In its recent earnings report, Electronic Arts (EA 0.01%) detailed a few of the main reasons why management is expecting to book zero growth in fiscal 2019 as profitability and operating cash flow both tick lower. Most of the blame falls on the delay of its Battlefield V game, executives explained in a conference call with Wall Street analysts, but there were other soft spots in the portfolio, too.
Below we'll look at a few of the key points that CEO Andrew Wilson and his team sought to get across to investors in that presentation, including the notion that EA's long-term growth opportunities remain strong.
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Crediting digital sales for the beat
The digital transformation continues, with growth in full-game downloads and live services and the launch of our first frontline subscription service.
-- CFO Blake Jorgensen
EA's business continues to benefit from the shift toward digital game delivery. Full-game downloads spiked 32% in the quarter, in fact, as players shelled out for the latest chapters in the FIFA and Madden sports franchises.
Executives noted that 42% of its major console titles on the Xbox One and PlayStation 4 were digital over the past year verses just 36% last year. That success pushed digital sales up to 69% of the entire business over the past 12 months compared to 63% in the prior-year period. The growth trend itself is encouraging, but so is the fact that there's much more room to tilt further toward digital.
Healthy demand for EA's content combined with lower marketing costs to produce much stronger earnings than executives had targeted, with its $0.83 per share of profits trouncing the $0.48-per-share forecast.
Challenges in the portfolio
Players are engaging with the new content we have added to FIFA 19, and this may be delaying their entry into FIFA Ultimate Team. However, once playing FIFA Ultimate Team, engagement metrics are up on last year.
-- Jorgensen
The portfolio had its share of misses during the quarter. EA noticed a drop-off in the volume of gamers joining its FIFA Ultimate Team subscription service compared to their expectations, for example. They believe this was caused by players focusing on new content first before joining the service. As a result, the company expects participation to improve over the coming quarters as it ramps up its live events.
The Madden mobile service shrank, too, which ensured that EA's mobile revenue inched higher by just 1%. Executives say the development team is hard at work adding new content and game modes to try to turn the slump around, but EA is still lowering its overall mobile growth forecast for the year.
Battlefield and beyond
Our revised outlook is for net bookings to be roughly flat to the prior year.
-- Jorgensen
EA affirmed the reduced sales guidance it issued in August after delaying the launch of its Battlefield V title. The $5.2 billion that the developer is predicting will amount to roughly zero growth over fiscal 2018, with the main headwinds being that release delay and a slightly weaker mobile business. Wilson said he considers that flat sales result a success given all the portfolio challenges EA has had to navigate. Operating cash flow and gross profitability are set to inch lower, too, but will remain near record territory.
Looking further out, the company is planning a multistage rollout for Battlefield V that includes a regular cadence of major content updates beginning just two weeks after its Nov. 20 release. The strategy represents another step toward EA's goal of shifting game sales toward more of a subscription service approach. "We are pioneering a new value model," Wilson said, "that is lowering friction for members to access new content." EA hopes to capitalize on that shift to return to sales growth in fiscal 2020.
