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The Science of Hitting
The Science of Hitting
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An Update on Electronic Arts

A look at the video game company's 2nd-quarter fiscal 2020 results

October 31, 2019 | About:

Electronic Arts (NASDAQ:EA) recently reported financial results for the second quarter of fiscal 2020.

For the period, net revenues increased 5% to $1.4 billion, with an 18% increase in digital offset by a mid-teens decline in packaged goods and other. Over the trailing 12 months, net revenues were $5.1 billion (roughly flat). Digital growth was led by Live Services, which increased 39% to $573 million. Over the past year, Live Services net bookings have grown by 17% to $2.5 billion. As shown below, this portion of EA’s business has grown significantly over the past five years.

Live Services in the third quarter was led by "Apex Legends," "The Sims 4" (monthly average players up 40% year over over) and the sports portfolio (primarily "FIFA Ultimate Team," or FUT, and "Madden Ultimate Team," or MUT). Chief Financial Officer Blake Jorgensen summed it up nicely: “The strong results this quarter illustrate the power of our Live Services and our core franchises.”

Personally, I think the growth in the sports franchises is key to the story. In the quarter, total Madden unique players increased 12% year over year, with MUT players climbing 19%. In addition, FIFA unique players increased 14% year over year, with FUT players climbing 22%. As those numbers suggest, EA is seeing increased engagement in its key game play modes.

As CEO Andrew Wilson noted on the call, ensuring continued engagement with these franchises through high-profile events for gamers is a critical component of the company’s strategy:

"The excellent core gameplay and first new experiences in franchise mode are delivering for our loyal fans, while Superstar X-Factor and the all-new Superstar KO mode are resonating with a broader football community. With a launch that began earlier in the preseason and a second major beat at the NFL kickoff weekend that brought more plays into the game, we've delivered growth across the board in Madden… Our Madden competitive gaming season has kicked off as well. Our major tournaments are aligned to key moments in the NFL season, and other major brands are partnering with us throughout the Madden NFL 20 Championship Series.

The innovation in FIFA 20 is also deeply engaging fans and bringing new players into the franchise… People are playing more FIFA than ever before, with total in-game matches up more than 30% year-over-year [number of matches played per FIFA player up 10% year-over-year]. And as players continue to engage in the FIFA 20 experience and Ultimate Team, our FIFA 20 Global Series is kicking off in November, with millions set to compete in our unparalleled nine-month worldwide esports competition. Last season, more than 800 million minutes of FIFA esports content were watched, and with sponsors like Adidas and others breaking new ground with us this year, we're excited to reach an expanding audience with more great content."

The company continues to have a strong balance sheet, with nearly $5 billion in cash and investments against $1 billion in debt (net cash of roughly $13 per share).

As I’ve noted previously, I think management could become more willing to use this excess liquidity as the business shifts towards Live Services (as noted on the call, the company expects to “drive growth in all of our major Live Services next year”). We’ve started to see that play out, with $300 million of share repurchase in the quarter and $1.2 billion over the past year (at an average cost of $93 per share). To put that number in context, EA cumulatively repurchased $2.3 billion of stock in the three-year period from fiscal 2017 through fiscal 2019. As a result of recent repurchases, the diluted share count declined by 3.6% in the quarter to 296 million shares.

For the year, management expects the business to generate roughly $1.6 billion in operating cash flows. After accounting for capital expenditures, EA should generate roughly $1.5 billion in free cash flow, or more than $5 per share.

Conclusion

The strong growth in Live Services, particularly from the sports franchises, points to the strength of EA’s portfolio. Personally, I think the market may be starting to underappreciate how growth in these businesses may impact the income statement over the next five to 10 years. I do not own the stock currently, but I’m close. If we get a bit of help from Mr. Market, which may happen if there’s an overreaction to short-term delays as the company waits for the next console cycle, there’s a good chance that I’ll be adding EA to my portfolio.

Disclosure: None.

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About the author:

The Science of Hitting
I'm a value investor with a long-term focus. My goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio - a handful of equities account for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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