Shares of Electronic Arts Inc. (NASDAQ: EA) surged in extended trading on Tuesday after the company reported stronger than expected revenues, easing concerns that free-to-play games were eroding market share. The company also gave a positive outlook on the current fiscal year, calling 2020 a “year of continued growth” for the gaming industry.

Q4 2019 Summary

  • Earnings Per Share: $0.69
  • Revenue: $1.24 billion
  • Net Bookings: $1.36 billion

 

Net Bookings Boost Optimism

The company is expected to get a significant boost in its fiscal second quarter with sports titles like Fifa, Madden NFL and NBA Live all scheduled to hit the shelves.

After laying off 4% of its staff, Electronic Arts appeared to be on the back foot heading into fiscal 2020. To be sure, the company reported a sizable drop in revenue and net profits during its fiscal fourth quarter, but the declines were less than expected as net bookings rose from a year earlier.

The Redwood City, California-based company reported net income of $209 million, or $0.69 per share, on revenues of $1.24 billion. Both figures were down considerably from a year ago.

Where Electronic Arts really stood out was in net bookings, an industry standard that factors digital and in-store sales. In this category, the video game maker generated $1.36 billion, higher than the $1.26 billion reported a year ago and well above forecasts calling for $1.2 billion.

For fiscal 2019, the company reported revenues of $4.95 billion, down from FY2018 but higher than the company’s estimates.

The company is expected to get a significant boost in its fiscal second quarter with sports titles like Fifa, Madden NFL and NBA Live all scheduled to hit the shelves. Electronic Arts also has Star Wars and Need for Speed titles scheduled for the third quarter.

 

A Changing Industry

Like other video game developers, Electronic Arts has seen its traditional revenue model disrupted by a new breed of engagement models that have attracted hundreds of millions of gamers. These include free-to-play “battle royale” games like Fortnite and subscription services that have eaten away at traditional console sales.

As the Financial Times reported, EA has launched its own successful line of battle royale-type games with Apex Legends bringing on some 50 million users in its first month. By comparison, Fortnite had 250 million registered users by the end of March.

EA Share Price YTD - May 8 2019

Source: Yahoo Finance

EA shares surged 7.9% in after-hours trading to close at $100.01 at 7:59 p.m. ET. The stock closed down 1.1% in regular trading, which isn’t too bad given the massive selloff on Wall Street Tuesday. The Nasdaq Composite index plunged 2% on Tuesday to close at its lowest level in almost a month.

 

Conclusion

Electronic Arts still faces enormous competition from free-to-play games, but its latest quarterly results show it has not shied away from new business models. Investors should keep a close watch of Apex Legends, which has been dubbed the “next evolution of battle royale.” The game will serve as an important bellwether for how EA performs in this evolving market.

Disclaimer: Author holds no investment position in Electronic Arts at the time of writing.