Morningstar | Electronic Arts Posts Mixed Start to Fiscal 2019, Issues Weak 2Q Guidance
Electronic Arts started fiscal 2019 on a mixed note, as revenue met expectations but EBITDA fell short of consensus expectations. Management provided weak top- and bottom-line guidance for the second quarter but maintained the previously issued full-year guidance for fiscal 2019. We note that the firm generally generates only 15% of total year revenue and EPS in the first quarter and that management is historically conservative with regards to raising annual guidance after the first quarter. We are maintaining our narrow moat rating and our fair value estimate of $115. With the shares trading in 2-star territory, we would seek a wider margin of safety before investing in this high uncertainty name.Net revenue of $1,137 million (down 21% year over year) was slightly ahead of guidance of $1,080 million while net bookings of $749 million came in line with guidance of $720 million. Total revenue from consoles fell 32% to $705 million, as the firm benefited from sales of Mass Effect: Andromeda last year. We note that the firm is relatively dependent on its annual sports releases, Star Wars, and Battlefield with only one major new title set, Anthem, to launch in fiscal 2019 and no new major title announced yet for fiscal 2020. Mobile revenue fell 2% year over year, as the ramp of FIFA Mobile in China was more than offset the decline in older titles. Digital sales continue to drive overall growth as the category increased to 73% of sales on a trailing 12-month basis versus 61% a year ago and 67% last quarter. Despite removing microtransactions from Battlefront II, live services revenue was up 29% on a trailing 12-month basis versus the first quarter of fiscal 2018 due to growth in Sims 4 and FIFA Online 4 (a PC version of FIFA for the Chinese market).
While EA is depending heavily on its stalwart franchises to drive fiscal 2019 growth, the firm is innovating in terms of game delivery and consumption. EA is the only major independent publisher to offer a subscription service for video games similar to Netflix. The services (EA Access on Xbox One and Origin Access on PCs) offer a back catalog of older titles to gamers that can be downloaded and played for as long as the monthly or annual subscription is valid. We note that Microsoft has a similar offering on Xbox One that is called Xbox Game Pass. At E3, EA announced a new tier for the PC called Origin Access Premier that will let subscribers play the newest EA titles upon launch. While the monthly price of $14.99 and annual price of $99.99 are well above the standard tier prices of $4.99 per month and $29.99 per year, we believe that the new Premier tier will attract a number of subscribers since the service will launch on July 30. This means that over the first three months, subscribers will have access to the return of Madden to the PC platform in August, the release of the new FIFA title in September, and the launch of Battlefield V in October.
Electronic Arts develops, markets, publishes and distributes games, content and services that can be played and watched on a variety of platforms, including game consoles, personal computers, and mobile phones. The company markets and sells its games and services through digital distribution channels and through retail channels. Digitally, the company's console games and services can be purchased through third-party storefronts. In its games and services, the company utilizes brands that it either wholly own or license from others. The company develops and publishes games and services across genres. Within and alongside its games, the company provides live services, including in-game purchases, downloadable content, and esports.
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