The year 2014 In Review: Electronic Arts
The gaming industry has had a tough year in terms of software sales, as gamers drift more towards digital titles with in-game digital content. On one hand, top video game developers, such as Electronic Arts (NASDAQ:EA) and Activision Blizzard (NASDAQ:ATVI), witnessed disappointment in terms of their core title sales. On the other hand, new generation video game consoles, such as Microsoft’s (NASDAQ:MSFT) Xbox One and Sony’s PlayStation 4, were in strong demand throughout the year. However, with the onset of the holiday season, the industry is witnessing an increasing interest of gamers in the new titles. According to the NPD November report for the U.S. region, the industry sales figure for the month of November was $2.41 billion, down 11% year-over-year (y-o-y). As per the seasonal trend, the industry usually witnesses an exponential increase in software and hardware sales in the month of November. However, this year software sales reached $1.09 billion, down 1% y-o-y. The highlight of the report was the decline in the hardware sales figure, which was $1.10 billion, down 23% y-o-y. [1] Below are the representation of the software and hardware sales for each month during the last couple of years, as reported by NPD.
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EA accounted for nearly 14% of global video game software sales last year. [2] Electronic Arts started the year with excellent financial figures in its March quarter, as the company’s core franchises and digital offerings, particularly its Ultimate Team services for sports-based Madden and FIFA franchises, boosted the revenue growth. EA earned over 45% of its Non-GAAP net revenue from digital streams including extra-downloadable content (DLC), full game downloads, mobile games, and in-game advertising and subscriptions. An increased contribution from digital streams allowed for margin expansion; EA’s March quarter gross margin was 77.4%, compared to the 74.3% figure observed last year and the company’s guidance of 71%.
EA’s momentum continued in its June quarter, as it reported non-GAAP net revenue of $775 million, up 57% year-over-year. [3] In that quarter, gamers played around 13.6 billion online sessions of EA games across the console, mobile and PC platforms. Moreover, the 2014 Electronic Entertainment Expo (E3), held in June, provided a huge platform for EA to showcase its upcoming title releases and other partnerships planned that helped define its space in the industry. [4] With strong sustained demand for new console platforms, the company managed to deliver excellent performance in the September quarter as well. The company reported net non-GAAP revenues of $1.22 billion in that quarter, up 17% year-over-year (y-o-y) and 7% above the given guidance. [5]
Our $39 price estimate for Electronic Arts’ stock is nearly 18% below the current market price.
See our complete analysis of Electronic Arts stock here
FIFA & Madden NFL Drive Software Sales
EA is the leader in sports genre games, with FIFA and Madden NFL accounting for 67% of the total sports title sales worldwide in 2013. (FIFA being the governing body of European football, which organizes the major international tournaments, most notably the World Cup.) Both the titles are the most popular and most widely played sports games in their respective regions. Last year’s edition of both the franchises continued to sell handsomely during the first half of the year, with FIFA 14 outperforming in Europe. FIFA is one of the major money minting franchises 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.
World Cup fever boosted the sales of FIFA 14, as well as FIFA World Cup Brazil. FIFA 14 climbed up to the 5th spot in the top selling games in the month of June, while FIFA World Cup Brazil stood at the 12th spot. [6] Moreover, the new edition of the FIFA franchise: FIFA 15 was launched in the last week of September, and the company forecasted a significant jump in sales of FIFA, since sales of the annual FIFA franchise went up 25% after the last World Cup in 2010. [7]
On the other hand, Madden NFL 15 was released in August and was one of the top selling games in September. It went on to become the most successful Madden title in recent years, as more than 89 million online Madden 15 games were played, up 48% y-o-y. 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. [8]
Entry Into First Person Shooter (FPS) Domain
EA is making a fresh foray in the FPS 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 leads the FPS genre. EA has announced that the release of the next edition of the Battlefield franchise: Battlefield Hardline, which was originally targeted to launch in October, has been delayed to March 2015.
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