Investors are showing Electronic Arts (EA -0.96%) some love again heading into 2020. After a sharp fall in 2018, the stock has rebounded 23% over the past year.
The difference between 2018 and 2019 is the momentum in live services, which includes revenue that the company generates from extra content sold to players in a game. Live services revenue increased 50% year over year in the fiscal second quarter (which ended in September) and is up 17% in the trailing 12-month period, making it EA's fastest-growing sales category.
Here are five things investors need to know about this increasingly important segment of EA's business.
1. It's the largest source of revenue
While EA still depends on selling new releases to drive a good portion of its top line, revenue from live services made up 52% of the company's total through the fiscal second quarter. That's higher than the 45% that live services totaled in fiscal 2019.
Management has said live services will become increasingly important to its business going forward as players spend time in certain titles for longer stretches.
2. It's more than in-game spending
EA's live services business also includes revenue from subscriptions, advertising, esports, and game software that's licensed to third parties that distribute EA's games on digital platforms. Out of those four sources, the two to watch are subscriptions and esports.
The company offers a few subscription services, including EA Access, Origin Access, and Origin Access Premier. These services allow players access to select games from EA's game catalog for a monthly fee. The company believes these services help build deeper connections with players and offer subscribers an economical way to play various titles.
Management is looking to expand the subscriptions business, especially in cloud gaming. The industry is increasingly moving to a subscription model as books, movies, and music have already done. Top tech giants such as Alphabet and Microsoft are investing heavily in this area, too, with Google Stadia and Project xCloud, respectively.
EA doesn't disclose revenue from esports, so it's still a small portion of the business currently, but it's the moonshot opportunity that could emerge as a major market. The company's two popular sports franchises, Madden NFL and FIFA, have been staples in the esports scene, but EA is planning to expand its presence in this space with additional franchises in the coming months.
3. Sports titles are the primary driver of live services growth
The largest source of revenue within live services is the Ultimate Team game mode in Madden NFL and FIFA. With Ultimate Team, players spend money to collect current and former athletes that they can use to compete against other players online.
Revenue from Ultimate Team made up 28% of the top line in fiscal 2019. The year before, Ultimate Team accounted for 21% of total revenue, and in fiscal 2017, that figure was just 16%. EA specifies that a substantial portion of Ultimate Team revenue comes from FIFA.
Meanwhile, in the most recent earnings report, the total number of FIFA players increased nearly 15% year over year.
4. It's a recurring revenue source
Management considers the revenue generated from sports titles to be a recurring revenue stream, mainly because EA releases a new version of Madden NFL and FIFA every year. The new versions come with updates to team rosters and other features. These games have a dedicated player base who not only buy the new version but also spend money on Ultimate Team throughout the year.
This is one reason the stock is climbing right now. The more Ultimate Team grows as a percentage of EA's revenue, the less dependent EA becomes on revenue from non-sports titles, which is not nearly as consistent and predictable for the company.
5. Live services revenue jumped significantly last quarter
After a temporary slowdown in calendar 2018, growth in live services has exploded over the past three quarters -- with 50% year-over-year growth in the fiscal second quarter.
The company reports fiscal third-quarter earnings on Thursday, Jan. 30, after the market closes. Investors should focus on results from the battle royale shooter Apex Legends and Ultimate Team, as management expects these to be the drivers of live services growth for the quarter.
Looking ahead, EA expects to deliver more growth in fiscal 2021, driven by continued momentum in live services and its subscriptions business.