Electronic Arts Q3 2016 Earnings Review: StarWars & Need For Speed Drive Holiday Season Revenues

The holiday season went moderately well for Electronic Arts (NASDAQ: EA), as it reported a 26% year-over-year (y-o-y) increase in the non-GAAP net revenues for Q3 2016. The company believes that the growth in this quarter was due to equal contributions from all their franchises and their digital content. Although EA’s sports titles remained the most profitable franchises, the company’s new titles further strengthened the top-line performance. The return of the  Need for Speed  franchise, the overall robust performance of StarWars, and the Live services of some of the titles played a significant part in helping the company beat the EPS estimates by 2 cents in Q3 2016. ^[1]

The surprise came when EA’s stock tumbled from $69 to $63 upon the release of the results. Despite the strong numbers from FIFA, Madden NFL, and StarWars, the investors felt the company could have performed better.

Our $75 price estimate for Electronic Arts’ stock is roughly 8% above the current market price.

See our complete analysis of Electronic Arts stock here

Sports Franchises Remain Strong

EA’s core franchises dominated the sports genre in their respective regions. While Madden NFL 16 remained the highest selling sports title in the U.S., FIFA 16 topped the charts across all genres in Europe. Monthly active users grew 10% year-over-year (y-o-y) in the third quarter of fiscal 2016. According to VGChartz data, FIFA 16 has sold more than 13.3 million units worldwide as of 2015 end. ^[2] Moreover, the title managed to stay among the top 10 titles in the U.S. for the month of December. Madden NFL 16 has sold over 6.2 million units as of 2015 end, with nearly 81% of the sales in the North American region. ^[3]

The Ultimate Team modes of these two popular sports franchises continue to attract more and more gamers every quarter. In the mobile segment, Madden NFL mobile was a huge hit in the U.S. over the holiday season, as monthly active players increased 50% year-over-year (y-o-y) and it was among the top three grossing apps in the U.S.  Moreover, the live events are driving the game-play hours two to three times y-o-y. The success of this game might encourage the company to introduce more games on this platform, further opening up opportunities for EA. The company’s non-GAAP digital revenues grew 16% y-o-y to $807 million, accounting for 45% of the net revenues. Mobile revenues grew 17% y-o-y to $162 million.

In March 2016, the company is all set to launch UFC 2, which will include new modes and fighters.

Need For Speed & StarWars: Key Titles In Holiday Season

What sets Electronic Arts apart from all the other major game developers is the mix of the games that the company introduces. This season EA came out with its all-time famous racing franchise Need for Speed. The new title engaged more than twice the number of gamers than its previous editions did. Even on mobile platforms, Need for Speed: No Limits enjoyed huge success and generated more downloads than the company’s expectations.

On the other hand, StarWars was probably the most successful franchise for the company this holiday season. StarWars Battlefront became one of the largest game launches ever for the StarWars franchise. To keep the momentum going, the company recently introduced the first free content update and the four expansion packs for the franchise.

On mobile platforms, StarWars Galaxy of Heroes was another blockbuster hit, as it was among the top 5 most downloaded iOS games in nearly 130 countries. On PC platforms, StarWars: The Old Republic community witnessed the highest number of subscribers in the last 3 years.

The highlight for this franchise was that it easily surpassed the 13 million units sales target three months before the target period, making it the primary reason for the 26% increase in the non-GAAP revenues.

Strong Guidance As EA Prepares For Another Year

Electronic Arts is confident of its strong line-up of titles in the coming few months. As a result, the company expects the fourth quarter GAAP net revenues to increase 7.5% y-o-y, whereas GAAP diluted EPS is expected to grow more than 20% y-0-y. Additionally, the company upgraded its non-GAAP revenue and EPS guidance for the full fiscal year 2016.

Earnings Takeaway:

• GAAP digital revenues for Q3 2016 increased 1.4% y-o-y
• GAAP net revenues for Q3 2016 decreased 5% y-o-y
• Non-GAAP digital revenues increased 16.5% y-o-y
• Non-GAAP net revenues increased 26% y-o-y

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1. Electronic Arts, Q3 2016, earnings call transcript [↩]
2. FIFA 16, game sales data, VGchartz [↩]
3. Madden NFL 16, game sales data, VGChartz [↩]