EA Financial Analysis

Analysis Date: 2/5/2025

Business Model

Electronic Arts generates revenue from the sale of full games (both digital downloads and packaged goods) and live services & other, which includes microtransactions, subscriptions, and downloadable content within their games. Revenue is generated across console, PC & Other, and mobile platforms.

Revenue Sources

• Full Game Sales: Revenue from sales of games, both digitally downloaded and packaged goods.
• Live Services and Other: Recurring revenue streams from in-game transactions, subscriptions, and DLC.

Revenue Distribution by Channel

• Q3 FY25 Net Revenue Composition: Full Game (32%), Live Services and Other (68%)

Income Statement Analysis

• Net revenue decreased by 3% year-over-year, primarily driven by a decrease in live services and full game sales.
• Cost of revenue decreased significantly by approximately 14% year-over-year, contributing to a slight increase in gross profit.
• Operating expenses remained relatively flat year-over-year.
• Operating income increased by 3% year-over-year, due to the decrease in cost of revenue offsetting the decrease in net revenue.
• Interest and other income increased significantly, positively impacting income before taxes.
• Provision for income taxes increased, but net income still showed a slight increase of 1% year-over-year.

Balance Sheet Analysis

• Slight decrease in cash and cash equivalents, while short-term investments increased, resulting in a minor increase in total cash and short-term investments.
• Receivables, net significantly increased, potentially indicating higher sales on credit or slower collections.
• Goodwill and Property and equipment remained relatively stable.
• Acquisition-related intangibles decreased, likely due to amortization.
• Deferred income taxes and Other assets slightly increased.
• Total Assets remained almost unchanged.
• Total Liabilities increased slightly, driven by increases in Income tax obligations and Other liabilities.
• Total Stockholders' Equity decreased slightly, primarily due to a decrease in retained earnings, possibly from share repurchases and dividend payouts outweighing net income.

Capital Allocation

EA's capital allocation strategy in Q3 FY25 includes: Dividends: Continued payment of quarterly cash dividends, although slightly decreased year-over-year. Share Repurchases: Aggressively repurchasing shares, with a significant increase in repurchase value compared to the previous year and announcement of a $1 billion accelerated stock repurchase program. Business Reinvestment: While not explicitly detailed in terms of reinvestment amounts in this quarter's documents, management commentary suggests ongoing investment in game development pipelines (Battlefield, Skate, College Football) and technology (acquisition of Trade Cab Technologies). The focus appears to be balancing shareholder returns with strategic investments for future growth.

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.”

“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: The Vale Guard underperformed, highlighting the competitive dynamics of the single player RPG market and EA SPORTS FC25 started strong but softened through the holiday period.”

Overall Sentiment: Mixed. Management expresses confidence in long-term growth and the strength of their franchises and pipeline, particularly highlighting the success and adaptability of their teams. However, they acknowledge the disappointing financial performance in Q3 FY25, particularly the underperformance of key titles. The announcement of a significant share repurchase program suggests underlying confidence despite near-term headwinds. Overall sentiment leans cautiously optimistic with a focus on execution and future growth drivers.

Recommendation

Rating: Hold

Reason for Rating: Given the mixed Q3 FY25 results, but with strong long-term potential and significant share repurchase program, a HOLD recommendation is appropriate. Near-term revenue challenges are apparent, particularly in key franchises, but management is taking action to address engagement and acquisition issues. The strong pipeline for FY26 and beyond, combined with capital return initiatives, provides a balanced outlook.

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: 2/5/2025, 3:39:11 AM