5 Things Electronic Arts' Management Wants You to Know

Five of the most important quotes from Electronic Arts' recent earnings call.

Aug 27, 2014 at 4:17PM

Shares of video game publisher Electronic Arts (NASDAQ:EA) have been on fire this year: In 2014 alone, the stock is up more than 65%, largely on a string of better-than-expected earnings reports.

Late last month, Electronic Arts turned in its fiscal-year first quarter results. On an annual basis, net profit rose 51% -- far exceeding analysts' expectations. Going into a new console cycle, Electronic Arts' management remains confident in its business.

During its first-quarter earnings call, Electronic Arts touched on several factors surrounding its business, including its slate of upcoming console titles, its ongoing digital transition, and its mobile growth. Below are five of the most important quotes from Electronic Arts' most recent earnings call.

The business is increasingly digital

Our non-GAAP digital net revenue...increased by 28% year-over-year to $482 million and accounted for more than 60% of [first quarter] revenue...trailing 12 month digital net revenue was up 10% to a record $1.9 billion.

Historically, Electronic Arts' business has centered on the sale of physical video game discs -- gamers purchase Electronic Arts' latest game, play it for awhile, and then (hopefully) purchase Electronic Arts' next title.

Unfortunately, this business model is volatile, and somewhat risky. Digital distribution, with its better margins and capacity for steady, recurring revenue, is much preferred. In the past, Electronic Arts has been explicit about its intentions to shift its business to digital -- steady growth in digital revenue reflects this ongoing transition.

Battlefield Hardline has been delayed
Despite exceeding analysts' expectations for the quarter, Electronic Arts shares slumped following the report. Although Electronic Arts' first quarter was solid, its upcoming quarters could disappoint -- the next installment in the popular Battlefield franchise has been delayed.

[We are] testing and implementing several new features that will help to make Battlefield Hardline a game that players can enjoy for many years to come. We are moving the release...to [the] fourth quarter of fiscal-year 2015.

Electronic Arts insists that the delays are quality-related -- that by extending its development time, it can produce a better, and therefore more successful, game. Still, Battlefield is one of Electronic Arts' signature franchises, and its absence could result in disappointing holiday sales.

Battlefield may not receive annual installments
At the same time, Electronic Arts has been coy about its intentions for the Battlefield franchise. As an online, multiplayer first-person shooter, it competes with other games in the same space, notably Call of Duty, a franchise with an annual release. Electronic Arts revealed that it may not follow suit.

Now does that mean we ship a Battlefield game every year? In some years, that may be the case. In others, it may not...But it doesn't mean that we want or need a Battlefield game every year.

Many of Electronic Arts' other franchises -- including Madden and Fifa -- see annual releases, with their respective player bases shelling out $60 per year for the latest installment. Based on the success of these franchises, it stands to reason that EA has a strong incentive to release new Battlefield as often as possible. That said, the establishment of Titanfall -- a new property for Electronic Arts -- has given the company two competitive first-person shooters to juggle. With two similar games under the EA umbrella, the company might stagger releases to prevent the titles from cannibalizing each other's sales. 

Nevertheless, investors in Electronic Arts should temper their expectations for the Battlefield franchise. Although annual releases are possible, Electronic Arts' management is not willing to make that promise.

It has the assets to be successful in mobile
At least for the time being, Electronic Arts' business is primarily centered around the console gaming space -- titles like the aforementioned Battlefield Hardline are primarily sold to traditional, console gamers.

But the mobile gaming space -- games played on smartphones and tablets -- is experiencing rapid growth. Electronic Arts already competes in this space with games like Plants vs Zombies and The Simpsons: Tapped Out, but believes it is well-positioned for further growth.

If you look at some of the more recent releases in mobile, like FarmVille or even [Kim Kardashian: Hollywood], it's really pointing to the fact that brands are becoming...more important in mobile...If you look at the charts, the concentration of...revenue is happening in brands.

Over the course of its history, Electronic Arts has established a strong slate of well-known video game franchises, whose success has been established in the console space. Electronic Arts believes that the current trend in mobile gaming, with established brands moving to the top of the charts, plays well to its strengths.

Pre-orders are not as vital as they once were
Finally, Electronic Arts has reset expectations for pre-orders. The concept of pre-ordering, which is somewhat unique to the video game space, encourages gamers to purchase new titles before they're released. Often, the number of pre-orders is used to asses how well a forthcoming game is likely to do at retail.

Electronic Arts' peers in the video game space, as well as major video game retailers, have noted a general downturn in the popularity of pre-ordering. On its most recent earnings call, Electronic Arts' management notes that there are other ways to asses a game's popularity.

[Pre-orders] are important, yes...but they're just one single data point in a myriad of data points we now use to measure our success going into launches.

In addition to pre-orders, Electronic Arts looks at social media mentions and other factors to determine the likely popularity of its games. In other words, the overall trend in pre-order numbers should not concern Electronic Arts' investors.

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Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.

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