Here’s What Will Drive Electronic Arts’ Near Term Revenue Growth
Electronic Arts (NASDAQ:EA) is seeing strong growth in its Services segment, led by some of its popular franchises, such as FIFA. The segment accounted for roughly half of the company’s revenues in fiscal 2018. However, we forecast the contribution to increase to over 60% by the end of our review period. This can be attributed to the company’s plan to expand its live services offerings. We have created an interactive dashboard ~ What Is The Outlook For Electronic Arts’ Services Business. You can adjust the segment revenue and margin drivers to see the impact on the company’s overall revenues, earnings, and price estimate.
Expect Services Revenue To Grow In High Teens In The Near Term
We forecast the Services revenues to grow in high teens to $3 billion in fiscal 2019. In the long run, we expect the segment revenues to be north of $5 billion. This can primarily be attributed to the company’s live services offerings, such as Ultimate Team, which allows the company to earn from matchmaking services. Ultimate Team was successful for its FIFA franchise, and the same is being expanded to other games, such as NFL, and NHL. Services have become the focus area for Electronic Arts, given it is a recurring revenue stream, and results in lower fluctuation in revenue. Electronic Arts, like other gaming companies, has taken advantage of developments in communications technology to expand its offerings. The company is no longer just reliant on physical sales of its products, but has adopted secondary service streams like downloadable content (DLC), subscriptions, matchmaking, and in-game advertising, and this has been working well for the company, evident from the growth in Services revenues over the past few years.
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The company offers two subscription based offerings, EA Access and Origin, which offers unlimited play on Xbox One (PC for Origin) for the EA games, and the same has been trending well. And now the company offers Origin Access Premier, which allows gamers to access new games days before the launch date. We forecast the Services segment to grow in double digits in the near term, as the company continues to expand its offerings into new gaming genres. In addition, the company’s recent tie up with Tencent for FIFA in China will likely aid the segment growth. Looking at the segment margins, they are much higher at 82%, when compared with 68% for Products segment (as of fiscal 2018), and this spread will likely be maintained in the coming years, given the lower cost associated with digital services.
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