Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

The following overview is a high-level discussion of our operating results, as well as some of the trends and drivers that affect our business. Management believes that an understanding of these trends and drivers provides important context for our results for the fiscal year ended March 31, 2018, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Form 10-K, including in the “Business” section and the “Risk Factors” above, the remainder of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)”, and the Consolidated Financial Statements and related Notes.

About Electronic Arts

We are a global leader in digital interactive entertainment, with a mission to inspire the world to play. We develop, market, publish and deliver games and services that can be played on a variety of platforms, including game consoles, PCs, mobile phones and tablets. In our games and services, we use brands that we either wholly own (such as Battlefield, Mass Effect, The Sims and Plants v. Zombies), or license from others (such as FIFA, Madden NFL and Star Wars). We develop and publish games and services across diverse genres such as sports, first-person shooter, action, role-playing and simulation. We believe that the breadth and depth of our portfolio gives us the opportunity to engage an increasing number of players across more platforms and geographies and through more business models.

Financial Results

Our key financial results for our fiscal year ended March 31, 2018 were as follows:

• Total net revenue was $5,150 million, up 6 percent year-over-year. On a constant currency basis, net of hedges, we estimate that total net revenue would have been $5,187 million, up 7 percent year over year.

• Digital revenue was $3,450 million, up 20 percent year-over-year.

• International net revenue was $3,060 million, up 12 percent year-over-year. On a constant currency basis, net of hedges, we estimate that international net revenue would have been $3,096 million, up 14 percent year over year.

• Gross margin was 75.2 percent, up 2 percentage points year-over-year.

• Operating expenses were $2,439 million, up 5 percent year-over-year. On a constant currency basis, net of hedges, we estimate that total operating expenses would have been $2,421 million, up 4 percent year over year.

• Operating income was $1,434 million, up 17 percent year-over-year.

• Net income was $1,043 million, up 8 percent year-over-year.

• Diluted earnings per share was $3.34, up 8 percent year-over-year.

• Operating cash flow was $1,692 million, up 7 percent year-over-year.

• Total cash, cash equivalents and short-term investments were $5,331 million.

From time to time, we make comparisons of current periods to prior periods with reference to constant currency. Constant currency comparisons are based on translating local currency amounts in the current period at actual foreign exchange rates from the prior comparable period. We evaluate our financial performance on a constant currency basis in order to facilitate period-to-period comparisons without regard to the impact of changing foreign currency exchange rates.

Trends in Our Business

Digital Business. Players increasingly purchase our games as digital downloads, as opposed to purchasing physical discs, and engage with the live services we provide on an ongoing basis. Our live services provide additional depth and engagement opportunities for our players and include microtransactions, extra content, subscriptions, and esports. Our net revenue attributable to live services comprised 40 percent of our total net revenue during fiscal year 2018 and we expect that live services net revenue will continue to be material to our business. Our most popular live service is the Ultimate Team mode associated with our sports franchises. Ultimate Team allows players to collect and trade current and former professional players in order to build and compete as a personalized team. Net revenue from Ultimate Team represented approximately 21 percent of our total net revenue during fiscal year 2018, a substantial portion of which was derived from FIFA Ultimate Team. Our digital transformation is also creating opportunities in platforms, business models and the way in which players engage with our games and services. For example, we have leveraged brands and assets from franchises typically associated with consoles and traditional PC gaming, such as FIFA, Madden NFL, The Sims, SimCity and Star Wars, to create mobile and PC games that are monetized through live services associated with the game. We also provide our EA Access and Origin Access subscription services, which offer players access to a selection of EA games and other benefits for a monthly or annual fee.

We significantly increased our digital net revenue from $2,409 million in fiscal year 2016 to $2,874 million in fiscal year 2017 and $3,450 million during fiscal year 2018. We expect this portion of our business to continue to grow through fiscal year 2019 and beyond as we continue to focus on developing and monetizing products and services that can be delivered digitally.

Technological Infrastructure. As our digital business has grown, our games and services increasingly depend on the reliability, availability and security of our technological infrastructure. We are investing and expect to continue to invest in technology, hardware and software to support our games and services, including with respect to security protections. Our industry is prone to, and our systems and networks are subject to, cyber-attacks, computer viruses, worms, phishing attacks, malicious software programs, and other information security incidents that seek to exploit, disable, damage, disrupt or gain access to our networks, our products and services, supporting technological infrastructure, intellectual property and other assets. We expect these threats to our systems and networks to continue.

Player Network. We have made, and expect to continue to make, investments that strengthen our player network, which connects our players to each other and to the games they love. We are adopting consistent, cross-company methodologies to better understand our players’ needs and will continue to invest in technology that enables us to build personalized player relationships that can last for years instead of days or weeks by connecting our players to us and to each other. This connection allows us to market and deliver content and services for popular franchises like FIFA, Battlefield and Star Wars to our players more efficiently. That same foundation also enables new player-centric ways to discover and try new games and experiences, such as our subscription-based EA Access and Origin Access services.

Concentration of Sales Among the Most Popular Games. In all major segments of our industry, we see a large portion of games sales concentrated on the most popular titles. Similarly, a significant portion of our revenue historically has been derived from games based on a few popular franchises, several of which we have released on an annual or bi-annual basis. In particular, we have historically derived a significant portion of our net revenue from our largest and most popular game, FIFA, the annualized version of which is consistently one of the best-selling games in the marketplace.

Mobile and PC Free-to-Download Games. The global adoption of mobile devices and a business model for those devices that allows consumers to try new games with no up-front cost, and that are monetized through the live service associated with the game, has led to significant growth in the mobile gaming industry. We expect this growth to continue during our 2019 fiscal year. Likewise, the wide consumer acceptance of free-to-download, live service-based PC games played over the Internet has broadened our consumer base. We expect revenue generated from mobile and PC free-to-download games to remain an important part of our business.

Recurring Revenue Sources. Our business model includes revenue that we deem recurring in nature, such as revenue from our annualized titles (such as FIFA and Madden NFL) and associated live services, subscriptions and our ongoing mobile business. We have been able to forecast revenue from these areas of our business with greater relative confidence than for new games, services and business models. As we continue to leverage the digital transformation in our industry and incorporate new content models and modalities of play into our games, our goal is to continue to look for opportunities to expand the recurring portion of our business.

Net Bookings. In order to improve transparency into our business, we disclose an operating performance metric, net bookings. Net bookings is defined as the net amount of products and services sold digitally or sold-in physically in the period. Net

bookings is calculated by adding total net revenue to the change in deferred net revenue for online-enabled games, and, for periods after the fourth quarter of fiscal 2018, excluding mobile platform fees.

The following is a calculation of our total net bookings for the periods presented:

	Year Ended March 31,
(In millions)	2018		2017
Total net revenue	$	5,150	$	4,845
Change in deferred net revenue (online-enabled games)	30		97
Net bookings	$	5,180	$	4,942

Net bookings were $5,180 million for the fiscal year ended March 31, 2018, driven by FIFA 18, FIFA Ultimate Team, Star Wars Battlefront II, and Madden NFL 18. Net bookings increased $238 million or 5 percent as compared to the fiscal year ended March 31, 2017 due primarily to growth in bookings associated with the Ultimate Team game mode. Digital net bookings were $3,538 million for the fiscal year ended March 31, 2018, an increase of $504 million or 17 percent as compared to the fiscal year ended March 31, 2017. The increase in digital net bookings was driven by growth in live services which grew $514 million or 31 percent year-over-year, primarily due to growth in bookings associated with the Ultimate Team game mode and sales of The Sims 4; and our mobile business which grew $31 million or 5 percent year-over-year, primarily due to FIFA Mobile. These increases were offset by a decrease of $41 million or 6 percent in our full game downloads. Full game downloads of FIFA 18 showed strength in fiscal 2018, but were offset by the success of Battlefield 1 in fiscal 2017.

Recent Developments

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. This stock repurchase program supersedes and replaces the stock repurchase program approved in May 2017, and expires on May 31, 2020. 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.

Acquisition of Respawn LLC. On December 1, 2017, we completed the acquisition of Respawn. Respawn is a leading game development studio and creators of games including the critically-acclaimed Titanfall franchise. In connection with the acquisition, we paid $151 million in cash. In addition, we granted long-term equity awards in the form of restricted stock units to employees with a grant date fair value of $167 million. Furthermore, we may be required to pay variable cash consideration that is contingent upon the achievement of certain performance milestones relating to the development of future titles, through the end of calendar 2022. The additional consideration is limited to a maximum of $140 million.

U.S. Tax Act. On December 22, 2017, the Tax Cuts and Jobs Act (the “U.S. Tax Act”) was enacted which significantly revised the U.S. corporate income tax system by, among other things, lowering the U.S. corporate income tax rates to 21 percent, generally implementing a territorial tax system, and imposing a one-time transition tax on the deemed repatriation of undistributed earnings of foreign subsidiaries (the “Transition Tax”). We recorded a provisional $235 million tax charge during the year ended March 31, 2018 as a result of the application of the U.S. Tax Act; $192 million of which relates to the Transition Tax.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, and revenue and expenses during the reporting periods. The policies discussed below are considered by management to be critical because they are not only important to the portrayal of our financial condition and results of operations, but also because application and interpretation of these policies requires both management judgment and estimates of matters that are inherently uncertain and unknown. As a result, actual results may differ materially from our estimates.

Revenue Recognition, and Sales Returns and Allowances

We derive revenue principally from sales of interactive software games, and related content and services on game consoles, PCs, mobile phones and tablets. We evaluate revenue recognition based on the criteria set forth in FASB Accounting Standards Codification (“ASC”) 605, Revenue Recognition and ASC 985-605, Software: Revenue Recognition. We classify our revenue as either product revenue or service and other revenue.

Product revenue. Our product revenue includes revenue associated with the sale of software games or related product content or updates, whether delivered digitally (e.g., full-game downloads, extra-content) or via a physical disc (e.g., packaged goods), and licensing of game software to third-parties. Product revenue also includes revenue from mobile full game downloads that do not require our hosting support (e.g., premium mobile games) in order to utilize the game or related content (i.e. can be played with or without an Internet connection), and sales of tangible products such as hardware, peripherals, or collectors’ items.

Service and other revenue. Our service revenue includes revenue recognized from time-based subscriptions, games, content or updates that requires our hosting support in order to utilize the game or related content (i.e., can only be played with an Internet connection). This includes (1) entitlements to content that are accessed through hosting services (e.g., microtransactions for Internet-based, social network and free-to-download mobile games), (2) massively multi-player online (“MMO”) games (both software game and subscription sales), (3) subscriptions for our Battlefield Premium, EA and Origin Access, and Pogo-branded online game services, and (4) allocated service revenue from sales of software games with a service of online activities (e.g., online playability). Our other revenue includes advertising and non-software licensing revenue.

With respect to the allocated service revenue from sales of software games with a service of online activities (“online services”) mentioned above, our allocation of proceeds between product and service revenue for presentation purposes is based on management’s best estimate of the selling price of the online services with the residual value allocated to product revenue. Our estimate of the selling price of the online services are comprised of several factors including, but not limited to, prior selling prices for the online services, prices charged separately by other third-party vendors for similar service offerings, and a cost-plus-margin approach. We review the estimated selling price of the online services on a regular basis and use this methodology consistently to allocate revenue between product and service for software game sales with online services.

We evaluate and recognize revenue when all four of the following criteria are met:

• Evidence of an arrangement. Evidence of an agreement with the customer that reflects the terms and conditions to deliver the related products or services must be present.

• Fixed or determinable fee. If a portion of the arrangement fee is not fixed or determinable, we recognize revenue as the amount becomes fixed or determinable.

• Collection is deemed probable. Collection is deemed probable if we expect the customer to be able to pay amounts under the arrangement as those amounts become due. If we determine that collection is not probable as the amounts become due, we generally conclude that collection becomes probable upon cash collection.

• Delivery. For packaged goods, delivery is considered to occur when a product is shipped and the risk of loss and rewards of ownership have transferred to the customer. For digital downloads, delivery is considered to occur when the software is made available to the customer for download. For services and other, delivery is generally considered to occur as the service is delivered, which is determined based on the underlying service obligation. If there is significant uncertainty of acceptance, revenue is recognized once acceptance is reasonably assured.

Online-Enabled Games

The majority of our software games and related content have online connectivity whereby a consumer may be able to download unspecified content or updates on a when-and-if-available basis (“unspecified updates”) for use with the original game software. In addition, we may also offer a service of online activities (e.g., online playability) without a separate fee. U.S. GAAP requires us to account for the consumer’s right to receive unspecified updates or the service of online activities for no additional fee as a “bundled” sale, or multiple-element arrangement.

We have an established historical pattern of providing unspecified updates (e.g., player roster updates to Madden NFL 18) to online-enabled games and related content at no additional charge to the consumer. Because we do not have vendor-specific objective evidence of fair value (“VSOE”) for these unspecified updates, we are required by current U.S. GAAP to recognize as

revenue the entire sales price of these online-enabled games and related content over the period we expect to offer the unspecified updates to the consumer (“estimated offering period”).

Estimated Offering Period

Because the offering period is not an explicitly defined period, we must make an estimate of the offering period. Determining the estimated offering period is inherently subjective and is subject to regular revision based on historical online usage. For example, in determining the estimated offering period for unspecified updates associated with our online-enabled games, we consider the period of time consumers are online as online connectivity is required. On an annual basis, we review consumers’ online gameplay of all online-enabled games that have been released 12 to 24 months prior to the evaluation date. For example, if our evaluation date is April 1, 2017, we evaluate all online-enabled games released between April 1, 2015 and March 31, 2016. Based on this population of games, for all players that register the game online within the first six months of release of the game to the general public, we compute the weighted-average number of days for each online-enabled game, based on when a player initially registers the game online to when that player last plays the game online. We then compute the weighted-average number of days for all online-enabled games by multiplying the weighted-average number of days for each online-enabled game by its relative percentage of total units sold from these online-enabled games (i.e., a game with more units sold will have a higher weighting to the overall computation than a game with fewer units sold). Under a similar computation, 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 an end consumer (i.e., time in channel). Based on these two calculations we then consider the method of distribution. For example, physical software games sold at retail would have a composite offering period equal to the online gameplay plus time in channel as opposed to digitally distributed software games which are delivered immediately via digital download and thus have no concept of channel. 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.

While we consistently apply this methodology, inherent assumptions used in this methodology include which online-enabled games to sample, whether to use only units that have registered online, whether to weight the number of days for each game, whether to weight the days based on the units sold of each game, determining the period of time between the date of sale to reseller and the date of sale to the consumer and assessing online gameplay trends.

We recognize revenue from the sale of online-enabled games for which we do not have VSOE for the unspecified updates on a straight-line basis, generally over an estimated nine-month period beginning in the month after shipment for physical games sold through retail and an estimated six-month period for digitally-distributed games.

Deferred Net Revenue (online-enabled games)

Because the majority of our sales are subject to a deferral period of generally six to nine months, our deferred net revenue (online-enabled games) balance is material. This balance increases from period to period by the revenue being deferred for current sales and is reduced by the recognition of revenue from prior sales that were deferred (i.e., the “net change” in the deferred balance). However, given the seasonal sales nature of our business, the net change in the deferred balance may be material from period to period. For example, because our sales have historically been highest in the fiscal third quarter, the deferred net revenue (online-enabled games) balance generally increases significantly in the third fiscal quarter. Similarly, because sales have historically been lowest in the first fiscal quarter, the deferred net revenue (online-enabled games) balance generally decreases significantly in the first fiscal quarter of a fiscal year.

Other Multiple-Element Arrangements

In some of our multiple-element arrangements, we sell non-software products with software and/or software-related offerings. These non-software products are generally music soundtracks, peripherals or ancillary collectors’ items, such as figurines and comic books. Revenue for these arrangements is allocated to each separate unit of accounting for each deliverable using the relative selling prices of each deliverable in the arrangement based on the selling price hierarchy described below. If the arrangement contains more than one software deliverable, the arrangement consideration is allocated to the software deliverables as a group and then allocated to each software deliverable.

We determine the selling price for a non-software product deliverable based on the following selling price hierarchy: VSOE (i.e., the price we charge when the non-software product is sold separately) if available, third-party evidence (“TPE”) of fair value (i.e., the price charged by others for similar non-software products) if VSOE is not available, or our best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. Determining the BESP is a subjective process that is based on multiple factors including, but not limited to, recent selling prices and related discounts, market conditions, customer classes,

sales channels and other factors. Provided the other three revenue recognition criteria other than delivery have been met, we recognize revenue upon delivery to the customer as we have no further obligations.

We must make assumptions and judgments in order to (1) determine whether and when each element is delivered, (2) determine whether VSOE exists for each undelivered element, and (3) allocate the total price among the various elements, as applicable. Changes to any of these assumptions and judgments, or changes to the elements in the arrangement, could cause a material increase or decrease in the amount of revenue that we report in a particular period.

Principal Agent Considerations

We evaluate sales of our interactive software games, extra-content, and services from our subscription offerings via third party storefronts, including digital channel storefronts from Microsoft, Sony, Apple, and Google, in order to determine whether or not we are acting as the primary obligor in the sale to the end consumer, which we consider in determining if revenue should be reported gross or net of fees retained by the storefront. Key indicators that we evaluate in determining gross versus net treatment include but are not limited to the following:

• The party responsible for delivery/fulfillment of the product or service to the end consumer

• The party responsible for the billing, collection of fees and refunds to the end consumer

• The storefront and Terms of Sale that govern the end consumer’s purchase of the product or service

• The party that sets the pricing with the end consumer and has credit risk

Based on evaluation of the above indicators, we have determined that generally the third party is considered the primary obligor to end consumers for the sale of our interactive software games. We therefore report revenue related to these arrangements net of the fees retained by the storefront.

Sales Returns and Allowances

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 product that they have not resold to end consumers. The amount of the price protection is generally the difference between the old wholesale price and the new reduced wholesale price. In certain countries for our PC and console packaged goods software products, we also have a practice of allowing channel partners to return older software products in the channel in exchange for a credit allowance. As a general practice, we do not give cash refunds.

When evaluating the adequacy of sales returns and price protection allowances, we analyze the following: historical credit allowances, current sell-through of our channel partners’ inventory of our software products, current trends in retail and the video game industry, changes in customer demand, acceptance of our software 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.

In the future, actual returns and price protections may materially exceed our estimates as unsold software products in the distribution channels are exposed to rapid changes in consumer preferences, market conditions or technological obsolescence due to new platforms, product updates or competing software products. While we believe we can make reliable estimates regarding these matters, these estimates are inherently subjective. Accordingly, if our estimates change, our returns and price protection allowances would change and would impact the total net revenue and related Balance Sheet accounts that we report.

Fair Value Estimates

Business Combinations. We must estimate the fair value of assets acquired, liabilities and contingencies assumed, acquired in-process technology, and contingent consideration issued in a business combination. Our assessment of the estimated fair value of each of these can have a material effect on our reported results as intangible assets are amortized over various estimated useful lives. Furthermore, the estimated fair value assigned to an acquired asset or liability has a direct impact on the amount we recognize as goodwill, which is an asset that is not amortized. Determining the fair value of assets acquired requires an assessment of the highest and best use or the expected price to sell the asset and the related expected future cash flows. Determining the fair value of acquired in-process technology also requires an assessment of our expectations related to the use of that technology. Determining the fair value of an assumed liability requires an assessment of the expected cost to transfer the liability. Determining the fair value of contingent consideration requires an assessment of the probability-weighted expected future cash flows over the period in which the obligation is expected to be settled, and applying a discount rate that appropriately captures the risk associated with the obligation. The significant unobservable inputs used in the fair value measurement of the contingent consideration payable are forecasted earnings. Significant changes in forecasted earnings would

result in significantly higher or lower fair value measurement. This fair value assessment is also required in periods subsequent to a business combination. Such estimates are inherently difficult and subjective and can have a material impact on our Consolidated Financial Statements.

Royalties and Licenses

Our royalty expenses consist of payments to (1) content licensors, (2) independent software developers, and (3) co-publishing and distribution affiliates. 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.

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 generally at the greater of the contractual rate or an effective royalty rate based on the total projected net revenue for contracts with guaranteed minimums. Significant judgment is required to estimate the effective royalty rate for a particular contract. Because the computation of effective royalty rates requires us to project future revenue, it is inherently subjective as our future revenue projections must anticipate a number of factors, including (1) the total number of titles subject to the contract, (2) the timing of the release of these titles, (3) the number of software units and amount of extra content that we expect to sell, which can be impacted by a number of variables, including product quality, number of platforms we release on, the timing of the title’s release and competition, and (4) future pricing. Determining the effective royalty rate for our titles is particularly challenging due to the inherent difficulty in predicting the popularity of entertainment products. Furthermore, if we conclude that we are unable to make a reasonably reliable forecast of projected net revenue, we recognize royalty expense at the greater of contract rate or on a straight-line basis over the term of the contract. Accordingly, if our future revenue projections change, our effective royalty rates would change, which could impact the amount and timing of royalty expense we recognize.

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 generally 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 product and service sales. 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 impairment exists, then the 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.

Income Taxes

We recognize deferred tax assets and liabilities for both (1) the expected impact of differences between the financial statement amount and the tax basis of assets and liabilities and (2) the expected future tax benefit to be derived from tax losses and tax credit carryforwards. We record a valuation allowance against deferred tax assets when it is considered more likely than not that all or a portion of our deferred tax assets will not be realized. In making this determination, we are required to give significant weight to evidence that can be objectively verified.

In addition to considering forecasts of future taxable income, we are also required to evaluate and quantify other possible sources of taxable income in order to assess the realization of our deferred tax assets, namely the reversal of existing deferred tax liabilities, the carryback of losses and credits as allowed under current tax law, and the implementation of tax planning

strategies. Evaluating and quantifying these amounts involves significant judgments. Each source of income must be evaluated based on all positive and negative evidence; this evaluation involves assumptions about future activity.

In the fourth quarter of fiscal year 2016, we realized significant U.S. pre-tax income for both the fourth quarter and the fiscal year ended March 31, 2016. As a result, we released the valuation allowance against all of the U.S. federal deferred tax assets and a portion of the U.S. state deferred tax assets during the fourth quarter of fiscal year 2016. We continue to maintain a valuation allowance related to specific U.S. state deferred tax assets and foreign capital loss carryovers, due to uncertainty about the future realization of these assets.

Our effective tax rate and resulting provision for income taxes for the year ended March 31, 2018 were significantly impacted by the U.S. Tax Act enacted on December 22, 2017. The U.S. Tax Act significantly revised the U.S. corporate income tax system by, among other things, lowering the U.S. corporate income tax rate to 21 percent, generally implementing a territorial tax system and imposing the Transition Tax.

Reasonable estimates of the impacts of the U.S. Tax Act are provided in accordance with SEC guidance that allows for a measurement period of up to one year after the enactment date of the U.S. Tax Act to finalize the recording of the related tax impacts. We expect to complete the accounting under the U.S. Tax Act as soon as practicable, but in no event later than one year from the enactment date of the U.S. Tax Act.

The final calculations of tax expenses and tax benefits resulting from the U.S. Tax Act may differ from our estimates, potentially materially, due to, among other things, changes in interpretations of the U.S. Tax Act, our further analysis of the U.S. Tax Act, or any updates or changes to estimates that we have utilized to calculate the transition impacts.

Prior to the U.S. Tax Act, a substantial majority of undistributed earnings of our foreign subsidiaries were considered to be indefinitely reinvested. The U.S. Tax Act included a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and as a result, substantially all previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax.

As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each jurisdiction in which we operate prior to the completion and filing of tax returns for such periods. This process requires estimating both our geographic mix of income and our uncertain tax positions in each jurisdiction where we operate. These estimates involve complex issues and require us to make judgments about the likely application of the tax law to our situation, as well as with respect to other matters, such as anticipating the positions that we will take on tax returns prior to our preparing the returns and the outcomes of disputes with tax authorities. The ultimate resolution of these issues may take extended periods of time due to examinations by tax authorities and statutes of limitations. In addition, changes in our business, including acquisitions, changes in our international corporate structure, changes in the geographic location of business functions or assets, changes in the geographic mix and amount of income, as well as changes in our agreements with tax authorities, valuation allowances, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in the estimated and actual level of annual pre-tax income can affect the overall effective tax rate.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

The information under the subheading “Impact of Recently Issued Accounting Standards” in Note 1 - Description of Business and Basis of Presentation to the Consolidated Financial Statements in this Form 10-K is incorporated by reference into this Item 7.

RESULTS OF OPERATIONS

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, 2018 and 2017 contained 52 weeks each and ended on March 31, 2018 and April 1, 2017, respectively. Our results of operations for the fiscal year ended March 31, 2016 contained 53 weeks and ended on April 2, 2016. For simplicity of disclosure, all fiscal periods are referred to as ending on a calendar month end.

Net Revenue

Net revenue consists of sales generated from (1) video games sold as digital downloads or as packaged goods and designed for play on game consoles and PCs, (2) video games for mobile phones and tablets, (3) separate software products and extra-content and online game services associated with these products, (4) licensing our game software to third parties, (5) allowing other companies to manufacture and sell our products in conjunction with other products, and (6) advertisements on our online web pages and in our games. We recognize revenue from the sale of online-enabled games for which we do not have VSOE for the unspecified updates on a straight-line basis, generally over an estimated six-month period for digitally-delivered games and content and an estimated nine-month period beginning in the month after shipment for physical games sold through retail.

We provide two different measures of our Net Revenue. (1) Net Revenue by Product revenue and Service and other revenue, and (2) Net Revenue by Type, which is primarily based on method of distribution. Management places a greater emphasis and focus on assessing our business through a review of the Net Revenue by Type (Digital, and Packaged goods and other) than by Net Revenue by Product revenue and Service and other revenue.

Comparison of Fiscal Year 2018 to Fiscal Year 2017

Net Revenue

For fiscal year 2018, net revenue was $5,150 million, an increase of $305 million, or 6 percent, as compared to fiscal year 2017. This increase was driven by a $681 million increase in revenue primarily from the FIFA and Mass Effect franchises. This increase was partially offset by a $376 million decrease in revenue primarily from the Star Wars, Plants vs. Zombies, and UFC franchises.

Net Revenue by Product Revenue and Service and Other Revenue

Our Net Revenue by Product revenue and Service and other revenue for fiscal years 2018 and 2017 was as follows (in millions):

	Year Ended March 31,
	2018		2017		$ Change			% Change
Net revenue:
Product	$	2,586	$	2,640	$	(54	)	(2	)%
Service and other	2,564		2,205		359			16	%
Total net revenue	$	5,150	$	4,845	$	305		6	%

Product Revenue

For fiscal year 2018, Product net revenue was $2,586 million, primarily driven by FIFA 18, Battlefield 1, and FIFA 17. Product net revenue decreased $54 million, or 2 percent, as compared to fiscal year 2017. This decrease was driven by a $450 million decrease primarily from the Star Wars, Battlefield, and UFC franchises. This decrease was partially offset by a $396 million increase primarily from the Mass Effect, The Sims, and Need for Speed franchises.

Service and Other Revenue

For fiscal year 2018, Service and other net revenue was $2,564 million, primarily driven by FIFA Ultimate Team, Star Wars: Galaxy of Heroes, and Battlefield 1 Premium. Service and other net revenue for fiscal year 2018 increased $359 million, or 16 percent, as compared to fiscal year 2017. This increase was driven by a $538 million increase primarily from FIFA Ultimate Team and Battlefield 1 Premium, partially offset by a $179 million decrease primarily from Need for Speed 2015 and the Plants vs. Zombies franchise.

Supplemental Net Revenue by Type

As we continue to evolve our business and more of our products are delivered to consumers digitally, we place a greater emphasis and focus on assessing our business performance through a review of net revenue by type.

Our net revenue by type for fiscal years 2018 and 2017 was as follows (in millions):

	Year Ended March 31,
	2018		2017		$ Change			% Change

Full game downloads	$	707	$	659	48			7	%
Live services ^(a)	2,083		1,589		494			31	%
Mobile	660		626		34			5	%
Total Digital	$	3,450	$	2,874	$	576		20	%

Packaged goods and other	$	1,700	$	1,971	(271		)	(14	)%
Net revenue	$	5,150	$	4,845	$	305		6	%

(a)Live services net revenue is comprised of net revenue previously presented as “Extra content” and “Subscription, advertising, and other” through the fourth quarter of fiscal 2017.

Digital Net Revenue

Digital net revenue includes full game downloads, live services, and mobile revenue. Digital net revenue includes game software distributed through our direct-to-consumer PC platform Origin, distributed wirelessly through mobile carriers, or licensed to our third-party publishing partners who distribute our games digitally.

For fiscal year 2018, digital net revenue was $3,450 million primarily driven by our digital business, particularly continued success with live services, including Ultimate Team and live services associated with Battlefield 1. Digital net revenue for fiscal year 2018 increased $576 million, or 20 percent, as compared to fiscal year 2017. This increase was due to (1) a $48 million or 7 percent increase in full-game download net revenue primarily driven by FIFA 18 and Mass Effect: Andromeda, partially offset by Battlefield 1 and Star Wars Battlefront, (2) a $494 million or 31 percent increase in live services net revenue primarily driven by our Ultimate Team game mode and Battlefield 1 Premium, (3) a $34 million or 5 percent increase in mobile net revenue primarily driven by Star Wars: Galaxy of Heroes and FIFA Mobile.

Packaged Goods and Other Net Revenue

Packaged goods and other net revenue includes revenue from software that is distributed physically. This includes (1) net revenue from game software distributed physically through traditional channels such as brick and mortar retailers, and (2) our software licensing revenue from third parties (for example, makers of console platforms, personal computers or computer accessories) who include certain of our products for sale with their products (“OEM bundles”).

For fiscal year 2018, packaged goods and other net revenue was $1,700 million, primarily driven by FIFA 18, FIFA 17, and Battlefield 1. Packaged goods and other net revenue for fiscal year 2018 decreased $271 million, or 14 percent, as compared to fiscal year 2017, primarily driven by consumers increasingly purchasing our games digitally, as opposed to purchasing physical discs. This decrease was driven by a $400 million decrease in net revenue primarily from the Star Wars, Plants vs. Zombies, and UFC franchises. This decrease was partially offset by a $129 million increase primarily from the Mass Effect and Battlefield franchises.

Cost of Revenue

Cost of revenue for fiscal years 2018 and 2017 was as follows (in millions):

	March 31,2018		% of Related Net Revenue		March 31,2017		% of Related Net Revenue		% Change		Change as a % of Related Net Revenue
Cost of revenue:
Product	$	822	31.8	%	$	893	33.8	%	(8	)%	(2.0	)%
Service and other	455		17.7	%	405		18.4	%	12	%	(0.7	)%
Total cost of revenue	$	1,277	24.8	%	$	1,298	26.8	%	(2	)%	(2.0	)%

Cost of Product Revenue

Cost of product revenue consists of (1) manufacturing royalties, net of volume discounts and other vendor reimbursements, (2) certain royalty expenses for celebrities, professional sports leagues, movie studios and other organizations, and independent software developers, (3) inventory costs, (4) expenses for defective products, (5) write-offs of post launch prepaid royalty costs and losses on previously unrecognized licensed intellectual property commitments, (6) amortization of certain intangible assets, (7) personnel-related costs, and (8) warehousing and distribution costs. We generally recognize volume discounts when they are earned from the manufacturer (typically in connection with the achievement of unit-based milestones); whereas other vendor reimbursements are generally recognized as the related revenue is recognized.

Cost of product revenue decreased by $71 million, or 8 percent in fiscal year 2018, as compared to fiscal year 2017. This decrease was primarily due to a decrease in inventory costs associated with Battlefield 1 and Titanfall 2 which were launched during the fiscal year 2017, a decrease in inventory and warehouse operations costs as a result of the closure of our Switzerland distribution business in fiscal year 2017, and a $25 million decrease in intangible amortization primarily due to the recognition of a $15 million impairment charge on an acquisition-related intangible asset during the fiscal year 2017. These decreases were partially offset by an increase in the royalty costs associated with our product launches during the fiscal year 2018, as compared to fiscal year 2017.

Cost of Service and Other Revenue

Cost of service and other revenue consists primarily of (1) royalty costs, (2) data center, bandwidth and server costs associated with hosting our online games and websites, (3) inventory costs, (4) platform processing fees from operating our website-based games on third party platforms, and (5) credit card fees associated with our service revenue.

Cost of service and other revenue increased by $50 million, or 12 percent in fiscal year 2018, as compared to fiscal year 2017. This increase was primarily due to an increase in royalty costs associated with higher sales associated with FIFA Ultimate Team and Madden Ultimate Team, offset by a $16 million decrease in intangible amortization.

Total Cost of Revenue as a Percentage of Total Net Revenue

During fiscal year 2018, total cost of revenue as a percentage of total net revenue decreased by $21 million, or 2.0 percent as compared to the fiscal year ended March 31, 2017. This decrease was primarily due to a decrease in inventory and warehouse operations costs as a result of the closure of our Switzerland distribution business in fiscal year 2017, and an increase in the proportion of our digital net revenues to packaged goods and other net revenues, which generally have higher costs than our digital products and services.

Research and Development

Research and development expenses consist of expenses incurred by our production studios for personnel-related costs, related overhead costs, contracted services, depreciation and any impairment of prepaid royalties for pre-launch products. Research and development expenses for our online products include expenses incurred by our studios consisting of direct development and related overhead costs in connection with the development and production of our online games. Research and development expenses also include expenses associated with our digital platform, software licenses and maintenance, and management overhead.

Research and development expenses for fiscal years 2018 and 2017 were as follows (in millions):

March 31,2018				% of Net Revenue			March 31,2017				% of Net Revenue			$ Change				% Change
$	1,320			26	%		$	1,205			25	%		$	115			10	%

Research and development expenses increased by $115 million, or 10 percent, in fiscal year 2018, as compared to fiscal year 2017. This $115 million increase was primarily due to a (1) a $78 million increase in personnel-related costs primarily resulting from an increase in headcount and an increase in salary costs, (2) a $37 million increase in stock-based compensation primarily resulting from an increase in equity award issuances to employees, and (3) a $21 million increase in facilities-related costs. These increases were partially offset by a $32 million decrease primarily due to a loss on a royalty-based commitment and impairment on a royalty based asset during fiscal year 2017.

Marketing and Sales

Marketing and sales expenses consist of personnel-related costs, related overhead costs, advertising, marketing and promotional expenses, net of qualified advertising cost reimbursements from third parties.

Marketing and sales expenses for fiscal years 2018 and 2017 were as follows (in millions):

March 31,2018				% of Net Revenue			March 31,2017				% of Net Revenue			$ Change				% Change
$	641			12	%		$	673			14	%		$	(32	)		(5	)%

Marketing and sales expenses decreased by $32 million, or 5 percent, in fiscal year 2018, as compared to fiscal year 2017. This $32 million decrease was primarily due to a decrease in advertising and promotional spending associated with our 2018 game launches as compared to our fiscal 2017 game launches, particularly Battlefield 1 and Titanfall 2, which were launched during fiscal 2017.

General and Administrative

General and administrative expenses consist of personnel and related expenses of executive and administrative staff, corporate functions such as finance, legal, human resources, and information technology, related overhead costs, fees for professional services such as legal and accounting, and allowances for doubtful accounts.

General and administrative expenses for fiscal years 2018 and 2017 were as follows (in millions):

March 31,2018				% of Net Revenue			March 31,2017				% of Net Revenue			$ Change				% Change
$	469			9	%		$	439			9	%		$	30			7	%

General and administrative expenses increased by $30 million, or 7 percent, in fiscal year 2018, as compared to fiscal year 2017. This $30 million increase was primarily due to (1) a $20 million increase in contracted services primarily due to higher legal expenses, (2) a $13 million increase in personnel-related costs primarily resulting from an increase in headcount, and (3) an $8 million increase in stock-based compensation. These increases were partially offset by an $8 million decrease in facility-related costs.

Income Taxes

Provision for income taxes for fiscal years 2018 and 2017 was as follows (in millions):

March 31, 2018				Effective Tax Rate			March 31, 2017				Effective Tax Rate
$	406			28.0	%		$	243			20.1	%

Our effective tax rate for the year ended March 31, 2018 was 28.0 percent as compared 20.1 percent for the same period in fiscal year 2017. Our effective tax rate and resulting provision for income taxes for the fiscal year ended March 31, 2018 was significantly impacted by the U.S. Tax Act. The U.S. Tax Act significantly revised the U.S. corporate income tax system by, among other things, lowering the U.S. corporate income tax rate to 21 percent, generally implementing a territorial tax system and imposing the Transition Tax. These impacts were offset by earnings realized in countries that have lower statutory tax rates and the recognition of excess tax benefits from stock-based compensation.

Our effective tax rates for fiscal year 2019 and future periods will continue to depend on a variety of factors, including changes in our business such as acquisitions and intercompany transactions, changes in our international structure, changes in the geographic location of business functions or assets, changes in the geographic mix of income, changes in or termination of our agreements with tax authorities, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in our annual pre-tax income or loss. We anticipate that the impact of excess tax benefits and tax deficiencies may result in significant fluctuations to our effective tax rate in the future.

Reasonable estimates of the impacts of the U.S. Tax Act are provided in accordance with SEC guidance that allows for a measurement period of up to one year after the enactment date of the U.S. Tax Act to finalize the recording of the related tax

impacts. We expect to complete the accounting under the U.S. Tax Act as soon as practicable, but in no event later than one year from the enactment date of the U.S. Tax Act.

We recorded a provisional tax expense of $235 million related to the U.S. Tax Act for the year ended March 31, 2018, $192 million of which relates to the Transition Tax. During the three months ended March 31, 2018, we adjusted the provisional amount initially recorded for the Transition Tax by recognizing an additional $41 million charge. We also recorded immaterial adjustments to certain other tax items. These adjustments were based on our further analysis of the U.S. Tax Act and certain changes to current year earnings estimates and assertions. These amounts remain provisional. The final calculation of taxes attributable to the U.S. Tax Act may differ from our estimates, potentially materially, due to, among other things, changes in interpretations of the U.S. Tax Act, our further analysis of the U.S. Tax Act, or any updates or changes to estimates that we have utilized to calculate the transition impacts.

The U.S. Tax Act creates new U.S. taxes on foreign earnings. Our provision for income taxes for the year ended March 31, 2018 provisionally does not reflect any deferred tax impacts of the U.S. taxes on foreign earnings. Because of the complexity of the rules regarding the new tax on foreign earnings, we are continuing to evaluate this accounting policy election.

Comparison of Fiscal Year 2017 to Fiscal Year 2016

Net Revenue

For fiscal year 2017, net revenue was $4,845 million and increased $449 million, or 10 percent, as compared to fiscal year 2016. This increase was driven by an $809 million increase in revenue primarily from the Star Wars, Battlefield, and FIFA franchises. This increase was partially offset by a $360 million decrease in revenue primarily from the Dragon Age, The Sims, and NHL franchises, and The Simpsons Tapped Out.

Net Revenue by Product Revenue and Service and Other Revenue

Our Net Revenue by Product revenue and Service and other revenue for fiscal years 2017 and 2016 was as follows (in millions):

	Year Ended March 31,
	2017		2016		$ Change		% Change
Net revenue:
Product	$	2,640	$	2,497	$	143	6	%
Service and other	2,205		1,899		306		16	%
Total net revenue	$	4,845	$	4,396	$	449	10	%

Product Revenue

For fiscal year 2017, Product net revenue was $2,640 million, primarily driven by FIFA 17, Battlefield 1, and Star Wars Battlefront. Product net revenue increased $143 million, or 6 percent, as compared to fiscal year 2016. This increase was driven by a $526 million increase primarily from the Battlefield and Star Wars franchises, and Titanfall 2. This increase was partially offset by a $383 million decrease primarily from the Dragon Age, FIFA, The Sims, and Need for Speed franchises.

Service and Other Revenue

For fiscal year 2017, Service and other net revenue was $2,205 million, primarily driven by FIFA Ultimate Team, Star Wars: Galaxy of Heroes, and Need for Speed 2015. Service and other net revenue for fiscal year 2017 increased $306 million, or 16 percent, as compared to fiscal year 2016. This increase was driven by a $404 million increase primarily from FIFA Ultimate Team and the Star Wars and Need for Speed franchises. This increase was partially offset by a $98 million decrease primarily from The Simpsons Tapped Out, Titanfall, The Sims FreePlay, and Battlefield 4 Premium.

Supplemental Net Revenue by Composition

Our net revenue by composition for fiscal years 2017 and 2016 was as follows (in millions):

	Year Ended March 31,
	2017		2016		$ Change			% Change

Full game downloads	$	659	$	465	$	194		42	%
Live services	1,589		1,400		189			14	%
Mobile	626		544		82			15	%
Total Digital	$	2,874	$	2,409	$	465		19	%

Packaged goods and other	$	1,971	$	1,987	$	(16	)	(1	)%
Net revenue	$	4,845	$	4,396	$	449		10	%

Digital Net Revenue

For fiscal year 2017, digital net revenue was $2,874 million primarily driven by FIFA Ultimate Team, FIFA Online 3 in Asia, Battlefield 1, and Star Wars: Galaxy of Heroes. Digital net revenue for fiscal year 2017 increased $465 million, or 19 percent, as compared to fiscal year 2016. This increase is due to (1) a $194 million or 42 percent increase in full-game download net revenue primarily driven by Battlefield 1 and FIFA 17, partially offset by Battlefield Hardline, (2) a $189 million or 14 percent increase in live services net revenue primarily driven by our Ultimate Team game mode and Star Wars Battlefront, and (3) an $82 million or 15 percent increase in mobile net revenue primarily driven by Star Wars: Galaxy of Heroes.

Packaged Goods and Other Net Revenue

For fiscal year 2017, packaged goods and other net revenue was $1,971 million, primarily driven by FIFA 17, FIFA 16, Star Wars Battlefront, and Battlefield 1. Packaged goods and other net revenue for fiscal year 2017 decreased $16 million, or 1 percent, as compared to fiscal year 2016.

Cost of Revenue

Cost of revenue for fiscal years 2017 and 2016 was as follows (in millions):

	March 31,2017		% of Related Net Revenue		March 31,2016		% of Related Net Revenue		% Change		Change as a % of Related Net Revenue
Cost of revenue:
Product	$	893	33.8	%	$	938	37.6	%	(4.8	)%	(3.8	)%
Service and other	405		18.4	%	416		21.9	%	(2.6	)%	(3.5	)%
Total cost of revenue	$	1,298	26.8	%	$	1,354	30.8	%	(4.1	)%	(4.0	)%

Cost of Product Revenue

Cost of product revenue decreased by $45 million, or 4.8 percent in fiscal year 2017, as compared to fiscal year 2016. This decrease was driven primarily by a reduction in licensing costs as a result of a change in mix of our titles (i.e. Star Wars Battlefront was a fiscal 2016 title that had royalties associated with it while Battlefield 1 was a fiscal 2017 title that does not bear royalties). This was partially offset by the recognition of a $15 million impairment charge on an acquisition-related intangible asset, as well an increase in royalty costs associated with FIFA 17 and Titanfall 2.

Cost of Service and Other Revenue

Cost of service and other revenue decreased by $11 million, or 2.6 percent in fiscal year 2017, as compared to fiscal year 2016. The decrease was primarily due to a decrease in inventory costs due to the launch of Need for Speed 2015 during fiscal year

2016 without a comparable service game launch during fiscal year 2017, partially offset by the recognition of a $10 million impairment charge on a royalty-based asset, and an increase in royalty costs associated with FIFA Ultimate Team and Star Wars: Galaxy of Heroes during fiscal year 2017.

Total Cost of Revenue as a Percentage of Total Net Revenue

During fiscal year 2017, total cost of revenue as a percentage of total net revenue decreased by 4.0 percent as compared to the fiscal year ended March 31, 2016. This decrease was primarily due to an increase in the proportion of our digital net revenues to packaged goods and other net revenues, as well as lower royalties expense associated with our current year title mix as compared to fiscal year 2016.

Research and Development

Research and development expenses for fiscal years 2017 and 2016 were as follows (in millions):

March 31,2017				% of Net Revenue			March 31,2016				% of Net Revenue			$ Change				% Change
$	1,205			25	%		$	1,109			25	%		$	96			9	%

Research and development expenses increased by $96 million, or 9 percent, in fiscal year 2017, as compared to fiscal year 2016. This $96 million increase was primarily due to a (1) $41 million increase in contracted services primarily driven by an increase in development advances to third-party developers associated with the Star Wars franchise, (2) an aggregate $32 million pre-launch loss on previously unrecognized minimum royalty-based commitments and impairment on royalty-based assets, and (3) a $23 million increase in personnel-related costs primarily resulting from an increase in headcount. These increases were partially offset by the quarter ended June 30, 2016 containing 13 weeks of personnel costs as compared to 14 weeks in the prior fiscal year, as well as a reduction in losses of $10 million from our cash flow hedging program in fiscal 2017 as compared to fiscal 2016. We use hedges to protect against currency exchange rate movements in our research and development expenses.

Marketing and Sales

Marketing and sales expenses for fiscal years 2017 and 2016 were as follows (in millions):

March 31,2017				% of Net Revenue			March 31,2016				% of Net Revenue			$ Change				% Change
$	673			14	%		$	622			14	%		$	51			8	%

Marketing and sales expenses increased by $51 million, or 8 percent, in fiscal year 2017, as compared to fiscal year 2016. This $51 million increase was driven by higher advertising expenses associated with our fiscal year 2017 game launches, primarily Battlefield 1 and Titanfall 2, as compared to advertising expenses associated with our fiscal year 2016 game launches.

General and Administrative

General and administrative expenses for fiscal years 2017 and 2016 were as follows (in millions):

March 31,2017				% of Net Revenue			March 31,2016				% of Net Revenue			$ Change				% Change
$	439			9	%		$	406			9	%		$	33			8	%

General and administrative expenses increased by $33 million, or 8 percent, in fiscal year 2017, as compared to fiscal year 2016. This $33 million increase was primarily due to (1) a $12 million increase in facility-related expense primarily due to office expansions, (2) a $7 million increase in contracted services primarily due to higher legal expenses, and (3) a $6 million increase in personnel-related costs resulting from an increase in headcount.

Income Taxes

Provision for (benefit from) income taxes for fiscal years 2017 and 2016 was as follows (in millions):

March 31, 2017				Effective Tax Rate			March 31, 2016				Effective Tax Rate
$	243			20.1	%		$	(279	)		(31.8	)%

Our effective tax rate for fiscal year 2017 was 20.1 percent. Our effective tax rate for the fiscal year 2017 differs from the statutory rate of 35.0 percent primarily due to non-U.S. profits subject to a reduced or zero tax rates. The effective tax rate for fiscal year 2017 differs from fiscal year 2016 primarily due to the reversal of a significant portion of our deferred tax valuation allowance recorded in fiscal year 2016. Excluding the impact of the reversal of the valuation allowance, our effective tax rate for fiscal year 2016 would have been 19.8 percent, which differs from the statutory rate of 35.0 percent primarily due to non-U.S. profits subject to a reduced or zero tax rates.

In the fourth quarter of fiscal year 2016, we realized significant U.S. pre-tax income for both the fourth quarter and the fiscal year ended March 31, 2016. As a result, we released the valuation allowance against all of the U.S. federal deferred tax assets and a portion of the U.S. state deferred tax assets during the fourth quarter of fiscal year 2016. Accordingly, we recorded a $453 million income tax benefit in fiscal year 2016 for the reversal of a significant portion of our deferred tax valuation allowance.

LIQUIDITY AND CAPITAL RESOURCES

	As of March 31,
(In millions)	2018			2017			2016
Cash and cash equivalents	$	4,258		$	2,565		$	2,493
Short-term investments	1,073			1,967			1,341
Total	$	5,331		$	4,532		$	3,834
Percentage of total assets	62		%	59		%	54		%
	Year Ended March 31,
(In millions)	2018			2017			2016
Cash provided by operating activities	$	1,692		$	1,578		$	1,465
Cash provided by (used in) investing activities	622			(759		)	(484		)
Cash used in financing activities	(643		)	(729		)	(548		)
Effect of foreign exchange on cash and cash equivalents	22			(18		)	(8		)
Net increase in cash and cash equivalents	$	1,693		$	72		$	425

Changes in Cash Flow

Comparison of Fiscal Year 2018 to Fiscal Year 2017

Operating Activities. In fiscal 2018, we delivered net revenue of $5.2 billion, cost of revenue of $1.3 billion, and operating income of $1.4 billion, which enabled us to record operating cash flow of $1.692 billion. Cash provided by operating activities increased $114 million during fiscal year 2018 as compared to fiscal year 2017. The increase is primarily driven by a $111 million increase in accounts receivable collections due to growth in sales associated with the Ultimate Team game mode and the collections from Mass Effect: Andromeda that was launched at the end of fiscal year 2017, partially offset by the live services sales at the end of fiscal year 2018 that will be collected in the beginning of fiscal year 2019.

Investing Activities. Cash provided by investing activities increased $1,381 million during fiscal year 2018 as compared to fiscal year 2017 primarily driven by a $1,885 million increase in proceeds from the sales and maturities of short-term investments as a result of repositioning such investments in order to make offshore funds available for repatriation. This was partially offset by a $370 million decrease in the purchase of short-term investments and a payment of $150 million in connection with the acquisition of Respawn.

Financing Activities. Cash used in financing activities decreased $86 million during fiscal year 2018 as compared to fiscal year 2017 primarily due to the repayment of $163 million of our formerly outstanding convertible notes in fiscal year 2017 without a corresponding transaction in fiscal year 2018, offset by a $93 million increase in the repurchase and retirement of our common stock in the current year.

Comparison of Fiscal Year 2017 to Fiscal Year 2016

Operating Activities. Cash provided by operating activities increased $113 million during fiscal year 2017 as compared to fiscal year 2016. The increase is primarily driven by a $385 million increase in sales related to FIFA 17, Battlefield 1, and Titanfall 2. This was partially offset by a $263 million decrease associated with a net increase in accounts receivable balances as of March 31, 2017 as compared to March 31, 2016 primarily due to the timing of game launches and higher digital sales during the three months ended March 31, 2017.

Investing Activities. Cash used in investing activities increased $275 million during fiscal year 2017 as compared to fiscal year 2016 primarily driven by a $585 million increase in the purchase of short-term investments and a $30 million increase in capital expenditures. This was partially offset by a $340 million increase in proceeds from the sales and maturities of short-term investments.

Financing Activities. Cash used in financing activities increased $181 million during fiscal year 2017 as compared to fiscal year 2016 primarily due to the issuance of Senior Notes for $989 million offset by the repurchases of our common stock for $510 million, both of which occurred during fiscal 2016. Also, we had a $35 million decrease in proceeds from the exercise of stock options and a $26 million decrease in taxes paid for shares withheld from employees, which were offset by a $307 million decrease in repayments related to our Convertible Notes during fiscal year 2017 as compared to fiscal year 2016.

Short-term Investments

Due to our mix of fixed and variable rate securities, our short-term investment portfolio is susceptible to changes in short-term interest rates. As of March 31, 2018, our short-term investments had gross unrealized losses of $9 million, or less than 1 percent of the total in short-term investments, and gross unrealized gains of less than $1 million, or less than 1 percent of the total in short-term investments. From time to time, we may liquidate some or all of our short-term investments to fund operational needs or other activities, such as capital expenditures, business acquisitions or stock repurchase programs.

Senior Notes

In February 2016, we issued $600 million aggregate principal amount of the 2021 Notes and $400 million aggregate principal amount of the 2026 Notes. We used the net proceeds of $989 million for general corporate purposes, including the payment of our formerly outstanding convertible notes and repurchases of our common stock. The effective interest rate is 3.94% for the 2021 Notes and 4.97% for the 2026 Notes. Interest is payable semiannually in arrears, on March 1 and September 1 of each year. See Note 11 - Financing Arrangements to the Consolidated Financial Statements in this Form 10-K as it relates to our Senior Notes, which is incorporated by reference into this Item 7.

Credit Facility

In March 2015, we entered into a $500 million senior unsecured revolving credit facility with a syndicate of banks. As of March 31, 2018, no amounts were outstanding under the credit facility. See Note 11 - Financing Arrangements to the Consolidated Financial Statements in this Form 10-K as it relates to our credit facility, which is incorporated by reference into this Item 7.

Financial Condition

We believe that our cash, cash equivalents, short-term investments, cash generated from operations and available financing facilities will be sufficient to meet our operating requirements for at least the next 12 months, including working capital requirements, capital expenditures, debt repayment obligations, stock repurchases, and potentially, future acquisitions, or strategic investments. We may choose at any time to raise additional capital to repay debt, strengthen our financial position, facilitate expansion, repurchase our stock, pursue strategic acquisitions and investments, and/or to take advantage of business opportunities as they arise. There can be no assurance, however, that such additional capital will be available to us on favorable terms, if at all, or that it will not result in substantial dilution to our existing stockholders.

As of March 31, 2018, approximately $3.7 billion of our cash, cash equivalents, and short-term investments were domiciled in foreign tax jurisdictions. As a result of the U.S. Tax Act, which generally implemented a territorial tax system, a substantial portion of this amount is available for repatriation.

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. This stock repurchase program supersedes and replaces the May 2017 program described below, and expires on May 31, 2020. 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.

In May 2017, a Special Committee of our Board of Directors, on behalf of the full Board of Directors, authorized a program to repurchase up to $1.2 billion of our common stock. During the fiscal year ended March 31, 2018, we repurchased approximately 5.0 million shares for approximately $570 million under this program. This program was superseded and replaced by the May 2018 program.

In May 2015, our Board of Directors authorized a program to repurchase up to $1 billion of our common stock. We repurchased approximately 0.3 million shares for approximately $31 million under this program, respectively, during the fiscal year ended March 31, 2018. We completed repurchases under the May 2015 program in April 2017.

We have a “shelf” registration statement on Form S-3 on file with the SEC. This shelf registration statement, which includes a base prospectus, allows us at any time to offer any combination of securities described in the prospectus in one or more offerings. Unless otherwise specified in a prospectus supplement accompanying the base prospectus, we would use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes, which may include funding for working capital, financing capital expenditures, research and development, marketing and distribution efforts, and if opportunities arise, for acquisitions or strategic alliances. Pending such uses, we may invest the net proceeds in interest-bearing securities. In addition, we may conduct concurrent or other financings at any time.

Our ability to maintain sufficient liquidity could be affected by various risks and uncertainties including, but not limited to, those related to customer demand and acceptance of our products, our ability to collect our accounts receivable as they become due, successfully achieving our product release schedules and attaining our forecasted sales objectives, the impact of acquisitions and other strategic transactions in which we may engage, the impact of competition, economic conditions in the United States and abroad, the seasonal and cyclical nature of our business and operating results, risks of product returns and the other risks described in the “Risk Factors” section, included in Part I, Item 1A of this report.

Contractual Obligations and Commercial Commitments

Note 12 - Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-K as it relates to our contractual obligations and commercial commitments is incorporated by reference into this Item 7.

OFF-BALANCE SHEET ARRANGEMENTS

As of March 31, 2018, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues and expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.

INFLATION

We believe the impact of inflation on our results of operations has not been significant in any of the past three fiscal years.

EA - Electronic Arts Inc.