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Morningstar | EA Reports Strong 2Q; Digital Sales Continue to Drive Growth

EA posted a strong fiscal 2019 second quarter as revenue and EBITDA beat consensus expectations. Management provided weak top- and bottom-line guidance for the third quarter but maintained the previously issued full-year guidance for fiscal 2019. The company has two important games launches over the next four months: Battlefield V in November and Anthem in February. We are maintaining our narrow moat rating and our fair value estimate of $115. As the shares have traded off heavily over the last quarter, we believe current prices offer an attractive entry point for investors.

Net revenue of $1,286 million (up 34% year over year) and net bookings of $1,222 million both came in slightly ahead of guidance ($1,270 million and $1,160 million, respectively). Total revenue from consoles grew by 54% to $917 million, as the firm benefited from increased digital full-game sales from FIFA and Madden, in addition to live services growth from the sports titles. While the firm remains relatively dependent on its annual sports releases, both FIFA and Madden continue to display strong growth in microtransactions. Mobile net bookings were up 1% year over year, as the ramp of FIFA Mobile in China just offset the decline in Madden and older titles. Digital sales continue to drive overall growth as the category increased to 70% of sales on a trailing 12-month basis versus 61% a year ago. Despite removing microtransactions from Battlefront II, live services revenue was up 23% on a trailing twelve-month basis versus the second quarter of fiscal 2018 due to growth in Ultimate Team, Sims 4, and FIFA Online 4.

While EA is relying on its stalwart franchises and new IP Anthem to drive fiscal 2019 growth, the firm continues to innovate in terms of game delivery and consumption. As we have discussed previously, EA is the only major independent publisher to offer a subscription service for video games similar to Netflix. Microsoft also offers a similar service on the Xbox One and PC as does Sony for the PlayStation 4 and PC. EA is now jumping into another new delivery mechanism for games: cloud-based streaming. The company debuted the service via a teaser video at EA Play in June which was a little light on specifics. In a blog post on Oct. 29, EA disclosed some more details about its effort, codenamed “Project Atlas.”

The new service will combine the firm’s proprietary game engine, Frostbite, and its current online game services with new technologies to enable cloud-based game streaming. The gamer will simply use a thin client to connect to the EA servers which will fully run the game. The firm believes that this offloading of the computational workload from the home console or PC to the distributed servers can be optimized such that the experience would be similar to running the game locally. The firm also expects that the use of distributed compute will also help with the further integration and use of artificial intelligence within games. The ability to stream games to a thin client would not only increase the number of potential user by lowering the entry cost, but also decrease of piracy since games would only sit on servers.

The firm is not the first to attempt this challenge as Sony currently offers a streaming option for its subscription service. However, PlayStation Now downgrades the visual quality of PS4 games and requires a relatively strong local client (PS4 or midrange PC). Microsoft and Google are also working on streaming game services with thin clients. Microsoft is expected to launch the public beta of its project, xCloud, in 2019 and the service will be available on PCs, phones, and tablets. Google’s attempt, Project Stream, recently held a closed beta test in which users played Ubisoft’s recent release, Assassin’s Creed Odyssey, inside the Chrome browser. Given the challenges faced by streaming games and the competitors in the space, we are slightly worried that EA may be outgunned in terms of money and network infrastructure, particularly with respect to Microsoft and Google which both operate data centers all over the world. However, the integration of Frostbite into cloud-streaming is a possible differentiator for the firm as it could sell access to a combined service to third-party developers.