This company, which primarily develops and publishes interactive entertainment content and services on video game console, personal computers, and mobile devices, has been grouped into console and PC game sector in toys and gaming industry.
It seems that the demand for interactive gaming products provided by companies in this sector has been strong and increasing in the past several years as indicated by average 5-10% annual growth in organic revenue of typical companies in this sector. Sales’ shifting to digital retail channel and online service has been apparent as indicated by about 12-20% annual growth in digital related revenue. Demand for physical retail products decreased quickly (down by about 20% annually and roughly consistent with growth in digital channel). The growth has also been reflected in mobile platform. Performance in console platform is better than that in PC platform.
Leveraging brought by increase in revenue, lower development costs, and shifting of sales to digital sales channel of higher margin help improve profitability of companies. The typical gross margin is about 62%, SG&A is about 27%, and operating margin is about 19% in 2018. The typical enterprise cash flow/EBI ratio is 83. The average annual increase in EBI/share is more than 40% in the past two years.
It seems that the demand for interactive gaming product of this company has rebounded back after a huge decline in 2015 as driven by increase in both console and PC games. Demand for packaged games seems to have gone down quickly during the same period of time and may
be shifting to digital sales channel.
The fiscal 2018 compared with 2017 (ended March 31 2018)
Net revenue increased 0.7%.
Digital online channel revenue increased 22%.
Retail channel revenue decreased 23%.
Console game revenue increased 1.6%.
PC game revenue decreased 3%.
Fiscal 2017 compared with fiscal 2016
Net revenue increased 26%.
Digital online channel revenue increased 32%.
Retail channel revenue increased 20%.
Console game revenue increased 23%.
PC game revenue increased 38%
Fiscal 2016 compared with fiscal 2015
Net revenue increased 31%.
Digital online channel revenue increased 53%.
Retail channel revenue decreased 14%.
Console game revenue increased 32%.
PC game revenue increased 22%.
Its gross margin went up from 40% to 47% in 2018 primarily due to lower software development costs and the shifting of sales to digital products and service (higher margins). With the flat SG&A as percentage of sales (at about 28%) and increased R&D spending, we see an improved operating margin (up to 8% in 2018).
Its average EBI/share significantly increased in the past three years.
Stock performance
This company is having an enterprise price/cash flow ratio of 125. We think that its stock is being relatively overvalued compared with its peers- ELECTRONIC ARTS INC.
