Company Overview: Electronic Arts Inc. develops, markets, publishes and distributes games, content and services that can be played by consumers on a range of platforms, which include consoles, personal computers (PCs), mobile phones and tablets. The Company's games and services are based on a portfolio of intellectual property that includes established brands, such as FIFA, Madden NFL, Star Wars, Battlefield, the Sims and Need for Speed. The Company markets and sells its games and services through retail channels and through digital distribution channels. The Company's PC games and additional content can be downloaded directly through its Origin online platform, as well as through third-party online download stores. Its mobile, tablet and PC free-to-download games and additional content are available through third-party application storefronts, such as the Apple Application Store and Google Play.
 

EA Details

Electronic Arts Inc. (NASDAQ: EA) has been performing well with the latest strong quarterly result. The group is well-positioned for the holiday quarter for adding momentum with massive new experiences. Despite the group indicating for little softness in third quarter, the long-term performance seems to be on track.
 
Growing Digital business: EA’s highlights for the second quarter ended September 30, 2017 included their new EA SPORTS titles, top-performing mobile games, and expanding e-sports competitions.  The industry is experiencing the digital transformation and the company is well-positioned for the ongoing growth with more stunning new titles, thriving on event-driven live services including competitive gaming, and continuing innovation for the players on all platforms. Therefore, in the second quarter, the company has experienced a notable shift to digital in EA’s sports titles and remarkable growth in the Ultimate Team. As per the performance highlights, EA in the second quarter of FY18 has posted a 26% growth in the Digital net bookings to $3.240 billion, and currently represents 63% of total net bookings for the same period. More than 50% of Madden NFL 18 players are engaged in the “Longshot” story mode through the second quarter and Madden Ultimate Team players are up 25% year-over-year. There is a growth of more than 113 million in the FIFA Mobile unique player base. The Battlefield 1 community has grown to more than 23.5 million players worldwide and the monthly active players for The Sims 4 on PC grew more than 40% year-over-year.
 

Net Revenue and Net Bookings (Source: Company Reports)
 
Top line performance: The group’s net revenue rose 7% year on year (yoy) to $959 million during the September quarter of 2017 driven by a $280 million rise in revenue mainly from the Battlefield and FIFA franchises, and Mass Effect: Andromeda.  Product net revenue rose 8% yoy to $454 million, boosted by Battlefield 1, FIFA 17, and FIFA Online 3 in Asia. Service and other net revenue rose 6% yoy to $505 million, boosted by FIFA Ultimate Team, Star Wars: Galaxy of Heroes and Battlefield 1 Premium. The group’s international net revenue rose 5% yoy to $532 million, while gross margin rose 4.1 percentage points year-over-year to 59.4 percent.
 
Other highlights: The group has posted net cash provided by operating activities of $52 million while the net cash provided by operating activities for the trailing twelve months was $1.802 billion, which is a record at the end of the second quarter. In the second quarter FY18, EA had repurchased 1.3 million shares for $153 million compared to $127 million in the second quarter of FY17. Moreover, in the second quarter, the company has reported a Digital net revenue of $689 million as compared to $566 million in the corresponding quarter previous year. The company has posted packaged goods and other net revenue in the second quarter of $270 million against the $332 million in the corresponding quarter previous year. The net loss fell to $22 million from $38 million in the same period last year and the loss per share improved to 7 cents from 13 cents same period previous year.
 
Completed the acquisition of Respawn: The group has finished the acquisition of Respawn, which is one of the leading independent game development studio and creators of AAA shooter and action games including the critically-acclaimed Titanfall franchise. The company had expressed its intention to shut down Visceral Games that happens to be a unit focusing on a major Star Wars title for EA. As per the acquisition plan, EA had to pay $151 million in cash up front for Respawn and there would also be an additional $164 million in long-term equity for employees. Further, there are a lot of people, who have their eyes fixed on the performance of Respawn through to 2022. The rumors initially hovered around about the maximum cash consideration of about $140 million in incentives. Moreover, Visceral was shut down recently and that has raised some concerns in the market.
 
Released Star Wars Battlefront II: EA and Lucasfilm Ltd., released one of the year’s most highly-anticipated games, Star Wars Battlefront II. Star Wars Battlefront II allows players to live out their own Star Wars fantasies as a trooper on the ground, an ace pilot dogfighting in space, and an epic hero dominating the battlefront. In the all-new single player campaign, the players will experience a previously untold Star Wars story from the unique perspective of Iden Versio, leader of the Imperial Special Forces unit, Inferno Squad.
 

FY18 Console/PC Titles (Source: Company Reports)
 
Outlook: In the third quarter of FY18, EA expects the net revenue to be approximately $1.135 billion. The change in deferred net revenue (online-enabled games) is projected to be approximately $865 million and the net loss is expected to be approximately $64 million. Further, EA expects the loss per share to be approximately $0.21 and the company had estimated a GAAP basic and diluted share count of 309 million shares due to an expected net loss. However, if the company posts net income instead of a net loss, the diluted share count for calculating diluted earnings per share would be 313 million shares. Additionally, in the third quarter of FY18, the net bookings are expected to be approximately $2.000 billion. The competitive gaming is expected to continue to grow in the portfolio in Q3. EA would release its third quarter earnings on 30 January 2018. For FY18, EA expects the net revenue to be approximately $5.075 billion and the change in deferred net revenue (online-enabled games) is projected to be approximately $75 million. Further, for FY18, the company expects the net income to be approximately $1.136 million and the diluted earnings per share to be approximately $3.63. Additionally, in FY18, the operating cash flow, that reflects the recently adopted accounting standard related to stock-based compensation, is expected to be approximately $1.600 billion. In addition, the net bookings are expected to be approximately $5.150 billion for FY18.
 

FY18 Guidance (Source: Company Reports)
 
Stock Recommendation: The group continues to witness a major portion of games sales concentrated on the most popular titles. Major chunk of the group’s revenue was derived from games based on a few popular franchises, several of which were released on an annual or bi-annual basis. But the rising importance to their business of revenue attributable to live services, has been accelerating. EA gets a major portion of their revenue from the Ultimate Team game mode available in annualized FIFA, Madden NFL and NHL games. The group enhanced their digital net revenue from $2,199 million in fiscal year of 2015 to $2,409 million in fiscal year 2016 and $2,874 million during fiscal year of 2017. They forecast this portion of their business to continue to grow through fiscal year 2018. Meanwhile, the shares of EA have risen 30.68% in the last one year (as of December 13, 2017), but the stock has corrected quite a bit in the last few months at the back of the recent Star Wars game controversy. However, the stock momentum is expected to pick up ahead of a stronger FY19 title slate, driven by renewed digital optimism, and operating leverage potential. Battlefront MTX relaunch and FIFA World Cup content launch were the key first half events of the company, and such moves will help the group sustain in the long run. We give a “Buy” recommendation on the stock at the current price of $105.54


EA Daily Chart (Source: Thomson Reuters)

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