Earnings Preview: EA

Electronic Arts Inc. ( EA - Analyst Report ) is scheduled to release its fiscal first quarter 2013 results after market closes today. In the run up to the earnings release we do not notice any estimates revision by the analysts covering the stock.

EA has outperformed the Zacks Consensus Estimate in the preceding four quarters by 6.74%. We expect this trend to continue in the current quarter.

Previous Quarter Highlights

EA’s bottom line of 11 cents in the fourth quarter (including stock based compensation but excluding other one time items) beat the Zacks Consensus Estimate of 6 cents. However, it slumped 45.0% from the previous-year quarter due to margin contractions.

Revenues, including deferred revenue of ($391 million), moved down 1.8% from the previous-year quarter to $977 million and missed the Zacks Consensus Estimate of $1.24 billion. The digital revenue segment’s jump failed to offset the decline in Publishing Packaged Goods and Other Revenue and Distribution Packaged Goods Revenue.

For further details please read: EA’s Outlook Disappoints

Estimate Revision Trend

In the last 30 days, none of the four analysts covering the stock revised their estimates. Thus, the Zacks Consensus Estimate for first quarter 2013 is pinned at a loss of 51 cents per share, which is wider than management’s guidance range of a non-GAAP loss per share of 45 cents to 40 cents.

Analysts remain cautious on the stock due to sluggish revenue from packaged goods segment coupled with lower subscription additions in the Star Wars: The Old Republic. Analysts expect social gaming segment to be a drag during the quarter. However, analysts continue to expects strong digital revenue growth in the quarter.

Recommendation

We expect EA to report a decent quarter, aided by the release of high-quality titles and downloadable content along with increasing online exposure. EA’s shift of focus to the digital format and its diversified portfolio, coupled with a strong product pipeline are expected to drive the top-line 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. ( ATVI - Snapshot Report ) , Zynga Inc. ( ZNGA - Snapshot Report ) and Take-Two Interactive Software Inc. ( TTWO - Snapshot Report ) may act as the other headwinds going forward. In addition, the company’s tepid guidance for the quarter has also acted as the detrimental factor. Moreover, year to date, EA’s shares are down 47.3% compared to a 8.5% rise in the S&P 500 which narrates the company’s dismal performance.

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.