Electronic Arts (
) is expected to announce its earnings for the second fiscal
quarter of 2013 on Tuesday, October 29. We expect strong results
from the video game developer as the video game market has surged
in the last two months after a year of suppressed sales. In August,
reported that retail sales of console and PC games increased 21%
over the prior year, the first positive change in sales since
November 2011. For September, the research group reported sales
growth of 27% in the physical retail sector, driven by Grand Theft
Auto V video game.
Electronic Arts had three titles in the list of top 10
highest-selling games for September: Madden NFL 25, FIFA 14 and NHL
14. With the much anticipated launch of the next generation Sony
Playstation 4 and Microsoft (
) Xbox One just around the corner, we believe that EA is
well-positioned to gain from the increased sales that the new
consoles will bring.
Our $27 price estimate for Electronic Arts' stock is in line
with the current market price.
See our complete analysis of Electronic Arts stock
Strong Market Share
According to our analysis, EA had a market share of around 14%
(in terms of units sold) in the global video game market last year.
FIFA 13 accounted for around 5% of global game sales, while
Battlefield 3 and Madden NFL accounted for 2% of global game sales
each. Recently released NPD figures list Madden NFL, FIFA 14 and
NHL 14 as the second, fifth and eighth highest selling games for
Electronic Arts has exclusive licensing agreements with sports
bodies like NFL and FIFA, and launches annual editions of its
popular titles, maintaining a near monopoly in the sports video
games domain. Given the immense popularity of its titles, we expect
EA to make a smooth transition to the next generation of consoles.
The company expects a 7% increase in packaged goods and
distribution revenues in fiscal 2014, but reported a 30% decline in
the same for the three months ending June.
The Shift To Digital
Video game developers have turned to the digital domain in
response to growing demand. Global digital game sales grew from $5
billion in 2005 to $42 billion in 2012, accounting for nearly 70%
of the video game market. The digital stream includes revenues from
extra downloadable content (DLC), full game downloads, mobile sales
and subscriptions and in-game advertising. Electronic Arts reported
a 42% year-on-year increase in GAAP digital revenue last quarter,
and we expect the company to maintain focus on these high-margin
secondary streams this quarter.
Half of the company's digital revenues come from the DLC stream,
which reported a 35% year-on-year increase in revenues last
quarter, driven by FIFA and Star Wars: The Old Republic. FIFA 13
digital revenue increased 92% year-on-year and accounted for 40% of
the DLC revenues. FIFA Online 3 digital revenues increased by 88%
over the prior year.
Full game downloads also benefited from the popularity of FIFA's
titles last quarter, with revenues increasing 12% over the prior
year. This stream accounts for 10% of Electronic Arts' digital
revenues. On the mobile front, the company has been helped by The
Simpsons: Tapped Out and Real Racing 3, which was the best selling
racing title on iOS last quarter with more than 45 million
downloads and an average of over 2 million daily active users since
its launch in March. Mobile revenues accounted for 27% of EA's
digital revenues in the June quarter and were up 73% over the prior
year. We expect further growth in the DLC and full game downloads
streams, but will keep a close eye on the mobile stream to see if
EA can maintain its momentum. The barriers to entry are low, and
free-to-play games are quite popular with mobile users.
While digital sales can cannibalize physical retail sales, they
can also help EA expand margins. The cost of revenue for the
digital stream is just around 30% of net revenue while the cost of
revenue for physical sales is around 50%. The non-GAAP gross margin
increased from 61.5% in the first fiscal quarter of 2013 to 63.8%
for the three months ending June this year as digital sales
increased. Going forward, we expect margins to rise to about 68% as
digital contribution increases further.
Electronic Arts is looking to launch FIFA in China as the
government has lifted the ban on sales of video game consoles in
the country. Gaming consoles were banned in China in 2000, but the
country's gaming market has been booming, with sales increasing 35%
year-on-year in 2012 to reach a total of $9.6 billion (60.3 billion
Chinese Yuan). EA will try to capitalize on the Chinese market,
particularly with its popular sports-based titles, and has
announced a collaboration with TenCent to launch FIFA Online 3 in
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