Digital Revenue Shines yet Again

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Electronic Arts (NASDAQ: EA) recently reported its 3Q 2013 results with a slightly disappointing quarter. In spite of this, the company was able to post Non-GAAP EPS of ~$0.57, which was above its guidance of $0.50. This was mainly due to its high margin digital revenue and its strict cost management. The digital revenue was boosted heavily by sales of its title FIFA 13, which sold over 12 million units in this quarter, up by ~23% compared to FIFA 12. The total digital revenue from FIFA 13 increased by a whopping 98% and was ~$100 million in the quarter. Also, the digital revenue has helped the company to mark a slight improvement in its overall loss of ~$45 million in 3Q 2013, as compared to ~$205 million in 3Q 2012.

 The Reformatory Measures

Coming over to the less bright side, the company’s sales witnessed a slump in Medal of Honor: Warfighter, which was once considered to be a strong competitor to Call of Duty. The game attracted poor consumer reviews and low sales as it was not as warmly accepted by the fans as expected, and as a result less than 3 million units have been shipped to date. Following this poor performance, the company has announced it will not be launching any more games under this franchise. I feel this move would help the company to focus on its more successful franchises such as Battlefield.

Another dismal performance from the company was the debut of Star Wars: The Old Republic, which also proved disappointing. To cope with these shortfalls EA has started taking some initiatives in order to boost sales. The company decided to make corrections in Star Wars as it is taking pre-orders for the very first expansion pack of the game. This pack will be named as Rise of the Hutt Cartel, and it is expected to be released in spring 2013. It will also include five new levels and will be priced at a 50% discount of the original price too. This initiative will help the company to grab the gamers’ imagination and will keep their interest in the franchise alive. I feel positive about this move looking at the company’s history of successful expansion packs for its famous franchises.

The Competition

Electronic Arts is in direct competition with Activision Blizzard (NASDAQ: ATVI), which has some of the best names under its umbrella, such as Call of Duty, the World of Warcraft, and StarCraft. Among these Call of Duty is the most successful series and has contributed more than ~1 billion in sales every year. World of Warcraft is considered to be the bread and butter earner for the company as it gets a fixed monthly revenue through a subscription-based model. The company has the best IP's in gaming and commands great loyalty. In order to keep the gamers engrossed, the company has increased the playing sessions of its games. Its games take much more time to complete than any other company’s games because of its multiplayer components, which are further updated with downloadable content.  Looking at Activision's robust strategies, I feel that EA has to be more innovative in order to compete with this giant.

Coming Soon

Electronic Arts will be releasing its popular titles and more new releases like Crysis 3, Army of Two: The Devil's Cartel, and Fuse in 2013. However, one of its most awaited games would be Dead Space 3, which is set to release on Feb. 5 in North America and on Feb. 8 in Europe. The pre-order numbers are already trending ahead of its previous title Dead Space 2. The game will also feature a micro-transaction system that will enable trading of booster packs of weapons, power-ups etc. This is an important source of revenue for the EA in its titles.

The company is making an aggressive promotional strategy for the launch, and its demo will be available for downloads for Microsoft (NASDAQ: MSFT) Xbox 360 users. The Xbox users will be using Kinect, which is Microsoft's motion sensor add on for Xbox, and they will also be able to interact verbally with their partners using simple commands, and for the single players it recognizes with voice and face identification. Microsoft has also announced that it will be releasing its Xbox 720 at E3 2013. This Xbox 720 will consist of a quad core processor, 3D viewing, Blu Ray support, and be 6x faster than the current Xbox. This new console is expected to change the gaming scenario by making the games more real. The company is also working on the Kinect glasses, which will further enhance the playing experience.

Conclusion

To sum up, I feel the growing digital revenue provides a strong opportunity for EA to pull its earnings growth back on track. The digital revenue is highly beneficial for the company's overall profitability with a gross margin of ~90%. The better 3Q 2013 results have raised the hopes for its future growth with over 30 million registered users, which include 13 million users on mobile. I expect EA's digital revenue to grow from ~$1.2 billion in FY 2012 to ~$1.65 billion in 2013, and it could reach ~$2 billion in 2014. This could be an upside to its stock price in the near to long term.


ShwetaDubey has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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