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Can Electronic Arts Improve Its Profit Margins in Fiscal 2018?

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Gross profit expected to reach 74.9% in fiscal 2018

Electronic Arts (EA) expects its gross margin to be 74.9% by the end of fiscal 2018. It was 73.2% in fiscal 2017, 69.2% in fiscal 2016, and 68.3% in fiscal 2015.

EA’s gross margin has steadily improved over the years compared to its level of 62.3% in fiscal 2014. In fiscal 4Q17, EA’s gross margin expanded 4 percentage points, primarily driven by product mix and digital revenue growth.

In fiscal 2012, EA’s Digital Business segment accounted for 29.3% of its total revenue. Its gross margin was 63.1%, and its operating margin was 9.5%. Its operating expenses in fiscal 2012 totaled ~$2.3 billion with earnings of $284.0 million and free cash flow of $105.0 million.

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These business metrics improved in fiscal 2017. EA’s Digital Business segment accounted for 62% of its revenue. Its gross margin expanded to 73.2%, and its operating margin expanded to 25.3%. Its operating expenses in fiscal 2017 were ~$2.1 billion with earnings of ~$967 million and free cash flow of ~$1.3 billion. The growth in EA’s Digital Business segment was driven by mobile, extra content, and full game downloads.

Impact of free-to-play and mobile purchases

EA’s strategy is a shift from a premium price model on mobile devices to a model of in-app and free-to-play purchases. The company’s strategic shift toward digital and mobile games and its cost control measures have enabled it to outperform the market’s expectations.

The shift to digital is also positively impacting the profit margins of peer companies such as Take-Two Interactive Software (TTWO) and Activision Blizzard (ATVI).

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