Net bookings of €746m, nicely ahead of estimates of €733m and
company guidance. Similarly, non-IFRS operating profit and free cash
flow were both sharply up vs last year and a touch ahead of
expectations. Back-catalogue and PRI (player recurring
investment/in-game revenues) were both up by c50% yoy and key to the
outperformance.
FY guidance was reiterated. Q3 net bookings guidance of c€600m is
below the €659m expectations, but due to phasing rather than underlying
underperformance.
Contrary to recent market concerns, Ubisoft noted the second-best
engagement levels for Rainbow Six and management expects that the
Rainbow Six Pro League Finals in November in Rio de Janeiro will act as
yet another booster to both player count and engagement. The game now
has over 40m registered players (similar to the likes of Activision
Blizzard’s Overwatch) and continues to grow.
Recent trial with Google’s Project Stream is going very well. I
still expect that it will be some 3-5 years before game streaming is
material to revenues, but it is likely to provide an extremely nice
tailwind to growth over the medium to long term.
Comments
Shares are now some 25-30% off the highs. However, the launch of
Assassin’s Creed Odyssey went well, Rainbow Six engagement has been
solid and the full-year guidance was reiterated.
The video game industry is also in the best shape we have seen for some time and I believe there are many growth drivers ahead.
I thus believe the current share price represents an extremely
attractive entry point in what is a strongly growing business in a very
attractive segment.
Electronic Arts
Q2 net bookings of $1.22bn (+4% yoy) were ahead of guidance at
$1.16bn. The outperformance vs guidance was driven by full-game sales of
FIFA and Madden Ultimate Teams. This should help to allay some fears
that the FIFA franchise has been negatively affected by Fortnite or
other games. Underlying profit was also ahead of expectations, driven by
increased sales, better gross margin and lower operating expenses.
Digital net bookings increased 10% to $637m, a new record for the
second quarter. Growth was driven by the continued shift from physical
to digital full-game distribution.
Both live services (+6%) and mobile (+1%) saw somewhat
unimpressive growth in Q2. The key live services drag in the near term
appears to be the transition from FIFA Online 3 to FIFA Online 4, which
is offsetting growth in Ultimate Team, The Sims and subscription
services. Mobile is a tale of two sports games with FIFA Mobile daily
active players growing 50% yoy, but Madden mobile is declining. I am
excited by the announcement of Command & Conquer: Rivals and
comments that FIFA Mobile is off to a strong start in China.
Q3 net bookings guidance of $1.725bn was 3% below forecast for
the quarter. FY 2019 guidance was reiterated suggesting – much like with
Ubisoft earlier in the day – there is more reliance on Q4 (and upcoming
online multiplayer Anthem) than was previously anticipated by
consensus.
With pretty low expectations now assumed in the FY 2019 guidance,
and valuation multiples having contracted markedly over recent weeks, I
think the risk/reward is somewhat attractive at these levels.
Comments
H1 results offered little to allay investors’ concerns, with EA’s
shares down c35% from the highs seen back in July. I do not believe
that this set of results offered much in the way of new incremental
support to our Buy thesis on the stock.
That said, a core part of the Buy thesis concerns the fact that
an investment in EA, in my view, is more than just about one or two
quarters of trading. I believe that EA’s growth is underpinned by the
material tailwind of a global rise in the interest of football (soccer)
and, among other things, the benefits that both subscription and cloud
gaming will bring over the medium term.
Clearly the near-term share price will be strongly linked to
current trading momentum, which is currently somewhat lacklustre, but
comments from management suggest to us that the most recent guidance
takes into account prudent assumptions on nearly every aspect of EA’s
business.
Additionally, record digital net bookings (USD1.22bn, +4% yoy)
for Q2 highlight the strong margin development potential. I therefore
continue to believe the current share price offers an attractive
risk/reward.
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