Electronic Arts Earnings Preview

May. 5.12 | About: Electronic Arts (EA)

Electronic Arts Inc. (NASDAQ:EA) is set to release its fiscal fourth quarter 2012 results after the market closes on Monday, May 7, 2012. In the run up to the earnings results, no substantial movement in analysts’ estimates for the quarter was noticed. However, we note that EA has outperformed the Zacks Consensus Estimates by an average of 14.54% over the last 4 quarters. We expect this trend to continue in the current quarter.

Looking Back at 3Q12

EA reported an impressive third quarter that was primarily aided by a surge in revenues from the digital segment. Moreover, strong performances from Battlefield 3, Star Wars: The Old Republic and FIFA 12 boosted the company’s top line.

Buoyed by the above factors, revenues earned by EA (including deferred revenue of $590.0 million) increased 17.0% year over year to $1.65 billion, which was way ahead of the Zacks Consensus Estimate of $1.15 billion and was at the high point of management’s guided range of $1.55 billion to $1.65 billion. EA’s digital revenue surged 79.0% year over year to $377.0 million in the third quarter and contributed 23.0% of the total revenue.

Moreover, the company reported third quarter 2012 non-GAAP earnings (excluding one-time items but including stock-based compensation) of 87 cents per share, which went past the Zacks Consensus Estimate of 83 cents. The reported earnings per share (NYSEARCA:EPS) came in at the lower end of the management’s guided range of 85 cents to 95 cents.

For further details please read: EA’s Impressive 3Q

Estimates for 4Q12 and FY12

For the fourth quarter 2012, EA expects non-GAAP revenues to be in the range of $925.0 million to $975.0 million. The Zacks Consensus Estimate is pegged at $1.24 billion. Non-GAAP gross profit margin is expected to be between 66.0% and 67.0%. Operating expense is expected to be $560.0 million.

Moreover, EA forecasts Publishing and other revenue in the range of $500.0 million to $525.0 million for the fourth quarter. Distribution revenue is expected to be approximately $25.0 million and Digital revenue is projected in the range of $400.0 million to $425.0 million in the fourth quarter.

EPS on a non-GAAP basis (excluding stock based compensation and one time items) are expected in the range of 10 cents to 20 cents in the current quarter. The Zacks Consensus Estimate is currently pegged at 6 cents for the quarter.

For fiscal 2012, management expects capital spending to be $140.0 million and non-GAAP digital revenue to be $1.2 billion.

Estimates Trend Revision

Over the past 30 days, out of the four analysts covering the stock, only one lowered estimates, while no upward revision was noticed. Over the same period, the Zacks Consensus Estimate for the fourth quarter of 2012 decreased by 2 cents to 6 cents per share.

Likewise, for fiscal 2012, out of the 3 analysts covering the stock, one negative revision was noticed, while no upward revision was noticed over the last 30 days. The Zacks Consensus Estimate for fiscal 2012 decreased by 3 cents to 45 cents over the same period.

Despite the release of some major titles like Mass Effect 3, Kingdoms of Amalur: Reckoning, SSX, Tiger Woods PGA Tour 13, FIFA Street and Syndicate, analysts covering the stock expect EA to face some headwinds going forward. Moreover, lower-than-expected subscription of the Star Wars: The Old Republic (SWTOR) will likely act as the detrimental factor in the quarter’s results.

However, the continued growth in the digital revenue segment coupled with new game launches and EA’s presence in the social and mobile gaming markets are some of the positives for the company going forward.

Our Take

We expect EA to report a positive quarter, aided by the release of high-quality titles and downloadable content along with increasing online exposure and social games. EA’s shift of focus to the digital format and its diversified portfolio, coupled with a strong product pipeline are expected to drive top-line growth going forward.

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), Zynga Inc. (NASDAQ:ZNGA) and Take-Two Interactive Software Inc. (NASDAQ:TTWO) may act as the other headwinds going forward.

We have a Neutral recommendation on Electronic Arts over the long term (for the next 6 to 12 months). Currently, Electronic Arts has a Zacks #4 Rank, which implies a Sell rating in the short term.