Electronic Arts’ Earnings Preview: FPS Games & FIFA Franchise To Drive Revenue Growth

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Gaming giant Electronic Arts (NASDAQ:EA) is scheduled to announce its first quarter report for the 2015 fiscal year on July 22. ((Electronic Arts Q1 2015 Earnings Conference Call)) The company accounted for nearly 14% of global video game software sales last year. [1] According to the research group NPD, new video game software sales were lagging behind the hardware sales till April, but software sales gained momentum in May, owing to the huge success of major multi-platform title releases such as Ubisoft’s Watch Dogs, Nintendo’s Mario Kart 8 and EA’s Titanfall. Gamers spent $274 on new video games at retail in May, up 57% over the same period last year. [2]

EA delivered excellent results in the fiscal year 2014, producing blockbuster titles and introducing innovative digital content. The industry shift to digital domain gave an incremental boost to the company’s top line growth in fourth quarter as it was able to beat its revenue guidance by 15%, primarily due to strong demand in digital offerings. The 2014 Electronic Entertainment Expo (E3) provided a huge platform to EA to showcase its upcoming title releases and other partnerships planned that will help define its space in the industry. [3] EA is all set for the release of the annual edition of its major franchises such as Madden NFL 15 and FIFA 15. Apart from these titles, other games to be released in the coming quarters include Sims 4, Star Wars: Battlefront, Dragon Age: Inquisition, Mass Effect 4 and the much awaited Battlefield Hardline. The gaming giant is trying to strengthen its hold on the FPS segment through its Titanfall and Battlefield franchises.

Our $27 price estimate for Electronic Arts’ stock is 40% below the current market price.

See our complete analysis of Electronic Arts stock here

EA anticipates its net GAAP revenue to be around $1.20 billion and GAAP diluted EPS to be close to $1.26 in the first quarter. The company expects the first and second quarters to deliver a slightly larger portion of revenue, as the title sales increases tremendously in the latter half of the calendar year due to holiday and festive seasons. Moreover, the company believes that strong hardware sales over the last few months will translate into better software sales this year.

High Hopes On Digital Content Segment

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The gaming landscape has changed over the last few years with the advent of smartphones and tablets, providing easy access to games and eventually leading to the rise of casual gaming. Video game developers such as Electronic Arts, Nintendo and Activision Blizzard (NASDAQ:ATVI) have been forced to change their business model to adapt to the digital revolution. EA’s business continues to transform from a traditional packaged goods business model to one in which its games and services are available via a network connection with digitally-delivered content, features and services.

For fiscal 2014, digital net revenues before revenue deferral rose to $1793, an increase of 8% as compared to fiscal year 2013. Digital sales accounted for 45% of EA’s revenues in 2014 fiscal. The company expects this segment of its business to grow further in fiscal 2015.

Extra-downloadable content (DLC) was the biggest digital contributor for Electronic Arts in the previous quarter, accounting for over 43% of March quarter digital revenues, driven by FIFA Ultimate Team, FIFA Online 3 and Star Wars: The Old Republic. Full game downloads is another stream that is gaining popularity; 19% of EA’s March quarter product revenues came from full game downloads, gaining 65% over the prior year with strong results from Battlefield 4.

Costs associated with product revenues include production costs, warehousing and distribution costs, personnel costs, expenses for defective products and royalties for manufacturing and software developers. On the other hand, for service streams, the primary expenditures include data center, server and bandwidth costs. Therefore, service revenues have higher gross margins of nearly 80%, whereas product streams have a gross margin of just 50%. Growth in service revenues will have a high impact on the companies’ bottom lines.

Focus On FPS Domain

In its E3 preview conference, EA threw light on early designs, concept visuals and prototypes of titles which are scheduled to be released in the coming couple of quarters. First person shooting games (FPS) are a major genre, accounting for about 14% of the video game market in 2013. [4] EA is making a fresh foray in this genre with its futuristic first-person multiplayer shooter, Titanfall and Battlefield 4, directly in competition with Activision’s Call Of Duty franchise, the leader in this genre with nearly 50% of the total shooter game sales worldwide. According to NPD’s May report, Titanfall slipped down to 8th place on the top-selling titles chart, but still lead the FPS genre.

EA has announced the release of the next edition of Battlefield franchise: Battlefield Hardline, which would be directly competing with Activision’s Call Of Duty: Advanced Warfare to be released in the first week of November, 2014.

FIFA World Cup To Boost Sales Of FIFA Titles

FIFA is one of the major money minting franchise for EA, accounting for 57% of the total sports title sales worldwide in 2013. FIFA contributed nearly 27% to the company’s total revenue and 22% to the company’s gross profits in 2013. In April, EA released a special edition of its FIFA franchise: 2014 FIFA World Cup Brazil for the PlayStation 3 and Xbox 360 consoles, ahead of the mega event: FIFA World Cup (June 12- July 13) held in Brazil this year. The excitement of the football season continues, as FIFA World Cup Brazil nicely captures the spirit of the recently concluded event.

World Cup fever boosted the sales of FIFA 14, as well as FIFA World Cup Brazil. FIFA 14 climbed up to 5th spot in the top selling games in the month of June, while FIFA World Cup Brazil stood at 12th spot. [5] Moreover, the new edition of the FIFA franchise: FIFA 15 is all set to release at the end of September. The company forecasts a significant jump in sales of FIFA titles as football fans and gamers all around the world eagerly wait for the new release. Sales of the annual FIFA franchise went up 25% after the last world cup in 2010. [6]

However, according to NPD June data, software sales were down 3% over the same period last year. It would be interesting to watch EA’s performance in terms of software sales. To summarize, EA is poised for another excellent quarterly result as the company has high hopes in its sports and FPS titles.

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Notes:
  1. VGChartz, 2013 Global Yearly Chart []
  2. May 2014 NPD: Watchdogs & Mario Kart 8 fuel industry wide surge []
  3. Electronic Arts: FPS games to drive market share []
  4. VGChartz []
  5. World Cup boosts FIFA sales []
  6. VGChartz, 2010 Global Yearly Chart []