EA "anxious" as it tries to navigate murky water
Not a great quarter, and once again we're told it will get better... eventually
Have you ever had one of those nightmares where you you're running just as fast as you can, but you don't seem to be going anywhere? That's what EA is going through right now. While digital sales are increasing, it's not happening fast enough to overcome the slide in packaged goods sales. Throw in a major franchise underperforming, and you've got the disappointing results EA delivered. Another quarter of marking time until good times come again... and when exactly will that be?
For all the bad news, EA sees hopeful signs in the year ahead. Mobile games continue to boom, EA's digital business grew rapidly and is now a respectable size, and new consoles may revive the badly sagging retail packaged goods business. Is EA indulging in overly wishful thinking, or can it really navigate to profitability through this sea of uncertainty? Let's examine what EA said and read between the lines a bit to find the key information.
The revenue miss came about for two reasons, according to EA: Medal of Honor tanked, and sales were worse than expected for the industry in general (the classic Monty Python 'It's a fair cop, but society's to blame' defense). It's not exactly reassuring that one title performing poorly can be blamed for a company as large as EA missing its numbers; you shouldn't reasonably expect every game to be a hit. At least, not if you want them all to ship on the date originally scheduled. As for the whole business doing worse than expected, it's true enough - but it doesn't mean you can't try and buck the tide.
"We're going to continue to maintain a smaller slate of titles than we had historically"
EA CFO Blake Jorgenson
A key point of the earnings call revolved around just how many profitable franchises EA has, and what's really driving the company's profits. Medal of Honor has now been sidelined for a while, and EA seems to be reasonably content to work with existing franchises, focusing on extending titles through digital content. "We're going to continue to maintain a smaller slate of titles than we had historically," CFO Blake Jorgenson stated. "The franchise build is try to build the profitability by not just having a big title, but by having a long digital life associated with that title. Battlefield is a great example; we're now over a year and a half outside of when that title was released, and we'll book at least $108 million dollars of revenue in the 4th quarter associated with the Battlefield Premium service."
Riccitiello followed up by listing EA's top franchises, then said: "Ten franchises, all profitable. Let me dispel the notion that it's only Battlefield and FIFA that contribute to our profitability. We have a deep bench of highly profitable, great franchises." Though Riccitiello had to admit that the company's top games matter. "Titles at the scale of FIFA and Battlefield are what drive the profitability of EA. My view is that the top 5 franchises globally in the industry probably define half the industry's profitability or something close to that."
One analyst asked, "In the event that the new consoles (from Sony and Microsoft) are not that competitive, what is plan B?" Riccitiello responded by saying "Over the last 12 months we've generated 37 per cent growth to get us to a $1.5 billion digital business. I could make a reasonable argument that absent all of our packaged goods business, that a billion and a half dollar digital business growing at 37 per cent might well be more valuable than the entirety of our current market cap, if I were to venture a guess. I think that's a vital, fast-growing, massive opportunity business for us. I think we've got a great story absent consoles." That may not make console makers very happy, but it does illustrate that EA is thinking beyond the console market.
"We know we've got a fast boat, we just don't know how deep the water is right now"
EA CEO John Riccitiello
Still, Riccitiello is not writing consoles off by any means. "As you might well expect, we know more about the road map and more about what's coming in consumer electronics in terms of specifics, devices that would play games than you might otherwise be exposed to. With the information we have, we remain bullish. That's why we planned to invest for this current fiscal year $80 million in that opportunity. Plan A is explode along with the opportunities we see in digital and console, and plan B is console written a little smaller, but we have high confidence in what we see coming."
One thing Riccitiello failed to note when pointing out the growth in digital sales: A large part of that revenue for EA (probably the majority) is based on brands that are driven by packaged goods releases. So if consoles continue to slow, and new consoles don't bring in packaged good sales at the levels of a few years ago, EA's digital sales are going to take a hit. Will the FIFA brand always be driven by the latest console release? Maybe not, but that day is not soon. Right now the most exciting, visceral, and graphic part of the FIFA franchise is driven by the console release. All the Ultimate Team revenue and DLC is linked to that, to a greater or lesser extent. Yes, the release date of the packaged good may not always be the most important revenue point, but it's still the engine that moves the whole ship.
EA is continuing to develop its mobile, online and free-to-play titles, but that revenue is not going to replace packaged goods revenues for the company for years. The prospect of growth in the social game sector has dimmed to the point where it was hardly mentioned in this earnings call, other than for Riccitiello to say "Social hasn't done as well for us, and the overall sector is significantly softer than we anticipated it going forward." Ouch.
"We like what we've got and we're not looking to draw"
EA CEO John Riccitiello
Looking at the current quarter things are still murky. "We are about to launch the first of three major packaged goods titles that will define our quarter," Riccitiello noted. "We know we've got a fast boat, we just don't know how deep the water is right now. We don't know precisely what to do with that; it's why we've widened the range a bit, to give us room to be sure we have the right answer. We think the content's great; we're anxious a little bit about the sector." Aren't we all?
Still, EA doesn't plan any dramatic moves for the near future. "Yes we have made some M&A; we've acquired a number of companies. I would argue at this point in time that we have the IP we need and the channel access we need," Ricitiello said. "We feel very good about the portfolio of digital assets we have. We think we're in a position to lead digital in the West and perhaps with great execution over time, take that lead into Asia, because we're now seeing our titles resonate there. We've got a full house with the things that are working: PC, console, mobile, free-to-play, premium. That's a great hand and at this point we're not going to trade anything. We like what we've got and we're not looking to draw."
How have investors reacted to EA's results? The stock closed up over 4 per cent the day after the earnings were reported.
From GamesIndustry.biz Recommendations by Taboola