EA Financial Analysis

Analysis Date: 2/4/2025

Business Model

Electronic Arts generates revenue from the sale of video games and related content and services. Revenue is categorized into Full Game sales (including downloads and packaged goods) and Live Services and Other. Revenue is also segmented by platform: Console, PC & Other, and Mobile.

Revenue Sources

• Full Game Sales: Revenue from sales of complete games, both digitally downloaded and in packaged physical format.
• Live Services and Other: Recurring revenue streams from in-game content, subscriptions, and other services associated with live games.

Income Statement Analysis

• Net Revenue decreased by 3.2% year-over-year, primarily driven by a decline in Net Bookings, although outperforming guidance. (Con)
• Cost of Revenue decreased significantly by 13.8% year-over-year, leading to an improvement in Gross Profit. (Pro)
• Gross Profit increased slightly by 0.8% year-over-year, indicating improved profitability at the gross level. (Pro)
• Operating Expenses remained flat year-over-year, demonstrating cost control. (Neutral)
• Operating Income increased by 3.3% year-over-year, driven by improved gross profit and stable operating expenses. (Pro)
• Interest and Other Income increased significantly, contributing positively to pre-tax income. (Pro)
• Net Income increased slightly by 1.0% year-over-year, despite a higher provision for income taxes. (Neutral)

Balance Sheet Analysis

• Cash and Cash Equivalents decreased by 4.3%, while Short-term Investments increased by 4.7%, indicating a slight shift in liquid asset allocation. (Neutral)
• Receivables, Net increased significantly by 31.3%, potentially indicating higher sales on credit or changes in collection periods. (Need further investigation - could be pro or con)
• Acquisition-related Intangibles, Net decreased by 20%, reflecting amortization. (Neutral)
• Total Assets, Total Liabilities, and Total Stockholders' Equity remained relatively stable, indicating no major shifts in the overall financial structure. (Neutral)
• Retained Earnings decreased slightly by 1.5%, likely due to dividend payouts and share repurchases exceeding net income. (Neutral)
• Income Tax Obligations increased by 15.3%, potentially indicating higher taxable income or changes in tax liabilities. (Neutral)

Capital Allocation

EA is actively allocating capital through dividends, share repurchases, and business reinvestment. EA declared a quarterly cash dividend of $0.19 per share. They repurchased $375 million worth of shares in Q3 FY25 and announced a $1 billion accelerated stock repurchase program. Reinvestment is evident in R&D expenses, which increased, and strategic acquisitions like TRACAB Technologies. Management emphasizes balancing growth investment with capital returns to stockholders.

Management Commentary

The record success of our EA SPORTS FC 25 Team of the Year event demonstrates our creative teams’ ability to adapt, innovate, and execute at scale.

As we build on this momentum across EA, we are confident in a return to growth in FY26 and beyond as we bring our next wave of iconic entertainment to players and fans worldwide.

Today, we announced plans for a $1 billion accelerated share repurchase, which is expected to bring total stock repurchases to $2.5 billion within the first year of our $5 billion authorization. This reflects both our confidence in EA’s long-term strategy and our ability to balance investment in growth with capital returns.

Q3 was not the financial performance we wanted or expected.

Dragon Age had a high quality launch and was well-reviewed by critics and those who played; however, it did not resonate with a broad-enough audience in this highly competitive market.

FC started Q3 in a strong position... However, this momentum did not sustain through the quarter. Two contributing factors to performance downside were soft top of funnel acquisition and lapsed engagement later in the quarter.

Overall Sentiment: Neutral to Cautiously Optimistic. Management acknowledges Q3 underperformance but expresses confidence in future growth, particularly in FY26, driven by new releases and continued strength in live services. The accelerated share repurchase signals confidence, but concerns remain about recent underperformance of key titles like FC and Dragon Age.

Recommendation

Rating: Hold

Reason for Rating: Hold rating is recommended due to mixed signals. While EA demonstrates strong cash flow, commitment to shareholder returns, and a pipeline of new games for FY26, the recent Q3 underperformance, particularly in key franchises like FC and Dragon Age, raises concerns about near-term growth. The company is navigating a competitive landscape and evolving player preferences. Need to see consistent performance improvement and successful launches in FY26 before considering a 'Buy' recommendation.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 2/4/2025, 10:21:00 PM