Electronic Arts Beats Analyst Expectations With Help from Star Wars

Electronic Arts (NASDAQ:EA) has an illustrious past.  A great metaphor, considering EA’s own NBA series of games, is someone like Michael Jordan, who after taking some time off from being a champion with the Chicago Bulls, returned back to the game after an absence.  But the game had changed.  He played for the Washington Wizards, a new franchise team, had a rocky start, but once he’d got his footing, he surprised critics and naysayers by eventually leading the team in points.  Is EA on the same path with their digital revolution?

Similar to MJ, EA has taken a step back from its former glory of 10 years ago, when retail sales were booming and their only concern was how to render Kobe Bryant’s face in a more realistic way to sell millions more copies of their games each successive year.  These days, retail sales are down, and EA is undertaking the difficult journey of regaining their once legendary status in the new world of digital gaming.  And a major move is their release of online MMORPG Star Wars The Old Republic.

If we look at the breakdown of the previous quarter, Q2 FY12, for the 3 months ended October 1st, we can see that EA beat most analyst estimates and their own guidance for the stock.  This growth in sales was driven by a 14% jump in Publishing, a 7% jump in distribution and a huge 30% year over year jump in digital revenues.  This is the key area for Electronic Arts, as they’ve taken the time to invest in social and mobile games whereas their rival, Activision-Blizzard (ATVI) has CEO Bobby Kotick publicly announcing that he’s still unsure whether social games are strongly profitable.  The importance of social games has become something of a hinge upon which stocks like EA, ATVI and the newly public ZNGA rotate.

Street Instincts looked at the breakdown of Electronic Arts’ digital revenue over at Seeking Alpha, and assumed that these digital revenues will continue to grow.  They looked at the breakdown of EA’s digital revenue, and from the chart we can see that both mobile and free-to-play have had steady growth from $219m and $193m in Q2 FY11 to $250m and $335m in Q2 FY12.  That’s a big chunk of overall digital revenues, and their predictions about growth have been correct, as we will look at in a discussion of Q3, whose results were just announced on February 1st, 2012.

Takeover Analyst was worried about Electronic Arts, saying that forward earnings expectations and a price-earnings estimate of 16x would price the stock at $19, and he was right — the stock took a beating after hovering around $22 late last year.  This downwards pressure was a scary proposition for investors, and hurt investors that had been jumping into EA for the course of 2011, hoping to catch some of the profits once Star Wars: The Old Republic (SWTOR) launched.

Unfortunately for investors, there was a glut of uncertain information after SWTOR launched.  People were unsure whether the game had lived up to expectations and sold over 1.5 million units, and while one analyst downgraded based on assumptions, Michael Pachter, a well respected game analyst defended EA and predicted they would hit around 2m units, which they did.  EA sold 2m copies of SWTOR and announced that they had 1.7m game subscribers with at least half of those as paying subscribers.  That puts it at least at 850m paying subscriptions.

World of Warcraft makes about $1.4B a year on 10 million accounts for Activision, so assuming that 850k number continues to grow for EA, it could become a large part of their business.  This does lead into a big question: whether EA’s Star Wars: the Old Republic, a massively multiplayer online role playing game (MMORPG) — developed by all star team Bioware — has what it takes to dethrone Activision-Blizzard’s (ATVI) World of Warcraft (WoW) behemoth.  WoW seems to be a bit susceptible with its latest Cataclysm release being overly criticized by hardcore WoW players, and ATVI announcing in their last earnings report that the World of Warcraft had lost 800,000 subscribers.