Electronic Arts (EA Quick QuoteEA - Free Report) reported third-quarter fiscal 2017 results wherein adjusted earnings per share (including stock based but excluding deferred revenue and other onetime items adjusted for taxes) of $2.45 surpassed the Zacks Consensus Estimate of $2.15.

Revenues (including deferred revenues) came in at $2.070 billion.

Per EA, total revenue (on a GAAP basis) came in at $1.149 billion, up 7.4% year over year. Continued increases in digital revenues and strength in mobile games and EA Sports titles like Battlefield 1 and FIFA 17 were the driving factors.

On a GAAP basis, the company reported breakeven earnings compared to the prior-year quarter’s loss of 14 cents a share.

EA’s (GAAP) digital revenues (60% of revenues) increased 20.4% to $685 million while revenues from EA’s Packaging goods and other segment (40% of total revenue) decreased 7.4% to $464 million.

Further segregating digital revenues, full game downloads revenues were up 51% to $169 million from the third quarter of 2016 while EA mobile games increased 16% year over year to $147 million. Revenues from subscriptions, advertising and other increased 15% to $102 million. Extra content revenues were up 11% to $267 million.

Margins                                                            

EA’s gross margin came in at 55.1% compared with 49% reported in the prior year quarter.  

Operating loss was $4 million, much narrower than $31 million reported in the prior-year quarter.

Balance Sheet and Cash Flow

As of Dec 31, 2016, EA had $4.22 billion in cash and short-term investments compared with $3.266 billion as of Sep 31, 2016. During the quarter, the company repurchased 1.5 million shares for $127 million. It still has $156 million worth of shares remaining in the buyback authorization.

Outlook

EA provided guidance for the fourth quarter and upped its fiscal 2017 projections. Strength in franchises like Battlefield, FIFA and Star Wars: Galaxy of Heroes will continue to fuel long term growth. Management expects the “live services components” of these franchises to emerge as a big future growth driver.

For the fourth quarter, the company expects GAAP revenues of $1.482 billion. Change in deferred revenues will be to the tune of negative $407 million. The company projects earnings per share of $1.64.

For fiscal 2017, EA now expects to generate GAAP revenues of approximately $4.800 billion, ahead of $4.775 billion projected earlier. Change in deferred revenues will be to the tune of $125 million. The company projects earnings per share of $2.91. Operating cash flow is estimated to be around $1.35 billion.

Our Take

We believe that EA’s popular franchises especially Battlefield and FIFA, and strength in digital business, especially mobile games are the key growth catalysts. Cost optimization initiatives will be beneficial going forward.

Stiff competition from other game makers such as Activision Blizzard Inc. and Glu Mobile Inc. remains major concerns.

In the last one year, Electronic Arts generated a positive return of 35.18% compared with the Zacks Toys/Games/Hobby/ Product industry’s gain of 19.18%.

Currently, Electronic Arts has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A better-ranked stock in the broader tech space is Oclaro Inc. , carrying a Zacks Rank #2 (Buy). In the trailing four quarters, Oclaro has delivered an average positive earnings surprise of 100%.

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