Video game publisher Electronic Arts (NASDAQ:EA) missed Wall Street’s revenue expectations in Q4 CY2024, with sales falling 20.4% year on year to $1.88 billion. On the other hand, next quarter’s outlook exceeded expectations with revenue guided to $1.76 billion at the midpoint, or 8% above analysts’ estimates. Its GAAP profit of $1.11 per share was 3% above analysts’ consensus estimates.

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“The record success of our EA SPORTS FC 25 Team of the Year event demonstrates our creative teams’ ability to adapt, innovate, and execute at scale,” said Andrew Wilson, CEO of Electronic Arts.

Company Overview

Best known for its Madden NFL and FIFA sports franchises, Electronic Arts (NASDAQ:EA) is one of the world’s largest video game publishers.

Video Gaming

Since videogames were invented in the 1970s, they have gradually taken more share of entertainment time. Ubiquitous mobile devices have powered a surge in “snackable” games that can be played on the go. Over time, games have developed more social engagement features where friends can play games together over the internet. The business models of games publishers have become less volatile due to digitization of distribution, in game monetization, and like Hollywood, an increasing dependence on surefire hit franchises. Covid driven lockdowns accelerated adoption and usage of videogames – a trend that has not slowed.

Sales Growth

A company’s long-term performance is an indicator of its overall quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for years. Electronic Arts struggled to consistently generate demand over the last three years as its sales dropped at a 1.7% annual rate. This fell short of our benchmarks, but there are still things to like about Electronic Arts.

This quarter, Electronic Arts missed Wall Street’s estimates and reported a rather uninspiring 20.4% year-on-year revenue decline, generating $1.88 billion of revenue. Company management is currently guiding for a 5.5% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 7.5% over the next 12 months. While this projection indicates its newer products and services will catalyze better top-line performance, it is still below average for the sector. At least the company is tracking well in other measures of financial health.

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Cash Is King

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Electronic Arts has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the consumer internet sector, averaging 27.7% over the last two years.

Taking a step back, we can see that Electronic Arts’s margin expanded by 4.6 percentage points over the last few years. This shows the company is heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

Electronic Arts’s free cash flow clocked in at $1.13 billion in Q4, equivalent to a 59.8% margin. This result was good as its margin was 8.6 percentage points higher than in the same quarter last year, building on its favorable historical trend.

Key Takeaways from Electronic Arts’s Q4 Results

We were impressed by Electronic Arts’s optimistic revenue and EPS guidance for next quarter, which blew past analysts’ expectations. We were also glad this quarter's EPS beat Wall Street’s estimates. On the other hand, its revenue missed significantly. Overall, this quarter was mixed, but the outlook was encouraging. The stock remained flat at $122 immediately following the results.

So should you invest in Electronic Arts right now? When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.