in fiscal year 2016, the Company will apply a tax rate of 22
percent to its non-GAAP financial results.
Losses on Licensed Intellectual Property Commitment. During the first quarter of fiscal 2015, we terminated
our right to utilize certain intellectual property that we had previously licensed and we incurred a loss of $122
million on the corresponding license commitment. This expense is excluded from our non-GAAP financial
measures.
Shares from Convertible Bond Hedge. In July 2011, we issued convertible senior notes that mature in July 2016
(the “Notes”) with an initial conversion price of approximately $31.74 per share. When the quarterly average
trading price of our common stock is above $31.74 per share, the potential conversion of the Notes has a dilutive
impact on our earnings per share. At the time the Notes were issued, we entered into convertible note hedge
transactions (the “Convertible Bond Hedge”) to offset the dilutive effect of the Notes. We include the anti-
dilutive effect of the Convertible Bond Hedge in determining our non-GAAP dilutive shares.
Stock-Based Compensation. When evaluating the performance of its individual business units, the Company
does not consider stock-based compensation charges. Likewise, the Company’s management teams exclude
stock-based compensation expense from their short and long-term operating plans. In contrast, the Company’s
management teams are held accountable for cash-based compensation and such amounts are included in their
operating plans. Further, when considering the impact of equity award grants, Electronic Arts places a greater
emphasis on overall stockholder dilution rather than the accounting charges associated with such grants.
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