Electronic Arts Franchises Deliver A Solid Performance Despite Industry Headwinds
Electronic Arts ( EA ) reported a 13% decline in GAAP revenues for the three months ending December 2012 with a net loss of $45 million. Excluding changes in deferred revenues, the company reported a 28% decline in non-GAAP revenues, affected by sector-wide headwinds. Industry sales during the holiday period dropped by 22% over the prior year reflecting console transition as Microsoft's ( MSFT ) X-Box 360 and Sony's Playstation 3 near the end of their product cycles.
Although console-packaged goods sales declined by 20% for the calendar year, EA's long-standing franchises like FIFA, Battlefield and Need For Speed delivered strong sales. Digital revenues and mobile sales also showed growth during the last quarter.
Our price estimate for Electronic Arts' stock is $17 , implying a premium of 10% to the current market price.
FIFA Remains Strong
The latest version of EA's soccer franchise, FIFA 13, sold 12 million units through the December quarter, an increase of 23% over its predecessor, FIFA 12. FIFA 13 was the top selling game in Europe in 2012, topping Activision Blizzard's ( ATVI ) Call of Duty: Black Ops II.
Digital revenue associated with the game through EA SPORTS FIFA Online 2 and FIFA World Class Soccer was over $100 million during the last three months of 2012, up 98% from the figure reported for FIFA 12. The number of gamers playing FIFA Ultimate Team increased by 61% over the prior year even as revenue per user increased by 30%. The beta version for FIFA Online 3 has been released in Korea and recorded average daily users of 440,000.
EA released the "Aftermath" expansion pack for Battlefield 3 in December which allowed it to add 500,000 subscribers in the last month of the calendar year, ending with a total of 2.7 million subscribers. Battlefield 3 premium generated $108 million in digital sales through the quarter. The company is expected to release two major titles in the first quarter of 2013: Dead Space 3 and Crysis 3. The pre-orders for the latter are already outpacing Crysis 2 pre-orders by 40%.
Although the Medal of Honor title and other games failed to deliver in 2012, EA's established franchises hold it in a good position to capitalize on the highly anticipated next-gen consoles. FIFA, in particular, has delivered strong sales for several years and will be adapted to fit the new consoles.
Digital And Mobile Sales Strong
Electronic Arts' digital sales platform, Origin, has over 39 million registered users including 17 million through mobile. EA reported a 17% year-on-year increase in GAAP digital net revenue for the quarter helped by strong sales of The Simpsons: Tapped Out which was the top grossing iOS game for the quarter.
EA has also stated its intention to shift operation entirely to the digital domain. The percentage contribution of digital revenues to total revenues has increased from 26% in the fourth calendar quarter of 2011 to 35% in 2012. As a result, the company's gross profit margin increased from 60% in 2011 to 63% in 2012. We expect a steady increase in digital revenues leading to increase in gross profit margins.