Investors were expecting to hear good things from Electronic Arts (NASDAQ:EA) when the video game maker issued its fiscal second-quarter results. The pandemic has placed a new premium on at-home entertainment just when EA was releasing a flood of new content across franchises like FIFA, Madden NFL, and Star Wars.

On Nov. 5, the company reported that it had surpassed those high expectations, and management issued an optimistic outlook for the key holiday shopping period ahead. EA also instated its first dividend program after cash flow hit a new record.

Let's take a closer look at the Q2 results.

Two kids sitting on a couch and playing console games.

Image source: Getty Images.

Electronic Arts growth is on track

Sales landed at $1.15 billion, or just slightly ahead of the $1.13 billion that management had projected back in late July. Zooming out, net bookings, which is management's preferred metric for tracking demand trends, is up 8% over the past 12 months. That's slower than fiscal 2020's result but still constitutes a strong expansion.

Executives credited EA's aggressive pace of new content releases, plus high demand for live services in its sports franchises, for keeping growth on track.

The latest iteration in the Madden NFL franchise, for example, has 30% more players in the ecosystem today than its predecessor did at this time last year. "We're delivering more fan-favorite games," CFO Blake Jorgensen said in a press release, "growing our leading live services, and engaging more players across more platforms than ever before."

Like Activision Blizzard (NASDAQ:ATVI) has with Call of Duty: Warzone, EA is getting a big lift from free-to-play offerings despite their reliance on small in-game transactions over a big initial purchase outlay. Apex Legends is on track to reach $1 billion in annual sales, in fact, by the end of this fiscal year.

Gushing cash flow

EA's shift toward more of a services-based business continues to support improving financial trends. Sure, pre-tax profits are down so far this year, to $607 million over the past six months compared to $720 million a year earlier. But the developer just notched a record $2 billion in annual operating cash flow and sees a clear path to more gains here on the way.

As a result, management decided to initiate a dividend program and approved a new stock repurchase program. "We are on track to deliver strong growth this year and expect continued growth in fiscal 2022 and in the years to come," Jorgensen said.

Looking ahead

The fiscal third quarter is always a big one for EA since it covers the holiday period that often accounts for more than one-third of its annual net bookings. This year that importance is amplified by the fact that a few title launches were pushed into the Q3 and Q4 earnings periods.

Overall, EA expects to log $1.675 billion in revenue in Q3, which would put it on track for the same $5.625 billion for the full year that management forecast three months ago. EA's annual earnings forecast was upgraded, though, to $924 million from the $869 million that executives had forecast in late July.

The video game releases that should dominate this quarter include FIFA 21 and NHL 21, and EA's portfolio will go up against rival launches like Activision Blizzard's annual blockbuster Call of Duty release. But the growing industry means there's plenty of room for both companies to boost their audience sizes while cranking out higher operating returns as spending shifts toward profitable in-game purchases and subscription services.

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