Videogames are flourishing in the pandemic, and game makers aren’t scared of the future

Videogames are flourishing in the pandemic, and game makers aren’t scared of the future

6 May    Finance News

With commerce closed in the real world, money is flowing into virtual worlds instead.

The two largest public videogame publishers in the U.S. reported Tuesday the results of millions of Americans retreating into their homes during a shelter-in-place: Booming profit from online activity. Electronic Arts Inc. EA, +2.38% reported record revenue from live services and doubled its profit, while Activision Blizzard Inc. ATVI, +2.74% said that it reached “new heights” in sales that created its best first-quarter profit in history.

The companies don’t expect much change in the trajectory: EA predicted profits this quarter would triple from the year before to more than a quarter-billion dollars, while Activision forecast adjusted profit of more than $500 million, a 67% increase.

The results were not entirely surprising, given that the results include data from March, when COVID-19 spread across the globe and forced people inside their homes. Superdata has reported that March was the first $10 billion month for videogame sales in history, and NPD Group said U.S sales reached their highest March level since 2008.

That 2008 figure may not be a coincidence. Executives from both companies voiced confidence that any economic slowdown will not massively change the trajectory for videogames, citing periods of growth during that recession as well as an earlier one. Activision Blizzard Chief Financial Officer Dennis Durkin noted that in the dot-com bust and the 2008 financial crisis, gaming spending continued to grow in the low- to mid-single digits.

Full results:Electronic Arts topped sales expectations, Activision Blizzard earnings beat

“We think that’s driven by the lost cost of our gaming, which makes it a great value versus other forms of entertainment,” Durkin said in Tuesday’s conference call.

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Durkin said the company stood to benefit from its digital distribution — gamers have been electing to download more games from online stores versus buying physical copies at a steady clip since 2009 — and gaming is considerably more socially connected than it once was. EA said that the closure of bricks-and-mortar retail stores such as GameStop Corp. GME, -1.64% hadn’t yet affected sales, as only 20% of EA’s bookings were from physical game purchases last year, compared with 84% in 2009.

Electronic Arts CFO Blake Jorgensen echoed Activision’s view, saying the videogame market has “historically proven resilient as players have seen games as a relatively inexpensive form of entertainment.”

The main pandemic concern for the videogame publishers appears to be the new work-from-home reality, which could hinder the development of new titles, as it has in the film business. For the remainder of the year, both EA and Activision said that they anticipated continuing with a full slate of releases, and executives did not mention delays related to specific titles in the twin conference calls Tuesday evening.

“Developing a game from home inevitably carries risks, and we haven’t yet solved all those problems, but, for example, we just had a very successful ‘FIFA Ultimate Team’ birthday event,” Jorgensen said in the earnings call. “‘Apex Legends Season 5’ is about to launch, and we expect to see the next ‘Sims’ expansion and ‘Command and Conquer Remastered’ to both launch in June as scheduled. Learning from this period will forever change the way we work at EA.”

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KeyBanc Capital Markets analyst Tyler Parker predicted in a note last week that EA would have a harder time hitting its release targets, mentioning that it is in the middle of developing its next “Battlefield” title. The company said Tuesday that development across the board was on track.

Like EA, Activision Blizzard also develops titles at studios around the world and said in its earnings call that working remotely adds “complexity and challenges” to aspects of game development. Specifically, Activision Chief Operating Officer Daniel Alegre said that it makes creative collaboration, motion capture and quality assurance, among other things, more difficult. He said the company has taken measures to minimize the impacts and the company continues to expect its slate of titles this year, including a release of “Call of Duty” and a “World of Warcraft” expansion.

“But so far, based on what we can see, and with true ingenuity and creativity from the teams for managing through this as best as we can, we just need to provide our community with the innovative content that they love that they want to keep playing,” Alegre said. “We’re currently still on track to deliver our key content in the second half of this year, and my primary focus is to ensure that we continue to execute on these top priorities.”

Expectations for the gaming giants were high heading into Tuesday’s earnings, with analysts’ average price targets heading higher for both companies as they slid elsewhere. J.P. Morgan analyst Alexia Quadrani wrote in an April note that she expected gaming giants would experience high levels of engagement and sales amid the coronavirus pandemic, noting the Superdata report.

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Electronic Arts shares dipped 5% in the extended session Tuesday, but shares have gained 29% in the past year, as the benchmark S&P 500 index SPX, +0.90% dropped 3.5%. Activision shares are up 45% in the past year and rose 5.8% in after-hours trading.

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