Electronic Arts Q2 2016 Earnings Preview: Increase In Unit Sales Per Title To Drive Revenue Growth
Electronic Arts (NASDAQ:EA) is scheduled to report its Q2 2016 earnings results on October 29. [1] The American video game developer has been enjoying great dominance in the sports genre for over a decade now. With the trend shifting gradually from hardware sale dominance to increasing software sales in 2015, as well as with the return of one of the popular racing franchises, Need for Speed, Electronic Arts has a lot of positives to look forward to in the next three months. Moreover, with the release of FIFA 16 and Madden NFL 16, this year’s edition of the company’s two highest selling franchises, Electronic Arts is expecting yet another solid top-line performance in Q2 2016.
There might be two things that the investors will have their eyes on: Performance of the sports & FPS titles, and, of course, updates on Need for Speed.
Our $76 price estimate for Electronic Arts’ stock is roughly the same as the current market price.
See our complete analysis of Electronic Arts stock here
Can Core Titles Outperform Last Year’s Performance?
It’s that time of the year, when the top video game developers release their core franchises before entering into the holiday season. Some of the AAA games, including Electronic Arts’ FIFA, Madden NFL, and other sports titles; and Activision Blizzard’s (NASDAQ: ATVI) Call of Duty, are the most awaited games of the year worldwide.
The year 2015 has witnessed a classic trend shift in the gaming industry, when it’s been more than 18 months since the last console platforms launch, and console sales start declining due to the decline in demand of the previous generation consoles. The eighth generation consoles, PS4, Xbox One, and Wii U, came out a couple of years back, and since then the gamers have been more interested in buying the new consoles. Gamers spending their limited money on hardware rather than software titles, coupled with the decreasing number of popular software titles in the market, led to a 13% decline in the physical software sales in the U.S. in 2014.
However, now when most of the gamers are through with the transition to new console systems, the top game developers are putting extra efforts to increase the unit sales per title for each of their games. From new extensive expansion DLC (downloadable content) packs to improved game-play, the gaming companies have been attracting more gamers this year to boost up their sales.
According to the NPD gaming data, net software sales for the first nine months of 2015 are roughly the same as that in the same period last year, and that, too, with less number of major titles in the market than that in 2014. [2] This suggests that unit sales per title have increased this year compared to last year’s figure. Moreover, with numbness in the market in the first half of the calendar year in terms of quality games, core gamers are eagerly waiting for the new editions of the games to be launched.
On the other hand, net hardware sales figures for the first nine months is down 10% year-over-year (y-o-y), due to declining demand for previous generation platforms. As a result, the market is speculating the holiday season 2015 to be better than last year, considering that more gamers will be eager this season to buy games to try out on the new systems.
- Sports Titles: Leading The Sales Growth
EA launched FIFA 16 in the second to last week of September 2015. [3] On the other hand, the company released the American football simulator, Madden NFL 16, in the last week of August 2015. [4] Last year’s Madden NFL 15 has sold over 6 million units worldwide till date. Madden NFL 16 went off to a flying start, as it was the number one seller within 5 days of its release in the U.S. [5] On the other hand, FIFA 16 will hardly contribute to Q2 results, as it was just released a week before the end of the quarter. However, the continued strong demand for its previous editions has kept the money flowing for EA.
Trefis estimates the number of Madden units sold to increase by 8% in 2015, and to account for more than 10% of the total revenue this year.
Additionally, Trefis estimates the number of FIFA units sold to increase by 6% y-o-y to 19.8 million units in 2015.
Apart from these core titles, other sports titles launched by EA include NBA Live 16 and NHL 16. These titles would further boost the revenue growth for the company.
- Battlefield Hardline To Contribute To Revenue Growth
Electronic Arts, along with Visceral Games, launched the new Battlefield: Hardline title worldwide in mid-March this year. [6] The game has been getting tremendous response by the gamers. With new game-play modes and improved graphics, the game has been a major contributor to the net revenues for the past two quarters. According to VGChartz, the title has sold close to 3.14 million units worldwide, with PS4 leading the race with 1.64 million unit sales. [7] The impact of “number of unit sales per title’ to EA’s valuation can be analyzed below:
Need For Speed: Can EA Win The Race?
On September 30, 2015, Electronic Arts launched Need for Speed: No Limits, exclusively for mobile platforms and available for free download on iOS and Android systems. [8] The game has generated a lot of hype in the last few months, as it is the first original title developed specially for the mobile devices. The company will release the console version of the game, perhaps by far the best edition ever, in the first week of November 2015. It will be the 21st major installment in the franchise and 2nd for the next-generation platforms. After a one year break, the franchise is returning back to the market with the biggest and most advanced edition ever.
Although, the title has no role to play in the third quarter earnings, enough hype has been generated for the game ahead of its release. Investors, as well as dedicated gamers will be looking forward to any updates related to the game in the earnings call. The popularity and the brand appeal of the game are, no doubt, much higher than that of any other racing game franchises. Return of the Need for Speed series this year will encourage those racing game lovers to buy the game. In our prior article, we have discussed the potential impact the game can have on EA’s holiday season. [9]
With an expected solid performance from EA’s core titles and an impressive line-up for the holiday season, it is likely that the company will report yet another strong quarterly result.
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Notes:- Electronic Arts, Q2 2016 earnings conference call [↩]
- September 2015 NPD sales, Venturebeat [↩]
- FIFA 16 release date confirmed [↩]
- Calling all playmakers for the launch of Madden NFL 16 [↩]
- August 2015 NPD report [↩]
- EA and Visceral games announce Battlefield Hardline is available now [↩]
- Battlefield Hardline, VGChartz, game sales [↩]
- Race on the edge in Need For Speed No Limits, available today on mobile [↩]
- Read: Need For Speed To Give An Upper Hand To Electronic Arts This Holiday Season [↩]