Electronic Arts’ Q1 Earnings: Digital Domain & Increased Sales Of Sports Titles Drive Revenues

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Gaming giant Electronic Arts (NASDAQ:EA) is off to a strong start for the fiscal year 2015, as it delivered excellent revenue figures in its first quarter report, released on July 22. The company reported non-GAAP net revenue of $775 million, up 57% year-over-year, whereas operating cash flow improved $252 million year-over-year. [1] In EA’s first quarter, gamers played around 13.6 billion online sessions of EA games across the console, mobile and PC platforms. The company’s Trailing Twelve Month (TTM) operating cash flow reached a record high of $964 million. Non-GAAP diluted EPS was $0.19, much above the company guidance.

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. [2] EA received more than 40 E3 awards including Best Role playing game (RPG) and Best Sports game. Moreover, the EA Mobile games drew 140 million monthly active players in Q1. Over the last 6 months, EA’s leading titles such as FIFA 14, Titanfall, Battlefield 4 and UFC contributed in making it the number 1 publisher on both the new twin consoles-the Microsoft (NASDAQ:MSFT) Xbox One and the Sony PlayStation 4. The company accounted for nearly 14% of global video game software sales last year. [3]

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

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See our complete analysis of Electronic Arts stock here

EA was able to reach its anticipated GAAP revenue of $1.20 billion with GAAP diluted EPS of $1.04. The company expects its non-GAAP net revenue to be around $1.14 billion and non-GAAP diluted EPS to be approximately $0.50 for the second quarter.

Digital Segment Continues To Generate Significant Profits

Digital expansion is the main focus for Electronic Arts as the gaming giant heads into a new era of gaming. For EA, the main stream is its extra Downloadable Content (DLC), accounting for nearly half of the digital revenues earned by the company. For the first quarter, non-GAAP digital net revenues rose to $482, an increase of 27.5% year-over-year. The company expects this segment of its business to grow further in fiscal 2015, as it accounted for more than 60% of first quarter’s revenue. The trailing twelve-month digital net revenue rose 10% to $1.9 billion.

Extra content and free-to-play mode contributed $211 million, up 19% over the prior year period, driven by 90% growth in our Ultimate Team mode. The Ultimate Team mode for sports-based titles such as Madden NFL and FIFA has gained much popularity in the digital domain, with live updates, new content and daily competitions. NHL Ultimate Team grew 50%, FIFA Ultimate Team rose 80% and Madden NFL’s Ultimate Team saw a significant growth of 350% year-over-year. Non-GAAP gross margins increased to 70%, primarily due to digital revenue offerings and continued focus on reducing online fees and costs.

With the annual editions of FIFA and Madden NFL to be released later this year and digital content of these titles gaining momentum every year, we can expect digital segment to play a more vital role in the coming quarters.

Tough Competition In The FPS Domain

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. The increasing popularity of Battlefield 4 Premium among the gamers is one of the key factors that led to increase in the subscription revenue.

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. The company expects the impressive first quarter results to compensate any negative impact that could delay Battlefield Hardline’s release.

FIFA World Cup Boosts FIFA Franchise Sales

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 BrazilFIFA 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]

During the first quarter, around 53 million matches were played in FIFA Ultimate Team World Cup mode. The World cup update to FIFA 14 on mobile devices drove record high players this quarter. The world cup craze among the football fans and gamers might also drive initial sales of FIFA 15.

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Notes:
  1. EA’s Q1 2015: Earnings call transcript []
  2. Electronic Arts: FPS games to drive market share []
  3. VGChartz, 2013 Global Yearly Chart []
  4. VGChartz []
  5. World Cup boosts FIFA sales []
  6. VGChartz, 2010 Global Yearly Chart []