Electronic Arts (EA) – Retail Discounting a Near-Term Positive?

First, highlights from prior quarter on November 2:

– Q2 EPS $0.53 vs. $0.41 estimate, big beat
– Q2 EBITDA $1.09B vs. $1.07B estimate, beat
– FY2017 EPS Guidance $3.65 vs. $3.54 estimate, beat
– FY2017 Revenue Guidance $4.93B vs. $4.9B estimate, beat

Additionally, it’s worth noting that in FY2017 guidance company only conservatively included Battlefield 1 and Titanfall 2 sales because each of them have been out for less than 2 weeks, not enough data. But then in conference call management discussed that comparable sales of these new games is running at 3.2x their prior versions. This was confirmed later by strong NPD data:

NPD Channel Checks – Out on November 18 for the month October, showing +31% increase QoQ to $505.7 million in console software sales while PC software jumped by +172% QoQ to $33.8 million. It was a big month for the AAA games business led by Battlefield 1, Gears of War 4, Titanfall 2 and Mafia 3. Total video game sales increased by +6% YoY to $875.7 million.

In a BAML note this morning, the firm makes the case that over the past few years, the holiday shopping season has been an aggressive time for discounting of software titles especially around Black Friday and Cyber Monday.  However, this year, BAML is seeing bigger discounting at retail than they can remember on AAA titles well ahead of Black Friday, which could be attributable to retailers trying to combat the digital mix shift.

Over the last week, retailers such as Target (TGT), Best Buy (BBY), Amazon (AMZN), and Walmart (WMT) ran specials on feature titles like Battlefield 1 and Titanfall 2 with discounts as high as 50% and have more specials planned for Black Friday.  Retailers are also aggressively price matching, with one retailer special resulting in other retailers instantly matching (which suggests to BAML that discounts are retailer funded and not publisher funded).

While discounting may move more units near term and benefit publishers, BAML thinks this creates an unhealthy retailer environment which trains consumers to wait for discounts on major titles before purchasing.  Also, while sales are higher, publishers could see a margin offset as more copies move through retail vs digital.

In terms of Electronic Arts (EA), we should see C4Q benefit from unit sales, but less digital. EA is likely to be one of the beneficiaries of heavy discounting by retailers as both Battlefield 1 and Titanfall 2 have been discounted at several retailers (BAML is assuming retailers are doing the discounting on their own at a loss and EA is benefiting from unit sales).  According to Amazon’s (AMZN) best seller list, Titanfall 2 is the best-selling game on Amazon for PS4 and Xbox One in November, ahead of the recently-released Call of Duty.  This would help EA unit sales on both Battlefield and Titanfall, but there could be a partial margin offset as fewer consumers purchase the digital version vs the cheaper retail copy.  A similar trend was seen last year in Q4 with Star Wars: Battlefront when discounting drove higher package good sales, but resulted in lower margins.  BAML has also seen some digital discounting with Titanfall 2 PC offered on EA Origin for $39.99 or $32 after a discount code, and for XBox One, a BF1 + Titanfall deluxe package for $75 (vs well over $100 retail), which suggests that EA may be using price as a lever to drive digital sales.