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Fitch upgrades EA on conservative financial policy, strong free cash flow

Fitch Ratings upgraded Electronic Arts Inc.'s issuer default rating to A- from BBB with a stable outlook, citing the video game company's conservative financial policy and strong free cash flow generation.

The rating agency said EA has managed its balance sheet in an "extremely conservative" way since 2016, keeping gross leverage in a range of 0.6x to 0.8x. The company has also maintained a net cash position since 2014.

EA's ability to generate free cash flow, which Fitch calculates at $1.5 billion for the trailing 12-month period ending June 30, has increased materially over the last five years amid successful efforts to attain a more disciplined operating cost structure, the rating agency also said.

"These strengths offset the competitive and hit-driven nature of the video game industry" that raises potential cash flow volatility, Fitch said Aug. 1.

Fitch projected EA's operating margin to increase over the next five years, mainly due to the video game industry's ongoing shift toward more digitally distributed content. This margin expansion will benefit the company's free cash flow, and in turn, its credit profile, the rating agency said.