Electronic Arts delivered financial results above their guidance for the fiscal first quarter ended June 30, and that wasn’t the only surprise from the earnings call. “In Q1, 76 percent of our non-GAAP revenue was digital,” said interim CEO Larry Probst, “driven by the online services of blockbuster franchises like Battlefield and FIFA, as well as our strong mobile portfolio.” The company reported $495 million in non-GAAP revenue, well beyond the $450 million EA predicted last quarter. The stock has risen over 10 percent today in early trading on the news.
“76 percent digital sales is absolutely no surprise to me,” said Peter Warman of market research firm Newzoo. “EA is one of the largest and most diversified game publishers and therefore you can expect to see the divide of their revenues more or less in line with the total market divide. This year, new boxed sales will represent a maximum of 35 percent of US game spending.”
“What is surprising is the discrepancy between digital revenue expectations on Wall Street and actual earnings: EA’s digital revenue was $378 million for the quarter, well above the $313 million expected earnings,” said Joost van Dreunen of digital goods measurement firm Superdata. “It indicates that the digital category is growing faster and has more potential than people anticipated.”
The digital surprise came from several sources. EA noted that The Simpsons: Tapped Out recorded its highest revenue quarter since it launched in 2012, and overall mobile revenue increased 30 percent for the quarter. EA’s Origin service now has 50 million members, 22 million of them on mobile, and digital sales of Battlefield 3 were strong despite the fact that Battlefield 4 is coming soon.
“It is also not surprising that EA mentions The Simpsons Tapped Out in its earnings call,” said Warman. “I can imagine the performance of this free-to-play game has sparked a turning point within the EA organization. Seeing a new free-to-play IP earning more money than paid games based on their key franchises must have been one of their biggest eye-opening experiences, taking away all doubt about the direction the market is heading.”
Meanwhile, EA is gearing up for the huge battles expected for the rest of the year. “Microsoft reports that Xbox One presales are trending ahead of the 360 during the same time period, and major U.S. retailers have sold out of their pre-sell allotments,” said president and COO Peter Moore. “And PlayStation believes this will be their biggest hardware launch ever. So we believe that the key indicators are pointing to a strong launch for both consoles in the holiday window.”
EA is expecting this transition to impact sales of sports titles, and so has developed a marketing strategy to ease that process. EA’s two biggest sports sellers, FIFA and Madden, will both be available at launch on the next-gen consoles. “Today, we announced that FIFA 14 will allow players to transfer their full roster of Ultimate Team players and in-game items from Xbox 360 to Xbox One and from PS3 to PS4. Our Madden franchise will provide a similar service,” said Moore.
The question of EA’s new CEO was briefly touched on during the earnings call. “I am assisting the Board of Directors in searching for a new CEO,” said Probst. “While we have nothing specific to share today, the Board is fully engaged in this process and evaluating both internal and external candidates.” EA’s CEO search is certainly more interesting than this bland statement would imply.
The fact that EA still doesn’t have a new CEO implies that the board of directors is looking seriously at external candidates. An internal candidate requires less vetting, and if that was the Board’s first choice EA would already have a new CEO. EA’s board may be looking for a charismatic leader who can revive morale among employees and investors. EA has a growth story ahead, looking at its success in digital and overseas expansions, but those transitions are still going to be difficult. Strong execution is needed to avoid more problems like the cancellation of NBA Live for two years or the poor performance of Medal of Honor: Warfighter.
“Of all traditional publishers, EA is the most active in trying new business models, screens and games in this period of change,” noted Warman. “It has been a rocky road if you look at Star Wars: The Old Republic and the recent launch of Sim City Online. But they are learning quickly by trying whilst other publishers like Activision just wait, not gather hands-on experience and count on their blockbusters to rake in the money. EA’s dare for trying new things is starting to pay-off and will continue to do so towards the future as their key franchises will start to benefit from these experiences.”
EA’s future looks brighter despite the difficult console transition ahead. The increasing momentum EA has on digital will surely help the company through disruptions in the packaged goods markets. “EA has been building a strong digital line-up, and it’s starting to bear fruit,” said van Dreunen. “Over the past year, the company’s transition from physical to digital is all over its balance sheet: digital sales have offset a relatively low number of packaged sales, allowing earnings to remain flat.”
The best opportunities ahead seem to be in mobile and abroad. “Having Apple as its largest retail partner last quarter indicates EA’s ability in capturing the shift to mobile,” van Dreunen noted. “But more important than the current success of titles like The Simpsons: Tapped Out and Real Racing 3, it shows the sustainability of mobile as a platform for the industry at large. For the next period, a key milestone in EA’s digital strategy will be the successful rollout of a free-to-play FIFA Online 13 in China together with its new partner TenCent.”
