Think Electronic Arts Had a Great Year? It’s Going to Get Even Better
Electronic Arts (NASDAQ: EA) just completed a record year for revenue, margins, and profit, driven by strong player engagement in its top sports titles -- FIFA 17 and Madden NFL 17. The stock is up 50% year to date, which follows an impressive almost 800% run over the last five years.
For fiscal 2018 ending in March, management has guided for another year of record revenue, as well as further expansion in gross margin from the growth in digital revenue. Digital revenue was 59% of total revenue last year and is expected to grow about 15% in fiscal 2018. Management is calling for gross margin to reach 74.9% as a result. Let's take a look at what is in store for key game releases in the next year to deliver these results.
EA's FIFA soccer title is one of the company's best-selling games. In fiscal 2017, it represented 11% of total revenue. The big draw for FIFA players is Ultimate Team -- a virtual card game where players can unlock real-world soccer stars to create fantasy teams to compete with other players online. Ultimate Team alone totaled 16% of EA's annual revenue last year and should continue to grow as a percentage of total revenue for the foreseeable future.
The FIFA Ultimate Team player base grew 13% in fiscal 2017 and another 11% through the fiscal first quarter of 2018. The great thing about this in-game feature is that it's addictive, fun, and enhances the gaming experience. The more money players spend buying card packs, the more fun the game becomes. It's a powerful, enormously profitable feature that is essentially printing money for EA since the cost of producing virtual (or digital) in-game cards is basically nothing compared to making the game itself.
The next installment in the series -- FIFA 18 -- releases in September, and this year's version may outsell last year's version. FIFA 18 is looking at a World Cup year next year, which should help grow the audience for the game as marketing and buzz around soccer will likely create greater interest from gamers.
Madden NFL 18 was just released in August and is the first Madden developed with the new Frostbite gameplay engine -- the same used in FIFA -- which generates realistic player animations and an authentic feel of playing through a real sporting event. The new Madden looks to duplicate the success of FIFA 17's popular story mode feature -- called The Journey -- which helped drive strong sales of FIFA 17 last year. Madden 18 has already received good reviews for its new Longshot story mode and should help the football franchise bring in new gamers.
Another element working in EA's favor with the new Madden is esports. EA and the NFL recently announced the new Madden NFL Club Championship. It creates the third Madden esports tournament as part of what's called the EA Majors, where the best Madden players will compete to win a $1.15 million cash purse.
What's interesting here is that Ultimate Team serves as the gateway to esports for EA's sports franchises, so as interest grows in Madden and FIFA esports tournaments, it helps fuel growth in Ultimate Team revenue.
Two upcoming titles to watch
Earlier in the year, management hinted at a new franchise in the works that is a fresh new concept, with a new story set in a unique universe. It is planned for launch sometime in fiscal 2019. The new game sounds like a science-fiction style game similar to Activision Blizzard's (NASDAQ: ATVI) largely successful Destiny franchise. The new franchise from EA will include additional in-game revenue opportunities from post-launch digital content, which means this game will be one more title EA has in its arsenal to grow digital revenue and margins.
Another big release on the horizon is Star Wars: Battlefront 2, which promises to be a big hit this holiday. It will feature a single-player story mode, which last year's version lacked -- something that gamers were disappointed about. Just the inclusion of a new single-player experience should help Battlefront 2 sell more copies compared to last year's Battlefront game.
But that's not all. Ultimate Team has been so successful for EA's sports franchises that management is bridging the massively popular Star Wars universe with in-game "Star Cards," which will be similar to Ultimate Team for FIFA and Madden.
All together, the company is looking at another record year in fiscal 2018. Whether or not it's enough to push the stock higher after its phenomenal run is a topic for another day. For now, shareholders should be encouraged that EA is not resting on its laurels, but is pushing the throttle forward for more growth.
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John Ballard owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.