In this segment of the Market Foolery podcast, host Chris Hill and Foolish investor-at-large Tim Hanson discuss why the market was so happy with what might -- on the surface -- appear to be an ugly earnings report from Electronic Arts (NASDAQ:EA).
The primary answer -- and one you'll hear repeatedly this season -- is that the big corporate tax cuts that Republicans passed in December require companies to book some paper losses now. But from an operational standpoint, EA is doing just great, and they dig into the details around its success.
A full transcript follows the video.
This video was recorded on Jan. 31, 2018.
Chris Hill: Earnings season is starting to heat up. Let's go with Electronic Arts, which reported a third-quarter loss of nearly $200 million. And I'm assuming that's better than Wall Street was expecting, because shares of Electronic Arts are actually up 8% this morning and hitting a new all-time high.
Tim Hanson: Yeah. It was a good report from an operating metrics standpoint. One thing to watch this quarter from an earnings standpoint is, a lot of companies are reporting losses associated with the new tax plan that got passed in Congress, just because some deferred tax assets and things being revalued, so there's a lot of lumpiness in the results. That's just writ large for everybody. But for Electronic Arts, yeah, a good quarter on operating levels. Guided to a strong finish to the year. Their fiscal year finishes in March '18. This is just one of those stories where they have some dynamite franchises, gaming franchises like FIFA, Madden, The Sims, that continue to attract users online, both on console and mobile. They're increasingly monetizing them through digital sales, power ups, things of that nature, which is high-margin business. You're not actually even making a tangible object. And that paid off for the company in the quarter.
Hill: We've talked before about the money that television networks are paying to sports leagues for the rights. One of the stories this morning, Fox just locked up Thursday night football for the next five years. When it comes to the video game companies and these franchises, I'm assuming that they're paying more to renew those, because they are valuable franchises. Maybe not, hopefully not, on the level that the television networks are paying. But, is that part of the financial equation for these companies?
Hanson: Yeah, they have licensing fees that go out to FIFA and Madden and so on and so forth. You have to pay for the use of likeness is of players and so on and so forth. But that's not nearly as expensive as buying the rights to the physical product. Additionally, EA has a history of building those franchises like FIFA and Madden from the ground up. That's one of those things where there are a lot of video soccer games out there and video football games out there, but they've built a fairly significant competitive advantage with their branding and their platforms. And with the rise of e-sports, I think there's a highly rated television show of competitive Madden. It's kind of like professional wrestling, in a way, which people often scoff at, but it's a very profitable business. And that's an advantage that EA has. At the end of the day, content is king. That's something we talked about with regards to Amazon Prime and Netflix and so on and so forth, and those companies are getting into making more of their own content. EA is one of those companies, like Disney, that has two or three decades of valuable content and branding behind it.