The Current State of Electronic Arts: 2013 Edition

Some would consider quarterly earnings conference calls to be a boring affair. I wholeheartedly disagree. Yes, much of it is focused on the balance sheet, and pouring over mundane numbers and actual vs. projected earnings. But if you take the time to pay attention to the little things, they are by far, the best way of looking into the future of the notoriously tight-lipped gaming industry.

Electronic Arts, the mega-publisher that everyone loves to hate, reported earnings yesterday, and after the dust settled, we got some very interesting nuggets of information that can be used as a barometer of the company going forward into next year.

In short, EA said that their earning forecast for the rest of 2013 and 2014 will be higher than Wall Street expectations on recent cost cuts, the introduction of profitable partnerships, and an acceleration of higher-margin digital sales.

What this means is that EA’s recent workforce reductions, game cancellations, and studio closures (cost cuts), coupled with their new deal with Disney and the Star Wars Franchise (profitable partnerships) and greater share of digital downloads (higher-margin sales) all will help bring in more revenue than stock analysts originally expected.

The X-Factor

Although we must take forward looking statements with a sense of caution because we have no idea how things will actually end up, they do have to be as accurate as possible from a financial standpoint, or the company will get creamed if they come up short. This means that EA’s outlook is highly positive and extremely bullish.

But the most vital part of this profit puzzle for EA will certainly be Battlefield 4, their biggest and most important title to date. If the game fails to bring in expected numbers, and underperform’s as compared to Call of Duty: Ghosts and other competitors, Electronic Arts will likely miss their earning targets and get pummeled from a stock price standpoint. If this happens, EA will be in a very tough spot…but even so, management believes in their product and expects to continue operating successfully.

“We’ve cut operating costs, sharpened our product focus, and made strategic investments in next-generation consoles, mobile, and PCs,” EA Executive Chairman Larry Probst told analysts during the call. He also mentioned that numbers were low in 2013 because consumers held back from buying hardware and software as they await the PS4 and Microsoft’s next Xbox. But said this will certainly pick up when the new platforms come to market at the end of the year.

Additionally, the company is extremely enthusiastic about their new multi-year deal with Disney, where they will be creating new games based off of the Star Wars franchise. Their A-team, Bioware, DICE and Visceral are taking the helm, and will begin development immediately. Even though the deal is official, they mentioned that we should not expect a new Star Wars game in fiscal 2014. Keep in mind that “fiscal year” is different from “calendar year” and actually ends on March 31st. This means anytime after March 31, 2014, we could be seeing a new Star Wars game. So it is not as long in the future as it would seem.

Here are a few other notable details from the call:

  • As expected the fourth quarter was rough for EA with net revenue was down in both the fourth quarter (by 11.6 percent, from $1.37 billion to $1.21 billion) and the full year (by 8.4 percent, from $4.14 billion to $3.80 billion).
  • But on the bright side, net income for the full year was up 28.9 percent, from $76 million for 2012 to $98 million for 2013. Much of this increase was buoyed by the FIFA Soccer and Battlefield franchises, along with the fact that EA was the world’s top iOS publisher for the fiscal year.
  • Digital revenue from mobile games, online offerings and other newer sales channels, rose 45 percent year-over-year to $618 million, larger than EA’s packaged goods business in the fourth quarter ended on March 31
  • EA touted over 1.4 million sales of SimCity (50%) from downloads, and $120 million from revenues related to purchases of Battlefield 3 Premium. In fact,  SimCity has performed better than projections and president of EA Labels Frank Gibeau stated the company has “learned our lesson and it won’t happen again.” He placed the blame for the title’s terrible launch on “consumers overwhelming the game servers.” What!?
  • The company spent more than $27 million in severance costs to laid-off employees (most of which probably went to ousted CEO John Riccitiello.)
  • Future layoffs and studio closures are likely with forward looking statements mentioning additional restructuring costs.
  • Gibeau reported that Crysis 3 and Dead Space 3 fell below forecasts during fourth quarter 2013. On the sports side, NBA Live 14 is one of 11 games slated for fiscal 2014. EA also stated that 15 titles are planned for iOS and Android.

The Cash Cow…don’t screw it up EA!!

All in all, the statements out of the EA camp are extremely positive. Almost too positive. But they have to look on the bright side after being in the doghouse for so long, which included a repeat win as The Consumerist’s “Worst Company in America.”

But with their new licensing agreement with Disney, a solid-looking Battlefield 4 and a leaner business model that actually takes the consumer into account, this could be the turn that EA has been looking for.

As someone who just want to see the gaming industry to stay viable and healthy, I really do hope that EA has learned from their mistakes and will become the great company that they once were. As much as we enjoy ragging on them, I would be much happier discussing the awesome products that EA just released as opposed to just bashing them all day. Consumers are running out of patience, so they need to start moving forward right now to stay viable.

From what you have read about EA going forward, what are your thoughts on the publishers prospects over the next few years? Have they turned over a new leaf, or will it be “big” business as usual?

One comment

  1. thanks for share!

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