EA: Q3 lower but digital grows
EA delivered lower revenues but higher income than expected; Medal of Honor taken out of franchise rotation
Electronic Arts is still growing its digital business strongly, but packaged goods are making things difficult. The company had non-GAAP net revenue of $1.182 billion for the last three months of 2012 (the company's Q3 for fiscal year 2013), compared to $1.651 billion in the same quarter of 2011. This was 9 per cent under the midpoint of EA's guidance, according to CFO Blake Jorgenson. EA highlighted the fact that non-GAAP earnings per share (EPS) came in at the high end of the expected range, at 57 cents per share.
CEO John Riccitiello noted that "EA's non-GAAP revenue was ... below expectations and guidance. The revenue shortfall was a result primarily of a miss with our Medal of Honor title and stronger than expected sector headwinds in console packaged goods." The publisher said that Medal of Honor is officially on hold and it's unclear what future the franchise now has. The good news is that EA was able to generate higher earnings than expected due to careful reduction in spending (by $70 million) along with strong growth in digital revenue.
"The revenue shortfall was a result primarily of a miss with our Medal of Honor title and stronger than expected sector headwinds in console packaged goods"
Jorgenson noted that digital revenue has grown 37 per cent over last year, for the fiscal year so far. EA particularly noted the success of The Simpsons: Tapped Out for iOS, which delivered $23 million in revenue. EA was the #1 iOS publisher in December, Jorgenson noted.
COO Peter Moore noted that in the industry overall, standard definition console titles (older consoles like the Xbox, PS 2 and the Wii) are down 46 per cent, while HD console titles (Xbox 360 and PS3) are down 13 per cent. Riccitiello noted that "I think most industry analysts were looking at the holiday quarter expecting a raft of really good titles," mentioning Halo 4 Assassin's Creed III and Call of Duty, "... and expected that title slate would have resulted in much stronger performance than we have seen in the first half of the year. Despite great games, well marketed, the December quarter was weaker than we had anticipated going in. That often happens when the consumer carries the expectation of a console transition."
An analyst wondered if the Wii U's poor performance over the holidays augurs poorly for the sales of new consoles from Sony and Microsoft. "Never count Nintendo out, " said Riccitiello. "They've got some of the best IP in the game industry. When their marquee titles show up, that's when you see the bounce. I deeply respect the achievements they've had over the last several years, and you shouldn't really count them out. Having said that, I wouldn't say that we see much correlation between the results that Nintendo has shown with their console debut of the Wii U and what we see coming; we see a pretty sharp distinction. A lot of devices come in and represent themselves as the next generation. In many ways what we're describing as Gen 4 is yet to come, and that's what we're excited about and that's what we're investing in."
"Social hasn't done as well for us, and the overall sector is significantly softer than we anticipated it going forward"
The question of games and guns arose as an analyst wondered if EA is seeing any softness in the FPS markets due to recent events. "I was hoping we weren't going to do this question," Riccitiello said. He handled it anyway, noting that "no, we're not seeing softness in the FPS sector" before explaining that the game industry is very mature. There's been a lot of research that's unable to find a linkage between games and violence, "because there isn't one," Riccitiello said. He noted that "the Supreme Court said we deserve all the First Amendment rights accorded to any media. Having said all of that, we understand while there may not be an actual problem there may be a perception of a problem. We intend to be part of the solution. Our medium reaches every American, and that can be a force for good."
Looking ahead, Riccitiello saw a better market going forward, with continued strong growth in digital and the prospect of exciting new consoles to re-ignite sales. "If you want to try to draw up a grid, it would be premium and free-to-play titles against both mobile, PC and console, and most of the console being add-on to core titles," said Riccitiello. "That's what's working well for us. Absent from that list is social. Social hasn't done as well for us, and the overall sector is significantly softer than we anticipated it going forward."