Saturday, June 8, 2013

Electronic Arts: Why I'm Optimistic

From The Motley Fool, Published May 30, 2013
By Sarfaraz A, Khan
Research Assistant: G. Yousuf

Walt Disney (NYSE: DIS), the leading media and entertainment conglomerate and the owner of Star Wars franchise, has reported strong quarterly results. A significant development occurred on the Star Wars front when Disney awarded the license to develop the games of the franchise to Electronic Art (NASDAQ: EA). Naturally, Walt Disney is shutting down LucasArts, the original developer of the games. The Star Wars brand is certainly going to be a healthy addition to EA’s pipeline, which has under-performed compared to its rival Activision-Blizzard(NASDAQ: ATVI).

Disney’s Impressive Growth
Disney's current quarter will also include the millions it has made on Iron Man 3. The blockbuster movie reported U.S. sales of $175 million from the debut alone, while overall global turnover has been $680 million. On the other hand, Time Warner’s DC Comics has not been able to mimic the success of Disney Avengers. 
Disney reported its earning earlier this month for the second quarter ending March, 2013. Its revenues rose 9.6% to $10.55 billion, while net income increased by an impressive 32.4% to $1.51 billion, or $0.83 per share. The strong growth in earnings is credited to the theme parks, ESPN cable network and, as indicated above, the film studio’s performance.
Walt Disney’s segments revenues
% Change
(in million)
(in Million)
Media Networks
Parks and Resorts
Studio Entertainment
Consumer Products
Walt Disney gets 47% of its total revenues from the Media Networks segment, which forms its biggest segment. Here, the cable networks revenue rose 9% to $3.46 billion, while broadcasting revenues fell by 2% to $1.50 billion due to a decline in ABC television network advertising revenue as a result of lower ratings. Parks and Resorts also reported increasing sales due to the multimillion dollar investments made in 2012 on domestic theme parks, which caused an increase in guest spending and attendance.
Some recent reports have also suggested that Disney has started working on the next version of a Star Wars animated television series, which could come out in the fall of next year. 
EA will bring the Star Wars games
EA will now develop Star War games for consoles, computers and mobile devices. EA has been trying to improve MMO (Massive Multiplayer online) games and is hoping that these efforts will provide the necessary infrastructure to develop popular titles like Activision’s ground-breaking series' Call of Duty, Diablo and World of Warcraft (WoW).
EA has opened a new studio in Las Angles, which will be used by its development team DICE which will work on Star Wars. The studio also aims to lure other talented developer from its rivals. By the end of this year, DICE plans to recruit 60 staffers. Gamers would remember DICE as the studio behind the success of “Battlefield 3,” which sold 17 million copies and generated an enormous subscriber base of 3.5 million. The studio is also planning to release “Battlefield 4” in fall.
EA is the second largest video-game maker in the U.S. It has released its quarterly earning earlier this month for the three months ended March 31. The business reported an 11.6% year-over-year drop in revenues to $1.21 billion, while net earnings fell 19.3% to $323 million, or $1.05 per share. The new console cycle is translating into a difficult period for companies like EA and Activision as consumers delay their spending decisions. Some of the decline can also be attributed to the increasing popularity of online and mobile games.
However, Activision has recorded an increase in both its top and bottom-line due to the successof Call of Duty: Black Ops II, Skylanders Giants, StarCraft II: Heart of the Swarm, and Diablo III. The company’s revenues rose 13% to $1.32 billion, while net income increased by 19% to $456 million. But the business reported a sequential drop of 1.3 million in WoW’s subscribers, while online subscription sales for WoW and Call of Duty Elite dropped 9% year-over-year. In essence, the revenue growth was led by console and PC games, which reported an 85% and 384% increase in sales, respectively. In this context, the slowdown from online gaming is troubling. The strong performance of consoles in particular could show further improvements in the coming quarters (explained below).
Why I’m optimistic
Clearly, Activision has performed far better than EA, and one of the reasons, as mentioned above, was that the latter hasn’t produced as many popular franchises as Activision. From this perspective, I think that the addition of Star Wars to its pipeline is going to play out well in the future.
Secondly, I believe that EA, like Activision, is a company in transition that is moving towards mobile and online gaming--hence it is witnessing a drop in console and PC revenues which is dragging on its income statement, as consoles are the single largest contributor to EA’s top-line. Its mobile revenues are witnessing impressive growth, but this unit still forms a small percentage of the overall sales. The company earns around 65% of its revenues from this segment, which fell by 13% to $790 million while PC revenues dropped by 24.6% to $252 million. But Mobile and Handheld sales rose by 40.8% to $138 million.
Thirdly, the industry is witnessing a new era of gaming following the release of the new Xbox. Therefore, things are looking better, as far as console gaming is concerned, for both Activision and EA. The latter has four sports franchises -- FIFA, NBA Live, Madden and UFC – powered by the new gaming engine due in the coming months. For Activision, its fans are awaiting the arrival of ‘Call of Duty: Ghosts’ on the new Xbox. 
While Activision and Microsoft have been taking the headlines when it comes to console gaming, investors following the gaming sector would do well to also keep tabs on Electronic Arts. The Fool can help. The Motley Fool's special report breaks down the risks and opportunities facing the company to help you decide if EA is right for your portfolio. Click here to get your copy now.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own personal opinion. I have no business relationship with any company whose stock is mentioned in this article