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2 Big Questions Electronic Arts Will Answer for Investors on Tuesday

By Demitri Kalogeropoulos – May 5, 2019 at 6:45AM

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The video game developer will likely announce a rare annual sales decline when it delivers its fiscal fourth-quarter earnings report.

Electronic Arts (EA -1.52%) will close out its fiscal 2019 reporting with an earnings release on Tuesday. That announcement will likely reveal several signs of stress on the video game developer's business, which has suffered weak launches in key franchises like Battlefield and Command & Conquer.

EA's struggles to sell these titles -- in part due to the strong popularity of Epic's Fortnite -- have analysts expecting declines in both sales and operating cash flow for 2019 overall. If that forecast is borne out, it will be the first time either of these metrics has fallen on an annual basis for EA in at least four years.

Two children playing console games.

Image source: Getty Images.

Against that tough backdrop, investors will be watching the report for evidence that EA's business is stabilizing, and that CEO Andrew Wilson and his team are making the right adjustments to ride their next round of game releases back toward sales and profitability growth.

Let's take a closer look at where things stand just ahead of the earnings release.

How is the portfolio doing?

Out of the dozens of major games that generated revenue this quarter, investors' focus will likely be on just a few key titles. Battlefield V is top among these, since it was the biggest disappointment in its launch quarter (fiscal Q3) when it sold just 7.3 million units -- about 1 million short of management's targets. Executives said back in February that they were optimistic about new content and playing modes they were adding to the franchise in March. Tuesday's report will show shareholders whether these upgrades strengthened sales and boosted gamer engagement.

Next in importance is Apex Legends, EA's most direct answer yet to the soaring popularity of Fortnite and other battle royale games. Early indications after its February launch suggested the free-to-play title could mount a serious challenge to Fortnite, and success on that front would go a long way toward returning EA's broader business to steady growth.

Finally, look for EA to update investors on key mobile titles including FIFA Online and Plants vs. Zombies. In its fiscal Q3 report three months ago, the company announced a brutal 22% drop in revenue from mobile sources, and management warned that competitive conditions have made it harder to climb up the sales charts lately. Wilson said EA was "doubling down" on its best franchises in response. We'll see on Tuesday if that strategy is helping turn the sales tide since it is so difficult to launch new intellectual property in the mobile channel.

Is the pipeline strong enough?

The already-announced pieces of EA's 2020 pipeline look solid. They include perennial hits in the sports franchises of Madden NFL, NHL Live and NBA Live, along with a new Star Wars title and almost two dozen content expansions in The Sims. EA's financial outlook for fiscal 2020 will let investors know if the company believes these releases will be popular enough to return it to rising sales, gross profit margin gains, and increased cash flow.

Barring a surprisingly strong showing in the fiscal fourth quarter, EA will post rare declines on all of those metrics for fiscal 2019. But the company has been working for months on a host of initiatives aimed at reversing those slides. Still, it takes time to shift development gears while creating quality video game content under a sustainable sales model. Thus, EA management is likely to appeal for investors' patience as it repositions its portfolio over the next few quarters.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.

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