Wall Street analysts were not prepared for the impressive earnings beat that Electronic Arts (NASDAQ:EA) delivered for the fiscal 2021 first quarter (ended June 30). EA reported net bookings of $1.39 billion, well above analysts' estimates for $1.06 billion. Earnings per share came in at $1.25, above management's own expectations for $0.93. 

During the conference call, CFO Blake Jorgensen said: "We saw extraordinary levels of player engagement through the first quarter, far higher than we even ever expected or had forecasted in May." 

Investors have been anticipating record levels of engagement with video games during the COVID-19 outbreak as more people adapt to working at home. EA's share price dipped briefly in March but has been steadily marching higher ever since, up about 36% year to date at the time of this writing. 

Of course, investors would love to know how long this heightened engagement will last, because the longer it does, the further EA's stock price will climb. While management basically admitted they have no idea, there are indicators that this high engagement period may linger longer than investors expect.

Screenshot of EA's Madden football video game showing virtual football players in action during a game.

Image source: Electronic Arts.

No live sports has benefited EA

The NBA has resumed playing games, and it looks like both college and pro football will pick back up in September. But the cancellation of sports in recent months had a profound effect on EA's FIFA and Madden titles.

During the fiscal first quarter, FIFA's player acquisition was up more than 100% year over year, and Madden was up nearly 140%. CEO Andrew Wilson noted on the earnings call, "With real world sports disrupted, EA SPORTS has become the center of the emotional connection to sports, and we've brought millions of new, returning, and existing players into their own personal sports stories through our games." 

Revenue from Ultimate Team, where players spend money on digital player cards in FIFA and Madden, increased 70% year over year adjusted for currency. Overall, EA's live services business, which includes in-game spending, grew a staggering 61% to reach $1.1 billion, and made up 79% of EA's bookings in the quarter.

New players are more engaged than existing players

While Jorgensen said they want live sports to resume, because it helps "feed the engagement and excitement around the business," he also made the point that these games have a strong social network, which should contribute to their continued success. When people play Madden and FIFA, they build their friends list and compete with others online. These games tend to be sticky with players.

"Our EA SPORTS live services are acting as social networks for sports fans around the world, and the strength of those connections will grow as real sports seasons return," Wilson said. "Players in our communities for The Sims, Apex, Star Wars and more are building relationships through our games, and we expect them to be with us for a long time to come." 

FIFA attracted seven million new players on consoles last quarter. Not only are these new players likely to buy the new FIFA 21 releasing Oct. 9, but management has found these new players to be their most engaged group. 

Jorgensen said, "[T]he unbelievably high monetization we saw in Q1 does not drop off a cliff. It will slowly decline as we all go back to a normal life. But if you ask many of us, that might be six months, nine months, or two years." 

A rosier outlook

EA is remaining cautious with guidance, but management feels good enough about current business trends to raise the full-year outlook. EA now expects net bookings to be $5.95 billion, up 10.8% this fiscal year (which ends in Mar. 2021), with operating cash flow of $1.85 billion. 

Other than new versions of sports titles, EA has a light release slate for new video games with Star Wars: Squadrons releasing in the fiscal second quarter. But with live services making up a very high percentage of the business right now and growing at healthy rates, EA can afford to milk its existing games for the foreseeable future and doesn't need new titles to drive growth.

As Jorgensen mentioned, these high engagement levels may last months or up to a few years. But the most important thing is that these strong results are providing a nice bridge over to the new console generation launching this fall with the Sony PlayStation 5 and Microsoft Xbox Series X. EA has new versions of Madden and FIFA ready to take advantage of the advanced graphics capabilities of the new consoles at launch, which could lead to big sales of those titles during the holiday quarter.