Electronic Arts Earnings Preview

Kaufman Bros. analyst Todd Mitchell sent a note to clients previewing Electronic Arts' (ERTS) upcoming earnings report, due out after the bell. Key points follow:

• Electronic Arts, Inc. (ERTS) will report fiscal 3Q07 results today after the close. Management will host a conference call at 5:00 p.m. EST.
• We expect EA's fiscal 3Q07 results will be within guidance. We look for revenue of $1.2 billion and GAAP EPS of $0.38, versus guidance of $1.2 billion-$1.3 billion and $0.33-$0.43. Our estimate assumes a 5% drop in total sales, with a 13% decline in video game sales offset by about $70 million in revenue from cellular, online and Fx gains. We project revenue of $3.05 billion for fiscal 2007 and GAAP EPS of $0.11.
• We sense expectations are now set somewhat higher. We remain more cautious on EA. EA's broad line-up was not well received this holiday season, due to narrow market demand for PS2 titles and a crowding out on the X360 from Gears of War. Among its mass market titles, EA has a tough Superman versus Harry Potter comp and its sales of DS or Wii titles were not all that impressive.
• We estimate EA's revenues could grow 20% in fiscal 2008. We project fiscal 2008 revenues of $3.65 billion and GAAP EPS of $0.61. In this report is a preliminary bottom-up forecast on a title-by-title, platform-by-platform basis. EA will have a tough soccer comp in fiscal 2008, but otherwise EA Sports should track pretty close to hardware growth, and the rest of EA's line-up will be stronger than fiscal 2007.
• We estimate the video game market will grow 16% in fiscal 2008. We project worldwide software sales growing 16% during EA's fiscal 2008 to over $23 billion. Our estimates foresee a 70% increase in next-gen software sales to $10.9 billion from $6.4 billion during fiscal 2007, with handheld sales growing 11% to $6.5 billion from $5.9 billion, and current-gen sales contracting by 24% to $5.9 billion from $7.7 billion.
• We believe shares of ERTS become compelling below $48. At current prices, there is about 18% upside implied in our price target of $58. We think investors can get constructive at these levels, but we are going to keep our HOLD rating because we have no evidence that EA will report significantly stronger-than-expected results, and unless that happens the stock is likely range-bound in the near term.
• We reiterate our HOLD rating and $58 price target. Our price target is based on 25.0x calendar 2009 FCF of $763 million discounted to present at 11%. Shares of ERTS have recently traded off, due to disappointing indications about this quarter's performance. We acknowledge weakness on multiple fronts, but expect EA to make the quarter. We consider investment in ERTS to be moderately risky.
• Technical Analysis: Key technical ranges that investors should note are: $68.25 to $69.00, $54.30 to $54.50, $51.90 to $52.00, $50.25 to $50.75, $49.50 to $49.80, $47.00 to $47.50, and $42.75 to $43.00.

ERTS 1-yr chart