How Healthy Is EA Sports?

| About: Electronic Arts (EA)

Summary

The growth rate of FIFA sales has been declining since FIFA 14.

FIFA 16 sales were flat if we compensate for the fact that FIFA 16 was not released on Wii and handheld consoles.

The Ultimate Team mode in Electronic Arts' sports games is a rapidly growing cash generator.

The transition to the Frostbite engine for FIFA 17 could bring the freshness the series needs in order to boost sales.

Introduction

The annualized sports titles are of the utmost importance for Electronic Arts (NASDAQ:EA). It seems, however, that the sales of EA's most recent FIFA slumped. How healthy is the sports division of EA? What can we expect from the upcoming releases of FIFA 17, Madden NFL 17 and NHL 17 in September and October?

EA Sports

Sales of the most recent editions of the annualized sports titles:

As of 27th July, 2016 (in millions of units) Sales
FIFA 16 15.49
Madden NFL 16 7.26
NHL 16 1.11
Total 23.86
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Figure 1: Sales of the most recent editions of the annualized sports titles, according to vgchartz.com

These 3 sports games represents approximately 43.2% (see Appendix A for calculation and sources used) of EA's total net revenue in fiscal year 2016 (the company's fiscal year ends March 31). It becomes clear that EA is highly dependent on its annualized sports titles.

How is FIFA doing?

At the moment of writing, EA is estimated to have sold 15.49 million copies of FIFA 16. It is estimated that in total, 17.31 million copies of FIFA 16 will be sold (based on FIFA 15 sales after July 2015; see Appendix B for calculation and sources used). How does this compare to previous editions?

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Figure 2: Total sales per FIFA edition, according to vgchartz.com (in millions of units)

(See Appendix B for more information of the sales data which are used in this article.)

This does not bode well. Unit sales of FIFA 16 are expected to be 8.22% lower than those of FIFA 15. This would be the first decline for FIFA in years. Is the FIFA series still a healthy cash machine? If we take a closer look at the platform distribution of the FIFA 16 sales, there is something noteworthy. In contrast to FIFA 15, FIFA 16 was not released on any handheld console. Could this be the explanation for the decrease in FIFA series sales?

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Figure 3: Sales per FIFA edition without handheld sales, according to vgchartz.com (in millions of units)

On average in the last four years, handheld sales amounted to 1.07 million copies per year, which is about 6.6% of total units sold. Excluding the FIFA handheld sales makes a difference, but sales of FIFA 16 are still expected to be lower than FIFA 15. However, the analysis does not stop here - there is one more circumstance that we have to take into account. FIFA 16 was not released on the Nintendo Wii (OTCPK:NTDOY, OTCPK:NTDOF), while FIFA 15 was. Should we compensate for that? Deducting handheld sales is not a big issue, since it can be argued that handheld consoles have a different target audience. This cannot be easily said for the Nintendo Wii. The Nintendo Wii is a more direct competitor of the "main consoles" (PC, PlayStation 3/4 (NYSE:SNE) and Xbox 360/One (NASDAQ:MSFT)) than handheld consoles are. It is likely that a FIFA 15 Wii player switched to one of the "main consoles" to play FIFA 16. Nevertheless, let's see what results we get when we exclude handheld and Wii sales. We can do this by taking sales of the remaining consoles: the "main consoles" (PC, PlayStation 2/3/4 and Xbox 360/One).

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Figure 4: Sales per FIFA edition for the "main consoles": PC, PS2/3/4 and Xbox 360/One, according to vgchartz.com (in millions of units)

On average in FIFA 12-FIFA 15, Wii sales amounted to 0.78 million copies per year, which is about 4.9% of total units sold. Without handheld and Wii sales, we see FIFA sales increasing, but the increase is small. FIFA 16 sales are only 2.5% higher than FIFA 15 sales. And this is probably overstated, since a proportion of people who played FIFA 15 on the Wii have switched to one of the "main consoles" (PC, PlayStation 3/4 or Xbox 360/One) to play FIFA 16. From the point of view of the FIFA 15 Wii player, this switch seems to be attractive - with FIFA 16, they have an extra reason to replace their 10-year old Wii for a next-gen console. If we assume 50% of the FIFA 15 Wii players bought FIFA 16 on one of the "main consoles", while they would not have bought FIFA 16 on a "main console" if it was released on the Wii, we can correct for that by deducting 0.37 million FIFA 16 units from the "main consoles" (PC, PlayStation 2/3/4 and Xbox 360/One). This results in 16.94 million units sold, which means sales for FIFA 16 were basically flat compared to the 16.89 million copies FIFA 15 sold on the "main consoles".

Although the raw numbers are too negative because FIFA 16 was not released on any handheld nor Wii, FIFA 16 showed the lowest increase in years for the FIFA series. The growth rate of FIFA sales has been declining since FIFA 14.

FIFA 17

FIFA 17 is scheduled to be released on 27th September, 2016. The most notable change is the transition to DICE's Frostbite engine. I have high expectations of FIFA 17 because of this engine. The Frostbite engine (used by Battlefield 1, Need for Speed etc.) could give it the freshness it needs. By using the same engine as other games, EA should also be able to decrease costs.

Ultimate Team

The Ultimate Team mode is a massive success. It was first launched in FIFA 09 and later introduced to Madden NFL and NHL. Ultimate Team is an ingenious concept based on microtransactions.

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Figure 5: FIFA revenue (non-GAAP) per fiscal year. (Source: Slide 21 CFO Presentation, I added the bars.)

The Ultimate Team mode is growing rapidly. In fiscal year 2016, FIFA Ultimate Team (FUT) made 33% of all FIFA (net) revenue, while in fiscal year 2015, this was 29.52% (see Figure 5). Because margins are higher on digital than on physical sales, FUT contributes more than 33% to the profit of the FIFA series.

Ultimate Team is a great addition to the game, and generates tremendous amounts of profit.

Conclusion

The growth rate of the FIFA has been declining since FIFA 14. FIFA 17 could change this. My expectations of the Frostbite engine are high - this could possibly give the freshness to the FIFA series that it needs.

Ultimate Team is an amazing cash generator for EA. The company is highly focused on the Ultimate Team mode, thus it is likely that this game mode will continue to grow in the future and generate a lot of cash.

I expect that EA's upcoming sports titles, especially FIFA 17, will be a huge success. The use of the new engine could boost sales, while the company's focus on Ultimate Team will improve digital revenue.

You could consider a long position in EA to profit from a possible success of upcoming sports titles. Note that its next quarterly results are scheduled to be reported on August 2. Also, be aware of other upcoming releases of EA around the same period (Battlefield 1 and Titanfall 2 in October).

Appendix A: Calculation of approximate proportion of EA's revenue from annualized sports titles

Approximation of EA revenue from FIFA, NHL and NFL
Information Source
Ultimate Team revenue approximately $650 million in fiscal year 2016.

"The extra content business is $1.3 billion a year. Half of that is roughly our Ultimate Team business." - CFO on the Morgan Stanley Conference (at 6 minutes).

Net (non-GAAP) revenue FY 2016 $4.566 billion EA's Financial model
Share of FUT in total FIFA revenue FY 2016 (non-GAAP) ≈ 0.3298 Slide 21 CFO Presentation Investor Day on 17th May, 2016.
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If we assume the share of Ultimate Team of total net revenue for NHL and NFL are the same as that of FIFA, we are able to do the following calculation:

Calculation of approximated EA revenue share from FIFA, NHL and NFL
650/0.3298 = 1970.8914
1970.8914/4566= 0.4316
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Appendix B: data

Screenshots of the sales data which are used from vgchartz.com can be found here.

Data
Total Sales (in millions of units) per FIFA 08 09 10 11 12 13 14 15 16E1 15 (31st July, 2015) 16 (26th July, 2016)
PC, PlayStation 2/3/4, Xbox 360/One 6.27 6.83 8.00 9.55 11.43 13.83 15.85 16.90 17.311 15.71 15.49
Wii/Wii U 1.02 0.90 0.99 1.08 0.78 1.18 0.42 0.74 0.47
DS 0.85 0.49 0.59 0.71
3DS 0.39 0.29 0.25 0.43

0.28

PSP 1.35 1.35 1.16 1.21 0.53 0.37 0.24
PS Vita 0.47 0.50 0.80 0.45
Total Sales (in millions of units) 9.49 9.57 10.72 12.55 13.13 16.13 17.26 18.86 17.311 16.92 15.49
Handheld sales 2.2 1.84 1.75 1.92 0.92 1.13 0.99 1.23
Sales without handheld sales 7.29 7.73 8.97 10.63 12.21 15.00 16.27 17.63 17.311 16.92 15.49
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Source: The vgchartz.com database (except for 16E). Retrieved on 27th July, 2016.

1Expected FIFA 16 sales. Calculated as: (FIFA 16 sales as at July 27, 2016)/(FIFA 15 sales as at July 31, 2015)/(FIFA 15 sales as at July 27, 2016) + 0.04 to compensate for 3 days' difference.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in EA over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.