Electronic Arts Inc. January 18th, Michael Gude Portfolio Manager. Chase Westenfelder Quantitative Model Developer

Transcription

1 Electronic Arts Inc. EA January 18th, 2018 Michael Gude Portfolio Manager Chase Westenfelder Quantitative Model Developer Taylor Crawford Private Equity Analyst

2 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

3 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

4 Company Overview, History, & Strategy

5 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) s 2011 Company is founded in Redwood City, California IPO at $8 per share Introduction of FIFA, Madden, NBA Live and recurring game business model EA acquires PopCap for $750 mm, largest acquisition in their history 2015 Creation of the Competitive Gaming Division (CGD), allowing EA to break into esports world 2017 SEED is created, EA s first investment commitment to deep learning research

6 Leadership Andrew Wilson - CEO Blake Jorgensen - CFO CEO since 2013, served several positions within EA since CFO since 2012, served as CFO for Levi Strauss and Yahoo! prior to joining EA. Compensation Andrew Wilson 2017 Base Salary - $1,083,846 Stock Comp - $16,150,342 Compensation Blake Jorgensen 2017 Base Salary - $762,981 Stock Comp - $7,498,342

7 Strategy Outlined Strategy Players First Players are forefront of EA s business model Deep portfolio to attract all types of gamers Develop long-lasting fun and enduring value entertainment Commitment to Digital Leading switch from physical game to online downloads Services include microtransactions, downloadable content, & subscriptions One EA Moving to streamlined developmental operations (i.e. all developers code in same language) Allows for greater operational flexibility and quicker game development for multiple platforms

8 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

9 Partnerships

10 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

11 Earnings Breakdown

12 Earnings Breakdown

13 Breakdown by Platform & Region

14 EA s Market Breakdown

15 Gaming Market - Platform Revenue

16 Gaming Market

17 Gaming Market - Geographic Breakdown

18 Gaming Market - Growth in China

19 Sports Markets

20 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 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

21 Competitor Analysis

22 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

23 Competitors

24 Comps Analysis

25 Comps Analysis

26 Comps Analysis

27 Comps Analysis

28 Comps Analysis

29 SWOT Analysis Strengths: Heavy investment in R&D Steady growth in both revenue and net income Focus on a relatively small portfolio of products in order to produce high quality ones that will drive sales Opportunities: Hold licenses to big names such as Star Wars, which could increase Experimenting with implementing VR into games Growth still exists in the gaming industry E-sports are gaining traction and EA is poised to grow alongside them opportunity for expansion in global markets Weaknesses: Seasonality of revenue - timing of game releases are typically clustered together No dividend Threats: A significant portion of sales are made to a limited number of large customers Potential for currency exchange rate effects on revenue Success is related to the performance of products from third parties

30 Fundamental Analysis & Valuation

31 Fundamental Analysis

32 Fundamental Analysis -

33 Fundamental Analysis

34 Fundamental Analysis

35 Fundamental Analysis

36 Valuation

37 Valuation

38 Valuation

39 Valuation

40 Valuation

41 Valuation

42 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

43 Investment Proposal

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

45 Portfolio Configuration

46 Questions?

47 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.

48 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 A 5. esports Market Valuation a. Figures for CAGR forecast through 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.

49 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.

50 Appendix 1 2

51 3 4 Appendix

52 5 Appendix 6

53 7 Appendix

54 Appendix 9

55 Appendix 9

56 Appendix

57 Appendix