Electronic Arts’ Earning Preview: Sports Titles To Boost Holiday Quarter Sales

Gaming giant Electronic Arts (NASDAQ:EA) is scheduled to announce its second quarter earnings report for the 2015 fiscal year on October 28. ^[1] The company accounted for nearly 14% of global video game software sales last year. ^[2] According to the research group NPD, new video game software sales lost momentum in September. According to the report, gamers spent $481 million on software sales in September, down 36% year-over-year (y-o-y). However, last year September sales were boosted by the blockbuster release: Grand Auto Theft V (GTA V). According to the sales figures, when we exclude the sales of GTA, software sales come out to be 2% more y-o-y. ((September NPD report))

Electronic Arts reported strong Q1 figures, as its non-GAAP revenues were up 57% y-o-y.  ((EA’s Q1 2015: Earnings call transcript))  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. In the second quarter, EA released its annual editions of the two biggest sports franchises: Madden NFL 15 and FIFA 15.

Our $36.76 price estimate for Electronic Arts’ stock is in line with the current market price.

See our complete analysis of Electronic Arts stock here

New Editions Of Sports Titles To Drive Top-line Growth

Over the last decade, EA’s dependence on its sports franchises, Madden NFL and FIFA, has increased manifold. Both the titles are the most popular and most widely played sports games in their respective regions. Madden NFL is the best selling sports series in the United States, whereas FIFA is the highest grossing sports title in Europe. Electronic Arts is the leader in sports genre games, with FIFA and Madden NFL accounting for 67% of the total sports title sales worldwide in 2013.

• Madden NFL 15 & FIFA 15 To Boost Revenue Growth

EA released its Madden NFL 15 in North America and Europe in the last week of August. The game’s core market is the U.S., as the sport is fairly popular in the country.  According to our estimates, Madden NFL franchise accounted for 7% of the company’s net revenues in 2013, with major contribution by the U.S. gamers. Within just five days of the release, Madden NFL 15 was able to outperform all other titles and topped the charts as the highest selling game in August, according to August NPD report. ^[3] The strong demand for Xbox One Madden NFL 15 bundle boosted the sales of Microsoft’s (NASDAQ:MSFT) Xbox One in August, but the game’s sale was still stronger on Sony’s PlayStation 4.

On the other hand, EA released FIFA 15 on September 23 in North America, September 25 in Europe and September 27 in the United Kingdom. Unlike the last year’s edition, it was released on both the new generation consoles (Sony’s PlayStation 4 and Microsoft’s Xbox One) and previous generation consoles (PS3 and Xbox 360) together. The game is the most awaited title every year and the excitement is much more this year due to the recently held Brazil FIFA World Cup. The soccer franchise accounted for 27% of the company’s net revenues and 23% of the company’s gross profits in 2013. The number of FIFA units sold doubled from 6.4 million in 2010 to 12.45 million in 2013. Sales of the annual FIFA franchise went up 25% after the last world cup in 2010. ^[4] The company expects a similar enthusiasm among the gamers this year, as this year’s edition provides interesting online content as well. In September, Madden NFL 15 and FIFA 15 grabbed the #2 and #3 spot in the top 10 titles list in terms of units sold. ^[5]

The increase in sales of the sports titles will translate to better revenue growth this year, as this year’s edition costs slightly more than previous year editions due to the inclusion of ultimate team mode.

• Digital Content To Provide Incremental Boost To Revenues

The Ultimate Team Mode for both the titles – FIFA and Madden NFL – has been successful, as it generated more than $380 million in fiscal year 2014. Madden Ultimate team showed a growth of 90% year-over-year, providing a boost to digital revenues. Clearly, EA is relying heavily on its sports titles and expect them to boost the top line growth of the company in the present scenario where software sales are still lagging compared to the previous year.

Delay In The Release Of Battlefield Hardline To Weaken Holiday Quarter

First person shooting (FPS) is a major genre, accounting for about 14% of the video game market in 2013. ^[6] EA is making a fresh foray in this genre with its futuristic first-person multiplayer shooter franchises, Titanfall and Battlefield, 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. Titanfall performed well in the early days after its release, but its sales slowed down with the release of other major FPS games, such as Activision’s Destiny.

Moreover, the release of Battlefield Hardline, which was originally targeted to launch in October, has been delayed to early 2015. In the absence of Battlefield and Need For Speed, EA is left with only three major titles- FIFA, Madden NFL and The Sims- for the holiday season. As a result, the company might face a tougher time in the holiday season with fewer titles as compared to other competitors, at a time when the software titles are not in much demand. However, the company has a strong lineup for the next calendar year, with the return of Need For Speed and Mass Effect franchises. It would be interesting to watch if the expected increase in sales of sports titles in the third quarter would offset the impact of Battlefield’s delay and absence of Need For Speed.

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1. Electronic Arts Q2 2015 earnings conference call [↩]
2. VGChartz, 2013 Global Yearly Chart [↩]
3. August 2014 NPD [↩]
4. VGChartz, 2010 Global Yearly Chart [↩]
5. Ref: 3 [↩]
6. VGChartz [↩]