Electronic Arts (NASDAQ:EA) delivered results for the fiscal third quarter late last week that were much better than management had anticipated. One of the reasons for that was Apex Legends.

EA has big plans to build this popular battle royale title into a perennial shooter franchise. In fact, Apex is performing so well that it is allowing EA to spend an extra year working on the next Battlefield installment.

Management had plenty to say about Apex Legends and its long-term potential on the latest conference call.

Characters from Electronic Arts' Apex Legends video game.

Image source: Electronic Arts.

Apex contributed to a record quarter for live services

Lately, EA's primary focus has been growing its live services business, which includes revenue from in-game spending, subscriptions, esports, and other items. Live services hit a new record during the holiday quarter, with revenue up 27% year over year to reach nearly $1 billion. "Growth was led by Apex Legends, but closely followed by double-digit growth in FIFA and Madden Ultimate Teams," COO Blake Jorgensen explained.

EA's sports titles are the largest component of live services revenue, but Apex Legends has the potential to grow into a substantial contributor to that business, too.

While it's uncertain whether Apex can match the enormous financial success of rival shooter Fortnite, which has made billions off of sales of virtual items sold to players in the game, management is making great progress in building a lucrative business around Apex Legends.

"The team has done an amazing job of continuing to innovate and add content and also leverage an incredibly engaged audience to try to feed them and give them things that they wanted to continue to play in the game," Jorgensen said.

EA has "continued to bolster the [Apex Legends] team with new talent," especially in live services. The hard work is paying off. New content has been flowing at a regular pace. Management reported that the game's competitive season three saw growth over season two "with higher peaks in daily active users."

Management is sticking with its previous outlook that Apex Legends and The Sims 4 will bring in between $300 million and $400 million for fiscal 2020 (which ends in March). While that's less than 10% of EA's annual revenue, management made it clear that this is just the beginning of what could be a 10-year franchise.

"People sometimes forget Ultimate Team was like an $8 million business 12 years ago," Jorgensen said, noting that Ultimate Team today generates nearly a third of EA's annual revenue. "And our goal is to always be innovating and improving over time to try to grow the business, and that's how we're thinking about Apex." All said, investors shouldn't underestimate the moneymaking potential of this viral shooter.

The future of Apex Legends looks bright

Apex has performed much better than management expected when the game quietly launched about a year ago. This is certainly new territory for EA, known for its military-based shooter Battlefield, which typically gets a new release every few years and directly competes with Activision Blizzard's Call of Duty. Apex Legends gives EA two major franchises to capture interest in the popular first-person shooter genre.

During the call, management mentioned a few initiatives it is pursuing to expand Apex Legends' audience reach and allow for more moneymaking opportunities in the next few years.

  • EA is looking to put its games on more platforms during fiscal 2021 (which ends in March), including Apex. The company is planning to launch Apex Legends on PC in China at some point. Plus, Jorgensen said there is "big upside" with the planned launch of a mobile version for Apex in that country. China is the world's largest gaming market.
  • EA is also excited about the prospects for Apex Legends on the esports scene. The Apex Legends Global Series is already underway and has attracted major brands as sponsors. "We're pleased to have Lenovo as an official sponsor for Apex competitive gaming, joining Gillette, Snickers, Pizza Hut, and other major brands and broadcast networks partnering with us on our esports portfolio," CEO Andrew Wilson said.

Can Apex Legends power this growth stock to new highs? In the short term, it's unlikely, because Apex is not contributing enough revenue to the top line to register on investors' radar. But if the content updates and expansion in China are successful in getting more players engaged, Electronic Arts may have another $1 billion franchise on its hands down the road.

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