Electronic Arts Inc. (NASDAQ:EA) Q4 2024 Earnings Call Transcript

Electronic Arts Inc. (NASDAQ:EA) Q4 2024 Earnings Call Transcript May 7, 2024

Electronic Arts Inc. misses on earnings expectations. Reported EPS is $1.37 EPS, expectations were $1.52. EA isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. My name is Bhavish and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Electronic Arts’ Fourth Quarter and Fiscal Year End 2024 Earnings Conference Call. I would like to turn the conference over to Mr. Andrew Uerkwitz, Vice President, Investor Relations. Please go ahead.

Andrew Uerkwitz: Thank you. Welcome to EA’s fourth quarter and fiscal 2024 earnings call. With me today are Andrew Wilson, our CEO; and Stuart Canfield, our CFO. Please note that our SEC filings and our earnings release are available at ir.ea.com. In addition, we have posted detailed earnings slides to accompany our prepared remarks. Lastly, after the call, we will post our prepared remarks, an audio replay of this call and a transcript. With regards to our calendar, our first quarter fiscal year 2025 earnings call is scheduled for Tuesday, July 30. As a reminder, we post a schedule of upcoming earnings calls for the fiscal year on our IR website. This presentation and our comments include forward-looking statements regarding future events and the future financial performance of the company.

Actual events and results may differ materially from our expectations. We refer you to our most recent Form 10-Q for a discussion of risks that could cause actual results to differ materially from those discussed today. Electronic Arts makes these statements as of today, May 7, 2024 and disclaims any duty to update them. During this call, the financial metrics with the exception of free cash flow and non-GAAP operating margin will be presented on a GAAP basis. For more information on our non-GAAP operating margin, please see our earnings slides and the FAQ document available on our Investor Relations website. All comparisons made in the course of this call, are against the same period in the prior year unless otherwise stated. Now, I’ll turn the call over to Andrew Wilson.

Andrew Wilson: Thanks, Andrew. In FY 2024, we entertained and connected hundreds of millions of people around the world. I’m inspired by how our teams continue to create and deliver more innovative content and deeper experiences than ever. Before I dive into our results, I want to talk about the accelerating transformations across the entertainment landscape and how we have been navigating and leading through change. Firstly, consumer retention and spend are increasingly consolidated in top franchises. As live services deliver fresh content, players are going deeper and spending more time with their friends in blockbuster experiences. For example, in North America, engagement for the top 10 franchises have increased their market share since fiscal 2022.

For a company that has some of the biggest IP in the world, this trend presents an incredible opportunity to evolve as an industry leader. It is against this backdrop that we have built our three strategic pillars around entertaining and engaging massive online communities, telling blockbuster stories and harnessing the power of community in and around our games. Secondly, players and fans are increasingly looking to us to deliver the entertainment they want today and tomorrow, bigger, bolder, more connected experiences where they can play, watch, create and connect like never before. As players needs and motivations expand, we continue to sharpen our focus. Across this past fiscal year, we took proactive steps to further empower our creative leaders by realigning our investments, organization and portfolio in support of our largest growth opportunities.

As we have demonstrated several times in the past by building some of the world’s largest franchises, when we rally behind a shared goal, EA delivers more creativity, more connection and more cutting edge experiences for players and fans. The most recent example of this is the incredible launch of our multi-platform experience, EA SPORTS FC, which was a truly profound moment for our players, our teams and our partners. This milestone as well as our execution across this fiscal year demonstrates how EA is leading the future of entertainment. I’m excited to share more details about our development pipeline, innovative experiences and new revenue streams at our Investor Day this September in New York. Our teams at EA Sports are the best in the business, delivering awesome gameplay, innovation and unmatched authenticity to fire the passion and imagination of hundreds of millions of players and fans.

FY 2024 was the biggest EA SPORTS year in our history, a year in which we launched eight titles across the year, including the highly successful launch of our own brand, EA SPORTS FC. Players are connecting, competing and celebrating global football with their friends, driving strong engagement across FC’s multi-platform experiences. In FY 2024, our global football franchise grew net bookings by high teens, a remarkable year considering the prior year benefited from significant tailwinds related to the World Cup. During calendar 2023, there were billions of matches played across FC experiences and the franchise’s astounding success goes far beyond gameplay. Our massive global football community watch more than a billion hours of content in and around our game.

Gameplay videos, pitch notes and e-sports in addition to content produced by our community. These many interactions on and off platform meaningfully increase in-game engagement, which drive stronger retention and ultimately greater levels of monetization. What we know when we look at play behavior in our games, as players spend more time with their friends, they play more, they play for longer, and this engagement leads to more in-game spend. With the successful launch of EA SPORTS FC, our focus was two-fold, delivering innovation in gameplay with HyperMotion V, new features and improvements across all modes of play for our core players, while continuing to expand the game’s reach through the acquisition of new players and reengagement of lapsed players.

Our go-forward strategy is anchored in building a platform that enables us to deepen our connection with players, lead the future of immersion by bringing the real world of sport and our experiences closer together and expanding the tools, modalities and partnerships to drive enhanced socialization, self-expression and creation for sports fans. We’ve engaged with partners like Nike, Pepsi, Uber Eats and Beats over the last year and we’ll continue to do so, integrating them into matchday experiences and providing them with a platform to deeply connect with our global audience. We are also building to unlock new multifaceted sponsorship and advertising opportunities. FC is more than just a game, it’s the world’s leading digital football fan platform, and this is just the beginning.

Year-after-year, Madden NFL unites fans and athletes through interactive experiences that fuel passion, connection and creativity. No one can match Madden’s unparalleled authenticity in American football. Our talented teams pushed more innovation in the Madden NFL 24, more modalities of play and amazing content throughout the season, leading to the highest selling installment for Madden since the early 2000s and record overall net bookings. Further innovation in live service events has led to deep ongoing engagement well beyond the NFL season, especially with younger audiences as we’ve seen increases in weekly active users into and following the Super Bowl. Most recently, excitement has continued through the NFL draft as top picks were dropped into Ultimate Team in real time.

We see this excitement leading us right into an incredible Madden NFL 25. To expand the American football experience, this summer we are launching the highly-anticipated EA SPORTS College Football 25, bringing new innovations, always on social connection and unrivaled immersion. This awesome experience will feature all 134 Football Bowl Subdivision schools, more than 11,000 college athletes, the iconic traditions and pageantry of the United States’ biggest college sport and unparalleled gameplay to inspire the fandom of millions of fans. This is the next step in a multi-year plan to further evolve and grow our American football experiences into a connected ecosystem to more deeply engage and expand an already thriving community. We see incredible opportunities ahead for us across our sports business, as we continue to build ecosystems around our biggest communities, we are also prioritizing our owned IP in the rest of our broad portfolio, which are among the most deeply engaging and culturally relevant entertainment properties in the world.

Since its surprise Smash Hit release in 2019, the HD title of Apex Legends has surpassed $3.4 billion in lifetime net bookings. In FY 2024, we focused on building features and improving quality of the experience to drive long-term engagement, positioning us for future revenue growth. For example, we finished the year with significant changes to the mechanics of our popular ranked mode. We engaged with the community, increased transparency and thoughtfully addressed their feedback, and as a result, saw dramatic improvements in player sentiment across the world improving 29 points. We have also prioritized expanding Apex’s appeal, making it more approachable for new and more casual players with improved onboarding and simplified modes of play like 3 Strikes and Straight Shot.

Looking to the future, we will continue to invest in broadening the audience by building upon the epic characters and storytelling of this world that go beyond the current Battle Royale. The passion for Sims Community remains strong as the franchise powers towards its 25th anniversary. Since its launch in 2014, the Sims 4 has surpassed 85 million players with FY 2024 up double-digits year-over-year. The Sims Online and the Sims Mobile combined have been downloaded over 500 million times. This is already one of the largest communities in the world and we believe this hugely successful franchise has the potential to become one of the largest creator platforms in entertainment. An early proof point of the platform’s evolution is the hundreds of millions of user generated content items that were shared in this fiscal year.

Looking ahead, we are committed to entertaining and inspiring our loyal and engaged Sims 4 fans through over 15 content updates over the coming year, while working on multiple experiences in the Sims universe to leverage user generated content to deepen our community and expand our audience. With each immersive action-packed season of Battlefield 2042, players have made it clear that they wanted an even deeper experience. Our teams have listened to the community, have learned valuable lessons and are driving to the future. Motive, armed with cutting edge frostbite technology and compelling storytelling is joining dice, criterion and ripple effect to build a Battlefield universe across connected multiplayer and single-player experiences. This is the largest Battlefield team in franchise history.

A few weeks ago, I was visiting with the teams and I couldn’t be more excited about what they showed and what we were able to play. Turning to mobile, we are heads down on bringing together mobile and HD franchise leadership for EA SPORTS FC, Madden NFL and the Sims, while also continuing to make strategic investments in standalone mobile titles. Mobile is the largest platform in our industry and with our teams aligned and more empowered than ever, we see growth opportunities in this part of our business over time. I will now turn it over to Stuart for more detail on FY 2024 with additional color on the near-term industry outlook and incremental detail and metrics around our confidence in FY 2026 and FY 2027.

Stuart Canfield: Thanks, Andrew, and good afternoon, everyone. As Andrew spoke to earlier, we’ve been on a journey to transform our business to meet the needs of an evolving industry landscape, which has seen players develop new engagement behaviors and demands. To meet these changing player needs, we’ve been deliberate over the last fiscal year to prioritize our investments, streamline our portfolio and align our teams and organization behind our biggest strategic opportunities. Overall, these changes set us up to deliver accelerated growth from the core business, while building the foundational blocks to expand and deepen both engagement and monetization into the emerging interactive entertainment categories of create, watch and connect.

Turning first of fiscal year 2024, EA delivered strong earnings growth and record cash flow in a highly competitive market. Our results were highlighted by the hugely successful rebrand for the EA SPORTS FC and growth across our largest sports franchises with both global football and Madden franchises delivering record net bookings results. For the fiscal year, we delivered total net bookings of $7.43 billion, up 1% year-over-year or up 3% in constant currency. Full game net bookings of $2.01 billion, up 11% year-over-year or 12% in constant currency was driven by the release of Star Wars Jedi: Survivor and our EA SPORTS portfolio. We launched four new non-annual sports titles in FY 2024, strengthening our EA SPORTS brand as it further expands fandom across one of the largest platforms in the world.

Live services net bookings was $5.43 billion, down 2% year-over-year or down 1% in constant currency. Excluding the impact of the sunset of Apex Mobile, live service net bookings was about flat year-over-year. Strength in live services was driven by high teens growth year-over-year in our global football franchise, fueled by FC Ultimate Team and FC Mobile was offset by declines in Apex Legends. Moving to our GAAP results, we delivered net revenue of $7.56 billion, up 2% year-over-year. Cost of revenue was $1.71 billion, down 5% year-over-year, driven by lower royalties and lower acquisition-related expenses, resulting in a gross margin of 77.4% for the year, an improvement of 150 basis points. As we continue to operate with focus and discipline, GAAP operating expenses were $4.33 billion, up 1% year-over-year, driven predominantly by incremental marketing spend to support our new releases and launch of EA SPORTS FC.

Our GAAP earnings per share was $4.68, which included $64 million of restructuring and related charges, significantly outpacing our original expectations, growing 63% year-over-year. Operating cash flow of $2.32 billion, a record for a fiscal year deliver considerable improvement and accelerated growth year-over-year. Capital expenditures for the year were $199 million, below our original $275 million guide as we further rationalized our real estate investment and footprint over the year. This resulted in a record year for free cash flow of $2.12 billion, up 58% year-over-year. This includes a one-time cash tax savings of approximately $150 million. Over the year, we returned $1.51 billion to shareholders through buybacks and dividends. Moving to fourth quarter results.

Total net bookings for the fourth quarter was $1.67 billion, down 14% year-over-year in both actual and constant currency. Full game net bookings for the quarter was $259 million, driven by slate timing. And live services for the quarter was $1.41 billion. As a reminder, we expected Q4 net bookings to be impacted by 8 points related to slate timing. We also provided a wider guidance range to account for the dynamics of Apex Legends and EA SPORTS FC, which faced difficult comparable periods. In Apex Legends, we saw elevated engagement and monetization trends early in the quarter. As the quarter progressed, monetization returned to prior norms while player sentiment and engagement remained strong. FC Mobile and Online declined year-over-year as they faced record comparables in the prior year period, fueled by World Cup tailwinds.

However, FC Ultimate Team, lapping a record 20% growth in Q4 FY 2023, again, grew year-over-year, delivering low-single-digit growth. We delivered net revenue of $1.78 billion, down 5% year-over-year. Cost of revenue was $357 million, which translated to a gross margin of 79.9%, up 380 basis points year-over-year as we benefited from lower royalties and change in deferred net revenue related to product mix. GAAP operating expenses for the quarter was $1.19 billion, down 5% year-over-year from lower restructuring related charges. GAAP EPS for the quarter was $0.67. We delivered operating cash flow of $580 million in the quarter and free cash-flow of $529 million. Now let me turn to our outlook. In FY 2025, we expect to again drive results in a highly dynamic market, delivering fiscal year growth, strong cash flow and enhanced return on capital.

We expect to do this despite a lighter slate, through new releases of iconic and fan favorite IP, continued execution and growth in our core live services and by staying focused and disciplined against our strategic growth initiatives. Our Q1 FY 2025 outlook reflects many of the trends we saw in Q4 2024 related to slate timing and atypical seasonality as we lap difficult comps year-over-year. We expect the quarter to be impacted by 15 point headwind related to release and content timing versus prior year due to three additional title launches. Live services, including EA SPORTS FC and Apex Legends will continue to face difficult comparable periods. As a reminder, Q1 FY 2024 was the largest Q1 in company history for our global football franchise.

We expect net bookings for Q1 to be $1.15 billion to $1.25 billion, down 27% to down 21% year-over-year. We expect net revenue of $1.575 billion to $1.675 billion, cost of revenue to be $240 million to $250 million and operating expenses were approximately $1.065 billion to $1.085 billion, resulting in earnings per share of $0.73 to $0.90. Now moving to our outlook for FY 2025. We expect fiscal year net bookings of $7.3 billion to $7.7 billion, down 2% to up 4% year-over-year with mid-single-digit growth in our core live services business, partially offset by fewer title launches, lighter catalog contributions and headwinds from our mobile business related to portfolio optimization decisions taken over the last six months. Excluding our sunset titles, we expect mobile to be up low single digit.

Turning to GAAP, we expect net revenue of $7.1 billion to $7.5 billion. We expect GAAP operating expenses to be $4.35 billion to $4.44 billion, flat to up 2% year-over-year as focus investment to drive growth is largely balanced by less marketing spend and acquisition related expenses. We expect GAAP operating margin to be 18% to 20.6%. We expect non-GAAP operating margin to be 29.6% to 31.7%, the impact from change in deferred net revenue is expected to be approximately 200 to 170 basis points. We expect fiscal year GAAP EPS of $3.34 to $4. We expect our business to continue to be a strong generator of cash with operating cash flow of $2.05 billion to $2.25 billion and capital expenditures of around $200 million, which would deliver a free cash flow of about $1.85 billion to $2.05 billion, roughly flat year-over-year when excluding the onetime cash tax benefit noted earlier.

Expanding upon the long-term financial framework we introduced last quarter, we are introducing non-GAAP operating margin guidance through FY 2027. We believe this best reflects our confidence in accelerating growth, ability to expand margins and grow cash flows. Moreover, it provides greater transparency around the impact of our strategy and future pipeline for our shareholders. By FY 2027, we expect our GAAP operating margin to expand an additional 300 to 350 basis points and we expect our non-GAAP operating margin to expand another 150 to 200 basis points. We do not expect any additional impact from change in deferred net revenue. Please refer to our slides and FAQs for further information. Our conviction in expanding margins and accelerating growth leads us to increase our stock repurchase program and extend it by an additional year.

Returning capital to shareholders is an important priority for us. Our Board has authorized a stock repurchase program of $5 billion over the next three years. We expect $1.5 billion to be returned in FY 2025 with the remainder scaling with growth in our business across FY 2026 and FY 2027. In closing, as we look ahead to our September Investor Day, I’m excited to share more on our ongoing value creation framework with insights into the growth drivers across our core business and upcoming releases from our development pipeline as well as our key strategic priorities to harness the power of our community. Now, I’ll hand it back over to Andrew.

Andrew Wilson: Thank you, Stuart. 25 years ago, there were dozens of major independent publishers in the video game space. Today, there are only a handful, and we have an incredible competitive advantage with the excellence of our creative talent, our production strength, our broad portfolio of incredible IP, including EA SPORTS and our massive player network. With these enviable strengths, we are well positioned to grow the industry and increase our market share. As we leverage the capabilities of AI, we believe it will further supercharge these differentiators. Through decades of experience and leadership, we have led through multiple transformations in our industry. Now we have an incredible opportunity in service of our players, communities and shareholders to lead through the one taking place right now. Now Stuart and I are here for your questions.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions]

Andrew Uerkwitz: Bhavish, we’re ready for your first question.

Operator: Thank you. Our first question comes from the line of Matthew Cost of Morgan Stanley. Please go ahead.

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Q&A Session

Unidentified Analyst: Hi, team. This is Dave on for Matt. Just a quick housekeeping question. It looks like in the new non-GAAP guidance, you’re providing us a better bridge to what we’re already doing in our model. So if I’m following correctly, we can now take the new non-GAAP operating margin and add or subtract for the change in deferred. And so if I’m doing the math correctly, does that bring us to an operating margin on net bookings of 31.6% to 33.4%? And then I guess, just as a quick follow up, if you could speak more to why the change in disclosure? Thanks.

Stuart Canfield: Dave, many thanks for the question. This is Stuart. Let me just quickly step back and talk about why now and why the change. We know that video game companies take different approaches with regards to capitalizing software costs. As you know, we don’t capitalize software costs and we expense as we go into the P&L. Thus, we felt it was important that by bringing this measure, it helps you better understand our business as we move forward, in particular, as we think about the pipeline in 2026 and 2027 and as a way for us to clearly demonstrate the conviction in the strategy and the direction that we see the business going forward into the future. Based on your assessment and using the adjustment for the change in deferred revenue, yes, you are correct.

And what I would tell you is a couple of pieces. One is that, obviously, you see expansion FY 2025, which is suddenly driven by our licensing changes. Revenue mix through the year and the ongoing focus and discipline around cost as you look at the 2025 guide and the framework of OpEx around net bookings. And then secondly, as we outlined in the prepared remarks, you’ll see FY 2026 and 2027 expansion driven by the pipeline as we start to bring to market through those later years and continue to enable us to drive return in the core business and importantly, still investing in the future. I’d also add that around all of that conviction and for using that metric, that would obviously have also announced the increased stock repurchase program, which is again another really meaningful signal in conjunction with this metric of where we see the business moving in the later years.

Unidentified Analyst: Great. Thank you.

Operator: Thank you. Our next question comes from the line of Chris Schoell of UBS. Please go ahead.

Chris Schoell: Great. Thank you. I appreciate you’ve been facing very difficult comps, but can you give some color on what you’re assuming for some of your larger franchises, including Apex and FC in fiscal 2025. And it appears the midpoint of the guidance is similar to your prior growth commentary, but anything you would flag that has changed relative to last earnings call in regard to your expectations for next year? Thank you.

Andrew Wilson: Thanks, Chris. Firstly, I’ll take the last question first. No material expectation shift from the framework that we outlined back in January. To your second question, broader assumption, I think it would be important to think about the phasing of how we’re thinking through the year. Obviously, we put out Q1 and you’ll see the challenging sort of headwinds around the title comps and slate from last year, which is really driven around we had those extra titles from before. As you think through the rest of the year and how we build out the business, obviously we look to Q2 and we see obviously the addition of college football and we expect an overall aggregated growth around our American football business. You would expect that we continue to see growth in both our core live service business and we talked to in the prepared remarks that we see that outpacing the market and sort of mid-single-digit growth.

You’d expect the FC that has grown for us, and again, we grew FC again last year in 2024 expect that FC 25 being both new innovations and we continue to grow that franchise through next year. In terms of Apex, we saw great engagement and retention from players in Q4. We continue to invest behind the franchise and expect to see some advancements innovations in new seasons over the next couple of seasons in front of us that we’d start to continue to believe we drive growth back into the franchise through FY 2025. That overall brings us to a — the profile we’ve put out, which is again low-single digit bookings growth for the year in a lighter release slate, but offset by growth in that core life service business.

Chris Schoell: Awesome. Thank you for that. And if I can just fit in one more quick one. Just regarding the stock repurchase program, how did you think about accelerating the buyback versus other capital allocation opportunity — opportunities you had at your disposal?

Stuart Canfield: Yes, great question. I think the first thing I would just say is our dividend remains unchanged. The second part is you want to kind of reinforce from the stock repurchase program, sort of three validations through it. One is aligning the length of the program with the framework we’re putting out in terms of the extended guidance we gave around the new disclosure metric. Secondly, I want to emphasize that the authorization obviously being bigger than our current one at $2.6 billion, rising to $5 billion. And basically something a signal we want to continue to scale that through the approach of a stock repurchase plan, which obviously gives us continued value in our mind back to shareholders and obviously flexibility as we scale through the next two or three years.

Chris Schoell: Great. Thank you very much for the color.

Operator: [Operator Instructions] We’ll take our next question from Mr. Eric Handler of ROTH MKM. Please go ahead.

Eric Handler: Good afternoon. Thanks for the question. You have a big live services bucket. And yes, we can decipher how much is PC and console versus mobile. But I’m wondering if you could break it up between, let’s say, sports, action shoot — action shooter and casual, how would — like how would that break down in terms of percentages?

Stuart Canfield: Hey, Eric. This is Stuart. We’re not going to break down directly the splits across the live service businesses. As a reminder, the live service category encompasses not only sort of sports, also incorporates mobile, incorporates other parts of our business, whether it’s our subscription business from EA Play and other parts that comprise live services. It’s a heavily aggregated category across multiple levers we have by virtue of the portfolio and the strategy we carry today. Obviously, we think that through our massive online communities, they are our largest components as we come through that live service piece. When you think about FC, Sims and Apex as comprising the biggest three of those mass online communities, we look to add obviously college football this year and obviously, Madden accompanies that inside of that envelope.