Despite a post-earnings share decrease that suggests otherwise, Electronic Arts (NASDAQ:EA) pulled out another impressive quarter. While there were concerns over a declining operating cash flow, and revenues roughly $80 million lower year-over-year at $693 million (0.15/share vs. 0.19/share), Electronic Arts during Q1 of the new fiscal is mostly about setting up for the year in new releases and taking stock of the company's extensive digital and mobile libraries.
One component of the business primarily focuses on the holiday shopping season, which this year will mean the highly anticipated Star Wars Battlefront release, while the other focuses on the long-term digital direction of the video game industry. Both segments show EA has strong potential for growth that would make the recent pullback a possible buying opportunity.
The hype builds for Battlefront
Some movie critics are expecting the latest Star Wars movie from Disney to be as big as Titanic and Avatar in gross box office sales, noting that the first trailer garnered more than 60 million views on YouTube, and about as many theories as to how the story will pan out in a post-Darth Vader universe. For gamers and EA investors, this will be good news because it should rub off on sales for the Battlefront video game tie-in. Already an award winner at E3 for Best Action game, where it was a headliner at the Sony (SNE) press conference, analysts are looking at possibly 20 million units of the game being sold. This would exceed the conservative estimate of 9-10 million units, but increased expectations prompted EA to raise its yearly guidance for fiscal year 2016 to $4.45 billion from $4.4 billion. There are other games coming out, most notably a large EA Sports lineup in Q2 that includes the new FIFA 16 and Madden 16 games, but Battlefront is the crown jewel in the EA fiscal calendar, and will likely be the game that people will judge not only EA's Q3, but likely the whole fiscal year.
Digital dominance continues
One notable statistic that came from the earnings report is that over 50% of revenue now comes in digital sales, a 10% improvement year-over-year, while mobile sales continue to grow as well. Most of the digital revenue comes from console downloads for the current generation of systems. Console game sales increased 66% year-over-year, while last-gen sales declined 46%, and most of the growth has come from extra content (21% increase at $255 million in sales) and full game downloads (18% increase at $84 million in sales). The increase in new console sales is set to pay high dividends later as EA Access gains in prominence as a subscription service, especially with Battlefront getting a special beta release on Xbox One (MSFT) later this summer. With a growing customer base and a large arsenal of multi-player friendly games on the near horizon, EA is setting up for a very strong fiscal year.
Final thoughts
It's a little weird to see Electronic Arts getting hit for an earnings report just because it wasn't the home run that analysts were expecting. But with the stock trading at 52-week highs and a near doubling in share price over the past year, a quarter with no console releases is probably a good time to let off a little steam. Fundamentally, Electronic Arts is not losing any strength, and three big quarters for releases are coming up that should impress long-term shareholders.
EA has confidence in Battlefront being a marquee game that it was willing to boost full year guidance, and the expected strength of the movie is set to be a boost for both Disney (DIS) and EA this holiday season. Whether or not Battlefront hits the 20 million unit threshold is up for debate, but the more conservative 10 million unit sale estimate appears easy to clear. Digital sales should continue to trend around the 50% mark in the near term, but it could increase due to the increasing concentration of consoles like Xbox One and PS4 in the marketplace, which was noted in the June NPD figures, that promotes digital over physical game sales, which EA benefits from as well as the recurring revenue from downloadable content. The recent pullback may give EA onlookers a chance to jump into the picture, and on the strength of the company's game line-up, it would be worth the jump.
