Electronic Arts: How to Destroy Shareholder Value – Electronic Arts Inc. (NASDAQ: EA)


Source: Google Images

5 days after the last time we wrote orr Article by Electronic Arts (EA) at the end of January, EA has announced its third quarter 2019 results and its shares have fallen by almost 20%, the worst drop since 1999. The catalysts described in our article have gone perfectly – BFV has not met expectations like expected, and digital sales were well below expectations.

It was the end, we think. However, EA quietly released a new game, Apex Legends, in early February. The success of Apex Legends has allowed EA stock to rebound significantly, from nearly $ 75 to over $ 106 at one point.

The problem – Apex Legends had very little to do with EA. EA is still the same old self, as shown by his latest publication, Anthem. Just look at the scores of users for their recent games excluding Apex Legends:

We believe investors should run, not away from EA. EA is preparing for a massive collapse.

Q3 2019

Q3 2019 was a disaster. It is difficult to describe in words how bad it was, so we will use graphics.

Source: Investors Presentation for the second quarter of 2019 of EA

These were forecasts for the 2019 fiscal year presented in the second quarter of 2019. The products were guided as stable and operating cash flows slightly as down. It's even worse, though …

Source: Investor Presentation in the Third Quarter of 2019 by EA

These are the indications given in the last call for results. As you can see, revenue is now down almost $ 300 million from the already weak revenue forecast for the second quarter, with most of the decline in the digital sector. OCF is also encouraged to save about $ 300 million, or nearly 20%. Most of the bulls that were expecting solid growth were greatly disappointed.

A call for disastrous earnings

Teleconferencing was probably the most interesting part of the third quarter of 2019. Management made many alarming admissions and continued to refuse to take responsibility for their actions.

First, the management started on Battlefield V:

Unfortunately, the later release date caused the game to sink deeper into a competitive holiday window where strong price cuts were an important factor. In addition, we also decided to give priority to other features, including a single-player experience, when launching via a Battle Royale mode. This year, Battle Royale modes have become incredibly popular in shooting games. As a result of these decisions, we struggled to gain momentum and did not meet our sales expectations for the quarter.

All quotes from this segment come from the call of the third quarter results

So, instead of admitting that they had made serious marketing and public relations mistakes, like Patrick Soderland who had ordered players not to buy the game if they did not like it, or the fact that they had tried to appeal to a small group of social justice warriors while being alienating. the fan base, they blamed Battle Royale for not being published. I think the ignorance in this statement is staggering. Even random commentators seem to know more than management:

Source: Youtube

This is the most offbeat management we have ever seen in our investor careers. Despite massive consumer reactions and missed sales, EA management still refuses to listen to customers. Not surprisingly, BFV has far exceeded sales expectations:

As a result, we sold 7.3 million units in the quarter, about 1 million less than our third quarter forecast.

We think investors should avoid companies like EA that have extremely disconnected management and can not understand what their customers want.

Management then turns to the mobile, especially the recent launch of "Command and Conquer: Rivals":

With our latest release, Command & Conquer: Rivals, we have achieved positive results in terms of smooth launch, but since the global release, the facilities have not been organically optimized.

For those who do not know, C & C Rivals was an old PC franchise that EA had received after buying Westwood Studios some time ago. The series stalled for a while until EA decided to launch a mobile game unexpectedly in 2018. Unsurprisingly, fans of the series were outraged and an influential influencer compared it to "profane a corpse".

This move seems quite similar to what Activision Blizzard (ATVI) did when they announced "Diablo Immortal", which resulted in a 7% drop in its stock. Like Diablo Immortal, the C & C Rivals trailer was considerably more popular than favoritism.

Source: EA's Youtube Channel

So do not be surprised that the franchise has missed expectations. If players do not want it, they will not install it.

Then, EA talks about the FIFA franchise, which was mentioned as "robust", while sales are stable, even year-over-year, even with strong 50% cuts on Black Friday, as mentioned in our last article .

The conversion was slower than expected, resulting in unit sales that remained stable year-over-year.

Again, this is a red flag for those expecting continued growth of EA. If its strongest franchise is flat, what about less robust franchises?

Management also admitted that the mobile, which is one of the most dynamic growth sectors in the game, will be down:

We started the year with a strong growth of the mobile phone, but the combination of a delayed game and poor performance means that the activity will end the year down .

Net bookings of mobile phones were $ 142 million, down 22% from the previous year, with declines across our entire portfolio. We made some changes to Madden Mobile to make it more attractive, but the monetization went down. We continue to work to remedy this.

Overall, this call simply shows that EA's growth story, on which its premium valuation is based, may be a story. Caveat Emptor.

Anthem – The imminent failure

Those who think that Anthem learned the lessons from the Battlefield V fiasco may be surprised. Anthem has already copied Battlefield V in a domain: A confused publishing calendar.

Source: Gamerant

Source: EA

Despite the fact that the Battlefield V release schedule did not lead to subscriptions and was a massive source of retaliation for the players, EA added it to Anthem. It is clear that the management of the EA must rethink its subscription strategy instead of digging deeper into its hole:

Battlefield V has generated fewer subscriptions to Origin Access Premier than we had hoped, given the difficult launch of the game.

The fact that EA has already received a lot of criticism from people who influence social media platforms does not help much because of this complicated publishing schedule.

Source: Youtube

Source: twitter

Instead of increasing subscriptions, many who saw the card were refunding their pre-orders and canceling subscriptions. EA has published a reply, but we doubt that it helped much, knowing that it only blamed Sony, but did not solve the problem. The terrible EA publication schedule is a classic example of picking up under a bulldozer.

After that, EA also had to deal with Anthem's microtransaction controversy after a photo of a $ 20 skin was leaked. A developer from Bioware responded that it was only one iteration, but again, this caused unnecessary feedback.

During the teleconference, EA indicated that it planned to sell units of 5 to 6 mil, but we strongly doubt that it could do so at a high price for several reasons that we will discuss below.

As for Hymne's prospects, I think I mentioned five to six million units, which is how we looked at it last quarter, and we're comfortable with what we're seeing and what we saw in the demo.

Source: Q3 conf call

Now that the anthem is officially made available to the public, we can access juicy details.

Until now, every major influencer we see on Youtube has published negative reviews regarding Anthem. Here are some highlights that have collected millions of times in total:

Source: Youtube

Note that these critics are not average players. They buy the game specifically to play it and revise it. They are experienced players and critics. In the case of Anthem, some of these critics played the game for dozens of hours before giving their opinion. Needless to say, players take these critics seriously and can avoid the game if critics give a negative review. These few videos alone have probably cost Anthem tens of thousands of lost sales.

Some highlights include:

The genius of Bioware that links story and gameplay is completely broken here

– I have played 20 years of thrower games and I have never experienced such a repetitive experience.

– Fort Tarsis is one of the most depressing centers I know in my life

– Avoid this game, it's not even worth a fraction of its price of $ 60 at the moment

– This is a screen loading simulator

The commentators point out an important problem: Anthem encourages team play BUT only the person who kills the enemy / opens the chest wins the reward. Seems quite contradictory for us.

Interestingly, even a PAID reviewer by EA has given a negative review of this game. It's just how bad this game is.

Online reviews do not shine either. The only positive comment comes from Tech Advisor. It's interesting to note that Metacritic's rating is even lower than Battlefield V's, and we all know how it went.

Critics of Metacritic have recently fallen to 61% and user reviews are just as disappointing at 3.8.

At best, Anthem seems to be a mediocre game. If Bioware does not work and does not fix the game, it could become the next Fallout 76, a game with a lot of bugs and appalling gameplay released last year. 5-6mil is a modest target, but with this type of rating, EA may need discounts on Anthem to reach that number.

With critics in free fall and a disgruntled user base, Bioware may be closed. Well, it would only be the 15th studio that EA closed.

Source: Google Images

The deterioration of the situation in the mailbox

In our last article, we explained that the regulation of the boxes of objects could be on the point of catching up with EA. At that time, EA was facing a legal battle with Belgium over whether the sale of FIFA points should be banned in Belgium. It seems that EA has lost this battle. FIFA points are used to purchase FIFA card packs, which are essentially randomized surprise boxes.

Around the time we published our article, EA released an 8-K form informing investors that:

After further discussions with the Belgian authorities, we decided to no longer offer FIFA points for sale in Belgium. We are working to make these changes effective in our PC consoles and PC games by 31 January 2019. This means that Belgian players will not be able to buy points for FIFA Ultimate Team packs.

Source: Form 8-K

Although EA has ensured that this would not affect their financial performance, there is no doubt that its FIFA Ultimate Team, or FUT, is one of their biggest sources of income, as well revealed CFO Blake Jorgensen in an interview in 2017.

We are not legal experts, but with the adoption of this law, FUT revenues from EA around the world could be threatened by the increasing number of governments considering a new law. ban more and more surprise boxes.

Apex Legends – Overhyped

Apex Legends is an EA game released in early February. It was a 3rd person battle type game in the Royale located in the Titanfall universe. It was free, but even for an F2P game, it was pretty successful. Today, the game would have reached the 25 million mark, with nearly 2 million competing players. Fortnite Battle Royale, which we will call Fortnite, took two weeks to achieve this goal. No doubt the investors understood it and queued to buy EA shares, raising the price from about $ 75 to about $ 96 as of today. which is an increase in market capitalization of about $ 6.3 billion.

When looking at Fortnite's earnings, it's easy to understand why investors were so excited. Fortnite reportedly reported about $ 2.4 billion in revenue last year. If Apex Legends could reach this level, it should be worth around $ 11 billion, using the 4.5x multiple of Activision's business figure.

However, we believe that investors should not count their chickens before hatching. The Apex legends are already richly valued and fundamentally different from Fortnite, which suggests that they will earn less revenue than Fortnite.

1. Fortnite is already a mature game with excellent performance – Fortnite has been out for almost a year and its execution is almost perfect until now. He beat his competitors like PUBG and the deluge of other Battle Royale clones who entered the market and failed. There is no reason he can not also outplay Apex Legends. Epic knows his game very well and has over a year of experience in testing and refining the game for the players' delight. Even after a year, millions of people still play Fortnite every day.

2. Fortnite literally attracts everyone – The bright colors and inclusion of trends make Fortnite attractive to adults and children, both men and women. Meanwhile, Apex Legends looks like a more "adult" version of Fortnite. Although there is significant growth in the beginning, we believe that the saturation of the market will soon be reached because there is no way for Apex to have the same TAM as Fortnite with its darker colors and less family-friendly content. Top Image: Apex Legends, Bottom Image: Fortnite

Source: Youtube

3. The Store – Apex Legends and Fortnite both have a cosmetics store offering different gaming currency items that can only be purchased with real money. Note that Fortnite V Dollars are worth the same as Apex coins.

Source: Youtube

A Forbes author wrote a scathing critique on the store, highlighting the overpriced items and limited choice in particular. Another concern was raised that the skins were sold at about the same price although Fortnite players get a lot more value for their skin compared to the Apex Legends skins. Indeed, Fortnite is a third-person shooter where the player can see his avatar for most of the game, while Apex Legends is a first-person shooter where players only see their character main for a few seconds only when it appears. The 2 images below show the game of Apex Legends and Fortnite, respectively. Note how in Apex Legend you can not see your own character. In Fortnite, meanwhile, one can easily see one's own character, making hides immensely more satisfying to use in Fortnite.

Source: Youtube

EA also seems to have made a major blunder by deliberately using sneaky tactics to get players to spend more, which was easily discovered by the influencers. In addition, high prices of items cause complaints from players, as in this thread reddit. Valentine's beauty products, for example, cost more than $ 10 each, even if they do not contain skins. Could EA greed also spread in Apex?

4. Cultural Conflict – Despite the fact that EA was the owner of Respawn, which developed Apex Legends, EA did in fact have very little to do with the creation of Apex Legends. According to an interview with a Respawn employee, EA actually has very little to do with the game. In fact, Respawn had to argue with EA leaders to implement some changes. So, for those who wonder if the success of Apex can be replicated, well, probably not without a major culture shift. To make matters worse, it is possible that EA executives, in search of more money, spoil the successful launch of Apex by interfering with Respawn. Why do we believe that? First of all, EA has a proven track record in buying studios and closing them because of internal disagreements. Respawn may be next on the chopping board if Apex monetization is below expectations. Secondly, this type of cultural conflict has already occurred, resulting in massive destruction of shareholder value. We're watching you, Activision Blizzard (ATVI).

We therefore believe that the rise in the share price is not justified and that it may not be as good as Fortnite. be a good opportunity to sell the stock. After all, Is Apex Legends really worth 1/4 of Activision Blizzard?

The future pipeline of EA

In addition to Anthem, EA offers new updates and intellectual property planning. We will give our opinion on all the main ones.

Battlefield V Firestorm – This is the Battle Royale Battlefield V mode, which will be released in March. The problem? Apex Legends. The success of Apex Legends will strongly cannibalize this BR game mode. Combine that with BFV's terrible reputation and you'll understand why we're skeptical that this game mode will help boost sales significantly.

Jedi's Fallen Order of Star Wars – Given EA's reputation for chess in Star Wars games, we are not overly optimistic. Moreover, since it is a one-player game, we are even less optimistic about the magnitude of the digital revenue growth that this can bring.

The competition

While EA is messed up, its competition is fierce. A studio, CD Projeckt Red (OTC: OTGLF), creates a single-player RPG named Cyberpunk 2077. The trailer gets more views than the EA Anthem trailer, and is much more appreciated by the community of players, as you can see on the site. like: do not like the ratio.

Source: Youtube

CD Projekt Red enjoys an excellent reputation among players, and it would not be surprising if players withhold money on Star Wars Jedi Fallen Order to buy Cyberpunk 2077.

Fortnite also does not sit idle, recently giving players the opportunity to win a free pass if they complete challenges. Epic Games also gave details of its Fortnite World Cup, with an impressive prize pool of $ 30 million. This is a serious incentive for players to return to Fortnite's Apex Legends, which has neither battle nor esport pass. As shown in this twitch screen capture, Fortnite is already catching Apex in twitch displays, after being 3 times lower than Apex in viewership.

Source: contraction

Competition in the mobile is also fierce, with parvenus such as Gluu Mobile (GLUU) publishing successful titles and incumbents like Activision Blizzard who would work on mobile games for all their IP addresses.

The sale of insiders continues

Source: Insiderinsights

Since stocks rebounded after the earnings call, insiders continued to sell EA shares. Sales from February 12 to 20 were approximately $ 5 million. Although some commentators think that insider sales are now normal due to the massive grant of stock options, we still consider that sales of new products are not the same. Insiders are negative, especially when they occur in these numbers. After all, if EA is to double in a year, why would insiders sell so much stock?

Recent developments

EA recently fired 40 to 50 people in its Australian studio, FireMonkey. Although this number seems small, it represents a quarter of the studio's workforce. As shown by the layoffs of Activision, this certainly does not bode well for future growth or during the course of action.

EA also won a prize! The CEO of EA was listed in an annual list of overpaid general managers after publishing several failed games and lowered the forecasts several times.


Honestly, EA is not much better than $ 75. Apex is certainly not a failure, but we are confident to say that it will not be the next Fortnite in terms of revenue. The hymn reviews so far have been below my expectations, and the competition is still strong. Insiders continue to sell large amounts of stock, and the layoffs only reinforce our belief that EA's growth is over. EA has been a colossal failure for shareholders and players, having launched an impressive number of failures in 2018 alone. Avoid EAs.

Disclosure: I / we have / we have no position in the actions mentioned, and we do not intend to initiate a position within the next 72 hours. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose actions are mentioned in this article.

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