NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Electronic Arts is a global leader in digital interactive entertainment. We develop, market, publish and deliver games, content and services that can be experienced on game consoles, PCs, mobile phones and tablets. At our core is a portfolio of intellectual property from which we create innovative games and experiences that deliver high-quality entertainment and drive engagement across our network of hundreds of millions of unique active accounts. Our portfolio includes brands that we either wholly own (such as Apex Legends, Battlefield, and The Sims) or license from others (such as Madden NFL, Star Wars, and the 300+ licenses within our global football ecosystem). Through our live services offerings, we offer our players high-quality experiences designed to provide value to players, and extend and enhance gameplay. These live services include extra content, subscription offerings and other revenue generated in addition to the sale of our base games. We are focusing on building games and experiences that grow the global online communities around our key franchises; reaching more players through connecting interactive storytelling to key intellectual property; and building re-occurring revenue from our annualized sports franchises, our console, PC and mobile catalog titles, and our live services.
Consolidation
The accompanying Consolidated Financial Statements include the accounts of Electronic Arts Inc. and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
Fiscal Year
Our fiscal year is reported on a 52- or 53-week period that ends on the Saturday nearest March 31. Our results of operations for the fiscal year ended March 31, 2023 contained 52 weeks and ended on April 1, 2023. Our results of operations for the fiscal years ended March 31, 2022 and 2021 contained 52 and 53 weeks and ended on April 2, 2022 and April 3, 2021, respectively. For simplicity of disclosure, all fiscal periods are referred to as ending on a calendar month end.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and the accompanying notes. Such estimates include offering periods for deferred net revenue, sales returns and allowances, provisions for doubtful accounts, accrued liabilities, relative stand-alone selling price for identified performance obligations in our revenue transactions, losses on royalty commitments, estimates regarding the recoverability of prepaid royalties, inventories, long-lived assets, discount rates used in the measurement and recognition of lease liabilities, assets acquired and liabilities assumed in business combinations, certain estimates related to the measurement and recognition of costs resulting from our stock-based payment awards, unrecognized tax benefits, deferred income tax assets and associated valuation allowances, as well as estimates used in our goodwill, intangibles and short-term investment impairment tests. These estimates require us to make judgments, involve analysis of historical and future trends, can require extended periods of time to resolve, and are subject to change from period to period. In all cases, actual results could differ materially from our estimates.
Recently Adopted Accounting Standards
In October 2021, the FASB issued ASU 2021-08, Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805). The amendments in this update require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. For business combinations prior to fiscal year 2023, we recorded deferred net revenue related to contracts from acquired entities at fair value on the date of acquisition. As a result, we did not recognize certain revenues related to these contracts that the acquired entities would have otherwise recorded as an independent entity. We adopted ASU 2021-08 in the fourth quarter of fiscal year 2023, and the amendments apply retrospectively to all business combinations with an acquisition date in the fiscal year of adoption. The adoption did not have an impact on our Consolidated Financial Statements and related disclosures, since we did not have any acquisitions in fiscal year 2023.
In November 2021, the FASB issued ASU 2021-10, Disclosures by Business Entities about Government Assistance (Topic 832). The amendments in this update establish Topic 832 and require additional disclosures regarding government grants and money contributions when entities accounted for transactions with a government by analogizing to a grant or contribution accounting model. We adopted ASU 2021-10 in the first quarter of fiscal year 2023 and elected to apply the amendments prospectively to all transactions within the scope of the amendment that are reflected in the financial statements at the date of adoption. The adoption did not have a material impact on our Consolidated Financial Statements and related disclosures.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash, Cash Equivalents, and Short-Term Investments
Cash equivalents consist of highly liquid investments with insignificant interest rate risk and original or remaining maturities of three months or less at the time of purchase.
Short-term investments consist of debt securities with original or remaining maturities of greater than three months at the time of purchase and less than a year, and are accounted for as available-for-sale securities and are recorded at fair value. Cash, cash equivalents and short-term investments are available for use in current operations or other activities such as capital expenditures, business combinations and share repurchases.
Unrealized gains and losses on our short-term investments are recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity, net of tax, until either (1) the security is sold, (2) the security has matured, (3) we determine that the fair value of the security has declined below its adjusted cost basis and the decline is due to an expected credit loss, or (4) we intend to, or more likely than not would be required to, sell a security in an unrealized loss position before the recovery of its amortized cost basis. Realized gains and losses on our short-term investments are calculated based on the specific identification method and are reclassified from accumulated other comprehensive income (loss) to interest and other income (expense), net. Determining whether a decline in fair value is due to an expected credit loss requires management judgment based on the specific facts and circumstances of each security. The ultimate value realized on these securities is subject to market price volatility until they are sold.
Our short-term investments are evaluated for allowances and impairment quarterly. For investments in an unrealized loss position, we consider various factors in determining whether we should recognize an allowance for expected credit losses or an impairment charge, including the credit quality of the issuer, changes to the rating of the security by rating agencies, the extent to which fair value is less than amortized cost, reason for the decline in value and potential recovery period, the financial condition and near-term prospects of the investees, our intent to sell and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value, and any contractual terms impacting the prepayment or settlement process, among other factors. We recognize an allowance for credit losses, up to the amount of unrealized loss when appropriate, and write down the amortized cost basis of the investment if we intend to, or it is more likely than not we will be required to, sell the investment before the recovery of its amortized cost basis. Allowances for credit losses and write-downs are recognized in our Consolidated Statements of Operations, and unrealized losses not related to credit losses are recognized in other comprehensive income (loss). Based on our evaluation, we did not recognize an allowance for credit losses, nor did we recognize any impairments, as of March 31, 2023 and 2022.
Property and Equipment, Net
Property and equipment, net, are stated at cost. Depreciation is calculated using the straight-line method over the following useful lives:
| | | | | | | | |
| Buildings | | 20 to 25 years |
| Computer equipment and software | | 2 to 6 years |
| Equipment, furniture and fixtures, and other | | 3 to 5 years |
| Leasehold improvements | | Lesser of the lease term or the estimated useful lives of the improvements, generally 1 to 15 years |
We capitalize costs associated with internal-use software development once a project has reached the application development stage. Such capitalized costs include external direct costs utilized in developing or obtaining the software, and payroll and payroll-related expenses for employees who are directly associated with the development of the software. Capitalization of such costs begins when the preliminary project stage is complete and ceases at the point in which the project is substantially complete and is ready for its intended purpose. Once internal-use software is ready for its intended use, the assets are depreciated on a straight-line basis over each asset’s estimated useful life, which is generally three years. We also capitalize costs associated with the purchase of possessable internal-use software licenses. The net book value of capitalized costs associated with internal-use software was $90 million and $86 million as of March 31, 2023 and 2022, respectively.
Acquisition-Related Intangibles and Other Long-Lived Assets
We recognize acquisition-related intangible assets, such as acquired developed and core technology, in connection with business combinations. We amortize the cost of acquisition-related intangible assets that have finite useful lives generally on a straight-line basis over the lesser of their estimated useful lives or the agreement terms, currently from two to seven years. We evaluate acquisition-related intangibles and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset group. This includes assumptions about future prospects for the business that the asset relates to and typically involves computations of the estimated future cash flows to be generated by these businesses. Based on these judgments and assumptions, we determine whether we need to take an impairment charge to reduce the value of the asset stated on our Consolidated Balance Sheets to reflect its estimated fair value. When we consider such assets to be impaired, the amount of impairment we recognize is measured by the amount by which the carrying amount of the asset exceeds its fair value.
Goodwill Impairment
In assessing impairment on our goodwill, we first analyze qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a goodwill impairment test. The qualitative factors we assess include long-term prospects of our performance, share price trends and market capitalization, and Company specific events. If we conclude it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, we do not need to perform an impairment test. If based on that assessment, we believe it is more likely than not that the fair value of the reporting unit is less than its carrying value we will measure goodwill for impairment by applying fair value-based tests at the reporting unit level. Reporting units are determined by the components of operating segments that constitute a business for which (1) discrete financial information is available, (2) segment management regularly reviews the operating results of that component, and (3) whether the component has dissimilar economic characteristics to other components. As of March 31, 2023, we have only one reportable segment, which represents our only operating segment.
Revenue Recognition
We derive revenue principally from sales of our games, and related extra content and services that can be experienced on game consoles, PCs, mobile phones and tablets. Our product and service offerings include, but are not limited to, the following:
•full games with both online and offline functionality (“Games with Services”), which generally includes (1) the initial game delivered digitally or via physical disc at the time of sale and typically provide access to offline core game content (“software license”); (2) updates on a when-and-if-available basis, such as software patches or updates, and/or additional free content to be delivered in the future (“future update rights”); and (3) a hosted connection for online playability (“online hosting”);
•full games with online-only functionality which require an Internet connection to access all gameplay and functionality (“Online-Hosted Service Games”);
•extra content related to Games with Services and Online-Hosted Service Games which provides access to additional in-game content;
•subscriptions, such as EA Play and EA Play Pro, that generally offer access to a selection of full games, in-game content, online services and other benefits typically for a recurring monthly or annual fee; and
•licensing to third parties to distribute and host our games and content.
We evaluate and recognize revenue by:
•identifying the contract(s) with the customer;
•identifying the performance obligations in the contract;
•determining the transaction price;
•allocating the transaction price to performance obligations in the contract; and
•recognizing revenue as each performance obligation is satisfied through the transfer of a promised good or service to a customer (i.e., “transfer of control”).
Certain of our full game and/or extra content are sold to resellers with a contingency that the full game and/or extra content cannot be resold prior to a specific date (“Street Date Contingency”). We recognize revenue for transactions that have a Street Date Contingency when the Street Date Contingency is removed and the full game and/or extra content can be resold by the reseller. For digital full game and/or extra content downloads sold to customers, we recognize revenue when the full game and/or extra content is made available for download to the customer.
Online-Enabled Games
Games with Services. Our sales of Games with Services are evaluated to determine whether the software license, future update rights and the online hosting are distinct and separable. Sales of Games with Services are generally determined to have three distinct performance obligations: software license, future update rights, and the online hosting.
Since we do not sell the performance obligations on a stand-alone basis, we consider market conditions and other observable inputs to estimate the stand-alone selling price for each performance obligation. For Games with Services, generally 75 percent of the sales price is allocated to the software license performance obligation and recognized at a point in time when control of the license has been transferred to the customer. The remaining 25 percent is allocated to the future update rights and the online hosting performance obligations and recognized ratably as the service is provided (over the Estimated Offering Period).
Online-Hosted Service Games. Sales of our Online-Hosted Service Games are determined to have one distinct performance obligation: the online hosting. We recognize revenue from these arrangements as the service is provided.
Extra Content. Revenue received from sales of downloadable content are derived primarily from the sale of virtual currencies and digital in-game content that are designed to extend and enhance players’ game experience. Sales of extra content are accounted for in a manner consistent with the treatment for our Games with Services and Online-Hosted Service Games as discussed above, depending upon whether or not the extra content has offline functionality. That is, if the extra content has offline functionality, then the extra content is accounted for similarly to Games with Services (generally determined to have three distinct performance obligations: software license, future update rights, and the online hosting). If the extra content does not have offline functionality, then the extra content is determined to have one distinct performance obligation: the online-hosted service.
Subscriptions
Sales of our subscriptions are deemed to be one performance obligation and we recognize revenue from these arrangements ratably over the subscription term as the performance obligation is satisfied.
Licensing Revenue
We utilize third-party licensees to distribute and host our games and content in accordance with license agreements, for which the licensees typically pay us a fixed minimum guarantee and/or sales-based royalties. These arrangements typically include multiple performance obligations, such as a time-based license of software and future update rights. We recognize as revenue a portion of the minimum guarantee when we transfer control of the license of software (generally upon commercial launch) and the remaining portion ratably over the contractual term in which we provide the licensee with future update rights. Any sales-based royalties are generally recognized as the related sales occur by the licensee.
Significant Judgments around Revenue Arrangements
Identifying performance obligations. Performance obligations promised in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct, (i.e., the customer can benefit from the goods or services either on its own or together with other resources that are readily available), and are distinct in the context of the contract (i.e., it is separately identifiable from other goods or services in the contract). To the extent a contract includes multiple promises, we must apply judgment to determine whether those promises are separate and distinct performance obligations. If these criteria are not met, the promises are accounted for as a combined performance obligation.
Determining the transaction price. The transaction price is determined based on the consideration that we will be entitled to receive in exchange for transferring our goods and services to the customer. Determining the transaction price often requires judgment, based on an assessment of contractual terms and business practices. It further includes review of variable consideration such as discounts, sales returns, price protection, and rebates, which is estimated at the time of the transaction. In addition, the transaction price does not include an estimate of the variable consideration related to sales-based royalties. Sales-based royalties are recognized as the sales occur.
Allocating the transaction price. Allocating the transaction price requires that we determine an estimate of the relative stand-alone selling price for each distinct performance obligation. Determining the relative stand-alone selling price is inherently subjective, especially in situations where we do not sell the performance obligation on a stand-alone basis (which occurs in the majority of our transactions). In those situations, we determine the relative stand-alone selling price based on various observable inputs using all information that is reasonably available. Examples of observable inputs and information include: historical internal pricing data, cost plus margin analysis, pre-release versus post-release costs, and pricing data from competitors to the extent the data is available. The results of our analysis resulted in a specific percentage of the transaction price being allocated to each performance obligation.
Determining the Estimated Offering Period. The offering period is the period in which we offer to provide the future update rights and/or online hosting for the game and related extra content sold. Because the offering period is not an explicitly defined period, we must make an estimate of the offering period for the service-related performance obligations (i.e., future update rights and online hosting). Determining the Estimated Offering Period is inherently subjective and is subject to regular revision. Generally, we consider the average period of time customers are online when estimating the offering period. We also consider the estimated period of time between the date a game unit is sold to a reseller and the date the reseller sells the game unit to the customer (i.e., time in channel). Based on these two factors, we then consider the method of distribution. For example, games and extra content sold at retail would have a composite offering period equal to the online gameplay period plus time in channel as opposed to digitally-distributed games and extra content which are delivered immediately via digital download and therefore, the offering period is estimated to be only the online gameplay period.
Additionally, we consider results from prior analyses, known and expected online gameplay trends, as well as disclosed service periods for competitors’ games in determining the Estimated Offering Period for future sales. We believe this provides a reasonable depiction of the transfer of future update rights and online hosting to our customers, as it is the best representation of the time period during which our games and extra content are experienced. We recognize revenue for future update rights and online hosting performance obligations ratably on a straight-line basis over this period as there is a consistent pattern of delivery for these performance obligations. Revenue for service-related performance obligations for games and extra content sold through retail is recognized over an estimated ten-month period beginning in the month of sale, revenue for service-related performance obligations for digitally-distributed games and extra content is recognized over an estimated eight-month period beginning in the month of sale.
During the three months ended September 30, 2021, we completed our annual evaluation of the Estimated Offering Period and noted consumers are playing certain of our Online Hosted Service Games, such as PC and console free-to-play games, for longer periods of time than in previous years. This extended consumer gameplay is due to players engaging with services we provide that are designed to enhance and extend gameplay, and as such, concluded that the Estimated Offering Period for such games should be lengthened. As a result, for all new sales after July 1, 2021, the revenue that we recognize for service-related performance obligations related to our PC and console free-to-play games is recognized generally over a twelve-month period. During the fiscal year ended March 31, 2023, this increase to our Estimated Offering Period resulted in increases in net revenue of $103 million, net income of $79 million, and diluted earnings per share of $0.28. During the fiscal year ended March 31, 2022, this increase to our Estimated Offering Period resulted in decreases in net revenue of $131 million, net income of $100 million, and diluted earnings per share of $0.35.
Deferred Net Revenue
Because the majority of our sales transactions include future update rights and online hosting performance obligations, which are subject to deferral and recognized over the Estimated Offering Period, our deferred net revenue balance is material. This balance increases from period to period by revenue being deferred for current sales with these service obligations and is reduced by the recognition of revenue from prior sales that were previously deferred. Generally, revenue is recognized as the services are provided.
Principal Agent Considerations
We evaluate sales to end customers of our full games and related content via third-party storefronts, including digital storefronts such as Microsoft’s Xbox Store, Sony’s PlayStation Store, Apple App Store, and Google Play Store, in order to determine whether or not we are acting as the principal in the sale to the end customer, which we consider in determining if revenue should be reported gross or net of fees retained by the third-party storefront. An entity is the principal if it controls a good or service before it is transferred to the end customer. Key indicators that we evaluate in determining gross versus net treatment include but are not limited to the following:
•the underlying contract terms and conditions between the various parties to the transaction;
•which party is primarily responsible for fulfilling the promise to provide the specified good or service to the end customer;
•which party has discretion in establishing the price for the specified good or service; and
•which party has inventory risk before the specified good or service has been transferred to the end customer.
Based on an evaluation of the above indicators, except as discussed below, we have determined that generally the third party is considered the principal to end customers for the sale of our full games and related content. We therefore report revenue related to these arrangements net of the fees retained by the storefront. However, for sales arrangements via Apple App Store and Google Play Store, EA is considered the principal to the end customer and thus, we report revenue on a gross basis and mobile platform fees are reported within cost of revenue.
Payment Terms
Substantially all of our transactions have payment terms, whether customary or on an extended basis, of less than one year; therefore, we generally do not adjust the transaction price for the effects of any potential financing components that may exist.
Sales and Value-Added Taxes
Revenue is recorded net of taxes assessed by governmental authorities that are imposed at the time of the specific revenue-producing transaction between us and our customer, such as sales and value-added taxes.
Sales Returns and Price Protection Reserves
Sales returns and price protection are considered variable consideration under ASC 606. We reduce revenue for estimated future returns and price protection which may occur with our distributors and retailers (“channel partners”). Price protection represents our practice to provide our channel partners with a credit allowance to lower their wholesale price on a particular game unit that they have not resold to customers. The amount of the price protection for permanent markdowns is the difference between the old wholesale price and the new reduced wholesale price. Credits are also given for short-term promotions that temporarily reduce the wholesale price. In certain countries we also have a practice for allowing channel partners to return older products in the channel in exchange for a credit allowance.
When evaluating the adequacy of sales returns and price protection reserves, we analyze the following: historical credit allowances, current sell-through of our channel partners’ inventory of our products, current trends in retail and the video game industry, changes in customer demand, acceptance of our products, and other related factors. In addition, we monitor the volume of sales to our channel partners and their inventories, as substantial overstocking in the distribution channel could result in high returns or higher price protection in subsequent periods.
Taxes Collected from Customers and Remitted to Governmental Authorities
Taxes assessed by a government authority that are both imposed on and concurrent with specific revenue transactions between us and our customers are presented on a net basis in our Consolidated Statements of Operations.
Concentration of Credit Risk and Significant Customers
We extend credit to various customers. Collection of trade receivables may be affected by changes in economic or other industry conditions and may, accordingly, impact our overall credit risk. Although we generally do not require collateral, we perform ongoing credit evaluations of our customers and maintain reserves for potential credit losses. Invoices are aged based on contractual terms with our customers. The provision for doubtful accounts is recorded as a charge to general and administrative expense when a potential loss is identified. Losses are written off against the allowance when the receivable is determined to be uncollectible. At March 31, 2023, we had two customers who accounted for approximately 32 percent and 30 percent of our consolidated gross receivables, respectively. At March 31, 2022, we had two customers who accounted for approximately 32 percent and 29 percent of our consolidated gross receivables, respectively.
A majority of our sales are made via digital resellers, channel and platform partners. During the fiscal years 2023, 2022, and 2021, approximately 81 percent, 77 percent, and 78 percent, respectively, of our net revenue was derived from our top ten customers and/or platform partners.
Currently, a majority of our revenue is derived through sales of products and services playable on hardware consoles from Sony and Microsoft. For the fiscal years ended March 31, 2023, 2022, and 2021, our net revenue for products and services on Sony’s PlayStation 3, 4 and 5, and Microsoft’s Xbox 360, One and Series X consoles (combined across all six platforms) was approximately 58 percent, 60 percent, and 64 percent, respectively. These platform partners have significant influence over the products and services that we offer on their platforms.
Short-term investments are placed with high quality financial institutions or in short-duration, investment-grade securities. We limit the amount of credit exposure in any one financial institution or type of investment instrument.
Royalties and Licenses
Royalty-based obligations with content licensors and distribution affiliates are either paid in advance and capitalized as prepaid royalties or are accrued as incurred and subsequently paid. These royalty-based obligations are generally expensed to cost of revenue at the greater of the contractual rate or an effective royalty rate based on the total projected net revenue for contracts with guaranteed minimums. Prepayments made to thinly capitalized independent software developers and co-publishing affiliates are generally made in connection with the development of a particular product, and therefore, we are subject to development risk prior to the release of the product. Accordingly, payments that are due prior to completion of a product are generally expensed to research and development over the development period as the services are incurred. Payments due after completion of the product (primarily royalty-based in nature) are generally expensed as cost of revenue.
Our contracts with some licensors include minimum guaranteed royalty payments, which are initially recorded as an asset and as a liability at the contractual amount when no performance remains with the licensor. When performance remains with the licensor, we record guarantee payments as an asset when actually paid and as a liability when incurred, rather than recording the asset and liability upon execution of the contract.
Each quarter, we also evaluate the expected future realization of our royalty-based assets, as well as any unrecognized minimum commitments not yet paid to determine amounts we deem unlikely to be realized through future revenue. Any impairments or losses determined before the launch of a product are generally charged to research and development expense. Impairments or losses determined post-launch are charged to cost of revenue. We evaluate long-lived royalty-based assets for impairment using undiscounted cash flows when impairment indicators exist. If an impairment exists, then the related assets are written down to fair value. Unrecognized minimum royalty-based commitments are accounted for as executory contracts, and therefore, any losses on these commitments are recognized when the underlying intellectual property is abandoned (i.e., cease use) or the contractual rights to use the intellectual property are terminated.
Advertising Costs
We generally expense advertising costs as incurred, except for production costs associated with media campaigns, which are recognized as prepaid assets (to the extent paid in advance) and expensed at the first run of the advertisement. Cooperative advertising costs are recognized when incurred and are classified as marketing and sales expense if there is a separate identifiable benefit for which we can reasonably estimate the fair value of the benefit identified. Otherwise, they are classified as a reduction of revenue and are generally accrued when revenue is recognized. We then reimburse the channel partner when qualifying claims are submitted.
We are also reimbursed by our vendors for certain advertising costs incurred by us that benefit our vendors. Such amounts are recognized as a reduction of marketing and sales expense if the advertising (1) is specific to the vendor, (2) represents an identifiable benefit to us, and (3) represents an incremental cost to us. Otherwise, vendor reimbursements are recognized as a reduction of the cost incurred with the same vendor. Vendor reimbursements of advertising costs of $37 million, $37 million, and $22 million reduced marketing and sales expense for the fiscal years ended March 31, 2023, 2022, and 2021, respectively. For the fiscal years ended March 31, 2023, 2022, and 2021, advertising expense, net of vendor reimbursements, totaled approximately $348 million, $396 million, and $222 million, respectively.
Software Development Costs
Research and development costs, which consist primarily of software development costs, are expensed as incurred. We are required to capitalize software development costs incurred for computer software to be sold, leased or otherwise marketed after technological feasibility of the software is established or for development costs that have alternative future uses. Under our current practice of developing new games, the technological feasibility of the underlying software is not established until substantially all product development and testing is complete, which generally includes the development of a working model. Software development costs that have been capitalized to date have been insignificant.
Foreign Currency Translation
Generally, the functional currency for our foreign operating subsidiaries is its local currency. Assets and liabilities of foreign operations are translated into U.S. dollars using month-end exchange rates, and revenue and expenses are translated into U.S. dollars using average exchange rates. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income (loss) in stockholders’ equity.
Foreign currency transaction gains and losses are a result of the effect of exchange rate changes on transactions denominated in currencies other than the functional currency. Net gains (losses) on foreign currency transactions of $31 million, $(22) million, and $9 million for the fiscal years ended March 31, 2023, 2022, and 2021, respectively, are included in interest and other income (expense), net, in our Consolidated Statements of Operations. These net gains (losses) on foreign currency transactions are partially offset by net gains (losses) on our foreign currency forward contracts of $(29) million, $21 million, and $(19) million for the fiscal years ended March 31, 2023, 2022, and 2021, respectively. See Note 5 for additional information on our foreign currency forward contracts. Income Taxes
We recognize deferred tax assets and liabilities for both the expected impact of differences between the financial statement amount and the tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards. We do not recognize any deferred taxes related to the U.S. taxes on foreign earnings as we recognize these taxes as a period cost.
Every quarter, we perform a realizability analysis to evaluate whether it is more likely than not that all or a portion of our deferred tax assets will not be realized. Our Swiss deferred tax asset realizability analysis relies upon future Swiss taxable income as the primary source of taxable income but considers all available sources of Swiss income based on the positive and negative evidence. We give more weight to evidence that can be objectively verified. However, estimating future Swiss taxable income requires judgment, specifically related to assumptions about expected growth rates of future Swiss taxable income, which are based primarily on third party market and industry growth data. Actual results that differ materially from those estimates could have a material impact on our valuation allowance assessment. Although objectively verifiable, Swiss interest rates have an impact on the valuation allowance and are based on published Swiss guidance. Any significant changes to such interest rates could result in a material impact to the valuation allowance. Switzerland has a seven-year carryforward period and does not permit the carry back of losses. Actions we take in connection with acquisitions could also impact the utilization of our Swiss deferred tax asset.
Share Repurchases
Shares of our common stock repurchased pursuant to our repurchase program, if any, are retired. The purchase price of such repurchased shares of common stock is recorded as a reduction to additional paid-in capital. If the balance in additional paid-in capital is exhausted, the excess is recorded as a reduction to retained earnings.
Restructuring
We generally recognize employee severance costs when payments are probable and amounts are estimable or when notification occurs, depending on the region in which an employee works. Costs related to non-lease contracts without future benefit or contract termination are recognized at the earlier of the contract termination or the cease-use dates. Other exit-related costs are recognized as incurred.
(3) FAIR VALUE MEASUREMENTS
There are various valuation techniques used to estimate fair value, the primary one being the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability. We measure certain financial and nonfinancial assets and liabilities at fair value on a recurring and nonrecurring basis.
Fair Value Hierarchy
The three levels of inputs that may be used to measure fair value are as follows:
•Level 1. Quoted prices in active markets for identical assets or liabilities.
•Level 2. Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities.
•Level 3. Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of March 31, 2023 and 2022, our assets and liabilities that were measured and recorded at fair value on a recurring basis were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using | | |
| | As of March 31, 2023 | | Quoted Prices in
Active Markets for Identical
Financial Instruments | | Significant
Other
Observable
Inputs | | Significant
Unobservable
Inputs | | |
| | (Level 1) | | (Level 2) | | (Level 3) | | Balance Sheet Classification |
| Assets | | | | | | | | | |
| Bank and time deposits | $ | 56 | | | $ | 56 | | | $ | — | | | $ | — | | | Cash equivalents |
| Money market funds | 956 | | | 956 | | | — | | | — | | | Cash equivalents |
| Available-for-sale securities: | | | | | | | | | |
| Corporate bonds | 113 | | | — | | | 113 | | | — | | | Short-term investments |
| U.S. Treasury securities | 80 | | | 80 | | | — | | | — | | | Short-term investments |
| U.S. agency securities | 28 | | | — | | | 28 | | | — | | | Short-term investments and cash equivalents |
| Commercial paper | 66 | | | — | | | 66 | | | — | | | Short-term investments and cash equivalents |
| Foreign government securities | 11 | | | — | | | 11 | | | — | | | Short-term investments |
| Asset-backed securities | 37 | | | — | | | 37 | | | — | | | Short-term investments |
| Certificates of deposit | 14 | | | — | | | 14 | | | — | | | Short-term investments |
| Foreign currency derivatives | 29 | | | — | | | 29 | | | — | | | Other current assets and other assets |
Deferred compensation plan assets (a) | 23 | | | 23 | | | — | | | — | | | Other assets |
| Total assets at fair value | $ | 1,413 | | | $ | 1,115 | | | $ | 298 | | | $ | — | | | |
| Liabilities | | | | | | | | | |
| Foreign currency derivatives | $ | 65 | | | $ | — | | | $ | 65 | | | $ | — | | | Accrued and other current liabilities and other liabilities |
Deferred compensation plan liabilities (a) | 24 | | | 24 | | | — | | | — | | | Other liabilities |
| Total liabilities at fair value | $ | 89 | | | $ | 24 | | | $ | 65 | | | $ | — | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using | | |
| | As of
March 31,
2022 | | Quoted Prices in
Active Markets for Identical
Financial Instruments | | Significant
Other
Observable
Inputs | | Significant
Unobservable
Inputs | | |
| | (Level 1) | | (Level 2) | | (Level 3) | | Balance Sheet Classification |
| Assets | | | | | | | | | |
| Bank and time deposits | $ | 55 | | | $ | 55 | | | $ | — | | | $ | — | | | Cash equivalents |
| Money market funds | 257 | | | 257 | | | — | | | — | | | Cash equivalents |
| Available-for-sale securities: | | | | | | | | | |
| Corporate bonds | 116 | | | — | | | 116 | | | — | | | Short-term investments and cash equivalents |
| U.S. Treasury securities | 104 | | | 104 | | | — | | | — | | | Short-term investments and cash equivalents |
| | | | | | | | | |
| Commercial paper | 51 | | | — | | | 51 | | | — | | | Short-term investments and cash equivalents |
| Foreign government securities | 17 | | | — | | | 17 | | | — | | | Short-term investments |
| Asset-backed securities | 38 | | | — | | | 38 | | | — | | | Short-term investments |
| Certificates of deposit | 18 | | | — | | | 18 | | | — | | | Short-term investments |
| Foreign currency derivatives | 63 | | | — | | | 63 | | | — | | | Other current assets and other assets |
Deferred compensation plan assets (a) | 21 | | | 21 | | | — | | | — | | | Other assets |
| Total assets at fair value | $ | 740 | | | $ | 437 | | | $ | 303 | | | $ | — | | | |
| Liabilities | | | | | | | | | |
| Foreign currency derivatives | $ | 14 | | | $ | — | | | $ | 14 | | | $ | — | | | Accrued and other current liabilities and other liabilities |
Deferred compensation plan liabilities (a) | 22 | | | 22 | | | — | | | — | | | Other liabilities |
| Total liabilities at fair value | $ | 36 | | | $ | 22 | | | $ | 14 | | | $ | — | | | |
(a)The Deferred Compensation Plan consists of various mutual funds. See Note 15 for additional information regarding our Deferred Compensation Plan.
(4) FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
As of March 31, 2023 and 2022, our cash and cash equivalents were $2,424 million and $2,732 million, respectively. Cash equivalents were valued using quoted market prices or other readily available market information.
Short-Term Investments
Short-term investments consisted of the following as of March 31, 2023 and 2022 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2023 | | As of March 31, 2022 |
| | Cost or
Amortized
Cost | | Gross Unrealized | | Fair
Value | | Cost or
Amortized
Cost | | Gross Unrealized | | Fair
Value |
| | Gains | | Losses | | Gains | | Losses | |
| Corporate bonds | $ | 114 | | | $ | — | | | $ | (1) | | | $ | 113 | | | $ | 117 | | | $ | — | | | $ | (1) | | | $ | 116 | |
| U.S. Treasury securities | 80 | | | — | | | — | | | 80 | | | 103 | | | — | | | (1) | | | 102 | |
| U.S. agency securities | 25 | | | — | | | — | | | 25 | | | — | | | — | | | — | | | — | |
| Commercial paper | 63 | | | — | | | — | | | 63 | | | 39 | | | — | | | — | | | 39 | |
| Foreign government securities | 11 | | | — | | | — | | | 11 | | | 17 | | | — | | | — | | | 17 | |
| Asset-backed securities | 37 | | | — | | | — | | | 37 | | | 38 | | | — | | | — | | | 38 | |
| Certificates of deposit | 14 | | | — | | | — | | | 14 | | | 18 | | | — | | | — | | | 18 | |
| Short-term investments | $ | 344 | | | $ | — | | | $ | (1) | | | $ | 343 | | | $ | 332 | | | $ | — | | | $ | (2) | | | $ | 330 | |
The following table summarizes the amortized cost and fair value of our short-term investments, classified by stated maturity as of March 31, 2023 and 2022 (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2023 | | As of March 31, 2022 |
| | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value |
| Short-term investments | | | | | | | |
| Due within 1 year | $ | 267 | | | $ | 266 | | | $ | 250 | | | $ | 249 | |
| Due 1 year through 5 years | 72 | | | 72 | | | 77 | | | 76 | |
| Due after 5 years | 5 | | | 5 | | | 5 | | | 5 | |
| Short-term investments | $ | 344 | | | $ | 343 | | | $ | 332 | | | $ | 330 | |
(5) DERIVATIVE FINANCIAL INSTRUMENTS
Assets or liabilities associated with our derivative instruments and hedging activities are recorded at fair value in other current assets/other assets, or accrued and other current liabilities/other liabilities, respectively, on our Consolidated Balance Sheets. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on the use of the derivative instrument and whether it is designated and qualifies for hedge accounting.
We transact business in various foreign currencies and have significant international sales and expenses denominated in foreign currencies, subjecting us to foreign currency risk. We purchase foreign currency forward contracts, generally with maturities of 18 months or less, to reduce the volatility of cash flows primarily related to forecasted revenue and expenses denominated in certain foreign currencies. Our cash flow risks are primarily related to fluctuations in the Euro, British pound sterling, Canadian dollar, Swedish krona, Australian dollar, Japanese yen, Chinese yuan, South Korean won and Polish zloty. In addition, we utilize foreign currency forward contracts to mitigate foreign currency exchange risk associated with foreign-currency-denominated monetary assets and liabilities, primarily intercompany receivables and payables. The foreign currency forward contracts not designated as hedging instruments generally have a contractual term of approximately three months or less and are transacted near month-end. We do not use foreign currency forward contracts for speculative trading purposes.
Cash Flow Hedging Activities
Certain of our forward contracts are designated and qualify as cash flow hedges. To qualify for hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedges and must be highly effective in offsetting changes to future cash flows on hedged transactions. The derivative assets or liabilities associated with our hedging activities are recorded at fair value in other current assets/other assets, or accrued and other current liabilities/other liabilities, respectively, on our Consolidated Balance Sheets. The gains or losses resulting from changes in the fair value of these hedges is initially reported, net of tax, as a component of accumulated other comprehensive income (loss) in stockholders’ equity. The gains or losses resulting from changes in the fair value of these hedges are subsequently reclassified into net revenue or research and development expenses, as appropriate, in the period when the forecasted transaction is recognized in our Consolidated Statements of Operations. In the event that the underlying forecasted transactions do not occur, or it becomes remote that they will occur within the defined hedge period, the gains or losses on the related cash flow hedges are reclassified from accumulated other comprehensive income (loss) to net revenue or research and development expenses, in our Consolidated Statements of Operations.
Total gross notional amounts and fair values for currency derivatives with cash flow hedge accounting designation are as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2023 | | As of March 31, 2022 |
| Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| | Asset | | Liability | | | Asset | | Liability |
| | | | | | | | | | | |
| Forward contracts to purchase | $ | 371 | | | $ | 2 | | | $ | 9 | | | $ | 375 | | | $ | 4 | | | $ | 3 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Forward contracts to sell | $ | 2,255 | | | $ | 23 | | | $ | 46 | | | $ | 1,829 | | | $ | 52 | | | $ | 6 | |
| | | | | | | | | | | |
The effects of cash flow hedge accounting in our Consolidated Statements of Operations for the fiscal years ended March 31, 2023, 2022 and 2021 are as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| 2023 | | 2022 | | 2021 |
| Net revenue | | Research and development | | Net revenue | | Research and development | | Net revenue | | Research and development |
| Total amounts presented in our Consolidated Statements of Operations in which the effects of cash flow hedges are recorded | $ | 7,426 | | | $ | 2,328 | | | $ | 6,991 | | | $ | 2,186 | | | $ | 5,629 | | | $ | 1,778 | |
| Gains (losses) on foreign currency forward contracts designated as cash flow hedges | $ | 185 | | | $ | (18) | | | $ | (14) | | | $ | 12 | | | $ | (30) | | | $ | 4 | |
Balance Sheet Hedging Activities
Our foreign currency forward contracts that are not designated as hedging instruments are accounted for as derivatives whereby the fair value of the contracts are reported as other current assets or accrued and other current liabilities on our Consolidated Balance Sheets, and gains and losses resulting from changes in the fair value are reported in interest and other income (expense), net, in our Consolidated Statements of Operations. The gains and losses on these foreign currency forward contracts generally offset the gains and losses in the underlying foreign-currency-denominated monetary assets and liabilities, which are also reported in interest and other income (expense), net, in our Consolidated Statements of Operations.
Total gross notional amounts and fair values for currency derivatives that are not designated as hedging instruments are accounted for as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2023 | | As of March 31, 2022 |
| Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| | Asset | | Liability | | | Asset | | Liability |
| Forward contracts to purchase | $ | 504 | | | $ | 4 | | | $ | — | | | $ | 496 | | | $ | 6 | | | $ | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Forward contracts to sell | $ | 587 | | | $ | — | | | $ | 10 | | | $ | 400 | | | $ | 1 | | | $ | 5 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The effect of foreign currency forward contracts not designated as hedging instruments in our Consolidated Statements of Operations for the fiscal years ended March 31, 2023, 2022 and 2021, was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended March 31, |
| | 2023 | | 2022 | | 2021 |
| | Interest and other income (expense), net |
| Total amounts presented in our Consolidated Statements of Operations in which the effects of balance sheet hedges are recorded | | $ | (6) | | | $ | (48) | | | $ | (29) | |
| Gains (losses) on foreign currency forward contracts not designated as hedging instruments | | $ | (29) | | | $ | 21 | | | $ | (19) | |
(6) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in accumulated other comprehensive income (loss) by component, net of tax, for the fiscal years ended March 31, 2023, 2022 and 2021 are as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized Net Gains (Losses) on Available-for-Sale Securities | | Unrealized Net Gains (Losses) on Derivative Instruments | | Foreign Currency Translation Adjustments | | Total |
| Balances as of March 31, 2020 | $ | (4) | | | $ | 39 | | | $ | (85) | | | $ | (50) | |
| Other comprehensive income (loss) before reclassifications | 5 | | | (94) | | | 64 | | | (25) | |
| Amounts reclassified from accumulated other comprehensive income (loss) | (1) | | | 26 | | | — | | | 25 | |
| Total other comprehensive income (loss), net of tax | 4 | | | (68) | | | 64 | | | — | |
| Balances as of March 31, 2021 | $ | — | | | $ | (29) | | | $ | (21) | | | $ | (50) | |
| Other comprehensive income (loss) before reclassifications | (3) | | | 74 | | | (8) | | | 63 | |
| Amounts reclassified from accumulated other comprehensive income (loss) | — | | | 2 | | | — | | | 2 | |
| Total other comprehensive income (loss), net of tax | (3) | | | 76 | | | (8) | | | 65 | |
| Balances as of March 31, 2022 | $ | (3) | | | $ | 47 | | | $ | (29) | | | $ | 15 | |
| Other comprehensive income (loss) before reclassifications | 1 | | | 133 | | | (50) | | | 84 | |
| Amounts reclassified from accumulated other comprehensive income (loss) | 1 | | | (167) | | | — | | | (166) | |
| Total other comprehensive income (loss), net of tax | 2 | | | (34) | | | (50) | | | (82) | |
| Balances as of March 31, 2023 | $ | (1) | | | $ | 13 | | | $ | (79) | | | $ | (67) | |
The effects on net income of amounts reclassified from accumulated other comprehensive income (loss) for the fiscal years ended March 31, 2023, 2022 and 2021 were as follows (in millions): | | | | | | | | | | | | | | | | | | | | |
| Statement of Operations Classification | | Amount Reclassified From Accumulated Other Comprehensive Income (Loss) |
| Year Ended March 31, |
| 2023 | | 2022 | | 2021 |
| (Gains) losses on available-for-sale securities: | | | | | | |
| | | | | | |
| Interest and other income (expense), net | | $ | 1 | | | $ | — | | | $ | (1) | |
| Total, net of tax | | 1 | | | — | | | (1) | |
| | | | | | |
| (Gains) losses on foreign currency forward contracts designated as cash flow hedges | | | | | | |
| Net revenue | | (185) | | | 14 | | | 30 | |
| Research and development | | 18 | | | (12) | | | (4) | |
| Total, net of tax | | (167) | | | 2 | | | 26 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Total net (gain) loss reclassified, net of tax | | $ | (166) | | | $ | 2 | | | $ | 25 | |
| | | | | | |
| | | | | | |
(7) GOODWILL AND ACQUISITION-RELATED INTANGIBLES, NET
The changes in the carrying amount of goodwill for the fiscal year ended March 31, 2023 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2022 | | Activity | | Effects of Foreign Currency Translation | | As of March 31, 2023 |
| Goodwill | $ | 5,755 | | | $ | — | | | $ | (7) | | | $ | 5,748 | |
| Accumulated impairment | (368) | | | — | | | — | | | (368) | |
| Total | $ | 5,387 | | | $ | — | | | $ | (7) | | | $ | 5,380 | |
The changes in the carrying amount of goodwill for the fiscal year ended March 31, 2022 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2021 | | Activity | | Effects of Foreign Currency Translation | | As of March 31, 2022 |
| Goodwill | $ | 3,236 | | | $ | 2,519 | | | $ | — | | | $ | 5,755 | |
| Accumulated impairment | (368) | | | — | | | — | | | (368) | |
| Total | $ | 2,868 | | | $ | 2,519 | | | $ | — | | | $ | 5,387 | |
Acquisition-related intangibles consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2023 | | As of March 31, 2022 |
| | Gross
Carrying
Amount | | Accumulated
Amortization | | Acquisition-
Related
Intangibles, Net | | Gross
Carrying
Amount | | Accumulated
Amortization | | Acquisition-
Related
Intangibles, Net |
| Finite-lived acquisition-related intangibles | | | | | | | | | | | |
| Developed and core technology | $ | 1,051 | | | $ | (754) | | | $ | 297 | | | $ | 1,102 | | | $ | (643) | | | $ | 459 | |
| Trade names and trademarks | 596 | | | (285) | | | 311 | | | 609 | | | (212) | | | 397 | |
| Registered user base and other intangibles | 56 | | | (50) | | | 6 | | | 56 | | | (30) | | | 26 | |
| | | | | | | | | | | |
| Total finite-lived acquisition-related intangibles | $ | 1,703 | | | $ | (1,089) | | | $ | 614 | | | $ | 1,767 | | | $ | (885) | | | $ | 882 | |
| Indefinite-lived acquisition-related intangibles | | | | | | | | | | | |
In-process research and development | $ | 4 | | | $ | — | | | $ | 4 | | | $ | 80 | | | $ | — | | | $ | 80 | |
| Total acquisition-related intangibles, net | $ | 1,707 | | | $ | (1,089) | | | $ | 618 | | | $ | 1,847 | | | $ | (885) | | | $ | 962 | |
Amortization of intangibles, including impairments, for the fiscal years ended March 31, 2023, 2022 and 2021 are classified in the Consolidated Statements of Operations as follows (in millions): | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2023 | | 2022 | | 2021 |
| Cost of revenue | $ | 120 | | | $ | 133 | | | $ | 4 | |
| | | | | |
| Operating expenses | 158 | | | 183 | | | 30 | |
| Restructuring | 66 | | | — | | | — | |
| Total | $ | 344 | | | $ | 316 | | | $ | 34 | |
During fiscal year 2023, we recorded impairment charges of $106 million for acquisition-related intangible assets, of which $66 million was recorded within restructuring, $28 million was recorded within operating expenses, and $12 million was recorded within cost of revenue. See Note 8 — Restructuring Activities for additional information on the impairment charge related to our 2023 Restructuring Plan. During fiscal year 2022, we recorded impairment charges of $45 million for acquisition-related intangible assets, of which $34 million was recorded within operating expenses and $11 million was recorded within cost of revenue. During fiscal year 2021, there were no impairment charges for acquisition-related intangible assets.
Acquisition-related intangible assets are generally amortized using the straight-line method over the lesser of their estimated useful lives or the agreement terms, currently ranging from 2 to 7 years. As of March 31, 2023 and 2022, the weighted-average remaining useful life for acquisition-related intangible assets was approximately 4.8 and 5.2 years years, respectively.
As of March 31, 2023, future amortization of finite-lived acquisition-related intangibles that will be recorded in the Consolidated Statements of Operations is estimated as follows (in millions):
| | | | | |
| Fiscal Year Ending March 31, | |
| 2024 | $ | 150 | |
| 2025 | 122 | |
| 2026 | 118 | |
| 2027 | 99 | |
| 2028 | 96 | |
| Thereafter | 29 | |
| Total | $ | 614 | |
(8) RESTRUCTURING ACTIVITIES
In fiscal year 2023, we announced a restructuring plan (the “2023 Restructuring Plan” or the “Plan”) focused on prioritizing investments to our growth opportunities and optimizing our real estate portfolio. The Plan includes actions driven by portfolio rationalization including headcount reductions, in addition to office space reductions. The actions associated with the Plan are expected to be substantially completed by September 30, 2023.
Under this plan, we estimate that we will incur approximately $170 million to $200 million in charges, consisting primarily of:
•A $66 million impairment charge related to an acquisition-related in-process research & development intangible asset as part of our portfolio rationalization activities;
•$55 million to $65 million related to employee severance and employee-related costs;
•$45 million to $55 million associated with office space reductions; and
•$5 million to $10 million of other charges, including contract cancellations.
Restructuring activities as of the fiscal year ended March 31, 2023 was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Acquisition-Related Intangibles Impairments and Other Charges (a) | | Workforce (a) | | Office Space Reductions (b) | | Total |
| Charges to operations | $ | 68 | | | $ | 43 | | | $ | 44 | | | $ | 155 | |
| Charges settled in cash | — | | | (10) | | | — | | | (10) | |
| Non-cash items | (66) | | | — | | | (44) | | | (110) | |
| Liability as of March 31, 2023 | $ | 2 | | | $ | 33 | | | $ | — | | | $ | 35 | |
(a) Charges are recorded within Restructuring in the Consolidated Statement of Operations. (b) Charges are recorded within General and administrative expenses in the Consolidated Statement of Operations. |
The restructuring liability of $35 million as of March 31, 2023, is included in accrued and other current liabilities on the Consolidated Balance Sheets. See Note 13 — Leases for additional information on our office space reduction activities, and remaining lease liabilities associated with those activities continue to be recognized and disclosed in that note.
(9) ROYALTIES AND LICENSES
Our royalty expenses consist of payments to (1) content licensors, (2) independent software developers, and (3) co-publishing and distribution affiliates. Content license royalties consist of payments made to celebrities, professional sports organizations, movie studios and other organizations for our use of their trademarks, copyrights, personal publicity rights, content and/or other intellectual property. Royalty payments to independent software developers are payments for the development of intellectual property related to our games. Co-publishing and distribution royalties are payments made to third parties for the delivery of products.
During fiscal years 2023, 2022 and 2021, we did not recognize any material losses or impairment charges on royalty-based commitments.
The current and long-term portions of prepaid royalties and minimum guaranteed royalty-related assets, included in other current assets and other assets, consisted of (in millions): | | | | | | | | | | | |
| | As of March 31, |
| | 2023 | | 2022 |
| Other current assets | $ | 105 | | | $ | 35 | |
| Other assets | 31 | | | 28 | |
| Royalty-related assets | $ | 136 | | | $ | 63 | |
At any given time, depending on the timing of our payments to our co-publishing and/or distribution affiliates, content licensors, and/or independent software developers, we classify any recognized unpaid royalty amounts due to these parties as accrued liabilities. The current and long-term portions of accrued royalties, included in accrued and other current liabilities and other liabilities, consisted of (in millions): | | | | | | | | | | | |
| | As of March 31, |
| | 2023 | | 2022 |
| Accrued and other current liabilities | $ | 208 | | | $ | 203 | |
| Other liabilities | — | | | 3 | |
| Royalty-related liabilities | $ | 208 | | | $ | 206 | |
As of March 31, 2023, we were committed to pay approximately $2,011 million to content licensors, independent software developers, and co-publishing and/or distribution affiliates, but performance remained with the counterparty (i.e., delivery of the product or content or other factors) and such commitments were therefore not recorded in our Consolidated Financial Statements. See Note 14 for further information on our developer and licensor commitments.
(10) BALANCE SHEET DETAILS
Property and Equipment, Net
Property and equipment, net, as of March 31, 2023 and 2022 consisted of (in millions): | | | | | | | | | | | |
| | As of March 31, |
| | 2023 | | 2022 |
| Computer, equipment and software | $ | 892 | | | $ | 853 | |
| Buildings | 369 | | | 375 | |
| Leasehold improvements | 186 | | | 202 | |
| Equipment, furniture and fixtures, and other | 92 | | | 95 | |
| Land | 66 | | | 66 | |
| Construction in progress | 11 | | | 30 | |
| 1,616 | | | 1,621 | |
| Less: accumulated depreciation | (1,067) | | | (1,071) | |
| Property and equipment, net | $ | 549 | | | $ | 550 | |
Depreciation expense associated with property and equipment was $193 million, $162 million and $138 million for the fiscal years ended March 31, 2023, 2022 and 2021, respectively.
Accrued and Other Current Liabilities
Accrued and other current liabilities as of March 31, 2023 and 2022 consisted of (in millions): | | | | | | | | | | | |
| | As of March 31, |
| | 2023 | | 2022 |
| Accrued compensation and benefits | $ | 436 | | | $ | 500 | |
| Accrued royalties | 208 | | | 203 | |
| Deferred net revenue (other) | 103 | | | 156 | |
Operating lease liabilities (See Note 13) | 66 | | | 81 | |
| | | |
| Other accrued expenses | 382 | | | 304 | |
| Sales returns and price protection reserves | 90 | | | 144 | |
| Accrued and other current liabilities | $ | 1,285 | | | $ | 1,388 | |
Deferred net revenue (other) includes the deferral of licensing arrangements, subscription revenue, and other revenue for which revenue recognition criteria has not been met.
Deferred net revenue
Deferred net revenue as of March 31, 2023 and 2022, consisted of (in millions): | | | | | | | | | | | |
| As of March 31, |
| 2023 | | 2022 |
| Deferred net revenue (online-enabled games) | $ | 1,901 | | | $ | 2,024 | |
| Deferred net revenue (other) | 103 | | | 156 | |
| Deferred net revenue (noncurrent) | 67 | | | 68 | |
| Total deferred net revenue | $ | 2,071 | | | $ | 2,248 | |
During the fiscal years ended March 31, 2023 and 2022, we recognized $2,176 million and $1,613 million of revenue, respectively, that were included in the deferred net revenue balance at the beginning of the period.
Remaining Performance Obligations
As of March 31, 2023, revenue allocated to remaining performance obligations consists of our deferred revenue balance of $2,071 million. These balances exclude any estimates for future variable consideration as we have elected the optional exemption to exclude sales-based royalty revenue. We expect to recognize substantially all of the current portion of deferred net revenue as revenue over the next 12 months.
(11) INCOME TAXES
The components of our income before provision for income taxes for the fiscal years ended March 31, 2023, 2022 and 2021 are as follows (in millions): | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2023 | | 2022 | | 2021 |
| Domestic | $ | 315 | | | $ | 204 | | | $ | 299 | |
| Foreign | 1,011 | | | 877 | | | 718 | |
| Income before provision for income taxes | $ | 1,326 | | | $ | 1,081 | | | $ | 1,017 | |
Provision for income taxes for the fiscal years ended March 31, 2023, 2022 and 2021 consisted of (in millions):
| | | | | | | | | | | | | | | | | |
| | Current | | Deferred | | Total |
Year Ended March 31, 2023 | | | | | |
| Federal | $ | 570 | | | $ | (339) | | | $ | 231 | |
| State | 92 | | | (76) | | | 16 | |
| Foreign | 75 | | | 202 | | | 277 | |
| $ | 737 | | | $ | (213) | | | $ | 524 | |
Year Ended March 31, 2022 | | | | | |
| Federal | $ | 203 | | | $ | (190) | | | $ | 13 | |
| State | 36 | | | (26) | | | 10 | |
| Foreign | 381 | | | (112) | | | 269 | |
| $ | 620 | | | $ | (328) | | | $ | 292 | |
Year Ended March 31, 2021 | | | | | |
| Federal | $ | 251 | | | $ | (26) | | | $ | 225 | |
| State | 24 | | | (2) | | | 22 | |
| Foreign | 47 | | | (114) | | | (67) | |
| $ | 322 | | | $ | (142) | | | $ | 180 | |
The differences between the statutory tax rate and our effective tax rate, expressed as a percentage of income before provision for income taxes, for the fiscal years ended March 31, 2023, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2023 | | 2022 | | 2021 |
| Statutory federal tax expense rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State taxes, net of federal benefit | 1.1 | % | | 1.9 | % | | 1.7 | % |
| Differences between statutory rate and foreign effective tax rate | 7.6 | % | | 6.8 | % | | 7.0 | % |
| | | | | |
| | | | | |
| Excess tax benefit from equity compensation | (0.3) | % | | (1.2) | % | | (2.7) | % |
| Research and development credits | (3.0) | % | | (2.8) | % | | (2.4) | % |
| | | | | |
| Swiss valuation allowance | 8.9 | % | | 2.7 | % | | (10.1) | % |
| | | | | |
Acquired IP intra-entity sales | — | % | | (5.9) | % | | — | % |
| Non-deductible stock-based compensation | 3.2 | % | | 3.8 | % | | 3.3 | % |
| Other | 1.0 | % | | 0.7 | % | | (0.1) | % |
| Effective tax rate | 39.5 | % | | 27.0 | % | | 17.7 | % |
During the fiscal year ended March 31, 2023, we recognized a $118 million tax charge to increase the valuation allowance on Swiss deferred tax assets, primarily as a result of an increase in Swiss interest rates.
During the fiscal year ended March 31, 2022, we completed intra-entity sales of intellectual property rights related to acquisitions to our U.S. and Swiss intellectual property owners (the “Acquired IP intra-entity sales”). The transactions resulted in overall taxable gains. Under U.S. GAAP, any profit resulting from the Acquired IP intra-entity sales was eliminated upon
consolidation. However, the transactions resulted in a step-up of the U.S. and Swiss tax-deductible basis in the transferred intellectual property rights and, accordingly, created a temporary difference between the book basis and the tax basis of such intellectual property rights. As a result, we recognized a $64 million net tax benefit for the current and deferred tax impacts of the sales.
In addition, during the fiscal year ended March 31, 2022, we recognized a $29 million tax charge to increase the valuation allowance on Swiss deferred tax assets that are not more likely than not to be realized.
Our effective tax rate and resulting provision for income taxes for the fiscal year ended March 31, 2021 included a $141 million tax benefit for changes in uncertain tax positions and the valuation allowance related to our Swiss deferred tax assets.
Our foreign subsidiaries are generally subject to U.S. tax, and to the extent earnings from these subsidiaries can be repatriated without a material tax cost, such earnings will not be indefinitely reinvested. As of March 31, 2023, approximately $925 million of our cash and cash equivalents were domiciled in foreign tax jurisdictions. All of our foreign cash is available for repatriation without a material tax cost.
The components of net deferred tax assets, as of March 31, 2023 and 2022 consisted of (in millions):
| | | | | | | | | | | |
| | As of March 31, |
| | 2023 | | 2022 |
| Deferred tax assets: | | | |
| Accruals, reserves and other expenses | $ | 197 | | | $ | 185 | |
| Tax credit carryforwards | 218 | | | 198 | |
| Research and development capitalization | 461 | | | 66 | |
| | | |
| | | |
| Stock-based compensation | 39 | | | 43 | |
| Net operating loss and capital loss carryforwards | 371 | | | 349 | |
| Swiss intra-entity tax asset | 1,665 | | | 1,782 | |
| Total | 2,951 | | | 2,623 | |
| Valuation allowance | (446) | | | (296) | |
| Deferred tax assets, net of valuation allowance | 2,505 | | | 2,327 | |
| Deferred tax liabilities: | | | |
| Amortization and depreciation | (41) | | | (79) | |
| Other | (3) | | | (7) | |
| Total | (44) | | | (86) | |
| Deferred tax assets, net of valuation allowance and deferred tax liabilities | $ | 2,461 | | | $ | 2,241 | |
As of March 31, 2023, we have net operating loss carry forwards of approximately $2.6 billion of which approximately $213 million is attributable to various acquired companies. The net operating loss carry forwards include $2.3 billion related to Switzerland, $99 million related to U.S. federal, and $133 million related to California. Substantially all of these carryforwards, if not fully realized, will begin to expire in fiscal year 2027. Switzerland has a seven-year carryforward period and does not permit the carry back of losses. We also have U.S. federal credit carryforwards of $12 million and California credit carryforwards of $194 million. The California tax credit carryforwards can be carried forward indefinitely.
As of March 31, 2023, we maintained a total valuation allowance of $446 million related to certain U.S. state deferred tax assets, Swiss deferred tax assets, and foreign capital loss carryovers, due to uncertainty about the future realization of these assets.
The total unrecognized tax benefits as of March 31, 2023, 2022 and 2021 were $867 million, $636 million and $584 million, respectively. A reconciliation of the beginning and ending balance of unrecognized tax benefits is summarized as follows (in millions):
| | | | | |
| Balance as of March 31, 2020 | $ | 983 | |
| Increases in unrecognized tax benefits related to prior year tax positions | 12 | |
| Decreases in unrecognized tax benefits related to prior year tax positions | (444) | |
| Increases in unrecognized tax benefits related to current year tax positions | 55 | |
| Decreases in unrecognized tax benefits related to settlements with taxing authorities | (2) | |
| Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations | (27) | |
| Changes in unrecognized tax benefits due to foreign currency translation | 7 | |
| Balance as of March 31, 2021 | 584 | |
| Increases in unrecognized tax benefits related to prior year tax positions | 5 | |
| Decreases in unrecognized tax benefits related to prior year tax positions | (21) | |
| Increases in unrecognized tax benefits related to current year tax positions | 139 | |
| Decreases in unrecognized tax benefits related to settlements with taxing authorities | (50) | |
| Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations | (18) | |
| Changes in unrecognized tax benefits due to foreign currency translation | (3) | |
| Balance as of March 31, 2022 | 636 | |
| Increases in unrecognized tax benefits related to current year tax positions | 245 | |
| Decreases in unrecognized tax benefits related to settlements with taxing authorities | (2) | |
| Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations | (6) | |
| Changes in unrecognized tax benefits due to foreign currency translation | (6) | |
| Balance as of March 31, 2023 | $ | 867 | |
As of March 31, 2023, approximately $395 million of the unrecognized tax benefits would affect our effective tax rate, a portion of which would be impacted by a valuation allowance.
Interest and penalties related to estimated obligations for tax positions taken in our tax returns are recognized in income tax expense in our Consolidated Statements of Operations. The combined amount of accrued interest and penalties related to tax positions taken on our tax returns and included in non-current other liabilities was approximately $54 million as of March 31, 2023 and $36 million as of March 31, 2022.
We file income tax returns in the United States, including various state and local jurisdictions. As of March 31, 2023, our subsidiaries file tax returns in various foreign jurisdictions, including Switzerland, Canada, Sweden, Italy, France, Germany, and the United Kingdom. We remain subject to income tax examination by the IRS for fiscal years after 2017. In addition, as of the period ended March 31, 2023, we remain subject to income tax examination for several other jurisdictions including in Switzerland for fiscal years after 2013, Canada for fiscal years after 2015, Sweden for fiscal years after 2017, Italy for fiscal years after 2019, France for fiscal years after 2019, Germany for fiscal years after 2016, and the United Kingdom for fiscal years after 2021.
We are also currently under income tax examination in the United States for fiscal years 2018 through 2020 and Germany for fiscal years 2017 through 2019.
The timing and potential resolution of income tax examinations is highly uncertain. While we continue to measure our uncertain tax positions, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued.
In fiscal year 2021, the Supreme Court of the United States denied Altera’s appeal of the decision of the Ninth Circuit Court of Appeals in Altera Corp. v. Commissioner (“the Altera Opinion”), resulting in a partial decrease of our unrecognized tax benefits. A complete resolution and settlement of the matters underlying the Altera Opinion is reasonably possible within the next 12 months, which would result in an additional reduction of our gross unrecognized tax benefits. However, it is uncertain whether a complete resolution and settlement of such matters would also result in resolution of all related and unrelated U.S. positions for all applicable years. Therefore, it is not possible to provide a range of potential outcomes associated with a reversal of our gross unrecognized tax benefits for Altera-related uncertain tax positions.
It is also reasonably possible that an additional immaterial reduction of unrecognized tax benefits may occur within the next 12 months, unrelated to the Altera Opinion, a portion of which would impact our effective tax rate. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements and tax interpretations.
(12) FINANCING ARRANGEMENTS
Senior Notes
In February 2021, we issued $750 million aggregate principal amount of 1.85% Senior Notes due February 15, 2031 (the “2031 Notes”) and $750 million aggregate principal amount of 2.95% Senior Notes due February 15, 2051 (the “2051 Notes”). Our proceeds were $1,478 million, net of discount of $6 million and issuance costs of $16 million. Both the discount and issuance costs are being amortized to interest expense over the respective terms of the 2031 Notes and the 2051 Notes using the effective interest rate method. The effective interest rate is 1.98% for the 2031 Notes and 3.04% for the 2051 Notes. Interest is payable semiannually in arrears, on February 15 and August 15 of each year.
In February 2016, we issued $400 million aggregate principal amount of 4.80% Senior Notes due March 1, 2026 (the “2026 Notes”). Our proceeds were $395 million, net of discount of $1 million and issuance costs of $4 million. Both the discount and issuance costs are being amortized to interest expense over the term of the 2026 Notes using the effective interest rate method. The effective interest rate was 4.97%. Interest is payable semiannually in arrears, on March 1 and September 1 of each year.
The carrying and fair values of the Senior Notes are as follows (in millions):
| | | | | | | | | | | |
| As of March 31, 2023 | | As of March 31, 2022 |
| Senior Notes: | | | |
4.80% Senior Notes due 2026 | $ | 400 | | | $ | 400 | |
1.85% Senior Notes due 2031 | 750 | | | 750 | |
2.95% Senior Notes due 2051 | 750 | | | 750 | |
| Total principal amount | $ | 1,900 | | | $ | 1,900 | |
| Unaccreted discount | (6) | | | (6) | |
| Unamortized debt issuance costs | (14) | | | (16) | |
| Net carrying value of Senior Notes | $ | 1,880 | | | $ | 1,878 | |
| | | |
| Fair value of Senior Notes (Level 2) | $ | 1,540 | | | $ | 1,711 | |
As of March 31, 2023, the remaining life of the 2026 Notes, 2031 Notes and 2051 Notes is approximately 2.9 years, 7.9 years, and 27.9 years, respectively.
The Senior Notes are senior unsecured obligations and rank equally with all our other existing and future unsubordinated obligations and any indebtedness that we may incur from time to time under our Credit Facility.
The 2026 Notes, 2031 Notes and 2051 Notes are redeemable at our option at any time prior to December 1, 2025, November 15, 2030, and August 15, 2050, respectively, subject to a make-whole premium. After such dates, we may redeem each such series of Notes, respectively, at a redemption price equal to 100% of the aggregate principal amount plus accrued and unpaid interest. In addition, upon the occurrence of a change of control repurchase event, the holders of each such series of Notes may require us to repurchase all or a portion of these Notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. Each such series of Notes also include covenants that limit our ability to incur liens on assets and to enter into sale and leaseback transactions, subject to certain allowances.
Credit Facility
On March 22, 2023, we entered into a $500 million unsecured revolving credit facility (the “Credit Facility") with a syndicate of banks. The Credit Facility terminates on March 22, 2028 unless the maturity is extended in accordance with its terms. The Credit Facility contains an option to arrange with existing lenders and/or new lenders to provide up to an aggregate of $500 million in additional commitments for revolving loans. Proceeds of loans made under the Credit Facility may be used for general corporate purposes.
The loans denominated in U.S. dollars bear interest, at our option, at the base rate plus an applicable spread or at a forward-looking term rate based upon the secured overnight financing rate plus a credit spread adjustment of 0.10% per annum (the “Adjusted Term SOFR Rate”) plus an applicable spread, in each case with such spread based on our debt credit ratings. We are also obligated to pay other customary fees for a credit facility of this size and type. Interest is due and payable in arrears quarterly for loans bearing interest at the base rate and at the end of an interest period in the case of loans bearing interest at the Adjusted Term SOFR Rate. Principal, together with all accrued and unpaid interest, is due and payable on the maturity date, as such date may be extended in connection with the extension option. We may prepay the loans and terminate the commitments, in whole or in part, at any time without premium or penalty, subject to certain conditions.
The Credit Facility contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, incur subsidiary indebtedness, grant liens, and dispose of all or substantially all assets, in each case subject to customary exceptions for a credit facility of this size and type. We are also required to maintain compliance with a debt to EBITDA ratio. As of March 31, 2023, we were in compliance with the debt to EBITDA ratio.
The Credit Facility contains customary events of default, including among others, non-payment defaults, covenant defaults, cross-defaults to material indebtedness, bankruptcy and insolvency defaults, material judgment defaults and a change of control default, in each case, subject to customary exceptions for a credit facility of this size and type. The occurrence of an event of default could result in the acceleration of the obligations under the Credit Facility and an increase in the applicable interest rate.
As of March 31, 2023, no amounts were outstanding under the Credit Facility. $2 million of debt issuance costs that were paid in connection with obtaining this credit facility are being amortized to interest expense over the 5-year term of the Credit Facility.
Interest Expense
The following table summarizes our interest expense recognized for fiscal years 2023, 2022 and 2021 that is included in interest and other income (expense), net on our Consolidated Statements of Operations (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| 2023 | | 2022 | | 2021 |
| Amortization of debt discount | $ | (1) | | | $ | (1) | | | $ | — | |
| Amortization of debt issuance costs | (2) | | | (2) | | | (2) | |
| Coupon interest expense | (55) | | | (55) | | | (43) | |
| Total interest expense | $ | (58) | | | $ | (58) | | | $ | (45) | |
(13) LEASES
Our leases primarily consist of facility leases for our offices and development studios, data centers, and server equipment, with remaining lease terms of up to 15 years. Our lease terms may include options to extend or terminate the lease. When it is reasonably certain that we will exercise those options, we include them in our measurement of lease payments and lease terms. Substantially all of our leases are classified as operating leases.
We determine if an arrangement is or contains a lease at contract inception. The contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In determining if a contract is or contains a lease, we apply judgment whether the contract provides the right to obtain substantially all of the economic benefits, the right to direct, or control the use of the identified asset throughout the period of use.
Operating lease right-of-use (“ROU”) assets and liabilities are recognized at the commencement date based on the present value of future lease payments over the lease term. In determining the present value of the future lease payments, we use our incremental borrowing rate as none of our leases provide an implicit rate. Our incremental borrowing rate is an assumed rate based on our credit rating, credit history, current economic environment, and the lease term. Operating lease ROU assets are further adjusted for any payments made, incentives received, and initial direct costs incurred prior to the commencement date.
Operating lease ROU assets are amortized on a straight-line basis over the lease term and recognized as lease expense within cost of revenue or operating expenses on our Consolidated Statements of Operations. Operating lease liabilities decrease by lease payments we make over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet. When we commit to a plan to abandon an operating lease at a future date, the amortization of the operating lease ROU asset and depreciation of the associated leasehold improvements are accelerated based on the revised useful life of the operating lease.
Some of our operating leases contain lease and non-lease components. Non-lease components primarily include fixed payments for common area maintenance and utilities. We elected to account for lease and non-lease components as a single lease component. Variable lease and non-lease components are recognized on our Consolidated Statements of Operations as incurred.
The components of lease expenses for the fiscal years ended March 31, 2023, 2022, and 2021 are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| 2023 | | 2022 | | 2021 |
| Operating lease costs | $ | 138 | | | $ | 98 | | | $ | 87 | |
| Variable lease costs | 22 | | | 21 | | | 21 | |
| Short-term lease costs | 7 | | | 2 | | | 2 | |
| Total lease expense | $ | 167 | | | $ | 121 | | | $ | 110 | |
During the fiscal year ended March 31, 2023, we recorded accelerated amortization of certain ROU Assets of $34 million within the operating lease costs and accelerated deprecation of property, plant and equipment for $10 million as part of our 2023 Restructuring Plan. See Note 8 — Restructuring Activities for additional information. Supplemental cash and noncash information related to our operating leases for the fiscal years ended March 31, 2023, 2022, and 2021 are as follows (in millions): | | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| 2023 | | 2022 | | 2021 |
| Cash paid for amounts included in the measurement of lease liability | $ | 97 | | | $ | 97 | | | $ | 85 | |
| ROU assets obtained in exchange for new lease obligations | $ | 97 | | | $ | 150 | | | $ | 90 | |
Weighted average remaining lease term and discount rate at March 31, 2023 and 2022 are as follows:
| | | | | | | | | | | |
| At March 31, 2023 | | At March 31, 2022 |
| Lease term | 7.5 years | | 6.8 years |
| Discount rate | 3.3 | % | | 2.5 | % |
Operating lease ROU assets and liabilities recorded on our Consolidated Balance Sheets as of March 31, 2023 and 2022 are as follows (in millions): | | | | | | | | | | | | | | | | | |
| As of March 31, | | Balance Sheet Classification |
| 2023 | | 2022 | |
| Operating lease ROU assets | $ | 276 | | | $ | 314 | | | Other assets |
| | | | |
|
| Operating lease liabilities | $ | 66 | | | $ | 81 | | | Accrued and other current liabilities |
| Noncurrent operating lease liabilities | 277 | | | 272 | | | Other liabilities |
| Total operating lease liabilities | $ | 343 | |
| $ | 353 | | |
|
Future minimum lease payments under operating leases as of March 31, 2023 were as follows (in millions):
| | | | | | | | |
| Fiscal Years Ending March 31, |
| |
| 2024 |
| $ | 73 | |
| 2025 |
| 69 | |
| 2026 |
| 56 | |
| 2027 |
| 41 | |
| 2028 |
| 32 | |
| Thereafter |
| 116 | |
| Total future lease payments |
| 387 | |
| Less imputed interest |
| (44) | |
| Total operating lease liabilities |
| $ | 343 | |
In addition to the amounts included in the table above, as of March 31, 2023, we have entered into an office lease that has not yet commenced with aggregate future lease payments of approximately $98 million. This lease is expected to commence in fiscal year 2024, and will have a lease term of 12 years.
(14) COMMITMENTS AND CONTINGENCIES
Development, Celebrity, Professional Sports Organizations and Content Licenses: Payments and Commitments
The products we produce in our studios are designed and created by our employee designers, artists, software programmers and by non-employee software developers (“independent artists” or “third-party developers”). We typically advance development funds to the independent artists and third-party developers during development of our games, usually in installment payments made upon the completion of specified development milestones. Contractually, these payments are generally considered advances against subsequent royalties on the sales of the products. These terms are set forth in written agreements entered into with the independent artists and third-party developers.
In addition, we have certain celebrity, professional sports organizations and content license contracts that contain minimum guarantee payments and marketing commitments to promote the games we publish that may not be dependent on any deliverables. These developer and content license commitments represent the sum of (1) the cash payments due under non-royalty-bearing licenses and services agreements and (2) the minimum guaranteed payments and advances against royalties due under royalty-bearing licenses and services agreements, the majority of which are conditional upon performance by the counterparty. These minimum guarantee payments and any related marketing commitments are included in the table below.
The following table summarizes our minimum contractual obligations as of March 31, 2023 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ending March 31, |
| Total | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | Thereafter |
| Unrecognized commitments | | | | | | | | | | | | | |
| Developer/licensor commitments | $ | 2,011 | | | $ | 349 | | | $ | 480 | | | $ | 434 | | | $ | 384 | | | $ | 146 | | | $ | 218 | |
| Marketing commitments | 971 | | | 256 | | | 245 | | | 197 | | | 154 | | | 67 | | | 52 | |
| Senior Notes interest | 781 | | | 49 | | | 55 | | | 54 | | | 36 | | | 36 | | | 551 | |
| Operating lease imputed interest | 44 | | | 10 | | | 8 | | | 7 | | | 5 | | | 4 | | | 10 | |
| Operating leases not yet commenced | 98 | | | — | | | 3 | | | 8 | | | 8 | | | 8 | | | 71 | |
| Other purchase obligations | 201 | | | 130 | | | 51 | | | 14 | | | 4 | | | 2 | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Total unrecognized commitments | 4,106 | | | 794 | | | 842 | | | 714 | | | 591 | | | 263 | | | 902 | |
| | | | | | | | | | | | | |
| Recognized commitments | | | | | | | | | | | | | |
| Senior Notes principal and interest | 1,906 | | | 6 | | | — | | | 400 | | | — | | | — | | | 1,500 | |
| Operating leases | 387 | | | 73 | | | 69 | | | 56 | | | 41 | | | 32 | | | 116 | |
| Transition Tax and other taxes | 17 | | | 4 | | | 6 | | | 7 | | | — | | | — | | | — | |
| | | | | | | | | | | | | |
| Total recognized commitments | 2,310 | | | 83 | | | 75 | | | 463 | | | 41 | | | 32 | | | 1,616 | |
| | | | | | | | | | | | | |
| Total Commitments | $ | 6,416 | | | $ | 877 | | | $ | 917 | | | $ | 1,177 | | | $ | 632 | | | $ | 295 | | | $ | 2,518 | |
The unrecognized amounts represented in the table above reflect our minimum cash obligations for the respective fiscal years, but do not necessarily represent the periods in which they will be recognized and expensed in our Consolidated Financial Statements. In addition, the amounts in the table above are presented based on the dates the amounts are contractually due as of March 31, 2023; however, certain payment obligations may be accelerated depending on the performance of our operating results.
In addition to the amounts included in the table above, in our Consolidated Balance Sheets as of March 31, 2023, we had a net liability for unrecognized tax benefits and an accrual for the payment of related interest totaling $594 million, of which we are unable to make a reasonably reliable estimate of when cash settlement with a taxing authority will occur.
Subsequent to March 31, 2023, we entered into certain agreements with third parties which are not included in the table above, and contingently commit us to pay an additional $125 million at various dates through fiscal year 2028.
Legal Proceedings
We are subject to claims and litigation arising in the ordinary course of business. We do not believe that any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on our Consolidated Financial Statements.
(15) STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
Valuation Assumptions
We recognize compensation cost for stock-based awards to employees based on the awards’ estimated grant-date fair value using a straight-line approach over the service period for which such awards are expected to vest. We account for forfeitures as they occur.
The estimation of the fair value of market-based restricted stock units, stock options and ESPP purchase rights is affected by assumptions regarding subjective and complex variables. Generally, our assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes. We estimate the fair value of our stock-based awards as follows:
•Restricted Stock Units and Performance-Based Restricted Stock Units. The fair value of restricted stock units and performance-based restricted stock units (other than market-based restricted stock units) is determined based on the quoted market price of our common stock on the date of grant.
•Market-Based Restricted Stock Units. Market-based restricted stock units consist of grants of performance-based restricted stock units to certain members of executive management that vest contingent upon the achievement of pre-determined market and service conditions (referred to herein as “market-based restricted stock units”). The fair value of our market-based restricted stock units is estimated using a Monte-Carlo simulation model. Key assumptions for the Monte-Carlo simulation model are the risk-free interest rate, expected volatility, expected dividends and correlation coefficient.
•Stock Options and Employee Stock Purchase Plan. The fair value of stock options and stock purchase rights granted pursuant to our equity incentive plans and our 2000 Employee Stock Purchase Plan, as amended (“ESPP”), respectively, is estimated using the Black-Scholes valuation model based on the multiple-award valuation method. Key assumptions of the Black-Scholes valuation model are the risk-free interest rate, expected volatility, expected term and expected dividends. The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant for the expected term of the option. Expected volatility is based on a combination of historical stock price volatility and implied volatility of publicly-traded options on our common stock. An expected term is estimated based on historical exercise behavior, post-vesting termination patterns, options outstanding and future expected exercise behavior.
There were an insignificant number of stock options granted during fiscal years 2023, 2022, and 2021.
The estimated assumptions used in the Black-Scholes valuation model to value our ESPP purchase rights were as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | ESPP Purchase Rights |
| | | | | | Year Ended March 31, |
| | | | | | 2023 | | 2022 | | 2021 |
| Risk-free interest rate | | | | | 3.1 - 5.0% | | 0.1 - 1.1% | | 0.1% |
| Expected volatility | | | | | 27 - 31% | | 25 - 30% | | 32 - 39% |
| Weighted-average volatility | | | | | 29% | | 27% | | 36% |
| Expected term | | | | | 6 - 12 months | | 6 - 12 months | | 6 - 12 months |
| Expected dividends | | | | | 0.8% | | 0.6 | % | | 0.3 | % |
The assumptions used in the Monte-Carlo simulation model to value our market-based restricted stock units were as follows:
| | | | | | | | | | | | | | | | | |
| | | | | |
| | Year Ended March 31, |
| 2023 | | 2022 | | 2021 |
| Risk-free interest rate | 3.3% | | 0.4 | % | | 0.2% |
| Expected volatility | 33 - 56% | | 24 - 76% | | 23 - 63% |
| Weighted-average volatility | 43% | | 40% | | 37% |
| Expected dividends | None | | None | | None |
Summary of Plans and Plan Activity
Equity Incentive Plans
We have equity awards outstanding under two incentive plans: our 2019 Equity Incentive Plan (the “2019 Equity Plan”), as amended, and our 2000 Equity Incentive Plan, as amended (the “2000 Equity Plan”). Our 2019 Equity Plan allows us to grant options to purchase our common stock and to grant restricted stock, restricted stock units and stock appreciation rights to our employees, officers, and directors, up to a maximum of 29.5 million shares, plus any shares authorized for grant or subject to awards under the 2000 Equity Plan that are not delivered to participants for any reason. Pursuant to the 2019 Equity Plan, incentive stock options may be granted to employees and officers and non-qualified options may be granted to employees, officers, and directors, at not less than 100 percent of the fair market value on the date of grant.
Approximately 21.7 million options or 15.2 million restricted stock units were available for grant under our 2019 Equity Plan as of March 31, 2023.
Stock Options
Options granted under the 2019 Equity Plan and the 2000 Equity Plan generally expire ten years from the date of grant. All outstanding options were fully vested and exercisable as of March 31, 2023.
The following table summarizes our stock option activity for the fiscal year ended March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options
(in thousands) | | Weighted-
Average
Exercise Prices | | Weighted-
Average
Remaining
Contractual
Term (in years) | | Aggregate
Intrinsic Value
(in millions) |
Outstanding as of March 31, 2022 | | 286 | | | $ | 39.28 | | | | | |
| | | | | | | | |
| Granted | | 4 | | | 123.23 | | | | | |
| Exercised | | (168) | | | 40.10 | | | | | |
| Forfeited, cancelled or expired | | (1) | | | 64.95 | | | | | |
Outstanding as of March 31, 2023 | | 121 | | | $ | 40.43 | | | 2.00 | | $ | 10 | |
| Vested and expected to vest | | 121 | | | $ | 40.43 | | | 2.00 | | $ | 10 | |
Exercisable as of March 31, 2023 | | 120 | | | $ | 40.25 | | | 1.99 | | $ | 10 | |
The aggregate intrinsic value represents the total pre-tax intrinsic value based on our closing stock price as of March 31, 2023, which would have been received by the option holders had all the option holders exercised their options as of that date. The total intrinsic values of stock options exercised during fiscal years 2023, 2022, and 2021 were $15 million, $8 million, and $76 million, respectively. We issue new common stock from our authorized shares upon the exercise of stock options.
Restricted Stock Units
We grant restricted stock units under our 2019 Equity Plan to employees worldwide. Restricted stock units are unfunded, unsecured rights to receive common stock upon the satisfaction of certain vesting criteria. Upon vesting, a number of shares of common stock equivalent to the number of restricted stock units are typically issued net of required tax withholding requirements, if any. Restricted stock units are subject to forfeiture and transfer restrictions. Vesting for restricted stock units is based on the holders’ continued employment with us through each applicable vest date. If the vesting conditions are not met, unvested restricted stock units will be forfeited. Our restricted stock units generally vest over 35 months to four years.
Each restricted stock unit granted reduces the number of shares available for grant by 1.43 shares under our 2019 Equity Plan. The following table summarizes our restricted stock units activity, excluding performance-based and market-based restricted stock unit activity which is discussed below, for the fiscal year ended March 31, 2023:
| | | | | | | | | | | | | | |
| | Restricted
Stock Units
(in thousands) | | Weighted-
Average Grant
Date Fair Values |
Outstanding as of March 31, 2022 | | 6,682 | | | $ | 129.57 | |
| | | | |
| Granted | | 5,391 | | | 126.41 | |
| Vested | | (3,649) | | | 126.50 | |
| Forfeited or cancelled | | (922) | | | 131.56 | |
Outstanding as of March 31, 2023 | | 7,502 | | | $ | 128.54 | |
The grant date fair value of restricted stock units is based on the quoted market price of our common stock on the date of grant. The weighted-average grant date fair values of restricted stock units granted during fiscal years 2023, 2022, and 2021 were $126.41, $136.78, and $127.27 respectively. The fair values of restricted stock units that vested during fiscal years 2023, 2022, and 2021 were $460 million, $457 million, and $420 million, respectively.
Performance-Based Restricted Stock Units
Our performance-based restricted stock units vest upon the achievement of pre-determined performance-based milestones, including, but not limited to, management reporting milestones of net bookings and operating income metrics, as well as service conditions. If these performance-based milestones are not met but service conditions are met, the performance-based restricted stock units will not vest, in which case any compensation expense we have recognized to date will be reversed. Generally, the measurement periods of our performance-based restricted stock units are 3 to 4 years, with awards vesting after each annual measurement period or cliff-vesting after the completion of the total aggregate measurement period.
Each quarter, we update our assessment of the probability that the performance milestones will be achieved. We amortize the fair values of performance-based restricted stock units over the requisite service period. The performance-based restricted stock units contain threshold, target and maximum milestones for each performance-based milestone. The number of shares of common stock to be issued at vesting will range from zero to 200 percent of the target number of performance-based restricted stock units attributable to each performance-based milestone based on the company’s performance as compared to these threshold, target and maximum performance-based milestones. Each performance-based milestone is weighted evenly and the number of shares that vest based on each performance-based milestone is independent from the other.
The following table summarizes our performance-based restricted stock unit activity, presented with the maximum number of shares that could potentially vest, for the fiscal year ended March 31, 2023:
| | | | | | | | | | | |
| Performance-
Based Restricted
Stock Units
(in thousands) | | Weighted-
Average Grant
Date Fair Value |
Outstanding as of March 31, 2022 | 190 | | | $ | 142.60 | |
| Granted | 509 | | | 127.98 | |
| Vested | (73) | | | 142.60 | |
| Forfeited or cancelled | (69) | | | 136.28 | |
Outstanding as of March 31, 2023 | 557 | | | $ | 130.03 | |
The weighted-average grant date fair values of performance-based restricted stock units granted during fiscal years 2023 and 2022 were $127.98 and $140.48, respectively. The fair values of performance-based restricted stock units that vested during fiscal years 2023 and 2022 were $9 million and $38 million, respectively. There were no performance-based restricted stock units granted or vested during fiscal year 2021.
Market-Based Restricted Stock Units
Our market-based restricted stock units vest contingent upon the achievement of pre-determined market and service conditions. If these market conditions are not met but service conditions are met, the market-based restricted stock units will not vest; however, any compensation expense we have recognized to date will not be reversed. The number of shares of common stock to be issued at vesting will range from zero to 200 percent of the target number of market-based restricted stock units based on our total stockholder return (“TSR”) relative to the performance of companies in the Nasdaq-100 Index for each measurement period, over either a one-year, two-year cumulative and three-year cumulative period, a two-year and four-year cumulative period or a three-year period.
The following table summarizes our market-based restricted stock unit activity, presented with the maximum number of shares that could potentially vest, for the year ended March 31, 2023: | | | | | | | | | | | | | | |
| | Market-Based
Restricted Stock
Units
(in thousands) | | Weighted-
Average Grant
Date Fair Value |
Outstanding as of March 31, 2022 | | 1,321 | | | $ | 134.69 | |
| Granted | | 178 | | | 176.70 | |
| Vested | | (95) | | | 114.97 | |
| Forfeited or cancelled | | (582) | | | 129.16 | |
Outstanding as of March 31, 2023 | | 822 | | | $ | 149.98 | |
The weighted-average grant date fair values of market-based restricted stock units granted during fiscal years 2023, 2022, and 2021 were $176.70, $170.44, and $145.78, respectively. The fair values of market-based restricted stock units that vested during fiscal years 2023, 2022, and 2021 were $12 million, $37 million, and $19 million, respectively.
ESPP
Pursuant to our ESPP, eligible employees may authorize payroll deductions of between 2 percent and 10 percent of their compensation to purchase shares of common stock at 85 percent of the lower of the market price of our common stock on the date of commencement of the applicable offering period or on the last day of each six-month purchase period.
The following table summarizes our ESPP activity for fiscal years ended March 31, 2023, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | |
| | Shares Issued
(in millions) | | Exercise Prices for Purchase Rights | | Weighted-Average Fair Values of Purchase Rights |
Fiscal Year 2021 | | 0.7 | | | $74.70 - $119.37 | | $ | 29.80 | |
Fiscal Year 2022 | | 0.6 | | | $113.39 - $118.14 | | $ | 35.94 | |
Fiscal Year 2023 | | 0.7 | | | $96.34 - $111.86 | | $ | 33.91 | |
The fair values were estimated on the date of grant using the Black-Scholes valuation model. We issue new common stock out of the ESPP’s pool of authorized shares. As of March 31, 2023, 3.5 million shares were available for grant under our ESPP.
Stock-Based Compensation Expense
The following table summarizes stock-based compensation expense resulting from stock options, restricted stock units, market-based restricted stock units, performance-based restricted stock units, and the ESPP purchase rights included in our Consolidated Statements of Operations (in millions): | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2023 | | 2022 | | 2021 |
| Cost of revenue | | $ | 7 | | | $ | 6 | | | $ | 5 | |
| Research and development | | 367 | | | 356 | | | 285 | |
| Marketing and sales | | 59 | | | 54 | | | 46 | |
| General and administrative | | 115 | | | 112 | | | 99 | |
| Stock-based compensation expense | | $ | 548 | | | $ | 528 | | | $ | 435 | |
During the fiscal years ended March 31, 2023, 2022, and 2021, we recognized $72 million, $68 million, and $56 million, respectively, of deferred income tax benefit related to our stock-based compensation expense.
As of March 31, 2023, our total unrecognized compensation cost related to stock options, restricted stock units, market-based restricted stock units, and performance-based restricted stock units was $740 million and is expected to be recognized over a weighted-average service period of 1.8 years. Of the $740 million of unrecognized compensation cost, $714 million relates to restricted stock units, $19 million relates to market-based restricted stock units, and $7 million relates to performance-based restricted stock units.
Deferred Compensation Plan
We have a Deferred Compensation Plan (“DCP”) for the benefit of a select group of management or highly compensated employees and directors, which is unfunded and intended to be a plan that is not qualified within the meaning of section 401(a) of the Internal Revenue Code. The DCP permits the deferral of the annual base salary and/or director cash compensation up to a maximum amount. The deferrals are held in a separate trust, which has been established by us to administer the DCP. The trust is a grantor trust and the specific terms of the trust agreement provide that the assets of the trust are available to satisfy the claims of general creditors in the event of our insolvency. The assets held by the trust are classified as trading securities and are held at fair value on our Consolidated Balance Sheets. The assets and liabilities of the DCP are presented in other assets and other liabilities on our Consolidated Balance Sheets, respectively, with changes in the fair value of the assets and in the deferred compensation liability recognized as compensation expense. The estimated fair value of the assets was $23 million and $21 million as of March 31, 2023 and 2022, respectively. As of March 31, 2023 and 2022, $24 million and $22 million were recorded, respectively, to recognize undistributed deferred compensation due to employees.
401(k) Plan, Registered Retirement Savings Plan and ITP Plan
We have a 401(k) plan covering substantially all of our U.S. employees, a Registered Retirement Savings Plan covering substantially all of our Canadian employees, and an ITP pension plan covering substantially all our Swedish employees. These plans may permit us to make discretionary contributions to employees’ accounts based on our financial performance. We contributed an aggregate of $42 million, $41 million, and $40 million to these plans in fiscal years 2023, 2022, and 2021, respectively.
Stock Repurchase Program
In May 2018, a Special Committee of our Board of Directors, on behalf of the full Board of Directors, authorized a program to repurchase up to $2.4 billion of our common stock. We completed repurchases under the May 2018 program in April 2020.
In November 2020, our Board of Directors authorized a program to repurchase up to $2.6 billion of our common stock. We completed repurchases under the November 2020 program in October 2022.
In August 2022, our Board of Directors authorized a program to repurchase up to $2.6 billion of our common stock. This stock repurchase program expires on November 4, 2024. Under this program, we may purchase stock in the open market or through privately negotiated transactions in accordance with applicable securities laws, including pursuant to pre-arranged stock trading plans. The timing and actual amount of the stock repurchases will depend on several factors including price, capital availability, regulatory requirements, alternative investment opportunities and other market conditions. We are not obligated to repurchase a specific number of shares under this program and it may be modified, suspended or discontinued at any time. We are actively repurchasing shares under this program.
The following table summarizes total shares repurchased during fiscal years 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| May 2018 Program | | November 2020 Program | | August 2022 Program | | Total |
| (In millions) | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount |
Fiscal Year 2021 | 0.7 | | | $ | 78 | | | 4.9 | | | $ | 651 | | | — | | | $ | — | | | 5.6 | | | $ | 729 | |
Fiscal Year 2022 | — | | | $ | — | | | 9.5 | | | $ | 1,300 | | | — | | | $ | — | | | 9.5 | | | $ | 1,300 | |
Fiscal Year 2023 | — | | | $ | — | | | 5.1 | | | $ | 650 | | | 5.3 | | | $ | 645 | | | 10.4 | | | $ | 1,295 | |
(16) INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net, for the fiscal years ended March 31, 2023, 2022 and 2021 consisted of (in millions):
| | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2023 | | 2022 | | 2021 |
| Interest expense | (58) | | | (58) | | | (45) | |
| Interest income | 49 | | | 4 | | | 24 | |
| Net gain (loss) on foreign currency transactions | 31 | | | (22) | | | 9 | |
| Net gain (loss) on foreign currency forward contracts | (29) | | | 21 | | | (19) | |
| Other income (expense), net | 1 | | | 7 | | | 2 | |
| Interest and other income (expense), net | $ | (6) | | | $ | (48) | | | $ | (29) | |
(17) EARNINGS PER SHARE
The following table summarizes the computations of basic earnings per share (“Basic EPS”) and diluted earnings per share (“Diluted EPS”). Basic EPS is computed as net income divided by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation plans including stock options, restricted stock units, market-based restricted stock units, performance-based restricted stock units, and ESPP purchase rights using the treasury stock method. | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| (In millions, except per share amounts) | 2023 | | 2022 | | 2021 |
| Net income | $ | 802 | | | $ | 789 | | | $ | 837 | |
| Shares used to compute earnings per share: | | | | | |
| Weighted-average common stock outstanding — basic | 277 | | | 284 | | | 289 | |
| Dilutive potential common shares related to stock award plans | 1 | | | 2 | | | 3 | |
| | | | | |
| | | | | |
| Weighted-average common stock outstanding — diluted | 278 | | | 286 | | | 292 | |
| Earnings per share: | | | | | |
| Basic | $ | 2.90 | | | $ | 2.78 | | | $ | 2.90 | |
| Diluted | $ | 2.88 | | | $ | 2.76 | | | $ | 2.87 | |
Certain restricted stock units, market-based restricted stock units and performance-based restricted stock units were excluded from the treasury stock method computation of diluted shares as their inclusion would have had an antidilutive effect. For the fiscal year ended March 31, 2023, two million such shares were excluded, and for the fiscal years ended March 31, 2022 and 2021, one million and two million such shares were excluded, respectively.
(18) SEGMENT AND REVENUE INFORMATION
Our reporting segment is based upon: our internal organizational structure; the manner in which our operations are managed; the criteria used by our Chief Executive Officer, our Chief Operating Decision Maker (“CODM”), to evaluate segment performance; the availability of separate financial information; and overall materiality considerations. Our CODM currently reviews total company operating results to assess overall performance and allocate resources. As of March 31, 2023, we have only one reportable segment, which represents our only operating segment.
Information about our total net revenue by timing of recognition for the fiscal years ended March 31, 2023, 2022 and 2021 is presented below (in millions): | | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| 2023 | | 2022 | | 2021 |
| Net revenue by timing of recognition | | | | | |
| Revenue recognized at a point in time | $ | 2,389 | | | $ | 2,326 | | | $ | 2,006 | |
| Revenue recognized over time | 5,037 | | | 4,665 | | | 3,623 | |
| Net revenue | $ | 7,426 | | | $ | 6,991 | | | $ | 5,629 | |
Generally, performance obligations that are recognized upfront upon transfer of control are classified as revenue recognized at a point in time, while performance obligations that are recognized over either the estimated offering period, contractual term or subscription period as the services are provided are classified as revenue recognized over time.
Revenue recognized at a point in time includes revenue allocated to the software license performance obligation. This also includes revenue from the licensing of software to third-parties.
Revenue recognized over time includes service revenue allocated to the future update rights and the online hosting performance obligations. This also includes service revenue allocated to the future update rights from the licensing of software to third-parties, online-hosted services such as our Ultimate Team game mode, and subscription services.
Information about our total net revenue by composition for the fiscal years ended March 31, 2023, 2022 and 2021 is presented below (in millions): | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2023 | | 2022 | | 2021 |
| Net revenue by composition | | | | | |
| Full game downloads | $ | 1,262 | | | $ | 1,282 | | | $ | 918 | |
| Packaged goods | 675 | | | 711 | | | 695 | |
| Full game | 1,937 | | | 1,993 | | | 1,613 | |
| | | | | |
Live services and other | 5,489 | | | 4,998 | | | 4,016 | |
| Net revenue | $ | 7,426 | | | $ | 6,991 | | | $ | 5,629 | |
Full game net revenue includes full game downloads and packaged goods. Full game downloads primarily includes revenue from digital sales of full games on console, PC, mobile phones and tablets. Packaged goods primarily includes revenue from software that is sold physically through traditional channels such as brick and mortar retailers and certain licensing revenue.
Live services and other net revenue primarily includes revenue from sales of extra content for console, PC, and mobile games, certain licensing revenue, subscriptions, and advertising.
Information about our total net revenue by platform for the fiscal years ended March 31, 2023, 2022 and 2021 is presented below (in millions): | | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| | 2023 | | 2022 | | 2021 |
| Platform net revenue | | | | | |
| Console | $ | 4,443 | | | $ | 4,400 | | | $ | 3,716 | |
| PC and other | 1,729 | | | 1,532 | | | 1,195 | |
| Mobile | 1,254 | | | 1,059 | | | 718 | |
| Net revenue | $ | 7,426 | | | $ | 6,991 | | | $ | 5,629 | |
Information about our operations in North America and internationally for the fiscal years ended March 31, 2023, 2022 and 2021 is presented below (in millions): | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2023 | | 2022 | | 2021 |
| Net revenue from unaffiliated customers | | | | | |
| North America | $ | 3,151 | | | $ | 3,039 | | | $ | 2,474 | |
| International | 4,275 | | | 3,952 | | | 3,155 | |
| Net revenue | $ | 7,426 | | | $ | 6,991 | | | $ | 5,629 | |
| | | | | | | | | | | |
| | As of March 31, |
| | 2023 | | 2022 |
| Long-lived assets | | | |
| North America | $ | 445 | | | $ | 446 | |
| International | 104 | | | 104 | |
| Total | $ | 549 | | | $ | 550 | |
We attribute net revenue from external customers to individual countries based on the location of the legal entity that sells the products and/or services. Note that revenue attributed to the legal entity that makes the sale is often not the country where the consumer resides. For example, revenue generated by our Swiss legal entity includes digital revenue from consumers who reside outside of Switzerland, including consumers who reside outside of Europe. Revenue generated by our Swiss legal entity during fiscal years 2023, 2022, and 2021 represents $4,085 million, $3,423 million and $2,731 million or 55 percent, 49 percent and 49 percent of our total net revenue, respectively. Revenue generated in the United States represents over 99 percent of our total North America net revenue. There were no other countries with net revenue greater than 10 percent.
In fiscal year 2023, our direct sales to Sony and Microsoft represented approximately 32 percent and 16 percent of total net revenue, respectively. In fiscal year 2022, our direct sales to Sony and Microsoft represented approximately 33 percent and 16 percent of total net revenue, respectively. In fiscal year 2021, our direct sales to Sony and Microsoft represented approximately 36 percent and 18 percent of total net revenue, respectively.