EA Results Carried by FIFA and Sims Social, Supports $20.60 Value

Electronic Arts (NASDAQ:ERTS) beat estimates with solid Q2 earnings release, hinging primarily on strong sales of FIFA 12 and digital gaming gains. ^[1] However contrary to expectations, the company did not raise its outlook significantly despite faring well this quarter and having a solid product pipeline for the next quarter, which led to a decline in its stock value. EA is an international developer, marketer, publisher and distributor of video games and competes with other game developers like Activision Blizzard (NASDAQ:ATVI), Take-Two Interactive Software (NASDAQ:TTWO) and casual gaming mainstays such as Zynga etc.

Below we try to analyze what were the meaningful trends for company this quarter and what is the current and near term positioning of EA against its competitors.

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FIFA 12 and Sims Social Contribute to a Strong Q2, However EA Needs to Pull its Socks Up in Mobile Gaming

EA has traditionally been known as a sports genre video game developer, and the company once again proved its mettle in the category with terrific sales of FIFA 12 and to a lesser extent by the moderate success of Madden NFL 12. EA sold nearly 8 million copies of FIFA 12 during this quarter and with the all important holiday season lying ahead, FIFA 12 looks well on track to overtake FIFA 11 as the highest sold FIFA series game.

Another major highlight of the earning was a 30% increase in digital gaming revenues. Growth in digital gaming was led by Sims Social, which has charted onto #2 of most played games on facebook, and a substantial increase in casual gaming visitors after the acquisition of The PopCap Games .

However apart from the positive trends, Q2 results did pinpoint to certain gaps in the company’s strategy. The most important of all was a lackluster performance in mobile gaming, with the mobile revenues contributing a meager 8% to the total revenues. With the video-gaming industry rapidly changing its dynamics and smartphones emerging as the fastest growing video-gaming platform, EA simply can not risk itself limiting to certain platforms. To address that, we believe that the company needs to chalk out a dedicated strategy for the growth of its mobile business.

Next quarter is going to be a make or break for the company

While this quarter certainly has been pleasing, the real testing times for the company lies ahead next quarter. Good thing however is that EA is not shying away from direct competition, and instead most of its awaited products slated for release next quarter challenges its competitors in their core gaming genres. Here we try to take a note of how the competition is shaping up between EA and its competitors ahead of this holiday season and what are the major trends we are looking forward to going ahead:

• EA vs Activision: With the successful launch of Battlefield 3, EA is trying to take on Activision which is the leading game publisher in first-person shooting genre with its Call of Duty franchise. Not that this is the first such attempt by EA, but certainly the most credible one with Battlefield 3 garnering high ratings from the gaming critics as well as testifying its might with an astonishing 5 million+ sales during the first week of its launch. However the real test will be in November, when Activision comes out with its Call of Duty: Modern Warfare 3. We will be keenly observing the competition between the two games, as the winner will eventually decide who stays at the top.
  

• EA vs Blizzard Entertainment: With the slated release of Star Wars: The Old Republic (SWTOR) in December, EA is taking a big aim on MMORPG space, an area traditionally dominated by Blizzard Entertainment with its World of Warcraft (WoW) franchise. EA has a lot on stake on the success of SWTOR, as the cost of development of the game is being rumored to be the highest of all games till date. The pre-sales reception of SWTOR has been phenomenal, with the game sweeping many prestigious video-gaming awards. However the reality will come out after December 20th only and this competition will be another area of our focus for the next quarter.
  

• EA vs Zynga: While this one is the most recent, the competition between EA and Zynga for casual gaming space is quickly turning out to be the one to watch out for. The first signs of the battle were given when EA purchased casual game developer PopCap Games for $1.3 billion against Zynga’s bid of $1 billion. Zynga’s games are considered to be the most widely used game applications on Facebook, but with a successful Sims Social, EA has made clear its aggressive growth plans in casual gaming space. Now with the addition of PopCap Games we expect the competition to only intensify going forward, and we will be eagerly following this for the next quarter.

We are in the process of revising our price estimate for EA’ stock standing at $20.62, which is nearly 10% below the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. EA reports solid Q2 results, Source: EA IR [↩]