This is a great time to be in the video game business. All three of the biggest content publishers -- Activision Blizzard (ATVI), Electronic Arts (EA 0.43%), and Take Two Interactive -- trounced the market last year thanks to the powerful mix of surging demand and increased profit margins as gamers embrace digital spending.
With its report set for Tuesday, Jan. 30, EA will be the first of these gaming giants to reveal sales and profit trends during the critical holiday shopping quarter. Here's what investors can expect from the report.
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Growth and profits
We already know that EA didn't earn the top spot on the sales charts during the quarter. That privilege will go to Activision Blizzard, whose Call of Duty: WWII was the top-selling console game in the U.S. market in 2017, putting the franchise on top for the ninth consecutive year. Activision also took home second place with the latest chapter in its Destiny brand, which went on to set a record for the company in PC-based sales.
Yet EA still likely had a solid holiday-quarter outing, led by powerhouse sports brands including Madden NFL, FIFA, and NBA Live. Healthy demand for these titles should have kept revenue essentially even for the quarter at about $2 billion.
Look for EA to have benefited from a continued surge toward digital revenue, too. That category spiked 19% last quarter and was the main driver behind its record profitability. In fact, EA should see its gross profit margin climb to 74.6% of sales in fiscal 2018, up from 73.2% last year and 62.3% back in fiscal 2014.
EA doesn't have a huge subscription-based franchise like Activision does in World of Warcraft. However, its live services, which are heavily tilted toward sports content, accomplish roughly the same thing as a group. Gamers sign up for things like season passes, refreshed content, and hundreds of microtransactions that upgrade their playing experience. As a result, players are more engaged in the brand, and each title's useful life is extended into years, rather than just the few months following a big game release.
Lessons learned
It's possible to take this strategy too far, as EA learned in the backlash against in-game purchase options in Star Wars: Battlefront II. In response to complaints that players were simply buying their way into unfair advantages, EA suspended microtransactions for the title and promised to fix issues with the system. "Sorry we didn't get this right," developer DICE said in a November blog post.
Investors will find out on Tuesday whether that controversy hurt the title's demand or impaired its earnings potential. If it did, EA might lower its full-year outlook, which currently calls for sales to rise by 4% to $5.1 billion with earnings of $3.63 per share, up from $3.08 per share in 2017.
It's likely that the setback won't ding the overall business, though, as growth in other franchises like FIFA and The Sims offset whatever weakness shows up in the Battlefront brand. Looking further out, the business has a bright future given that EA's digital sales are sitting at just 63% of the business today. That's up from 57% a year ago, but it still has plenty of room to expand closer to 100% over time.
