Electronic Arts Sees Acceleration in Digital Growth
Top video game maker Electronic Arts (NASDAQ: EA) delivered a treat to investors when it reported earnings on Halloween. The new release of Madden NFL 18 helped fuel an acceleration in digital bookings (management's new term for digital revenue) which is now 63% of EA's total revenue over the trailing-12-month period.
Some investors didn't like their treat, with the stock down about 5% following the earnings release. But, as Foolish investors, we're focused on how the business is doing knowing that the stock price will take care of itself over the long term. And from that perspective, EA is performing very well.
It's all about digital growth
The digital distribution trend is sweeping through the video game industry, and this was very evident looking at EA's earnings results. In last year's comparable quarter, digital bookings grew only 1% but accelerated to a 19% growth rate in this year's quarter. On a trailing-12-month basis, digital bookings grew 26% year over year to $3.24 billion.
The largest component of digital bookings is live services, which includes revenue from Ultimate Team, where players can buy in-game card packs for EA Sports titles. Revenue from live services grew 22% for the quarter, driven by Battlefield 1 and Ultimate Team, bringing the trailing-12-month amount to $1.814 billion.
Digital bookings were also driven by strong growth in the number of players choosing to buy Madden NFL 18 directly over console as opposed to buying a physical copy in stores. Full game downloads are better for EA's margins than sales of physical game discs, but it's still a minor percentage of EA's annual revenue. This category grew 28% in the quarter and grew 54% on a trailing-12-month basis, so it won't take long for it to become a key component of EA's annual game sales, helping to fuel margin expansion over time.
EA Sports titles showing solid growth
The strategy behind EA Sports titles is to funnel gamers to Ultimate Team. This digital card game also serves as the gateway to esports for the company, so it's important to see the digital side of EA Sports titles growing over time.
This year is shaping up to be a very strong year for Ultimate Team which totaled 17% of EA's revenue in fiscal 2017. FIFA 18's digital portion of total game sales is 25%, up from 16% for the previous version. Same story for Madden, where Madden 18's digital portion of total game sales increased to 34%, up from 25% last year.
A key part of Madden 18's success is a new story mode called "Longshot" which tells the story of a struggling college football star's road to the NFL. A similar story mode helped sell more copies of FIFA 17 last year, and it's clearly worked the same charm with Madden players. Management reported an increase of 25% in player engagement for Madden Ultimate Team, which has carried over to a 30% increase in the number of players participating in online competitive matches.
The EA Sports label is an important contributor to EA's business, and Madden is a big part of the company's esports plans, so it's great to see the game continuing to grow year over year in key engagement metrics.
There's more to come
The strength of the company's digital growth caused management to raise its expectations for the full fiscal year ending in March 2018. Management expects bookings to be $5.15 billion, compared to the previous guidance of $5.1 billion. Earnings per share are now expected to be $3.63, up from previous guidance of $3.57 per share.
Management's raise to guidance signals they are expecting a strong holiday quarter. EA has two big releases for November -- Need for Speed: Payback and Star Wars: Battlefront 2. Both titles are getting buzz from the gaming community and are expected to be strong sellers during the holiday season.
This fiscal year is turning out to be a strong one for EA, which gives the game maker a lot of momentum heading into what should be another big year.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.