Electronic Arts Inc.

EA
January 18th, 2018

Michael Gude
Portfolio Manager

Chase Westenfelder
Quantitative Model Developer

Taylor Crawford
Private Equity Analyst
Table of Contents

Investment Thesis Competitor Analysis

Company Overview & Strategy SWOT Analysis

Product Lines Fundamental Analysis

Earnings Breakdown Valuation

Video Game Market Breakdown Outlook

Sports Market Analysis Proposal

 Investment Thesis

● Company
○ Better buy than competitors based on value oriented strategy
○ Increased sales in fastest growing segments (digital & mobile)
■ Improving OM
○ More efficient software development
○ Growing live services engagement
■ Microtransactions, downloadable content, subscriptions
○ Stock repurchase program of $1.2B through May 2019

● Macro Perspective
○ Steadily growing gaming market (4-6% CAGR through 2020)
○ Expansion of digital market with focus on mobile
○ Growing sports fan base provides opportunity to reach new customers
○ More video game players due to mobile and free to download PC games
Company Overview, History, &
Strategy
 Company Overview & Key Events

● Global leader in digital interactive entertainment software

● Develop, market, publish and distribute games, content and services that can be played by
consumers on a variety of platforms
○ Game consoles (Xbox, Playstation)
○ PC / Browser
○ Mobile (App, Google Play stores)

1982 1990 2000’s 2011 2015 2017

Company is IPO at $8 per Introduction of EA acquires Creation of the SEED is
founded in share FIFA, Madden, PopCap for Competitive created, EA’s
Redwood City, NBA Live and $750 mm, Gaming Division first investment
California recurring game largest (CGD), allowing commitment to
business acquisition in EA to break into deep learning
model their history research
eSports world
 Leadership

Andrew Wilson - CEO Blake Jorgensen - CFO

CEO since 2013, served CFO since 2012, served

several positions within EA as CFO for Levi Strauss
since 2000. and Yahoo! prior to joining
EA.
Compensation
Andrew Wilson 2017 Compensation
Blake Jorgensen 2017
Base Salary - $1,083,846
Stock Comp - $16,150,342 Base Salary - $762,981
Stock Comp - $7,498,342
 Strategy
Outlined Strategy

Players First Commitment to Digital One EA

Players are forefront of Leading switch from Moving to streamlined

EA’s business model physical game to online developmental
downloads operations (i.e. all
Deep portfolio to attract developers code in
all types of gamers Services include same language)
microtransactions,
Develop long-lasting fun downloadable content, & Allows for greater
and “enduring value” subscriptions operational flexibility and
entertainment quicker game
development for multiple
platforms
 Company Structure

● EA Worldwide Studios
○ Action-adventure & combat titles
● EA Sports
○ Realistic, casual, and freestyle sports-based titles
○ FIFA, Madden NFL, NBA Live, NCAA Football, NHL
● EA Maxis
○ Life-simulation games
○ Sims series
● EA All Play
○ EA origininals and franchise partnerships: Simpsons, Tetris, SCRABBLE, MONOPOLY, &
Pogo.com
● EA Competitive Gaming Division
○ eSports competition enabler with EA Sports titles
● SEED
○ Tech incubator for deep learning and neural networks research
Partnerships
 2018 Announced Titles

● Looking to see effect of Q2-Q3

releases in Q4 earnings

● Q3 seasonality & deferred revenue

● Still seeing strong growth in

veteran games
○ Sims 4 revamp
○ FIFA Mobile - hit 113 million
downloads during Q2
Earnings Breakdown
Earnings Breakdown
Breakdown by Platform & Region
EA’s Market Breakdown
Gaming Market - Platform Revenue
Gaming Market
Gaming Market - Geographic Breakdown
Gaming Market - Growth in China
Sports Markets
 Sports Markets

● World Atlas puts association football as world’s most popular sport, estimated 4 billion fans

○ FIFA - growth in World Cup attendance (3.4 million in 2014)

○ NBA - international games, 2017 championship was most-viewed since 1998

■ China’s viewership up 30% via Tencent for NBA Finals
■ 760 million total Chinese viewers in 2015-2016 season
■ 1.2 billion followers on social media

○ NFL - international games in London, Mexico City, expansion to China

■ NFL executives set goal for $25 billion revenue growth every year
■ Looking to reverse viewership trends in U.S. while increasing viewership figures
internationally
Competitor Analysis
 Competitors

● Activision Blizzard
○ Based out of Santa Monica CA
○ Popular games titles include Call of Duty and owns World of Warcraft
○ experienced significant growth in the past year
● Nintendo
○ Japanese multinational company that is a legacy brand in the gaming industry
○ Does not seem to be looking into VR anymore
○ offers gaming consoles such as the Switch
● Take Two
○ US based multinational gaming software company
○ Fully owns RockStar Games and 2K Games
○ Popular game titles include Grand Theft Auto and Bioshock 2
Competitors
Comps Analysis
Comps Analysis
Comps Analysis
Comps Analysis
Comps Analysis
 SWOT Analysis

Strengths: Weaknesses:
● Heavy investment in R&D ● Seasonality of revenue - timing of game
● Steady growth in both revenue and net releases are typically clustered together
income ● No dividend
● Focus on a relatively small portfolio of
products in order to produce high quality
ones that will drive sales

Opportunities: Threats:
● Hold licenses to big names such as Star Wars, ● A significant portion of sales are made to a
which could increase limited number of large customers
● Experimenting with implementing VR into games ● Potential for currency exchange rate effects
● Growth still exists in the gaming industry on revenue
● E-sports are gaining traction and EA is poised to
● Success is related to the performance of
grow alongside them
● opportunity for expansion in global markets products from third parties
Fundamental Analysis
& Valuation
Fundamental Analysis
 Fundamental Analysis

-
Fundamental Analysis
Fundamental Analysis
Fundamental Analysis
Valuation
Valuation
Valuation
Valuation
Valuation
Valuation
 Outlook

● Continued OM improvement with shift to digital

● Steady industry growth with broadening customer base

● One code language on one platform will cut costs and development time
○ Compared to 20+ development platforms

● Continued growth in digital segment and reduction in packaged goods

○ Focus on mobile and live services

● Stock repurchase program

Investment Proposal
 Proposal

Buy 94 shares at $114.14 for a total of $10,729.16

Portfolio Configuration
Questions?
 See Graphs Below
Appendix

1. Major Game Console Sales Trends

a. Using Tableau, we compared the sales (units) of major game consoles between Microsoft and their Xbox console and Sony and
their Playstation console. Although revenue stemming from gaming consoles is increasing, we have noticed two distinct patterns
from this data.
i. Overall game console sales, in units, is declining for the entire market. This is theoretically a poor situation for EA, but
given the strength in partnerships for all video game companies, this declining market will hurt anyone involved. Again, it is
also a fundamental factor that revenue stemming from game consoles is steadily increasing for EA.
ii. Another trend is the pattern of units sold for the two major consoles, Xbox and Playstation. Overall, we want to ignore the
competition between these two consoles because EA has strong partnerships with both Microsoft and Sony. However, if
we look at units sold, we see a right-tailed distribution when a new console is released. There is strong growth that slightly
tails off, as expected when a console becomes 2-3 years old and outdated. Using Tableau, we compared the latest 2
versions of each major console and saw that this distribution existed. We think that this trend will continue, adding to the
seasonality of revenue for video game companies. We also believe there is a large gap from the absence of mobile
devices in this market that makes up for the decrease in overall consoles.

2. Call of Duty sales (units) of each version (Statista Research)

a. This is an Activision game that is a key driver in the growth of the company. Without this game, Activision loses its grip in the
video game market. Sales of Call of Duty: WWII (as of November, 2017) were twice that of Call of Duty: Infinite Warfare (about
22 million units), showing that the newest version, although popular, has come nowhere close to the top spot set by Modern
Warfare 3 in 2011.
 See Graphs Below
Appendix

3. Earnings Hits and Misses

a. EA’s history of earnings (quarterly) over the last 7 years is displayed. They have missed earnings expectations twice in 24
quarters, leading us to believe they have a strong future of consistent earnings performances
i. Average stock increase in an earnings week for EA is put at 2.5% (NASDAQ)

4. Forward P/E Ratio

a. Displayed is the forward P/E ratio estimates for EA
i. Differing from our actual calculations due to current price fluctuations and calculation of EPS
ii. Ranging from 30 - 37 2017A

5. eSports Market Valuation

a. Figures for CAGR forecast through 2020

6. Geographic eSports Breakdown

a. China VS North America eSports market figures

7. eSports Audience Growth

a. Broken down between “occasional viewers” and “eSports Enthusiasts”, which is a metric that is very hard to gather data on. This
is important for market sizing, and growth in enthusiasts is the most important driver for the eSports market. This is due to the
fact that the monetary distribution is favored towards companies like EA when there are gamers that are playing, not viewers.
 Appendix

8. Litigation (no graphic)

a. 2 appeals against favorable ruling for EA regarding minor copyright infringement cases
b. 1 case dealing with lack of consent to use characters in Madden games - case was thrown out
c. Based on website Justia and reports reviews, no evidence to suggest EA is involved in any major or minor lawsuits at this time.

9. Game Portfolio Graphic

a. Not every game is included in this graphic, but it is a good visualization of their diversity in platform development.
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