Electronic Arts (NASDAQ:EA) is one of the largest and most successful video game companies in the world. For its current fiscal year, the company expects to generate $4.875 billion in net revenue, with net income expected to come in at $980 million.
While it's clear that the company generates substantial revenue and net income, anybody thinking of investing in EA would be well served to have an understanding of where the company's revenue comes from and the big-picture trends of each major component of that revenue.
It's mostly digital
Historically, video game publishers would distribute games on physical media (such as floppy disk, CD-ROM, or DVD-ROM) to customers, either through direct mail order or, more commonly, through third-party resellers.
For a while now, thanks to the advent of fast broadband connections, game publishers have increasingly been moving to digital content distribution. This model is beneficial to game companies like EA, as digital goods tend to be cheaper to distribute; they don't need to incur the costs associated with producing and shipping physical goods.
Digital distribution also allows companies to sell and distribute add-on content to a game more easily.
Unsurprisingly, of the $4.875 billion in net revenue that Electronic Arts is guiding to for its current fiscal year, $3.615 billion, or about 74% of the total, is expected to come from digital sales, while the remaining 26% is set to come from "packaged goods & other net revenue."
The transition from packaged goods to digital sales has had a positive impact to the company's gross margin. As the company points out in its earnings presentation, its gross margin during its fiscal year 2015 -- a year in which packaged goods made up slightly more than half its net revenue -- was 68.3%, while in fiscal year 2019, its gross margin looks set to be about 73.1%.
Breakdown by platform
Electronic Arts breaks down its revenue by the platforms it serves: PC and other, console, and mobile. Over the last 12 months, $3.7 billion of the company's nearly $5.3 billion in revenue came from game consoles. Games for the PC accounted for $773 million, $807 million came from mobile games, and then $11 million came from "other."
Translating that into percentages, consoles made up 70% of Electronic Arts' sales, PCs made up 14.6%, and mobile represented 15.2% of the company's revenue.
Now, the absolute percentages paint a clear picture: Console gaming dominates EA's business. What's interesting is that in terms of growth rate over that trailing 12-month period, console net revenue rose 4.4%, PC sales dropped 10.4%, and mobile was up 21.5%.
So it's fair to say that consoles continue to be Electronic Arts' bread and butter, making up the biggest slice of the company's business and delivering decent growth, too. Mobile is the second-largest segment, but it's the fastest growing. PC gaming is the third-largest platform for the company, but its growth rate isn't inspiring.
Games as a service
It's clear that most of Electronic Arts' revenue comes from digital sales, but the composition of that digital revenue is quite interesting.
The company breaks down its digital revenue into three subcategories: full game downloads, live services, and mobile. Full game downloads represent a customer choosing to outright buy a game, and mobile games are generally monetized through some combination of upfront game purchases, advertisements, and in-game purchases.
Of the $3.75 billion in digital revenue that Electronic Arts generated over the last 12 months, $743 million -- 19.8% of the total haul -- came from full game downloads. Mobile accounted for $804 million, or 21.5%.
The remaining $2.2 billion -- nearly 59% of that total -- came in as a result of what the company terms "live services."
In its fiscal year 2018 annual filing, the company explains that its live services revenue includes "microtransactions, extra content, subscriptions, and esports."
The idea here is simple and brilliant: Instead of getting a one-time fee from gamers, the company sells gamers a base game and then continues to extract value from them through the methods and content types that the company described. This, the company explains, helps to "extend the life of those games by engaging players over longer periods of time."
Electronic Arts has a solid business model and good exposure to the key platforms in the gaming market. The company's business mix has also increasingly moved toward digital distribution, which has been good for the company's gross margin profile and, ultimately, profitability.
The company's stock is down significantly from the peak that it enjoyed back in July of 2018, as the company's financial projections for the year -- following the delay (and subsequent disappointing performance) of Battlefield V as well as some struggles in getting new mobile game franchises off the ground -- have come down.
However, over the long term, I expect the business to thrive driven by that solid business model and a portfolio of compelling game franchises.