Electronic Arts Q3 Earnings: Record Digital Revenue Drives Revenues Growth
The Gaming giant, Electronic Arts (NASDAQ:EA), delivered impressive financial results in its third quarter earnings report released on January 27. For the quarter, the company reported non-GAAP net revenue of $1.43 billion, which was 12% above the guidance, but down 9% year-over-year (y-o-y). However, last year’s third quarter witnessed the launch of Battlefield 4, giving it an advantage over this year’s holiday quarter, which was without the launch of new Battlefield title. On a trailing twelve month basis, EA’s non-GAAP net revenue reached $4.337 billion, and digital receipts accounted for more than half of the revenues ($2.178 billion) for the first time ever, up 17% y-o-y. The company’s core sports titles: FIFA 15, Madden NFL 15, and Hockey Ultimate Team services recorded a massive 82% y-o-y growth. [1]
2014 proved to be a huge success for EA, as it was the #1 publisher on all the major platforms in the world. The company’s successful quarter is credited to its 3 major titles: FIFA 15, Madden NFL 15, and Dragon Age: Inquisition. Their success, coupled with effective cost controls, led to a 250 basis points improvement in the operating margins to 36.3%. EA’s non-GAAP digital revenues for the quarter rose 34% y-o-y to $693 million. Moreover, EA’s mobile games had an average of more than 160 million monthly active users in Q3.
Our $39 price estimate for Electronic Arts’ stock is 20% below the current market price.
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See our complete analysis of Electronic Arts stock here
EA’s Major Title Releases Spurred Revenue Growth
- Dragon Age: Inquisition
Developed by Bioware, this third edition of the major action role-playing franchise Dragon Age was released in November worldwide. The game widely became popular just after the release, making it the most successful launch in the Bioware history. Till date, nearly 113 million hours have been spent on this game by the gamers, with the count increasing day by day. It was named the game of the year by several media outlets.
According to VGChartz, as of January 3, nearly 1.3 million units of this game was sold on Sony’s PlayStation 4, whereas approximately 0.60 million units were sold on Microsoft’s Xbox One. [2] Taking all the gaming platforms into account, the game sold over 3 million units till that date, with even more demand on new generation consoles.
- FIFA and Madden NFL
Over the last decade, EA’s dependence on its sports franchises, Madden NFL and FIFA, has increased manifold. Both titles are the most popular and most widely played sports games in their respective regions. According to VGChartz, FIFA 15 sold over 15.65 million units till January 3, with Sony’s PlayStation 4 & 3 leading the FIFA sales with 5.79 million and 4.30 million units, respectively. On the other hand, FIFA 15 sales on Xbox One was nearly 1.8 million units. [3] Europe accounted for almost 60% of the FIFA 15 unit sales on PlayStation 4. The games weekly unit sales increased by nearly 40% and 70% in the last two weeks of November respectively. The increase in demand for the sports titles just before the holiday quarter was anticipated by the company. FIFA 15 was the #1 title in Europe and #10 title in the U.S. in 2014. According to the company, there were 50% more gamers logging in each week y-o-y.
On the other hand, America’s favorite sports title, Madden NFL, was the #2 selling title in North America. Gameplay hours for the title rose 30% y-o-y. The game has sold over 5.4 million units till date, with North America accounting for 87% of the total sales. [4] Both the sports tiles might still account for more than two-thirds of the total sports titles sold in 2014, and might continue to be the money minting franchises for the company.
- Other Titles
EA’s other popular titles, such as The Sims 4, Titanfall, and Battlefield 4, provided a huge boost to the company’s quarterly revenues. The company released three major updates to The Sims 4 during the third quarter, as the title went to sell nearly 1.5 million units by the end of 2014. Moreover, the company also released a new expansion pack for Star Wars: The Old Republic, in December, that attracted many new gamers. On the other hand, EA’s first-person shooter (FPS) titles: Titanfall and Battlefield 4, are still contributing to the revenue growth.
Digital Growth: The Next Big Segment For EA
For the third quarter, EA reported 34% y-o-y growth in its non-GAAP digital revenues, and 32% y-o-y growth in GAAP digital revenues. The Ultimate Team services for FIFA 15, Madden NFL 15, and NHL 15, contributed tremendously to the digital growth. In Q3, the total number of gamers signing in for the Ultimate Teams for these three games grew by nearly 45% y-o-y. This indicates the increasing interest of gamers in the digital online format of gaming. On the other hand, the recently launched SimCity BuildIt recorded more than 22 million downloads in the first month of its launch, grabbing a spot in the Top 5 iOS game downloads in more than 100 countries.
Among the digital revenues, Extra content and “freemium” contributed $314 million, up 47% y-o-y, primarily due to the Ultimate team services. This segment continues to see great potential, as more gamers are drawn towards the Ultimate Team concept, and might remain the largest contributor in the digital domain. FIFA Online 3 continues to show progressive growth in Korea, whereas in China FIFA Online is becoming popular.
Full game downloads contributed $140 million to the net revenues in Q3, up 22% y-o-y, whereas mobile revenues were up 13% y-o-y. Mobile platform had an impressive holiday quarter, due to the success of FIFA 15 Ultimate Team Mobile, Madden NFL Mobile, and SimCity BuildIt.
As a result, due to the increase in demand of Digital content, which has low costs, the company’s non-GAAP gross margin for the quarter was 72.8%, up from 68.1% in Q3 last year. Moreover, the strong demand for current generation consoles also helped the company improve its profitability.
With the sustained demand for these consoles, and the release of new Battlefield titles, we might see another strong quarter. Keeping these factors in mind, the company expects the non-GAAP net revenues to be approximately $830 million in the Q4, and non-GAAP diluted EPS to be approximately $0.22.
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