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Electronic Arts Shatters Expectations

Summary

Electronic Arts Inc.'s shift to digital sales combined with its focus on cost reductions have substantially bolstered its financial performance.

The videogame maker continues to blow past its own bullish expectations and heading into FY2017, there is plenty more to look forward to.

Response to Battlefield 1 has been very positive so far as EA returns to its roots come this October 21, 2016.

Electronic Arts Inc. (NASDAQ:EA) has had its ups and downs over the past 12 months, but the market is once again starting to become bullish on the videogame maker.

For some context, Electronic Arts has been able to keep marching towards a heavier digital sales mix (as I've written about in the past), materially enhancing its economics in the process. During fiscal year 2015 (which ended on March 31, 2015), Electronics Arts generated more revenue from its digital sales than from physical sales for the first time. In return, Electronic Arts' gross margin grew from 68% in FY2014 to 71% in FY2015 (which beat its previous 69% guidance).

At the time, management guided that in FY2016, Electronic Arts' gross margin, revenue, and operating cash flow would continue to grow to 71.5%, $4.4 billion (57.95% digital), and $1.05 billion, respectively. Fast forward to now, and EA beat most of those estimates. In FY2016 (which ended March 31, 2016), Electronic Arts Inc. sported a gross margin of 71.4%, $4.55 billion in revenue (55.43% digital), and operating cash flow of $1.223 billion. While its digital sales as a percentage of revenue grew from 51.6% in FY2015, stronger than expected physical copy sales caused its guidance to be off marginally (digital sales came in higher than expected as well).

Going forward, Electronic Arts continues to paint a bright future. Management is guiding for its gross margin, revenue, and operating cash flow to keep climbing higher to 72.5%, $4.9 billion (59.2% digital), and $1.3 billion, respectively, during fiscal year 2017. EA has also been focusing on controlling its...


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