EA: "We've reached an end of an era"

Electronic Arts had an earnings call with with a mixture of good news and bad, with twists and turns and unexpected surprises. In the end, it's turned out to be about what the company expected, though the guidance for the next quarter has been reduced a bit. In all, there's enough good news to keep the investors who believe in the stock hanging in there a while longer. The naysayers will see enough weak spots to keep them on the sidelines a while longer. Meanwhile, EA will continue to try and generate enough solid hits in one quarter to create some truly impressive earnings results.

Here's how CEO John Riccitiello characterized EA's performance and the overall market environment: "Our non-GAAP revenue was $1.08 billion in the quarter, higher than a year ago despite a significant headwind from the declining packaged goods channel. We also continue to see overall choppiness in the sector. Digital games and services are surging, mobile is scaling nicely and free-to-play is bringing in millions of new consumers. The growth in social network gaming has slowed and console packaged goods are declining, which is typical for console games this late in the cycle."

The growth in social network gaming has slowed? I suppose you could say that, but it's like describing what just hit the East Coast as a 'storm.' When your social gaming customers plummet from over 100 million last year to about 40 million this year, that is more properly described as cataclysmic. It's no wonder that EA spent lots of time talking about mobile games on this earnings call, and near zero time talking about social games.

"The growth in social network gaming has slowed? I suppose you could say that, but it's like describing what just hit the East Coast as a 'storm'"

Riccitiello again: "We have diversified our platform partners and business model so that EA is less vulnerable to weakness in a single channel, platform or business model." A good thing to do, and a subtle dig at companies like Zynga and Activision who have most of their eggs in one basket. It is, however, a very defensive statement, and speaks to what EA sees in the near future: A rather scary retail environment, aging consoles, and no immediate prospects with a big upside potential. It's a conservative outlook, and it implies that EA does not expect a big upside potential in the Wii U, or that new consoles from Sony and Microsoft will arrive any time soon, or that they will substantially move the needle for the console business in any case.

The Wii U was, in fact, not mentioned at all in this earnings call, either by EA or by the analysts asking questions. That means nobody thinks the Wii U is going to be important to EA in the next six months or more, not enough to make a significant difference in earnings. Once again, as with the Wii, if Nintendo wants to see substantial support from EA it will have to show amazing sales numbers for the Wii U. Nintendo's own estimate of 5.5 million units through March 2013 does not constitute an amazing number of units.

Riccitiello is looking to the future, if not in Nintendo's direction: "We are building bridges to the next generation of games and technology. This strategy is delivering for us, and here's a proof point: inclusive of our successes on Battlefield 3 Premium, EA is currently tied for first in digital revenue among western gaming companies. Over the past 5 years, we have consistently grown our digital revenues, averaging annual growth of nearly 40 percent."

"Building a bridge to the future is a good thing, but how long is that bridge going to be?"

Steak yesterday, and steak tomorrow, but never steak today. Building a bridge to the future is a good thing, but how long is that bridge going to be? When will the future arrive? EA's stock price is still languishing as investors continue to believe that the future isn't nigh for EA. Investors are in the back seat, whining "Are we there yet?" "When are we getting to the future, I'm hungry for profits." EA's response: "Pipe down back there, and have some of these digital revenue energy bars."

Riccitiello sounded a somewhat passive note about EA's approach to the market: "To summarize, the game sector is in a volatile period of change and transition, awaiting new catalysts for even more rapid growth." Can't EA whip up some of its own catalysts for growth? A major push into tablet gaming, or a key acquisition, or a stunning new IP? Signing up over 70 independent developers on Origin to sell their games is a good step in that direction; let's hope some of them have some breakout hits.

EA did have some solid success stories to tell. The continued strong growth in digital revenue is a bright spot, and one that continues to help alleviate the pain from underperforming titles. In the upside surprise category, both FIFA 13 and Madden 13 had a hell of quarter. EA's Frank Gibeau gave the numbers: "FIFA 13, EA's biggest game of the year with more than 7.4 million units sold in the first 4 weeks. FIFA 13 launched with a 90 Metacritic and quickly became the #1 seller in more than 40 countries." Madden 13 is tracking to be the best-selling Madden ever, and both of those titles are doing this at a time when the consoles are in their 7th year.

Gibeau continued, "Another breakout hit in the fiscal quarter was The Simpsons: Tapped Out, a free-to-play mobile title which launched in August and was the #1 grossing game on iOS for most of the last 4 weeks. The game has registered roughly 17 million downloads and is generating meaningful revenue in more than 40 countries."

The big disappointments for EA are NBA Live, which EA canceled, and Medal of Honor Warfighter. Medal of Honor is falling well below expectations in sales and critical reviews, but EA will keep pushing it to see if it finds an audience. As for NBA Live, certainly EA would love to have a quality basketball game, and you can bet the publisher's planning to put a good team on the project. The pressure will really be on that team to perform after the embarrassment of a canceled product.

"Our average sale on Origin, actually, is about $64, so people are buying multiple games"

Frank Gibeau

Further out, Gibeau looks to Crysis 3, Dead Space, 3, Real Racing 3, and Sim City to drive revenues through the rest of EA's fiscal year. The odds look good for strong performances on all of those titles, but one does notice a lack of original IP in the mix. Is it still possible for EA or Activision to have a major, stock-price enhancing hit with a brand new IP? Or is that just too damn risky these days?

Analysts asked about EA's efforts on next-gen consoles, which apparently does not include the Wii U in anyone's mind. Predictably, EA declined to say anything about new consoles, other than the already announced investment in next -gen titles last quarter ($80 million, a fairly conservative amount).

Another analyst question, about EA's Origin digital distribution service, brought out some interesting data. EA has 30 million registered users on Origin, and according to Gibeau "about 4.4 million people have actually purchased on Origin. And our average sale on Origin, actually, is about $64, so people are buying multiple games. The breakup of that 30 million is, I think, mostly interesting is we're now seeing as many as 13 million who are accessing Origin via their mobile devices."

Finally, Riccitiello summed up EA's view on the industry thusly: "We're pretty strong believers in revenue growth going forward. We think we've reached sort of an end of an era. We are reaching a tipping point relative to digital, and we've intimated, in many ways as we can, without getting ahead of ourselves that we are believers and it's worth investing in next-generation technology." It sounds good, but it seems that most investors will continue to sit on the sidelines until EA starts posting more impressive numbers.