Digital Future at Electronic Arts

According to the latest report by NPD Group, video game retail sales of new hardware, software, and accessories in the U.S. fell 22% last year to $13.26 billion. Sales were also down 22% for December at $3.21 billion. Hardware sales reported a decline of 20% for December and were down 27% for the year. Software sales slipped 26% for the month and 23% for the year. Accessories performed marginally better, with sales falling 14% over the month and 8% over the year. The decline in sales was attributed to the absence of significant new releases during the year.

Electronic Arts’ Financials
During the second quarter, Electronic Arts’ (NASDAQ:EA) revenues grew 4% over the year to $1.08 billion, in line with market expectations. EPS of $0.15 for the quarter was ahead of the Street’s target of $0.11.

EA’s growth was driven by its strong digital performance. Digital revenues grew 40% over the year to $324 million for the quarter. For the trailing twelve months, EA reported digital revenues of $1.44 billion.

By region, sales from North America contributed 46% of the quarter’s revenues and grew 6% over the year. Sales from Europe remained flat at $503.0 million, and revenues from Asia grew 35% to reach $69.0 million.

For the current quarter, EA projects revenues of $1.25 billion-$1.35 billion with EPS of $0.50-$0.60. The Street projects revenues of $1.37 for the quarter with EPS of $0.71. EA expects to end the year with revenues of $4.05 billion-$4.20 billion and EPS of $1.00-$1.15. Analysts models have the fiscal year’s performance at revenues of $4.12 billion and EPS of $1.05.

EA’s Growth Strategy
Overall, EA is focused on three the development of three key areas: brands, platform, and talent. As part of its brand development, EA has scaled down the launch of number of games and is instead focused on key franchises. It is expanding its game franchise by adding digital content and services.

As part of brand management and optimizing game management efforts, EA is also revisiting its library of games available on both social media networks and consoles. Recently, EA listed several games it plans to shut down on Facebook. Game publishers find it difficult to maintain a social game if the games don’t have a strong enough following. On Facebook, EA is closing games like World Series Superstars and EA Sports PGA Tour Golf Challenge, to name a few. The increased adoption of other games to the social gaming model is also resulting in the shutdown of games for consoles. For instance, EA plans to shut down FIFA Soccer 11 Ultimate Team for PlayStation 3 and Xbox, and Madden NFL 11.

On the platform front, EA is expanding in digital channels and also building its platform technology to facilitate growth. With the launch of new mobile devices such as Google’s Nexus 7, Windows Surface, iPad Mini, and iPhone 5, analysts expect digital gaming to continue to grow. The video game industry is seeing sluggish growth in sales of traditional video games as gamers migrate in increasingly greater number to games online or on mobile devices.

EA has already seen strong digital growth. During the first half of this year, the FIFA soccer game generated $115 million in digital revenues. Battlefield 3’s premium service has also sold more than two million subscriptions to date. The Simpsons game on iOS, Tapped Out, is ranked among the top-grossing game for the past four weeks.

Finally, with regards to talent growth, the company is expanding both organically and inorganically. Last quarter, it announced the acquisition of Swedish tech firm ESN for an undisclosed amount. The 25-employee team at ESN is best known for Planet, the web-based games framework. Prior to the acquisition, the two companies had worked with each other to create the online social-web component for EA’s Battlefield 3, Battlelog.

As EA navigates its way in the digital future, pure-play digital domain companies like Trion World are also changing gear. Trion has a number of major games coming this year, including Defiance. It is also switching gears from pay-to-play to include more of a freemium strategy with digital-goods-based monetization. Somewhere along the way, EA will need to develop a strategy to compete with players like Trion, or potentially acquire some of them.

EA’s stock is trading at $14.43 with market capitalization of $4.4 billion. It touched a 52-week high of $20.64 in February last year.