Shares of video game giant Electronic Arts (NASDAQ:EA) tumbled last week following a disappointing quarterly report. Although Electronic Arts managed to post strong earnings, both its revenue and its outlook fell short of expectations.
During the company's subsequent earnings call, CEO Andrew Wilson and CFO Blake Jorgensen spoke about the trends currently affecting Electronic Arts' business, its future plans, and its expectations for the industry. Here are five of the most important quotes from that earnings call.
Gift-giving weighed on digital downloads
In recent years, Electronic Arts' management has repeatedly emphasized its desire to drive players away from physical discs. While the bulk of console video games continue to be sold in physical form, fully digital titles are now offered as an alternative. Electronic Arts' margins are better on digital sales, and it doesn't need to worry about the second-hand market cannibalizing demand.
The popularity of these so-called "full game downloads" has been trending up in recent years, and management has been optimistic it would continue at an accelerating pace. Digital downloads did rise during the third quarter, but demand was limited by a major cultural tradition: holiday gift-giving. During the call, Jorgensen addressed the topic.
"Full game PC and console downloads generated $195 million -- up 39% over the prior year -- driven by Star Wars: Battlefront, offset by [foreign exchange]. Star Wars: Battlefront was our largest digital launch ever, although it did lean more toward physical copies over the full quarter as holiday gift-giving became the dominant driver."
A drag on margins
Electronic Arts exceeded its estimates for both earnings and during the quarter, but its gross margin fell short of its outlook. Jorgensen explained during the call.
"Our [adjusted] gross margin for the quarter was 70.4%, down from last year's 72.8% and [1.10%] below our guidance. The decrease from last year was driven largely by mix...[2014's key holiday title] Dragon Age: Inquisition...compared to the royalty-bearing Star Wars: Battlefront this year. We had factored into guidance our expectation that Star Wars: Battlefront would be a strong gift-giving title [and therefore sell many physical discs], but it skewed even more physical than we had anticipated. The other significant driver of the margin shortfall...was also a positive, the strong performance of our royalty-bearing console and mobile games, which triggered greater royalty expenses than expected."
EA's future plans
As a video game publisher, Electronic Arts' results depend on its slate of upcoming titles. During the call, Wilson laid out Electronic Arts' plans for the next four quarters.
"Unravel launches on February 9...On February 23, Plants vs. Zombies: Garden Warfare 2 goes live...Then on March 15...EA SPORTS UFC 2 set to debut...Looking ahead to [fiscal year 2017, which ends March 2017], we will introduce breakthrough games from some of our biggest and most popular franchises....Mirror's Edge Catalyst...in May. A great line-up of EA SPORTS titles are in development...An all-new Battlefield game...will arrive in time for the holidays, we're excited to have a new Titanfall experience coming...and...Mass Effect: Andromeda...will launch later in the fiscal year."
The Xbox One and PlayStation 4 are selling well
Electronic Arts' participates in almost all aspects of the video game industry, selling titles on virtually every platform, including PCs and mobile devices. But Electronic Arts remains dependent on the market for video game consoles -- a full 76% of Electronic Arts' adjusted revenue came from the sale of its games on the PlayStation 3, Xbox 360, PlayStation 4, and Xbox One. The later two were particularly important, generating about two-thirds of Electronic Arts' adjusted revenue. Fortunately, they're quite popular. During the call, Jorgensen noted the extent of their relative popularity.
"Our estimate is 55 million [PlayStation 4 and Xbox Ones] out there which has exceeded virtually everyone's forecast for the year, and [is] now almost 50% higher than [the Xbox 360 and PlayStation 3 at this point in their lifecycles]."
Star Wars developers are hamstrung by canon
Electronic Arts sold 13 million copies of Star Wars: Battlefront into the sales channel last quarter. Although those players have already given Electronic Arts' some money for the game itself, they offer additional monetization opportunities through the sale of post-release, add-on digital content. However, while Electronic Arts' management remains committed to the game, it is limited in terms of what it can offer. During the call, Jorgensen offered up some details on the company's Star Wars deal.
"Part of our arrangement with Lucas...[we] can't make a game in [the] Star Wars [universe] that violates the canon of Star Wars...[We] can't take something from the future and bring it back into the past unless it's a reference. Not knowing yet exactly what the storyline in [the upcoming Star Wars spinoff film] Rogue One is going to be, I can't comment on how that could come into ...our current Battlefront game...which is [placed] 30 years before [Episode VII, so it] will limit our ability to bring some new content into that."