Electronic Arts Inc. (EA): Why I’m Optimistic

Electronic Arts Inc. (NASDAQ:EA).The Walt Disney Company (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 Arts Inc. (NASDAQ:EA). Naturally, The Walt Disney Company (NYSE:DIS) 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, Inc. (NASDAQ:ATVI).

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 Inc. (NYSE:TWX)’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.

Segments Q2-2012 Q2-2013 % Change
(in million) (in Million)
Media Networks $4,692 $4,957 5.60%
Parks and Resorts $2,899 $3,302 13.90%
Studio Entertainment $1,180 $1,338 13.40%
Consumer Products $679 $763 12.40%
Interactive $179 $194 8.40%

The Walt Disney Company (NYSE:DIS) 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 now develop Star War games for consoles, computers and mobile devices. Electronic Arts Inc. (NASDAQ: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 Blizzard, Inc. (NASDAQ:ATVI)’s ground-breaking series’ Call of Duty, Diablo and World of Warcraft (WoW).

Electronic Arts Inc. (NASDAQ: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.

Electronic Arts Inc. (NASDAQ: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 Electronic Arts Inc. (NASDAQ:EA) and Activision Blizzard, Inc. (NASDAQ:ATVI) 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 Blizzard, Inc. (NASDAQ:ATVI) has recorded an increase in both its top and bottom-line due to the success of 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).

Clearly, Activision Blizzard, Inc. (NASDAQ:ATVI) has performed far better than Electronic Arts Inc. (NASDAQ: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 Electronic Arts Inc. (NASDAQ: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 Blizzard, Inc. (NASDAQ:ATVI) and Electronic Arts Inc. (NASDAQ: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.

The article Electronic Arts: Why I’m Optimistic originally appeared on Fool.com.

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