Electronic Arts Inc. (NASDAQ:EA) Q3 2024 Earnings Call Transcript

Electronic Arts Inc. (NASDAQ:EA) Q3 2024 Earnings Call Transcript January 30, 2024

Electronic Arts Inc. beats earnings expectations. Reported EPS is $2.96, expectations were $2.91. Electronic Arts Inc. 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 Brianna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Electronic Arts Third Quarter Fiscal Year 2024 Earnings Conference Call. I would now like to turn the conference over to Ms. Katie Burke, Director of Investor Relations. Please go ahead.

Katie Burke: Thank you. Welcome to EA’s third quarter fiscal year 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 fourth quarter fiscal year 2024 earnings call is scheduled for Tuesday, May 7. As a reminder, we post the 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, January 30, 2024, and disclaims any duty to update them. During this call, the financial metrics, with the exception of free cash flow, will be presented on a GAAP basis. Please see our earnings slides for further information. 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.

Andrew Wilson: Thanks, Katie. It was a strong Q3, as we continue to entertain hundreds of millions of players and fans around the world. Our exceptional teams created high-quality games and experiences across our broad portfolio that, drove deep engagement and record live services. This quarter, two of the world’s most celebrated interactive entertainment experiences EA SPORTS FC and EA SPORTS Madden NFL delivered phenomenal strength, as sizable drivers of long-term growth. We are launching amazing games and experiences that entertain massive online communities, create blockbuster interactive storytelling, and harness the power of community in and around our games. EA’s Q3 results are a great example of our execution across our strategy.

The FC platform is thriving at the center of the action, fandom, and culture of the world’s game. The launch of EA SPORTS FC 24 has been a great success and has, once again, outperformed our expectations. Players are connecting, competing, and celebrating global football with their friends, driving strong engagement across FC’s multi-experience ecosystem. In Q3, players dove into Ultimate Team, driving double-digit net bookings growth and delivering the franchise’s biggest net bookings week ever. FC Mobile also generated deep engagement with daily active users up by 29% year-over-year, while FC Online grew new players by 20% year-over-year. In calendar 2023, Madden NFL was the best-selling sports game in North America and continues to grow.

Madden NFL 24, is engaging more players year-over-year through new, innovative gameplay features and compelling live services. In Q3, net bookings grew and engagement with Ultimate Team increased 19%. Madden Mobile also saw an increase in players during the quarter, generating double-digit growth across the community. Our business is gaining momentum as our communities continue to grow and the definition of play rapidly expands, to include watching gameplay, creating user generated content, and connecting with friends and families in and around beloved IP. There are billions of players around the world and this number, is expected to increase as younger generations choose gaming as their number one form of entertainment, generating incredible opportunities, for us to engage and deliver new experiences.

The evolving worlds, unfolding stories, and rich characters of our live services are deepening players’ relationship with our IP and broadening the global appeal of our portfolio. To further entertain our communities, we are building more ways for them to play, watch, create, and connect to generate growth and longevity in our biggest franchises. The Sims franchise, is the definitive life for simulation experience, offering its multi-generational community incredible ways to connect, create, and express their individuality. During calendar 2023, players have spent an astounding 1.8 billion hours in the Sims 4, a nearly 30% increase from the prior year. We remain committed to the global growth and innovation of this franchise. We’re focused on delivering what the community wants most, from ongoing, new content and game modes for the Sims 4, to the social innovation, expansion, and connection in our future Sims release.

Millions of passionate fans continue to come together through the nonstop action of Battlefield. The Battlefield 2042 community continues to grow, with total players up 17% year-over-year, and Season 6 live services driving strong engagement with weekly average users up 37% year-over-year. Our team is working hard to deliver for the community with increasingly engaging live services, like the recent announcement of Season 7 with new maps, weekly missions, and much more. In addition, we are making investments in the future of the franchise. Our exceptional teams from multiple world class studios, working with cutting-edge Frostbite technology, are building an expansive, community-focused Battlefield universe for fans all over the world. As a category leader with millions of loyal fans, we are looking forward to celebrating the fifth anniversary of Apex Legends.

Over the past few months, we have listened closely to our community, and have deployed new features, new styles of play, and new content. We have also implemented tools, to better understand day-to-day game performance. In Q3, our new modes drove improved engagement, and the early impact of our new content in the current quarter is promising. To generate future growth, we are focused on entertaining core players and engaging new players, by investing in geographic expansion, innovating in the game economy, and making it easier than ever, for players to jump into our gameplay. Turning to FY ’25, we will deliver even more excitement and entertainment through an expanded portfolio of connected ecosystems. Industry-leader EA SPORTS will launch a strong core slate of titles and always-on live services, to grow our sports business as a global community and drive value, year-after-year.

Our journey building FC, the world’s largest interactive platform for global football fans will continue with accelerated gameplay innovation, more social connection, and new brand collaborations to deliver even more value for players. Our teams, working with an incredible roster of partners, are just getting started with FC. We are well positioned to grow this platform as a cultural phenomenon. The momentum in Madden NFL will continue with events and experiences, tied to the biggest moments in the sport, alongside deeper investments in this ecosystem, including leaps in gameplay and deeper fan immersion. In addition to the meaningful advancements in Madden, we are bringing back fan favorite EA SPORTS College Football for the first time in over a decade.

Looking further ahead, as more people spend more time playing and connecting in and around our titles, we see incredible potential for growth. Within our online communities, we are expanding blockbuster storytelling through deep, rich characters and new story modes to deliver bigger, broader games and live services. Connected experiences offer new, cutting-edge ways to engage and inspire players, and can unlock future innovative growth opportunities. Over the coming years, we expect accelerated growth in our business. Our long-term outlook coupled with secular tailwinds, drives further conviction in our strategy. By aligning our priorities and investments with our greatest opportunities, we can make the biggest impact and drive long-term value in service of our people, our players, and our shareholders.

Now, I’ll hand the call over to Stuart to provide additional details on our business.

Stuart Canfield: Thanks, Andrew, and good afternoon, everyone. For the third quarter, we delivered net bookings of $2.37 billion, up 1% year-over-year, or 2% in constant currency, and in line with our expectations. Strength in our live services business, particularly EA SPORTS FC Ultimate Team, was partially offset by some softness in the full game. Live services net bookings grew to a record $1.71 billion in Q3, up 3% year-over-year, or up 5% in constant currency, exceeding our expectations, as we continue to drive healthy engagement and bring new players to our franchises. Full game net bookings of $654 million was down 5% year-over-year, or down 4% in constant currency, versus a high prior year comparable that included the World Cup event.

On a trailing 12-month basis, total net bookings was up 8% year-over-year, with live services contributing $5.6 billion, or 73% demonstrating the resilience of this evergreen business model. Building on the strong momentum from our launch at the end of Q2, EA SPORTS FC again exceeded expectations, as EA SPORTS FC Ultimate Team and FC Mobile delivered exceptional double-digit net bookings growth, against a World Cup comparable in the prior year. Our global football business net bookings grew 7% year-over-year, as our teams continue to drive strong retention of our core player base, through the FC brand transition. EA SPORTS Madden NFL, also saw another strong quarter, with net bookings up 5% year-over-year, highlighted by strong engagement trends across full game, Ultimate Team, and mobile.

Additional highlights from the third quarter included new releases of EA SPORTS UFC, NHL, and World Rally Championship, which contributed to further expanding the aggregate fandom and strength of our EA SPORTS community, creating additional value-added services in one of the largest sports brands and platforms in the world. In a highly competitive quarter, Apex Legends did not meet our expectations, as our teams continue to learn and iterate with each new season and event. In the past few weeks, our recent cross-over promotion showed early promising signals, delivering two of our highest net bookings days over the fiscal year. With Season 20 launching in February, our teams will deliver more innovation as we continue to build for the long-term.

We remain committed to Apex Legends, a proven franchise with loyal fans, and we will continue to invest in opportunities to drive new growth points as we build and expand the franchise over time through engaging a broader base of players. Moving to our GAAP results, we delivered net revenue of $1.95 billion, up 3% year-over-year. As we continue to operate with focus and discipline, operating expenses were favorable to our expectations, also benefiting from some phasing of spend to Q4. On a year-over-year basis, operating expenses were up 3%, driven primarily by incremental marketing spend as we invested to support our titles and the EA SPORTS FC transition through the critical holiday season. Our GAAP earnings per share was $1.07, up 47% year-over-year.

Operating cash flow in the quarter was $1.26 billion, up 13% year-over-year. On a trailing 12-month basis, free cash flow was a record $2.16 billion. And we returned $376 million to shareholders through dividends and our ongoing share repurchase program. We are entering the final quarter of FY ’24 well positioned to deliver on our commitments for the fiscal year. With our strong business performance year-to-date, our unrivaled portfolio of IP, and our consistent execution in our core live services business. Even in an incredibly competitive market, we are poised to deliver growth in net bookings consistent with what we outlined at the beginning of the year. At the same time, we are tracking to deliver higher levels of underlying profitability and record free cash flow.

We remain deliberate and focused around the prioritization and allocation of resources across our teams and portfolio as we make progress against our long-term strategy to drive durable growth, strong cash flow, and shareholder returns. Turning to our Q4 outlook, I’d like to start by sharing a few key considerations. First, as a reminder, our Q4 net bookings, is impacted by timing, including releases of our full game and content offerings in the prior year. Second, we expect moderated growth in our EA SPORTS FC franchise as we lap record prior year performance. For the full year, we now expect EA SPORTS FC net bookings, to grow mid-to-high single digits, excluding FX. Third, we continue to take a measured approach to Apex Legends in its largest quarter of the year, as we introduce new modes of play and content offerings.

And finally, we expect impact from FX to be minimal, as the benefit from more favorable currency exchange rates, is offset by hedging gains from the prior year. As a result, we expect net bookings of $1.625 billion to $1.925 billion, down 16% to down 1% year-over-year, including approximately eight points of impact from the timing noted earlier. We expect GAAP net revenue of $1.625 billion to $1.925 billion and cost of revenue of $360 million to $410 million. We expect operating expenses of $1.125 billion to $1.205 billion, including a $70 million impairment charge of certain acquisition-related intangible assets. This results in GAAP earnings per share of $0.20 to $0.68 for the fourth quarter. Before handing back to Andrew, I’d like to take a moment to share some early perspective on our multiyear growth objectives.

EA is in an advantaged position to lead the future of interactive entertainment, with ongoing secular tailwinds and structural shifts within the industry, further amplifying our strategy. Our long-term financial framework is founded upon creating value for our shareholders by accelerating growth, delivering forward operating leverage, and increasing cash flow. In executing on our strategy, we expect to scale operating leverage through the following growth levers: 1) expanded player acquisition, engagement, and retention 2) highly accretive digital and live services 3) blockbuster new releases from our development pipeline, alongside compounding growth across our core franchises, and 4) discipline and focus on aligning our cost structure to invest in support of our strategic growth opportunities.

As we look ahead to FY ’25, and more specific guidance in our upcoming Q4 earnings call, I wanted to share some initial considerations. Assuming minimal impact to our results from FX, we expect low-single-digit net bookings growth, reflecting continued execution in our core businesses in a lighter release slate year. And excluding any impact from future share repurchases, we expect mid-to-high single-digit growth in underlying profitability. Looking beyond FY ’25, over the next couple of years, we expect our net bookings growth to accelerate, bolstered by our portfolio of industry-leading IP. Compounding growth within our core Sports franchises, new content and engaging experiences across our massive online communities, and iconic new releases like Battlefield, Sims, and other in-development titles, provide the inflection point that fuels net bookings growth and increases underlying profitability.

And we expect to continue to deliver meaningful operating leverage and drive increased cash flow conversion, even as we continue to invest, to support our strategic objectives. In summary, with our incredible talent, industry-leading IP and technology, global and growing communities of fans, and our focus and discipline around our strategic objectives, we are confident in our ability to continue to deliver on our long-term growth commitments and drive value for our players and for our shareholders. I look forward to sharing more over the coming quarters. Now, I’ll hand it back to Andrew.

Andrew Wilson: Thanks, Stuart. I am inspired by the opportunities ahead, as we continue to execute our long-term strategy. Our mission to inspire the world to play is evolving and expanding beyond the traditional bounds of play. Technological advancements are powering creativity and innovation, transforming what we can deliver. We are positioned to bring bigger, broader games and experiences to an even larger global audience in the coming years. Our awesome teams, industry leading technology, world-class IP, and global network of players position EA as a leader of the future of entertainment. Now, Stuart and I are here for your questions.

Katie Burke: Thank you. Brianna, we’re ready for our first question.

See also 12 Best February Dividend Stocks To Buy and 13 Best Aerospace Stocks To Buy On Sale.

Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Andrew Uerkwitz with Jefferies. Please go ahead.

Andrew Uerkwitz: Thanks for taking my questions. One tactical, one long-term. On the tactical one, it looks like the fourth quarter and full year guidance ranges, are pretty wide relative, to what you normally do. Just curious, one, if that’s correct, and two, why is that when it seems like a lot of live services is outperforming?

Stuart Canfield: Andrew, this is Stuart. I’ll take that. Yes, first of all, the range, as we look forward, we’ll continue to be broader, in this case, in the quarter, in part for two reasons. One, it’s a more dynamic quarter for us, as you referenced, on our core live services. And the range is that, it reflects the both strength and opportunity we see. So, we’re slapping a record World Cup comp for FC, and also is a fiscal high quarter for Apex. The second part, I’d also flag is that, as a reminder on the prepared remarks, is that we have eight points of headwind as well from timing of content released in the prior year. So, hence, the spread between the top and the bottom, is based around the biggest dynamic services we have in the quarter, particularly FC and Apex.

Andrew Uerkwitz: Got it. That’s helpful. And then, I appreciate you giving the color on the forward years. On the operating leverage, could you just maybe, walk us through a little bit, or give us additional color on the primary drivers there? Is that more live services from games, like Sims or Escape eventually? Or is that just naturally operating leverage from the fact you guys don’t capitalize costs? Just kind of help us out, understand that dynamic a little bit better. I appreciate it? Thank you.

Andrew Wilson: Yes, let me start with this. Let’s take a look at sort of the business over the longer term. We’re laying out that overarching framework. It’s kind of grounded in three pieces, accelerating growth on the top line, expanding leverage on the bottom and increasing cash flow. We’re looking at that through a couple of different lenses. So one is, we do expect to continue to drive compounding growth across our core franchises. Plus, we expect to release from our pipeline that’s been in development. And both of those will be bolstered, by expanded player acquisition, engagement and retention. As you know, our live services make up almost three quarters of our business, which highlights the evergreen nature of that business model and thus the ability to drive compounded growth, on those franchises through the future.

New releases are the second part and they’re an important lever for us, on that multi-year growth journey. And we’re really flagging, through the long-term journey. They’ll create some non-linearity in that growth, in terms of how we accelerate through the later years, depending on timing around that pipeline. Additional context would be that as we continue to drive through live service, and we see greater digital, we get far more accretion through that mix. We’re also continuing to be really focused around getting leverage and scale out of OpEx in terms of our cost structure to drive growth. So, we think about those four pieces, core compounding growth across our current core business and live services, a more digital nature around that drives accretion and scale.

Add to that the new releases that come through the pipeline, and ongoing management of costs, to ensure that we’re investing for the future will ultimately provide leverage over the long-term for us.

Andrew Uerkwitz: Got it. Thank you. I appreciate the color.

Katie Burke: Brianna, next question, please.

Operator: Our next question comes from Matthew Cost with Morgan Stanley.

Matthew Cost: Hi, everybody. Thanks for taking the question. One would just be on some recent changes we’ve seen on app store fees in Europe, for Apple specifically. I guess, any early learnings there, any reflection on the possibility that you could see outside to gross margins for your mobile game business, at least in Europe? Is that an option that you would be interested in? Since I know it’s an opt-in thing for game publishers. That’s point one, question one. Question two, just beyond college football, as we get a little bit closer to release, can you do anything to help scale the opportunity for everyone and sort of think through what is incremental versus, what might come from the existing Madden customer base? Thank you.

Andrew Wilson: Hi, Matt. So, I’ll quickly touch on the Apple one first. Yes, we’re also aware of the intentions to update the European app store tied to their fees. We’re still actively reviewing all of those updates and sort of working to understand potential implications to our business and any changes that may flow through from a gross margin perspective. As we gain more insight, understanding, we’ll be able to provide a more update sort of next quarter in terms of how that might map through for us and impact gross margin, but no updates, or reflection of that at this point.

Stuart Canfield: And on college football, our expectation is it will be additive. As we think about Madden, Madden is performing incredibly well this year. As we said in our prepared remarks, the biggest game, the biggest sports game in calendar year 2023, we’re seeing increased engagement in the game and increased monetization in Ultimate Team as part of that. The team is continuing to invest meaningfully into the modes of Madden and the expansion of Madden as a product and certainly as we look at the NFL broadly and the fan base continue to grow and the incredible season we’re having this year, our expectation is that we will invest behind Madden and grow Madden, and that what college football represents as a game that’s been 10 years in the waiting for our fans.