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Morningstar | EA Posts Weak 3Q as Battlefield Disappoints; Apex Legends and Anthem Launches Increase in Importance. See Updated Analyst Note from 06 Feb 2019

EA reported a very disappointing fiscal 2019 third quarter as the top and bottom lines fell short of both consensus expectations and the company’s weak guidance. Management slashed its previously issued full-year guidance for fiscal 2019. February has turned into an even more important month for the firm due to the launch of Anthem on Feb. 23 and the surprise launch of Apex Legends on Feb. 4. We are maintaining our narrow moat rating but have reduced our fair value estimate to $108 from $115 to account for lower revenue growth and margin expansion due to slower microtransaction penetration. With shares trading in four-star territory, the current levels may provide an attractive entry point for investors.

Net revenue of $1,289 million (up 11% year over year) and net bookings of $1,199 million (down 3% year over year) both came in below guidance ($1,375 million and $1,780 million, respectively). Total revenue from consoles grew by 9% to $885 million but fell well short of our $988 million estimate, as Battlefield V failed to meet expectations and sales of FIFA 19 were flat year over year versus FIFA 18. The flagship shooter sold through 7.3 million units in the quarter, a million copies below management’s expectation. FIFA 19 sales may have hampered by the push to sell FIFA 18 in conjunction with the World Cup last summer.

Despite the flat sales, FIFA Ultimate Team revenue was up 6% year over year. Overall, live services net bookings were down 0.4% to $784 million as the growth at FIFA 19 did not offset the expected tail off in Battlefield 1 live services and FIFA Online 4 conversion issues in China. Mobile net bookings declined 22% year over year, as company suffered declines across its portfolio. While the firm launched a Command & Conquer mobile title in the quarter, organic growth has been weaker than expected. We believe that launching a new mobile title has become increasing difficult as many top titles maintain their ranking for three or more years.

While Battlefield games do tend to have a long tail, the lack of a battle royale mode (ala Fortnite) has hurt the game in the initial sales window. Battlefield V will get a battle royale mode in its March update, but the game will be competing with not only established competitors like Fortnite, PUBG, and Call of Duty, but also with another EA title, Apex Legends. Apex Legends was surprise launched on Feb. 4 by Respawn, the Titanfall developer. Apex Legends is a free-to-play team-based battle royale game set within the Titanfall universe. While the two titles are set within different universes and will likely have some gameplay differences, we expect that a large part of the potential player base for the two games will overlap. As a result, EA is effectively pitting two of its top development studios (Dice and Respawn) against each other once again. Titanfall 2 failed to make a strong commercial impression despite strong critical reviews due to being overshadowed by Call of Duty: Infinite Warfare and Dice’s Battlefield 1. This time, Battlefield may suffer as the Apex Legends team has done a great job of marketing the new game to Twitch streamers who have kept the game in first place ahead of Fortnite on the streaming platform for the two-day post launch.

Beyond Battlefield, Apex Legends may also cut into the launch of Anthem, the team-based persistent world shooter from BioWare. The response from the beta tests for Anthem has been mixed and a new team base battle royale game could further dampen enthusiasm around this important title for EA. The key for Anthem will be not only attracting a large audience but ensuring that endgame content is robust enough to keeping the core players interested. While the separation of Bungie and Activision has put a cloud over Destiny 2, Ubisoft will launch Tom Clancy's The Division 2 on March 15, providing Anthem with a direct competitor. The games are set in completely different universes but both titles are attempting to marry online role-playing with team-based action-adventure gameplay. Versus EA, Ubisoft has done a much better job of supporting its multiplayer online games like Ghost Recon Wildlands and Rainbow Six Siege over the long term as part of its games as a service business model. This history may help some gamers choose Division 2 over Anthem.