Electronic Arts Earnings Preview

Jan.30.12 | About: Electronic Arts (EA)

Electronic Arts Inc. (NASDAQ:EA) is scheduled to release its fiscal third quarter 2012 results after the closing bell on Wednesday, February 1, 2012.

Recap from Prior Quarter

In the second quarter of 2012, EA breezed past the Zacks Consensus Estimates, both earnings and revenues, on the back of an improved performance from its digital segment that surged 30.0% year over year, primarily driven by growth in mobile and other handheld revenues and downloadable content (NYSE:DLC).

Additionally, strong performance of FIFA 12, NCAA Football 12, NHL 12, Madden NFL 12 and The Sims Social propelled growth in the second quarter. FIFA 12 sold nearly 8 million units while Madden NFL 12 sold more than 3 million units in the second quarter.

EA’s non-GAAP loss (excluding one-time items but including stock-based compensation) of 8 cents per share was much wider than 3 cents per share reported in the year-ago quarter. It was, however, in line with the mid-point of management’s guided range of a loss of 13 cents to 3 cents.

The loss in the quarter was primarily attributed to higher marketing expenses related to the launch of Battlefield 3 in the quarter. Moreover, the number of title releases in the quarter was also low compared with the year-ago quarter (5 versus 7). For further details please read: EA Betters Estimates, Loss Widens

Expectations from Third Quarter and FY12

For the third quarter of 2012, EA expects non-GAAP revenues in the range of $1.55 billion to $1.65 billion. The Zacks Consensus Estimate for the current quarter is pegged at $1.09 billion.

Non-GAAP gross profit margin is expected to be approximately 67.0%. Operating expense is expected to be $650.0 million.

For the third quarter, earnings per share (NYSEARCA:EPS) on a non-GAAP basis are expected in the range of 85 cents to 95 cents. The Zacks Consensus Estimate is currently pegged at 83 cents for the quarter.

Moreover, the company raised its 2012 revenue guidance and the lower end of the earnings guidance. Revenue on a non-GAAP basis is projected at between $4.05 billion and $4.20 billion (previous guidance was $3.90 billion to $4.10 billion). Earnings on a non-GAAP basis are expected in the range of 75 cents to 90 cents (previous guidance 70 cents to 90 cents) per share for fiscal 2012.

EA forecasts Publishing and other revenue in the range of $2.65 billion to $2.75 billion (up from $2.55 billion and $2.70 billion) for fiscal 2012. Distribution revenue is expected to be approximately $250.0 million and Digital revenue is expected in the range of $1.15 billion to $1.20 billion for fiscal 2012.

For fiscal 2012, the non-GAAP gross profit margin is expected to be approximately 63.0%. Operating expense is estimated to be $2.20 billion. EA expects to release 22 titles in fiscal 2012, with 6 titles scheduled for the third quarter.

EA, on a GAAP basis, expects operating cash flow in the range of $250.0 million to $300.0 million for fiscal 2012.

Estimate Revision Trend

In the last thirty days, only one out of the 7 analysts covering the stock raised estimates for the current quarter, while none moved in the opposite direction. Over the same period, the Zacks Consensus Estimate for the current quarter increased by a penny to 83 cents a share.

For fiscal 2012, one upward revision was noticed from the 7 analysts covering the stock. The Zacks Consensus Estimate for fiscal 2012 is pegged at 58 cents per share.

Analysts covering the stock expect EA to be positively impacted by the growth in the digital segment, which in the long run would offset the weak demand for packaged goods. Moreover, recent offerings from EA’s stable are expected to boost the results of the company. Holiday-driven spending is also expected to play a part in the overall results of the company.

However, analysts have raised concerns regarding the slowing sales of the Star Wars: The Old Republic that might act as a headwind in the near term. On the contrary, analysts expect the game to make a strong contribution in the FY13 earnings and revenues.


We notice that in the past four quarters, EA has a positive earnings surprise of 11.91%, meaning that it is likely to beat the Zacks Consensus Estimate by the same magnitude in the current quarter.

EA’s significant exposure to digital gaming and the social and mobile games segment will drive top-line growth in the upcoming quarters. We believe that the company’s high-quality titles, impressive product line, increasing online exposure, social games and portfolio diversification guarantee market share gains over the long term.

However, the gloomy macro-economic environment, increasing competition and weak video game sales results over the last 12 months, compel us to remain cautious in the near term. Competition from Activision Blizzard Inc. (NASDAQ:ATVI) and Zynga Inc. (NASDAQ:ZNGA) are the other headwinds going forward.

Therefore, we currently have a Neutral recommendation on Electronic Arts over the long term (for the next 3 to 6 months). For the short term (1-3 months), we also have a Hold rating on the stock, as indicated by the Zacks #3 Rank.

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