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Electronic Arts (EA) Q3 Earnings Top, Battlefront 2 Hurts

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Electronic Arts (EA - Free Report) reported third-quarter fiscal 2018 results, wherein the company’s non-GAAP earnings of $2.22 per share beat the Zacks Consensus Estimate of $2.18 but declined nearly 14% from the year-ago quarter.

Underperformance of Star Wars Battlefront 2 compared to Battlefield 1 launched in the year-ago quarter was a dampener.

Net bookings came in at $1.97 billion, down 4.8% year over year. It also missed the Zacks Consensus Estimate of $2.02 billion.

Revenues (excluding deferred revenues) came in at $1.160 billion compared with $1.149 million in the year-ago quarter.

The company benefited from its popular franchises, especially Battlefield and FIFA. Strength in digital business backed by live services and mobile games was a key growth driver.

EA shares have gained 42.3% in the past year, underperforming the  industry’s 48.7% rally.

 

Quarterly Details

EA’s digital revenues (67.2% of revenues) increased 13.9% to $780 million due to Battlefield 1, Ultimate Team and Madden NFL 18 full game downloads. Revenues from EA’s Packaging goods and Other segment (32.8% of total revenue) were down 18.1% to $380 million.

Further segregating digital revenues, full game downloads revenues declined 15% to $143 million from the third quarter of fiscal 2017. EA mobile games revenues increased 10% year over year to $161 million.

Revenues from Live services increased 29% to $476 million. It now includes revenues from extra content and subscriptions, advertising, and others. Live services net bookings were up 39% year over year to $787 million driven by Ultimate Team and The Sims 4.

Geographically, revenues in North America (39% of total revenue) declined 19% year over year to $452 million. Internationally (61% of total revenue), revenues increased 20% from the year- ago quarter to $708 million.

Margins

EA’s gross margin of 56.8% expanded 170 basis points (bps) on a year-over-year basis.

Operating loss was $21 million, wider than a loss of $4 million in the prior-year quarter.

Balance Sheet and Cash Flow

As of Dec 31, 2017, EA had $4.89 billion in cash and short-term investments compared with $4.36 billion as of Sep 30, 2017. Net cash provided by operating activities in the quarter came in at $849 million.

The company repurchased 1.4 million shares for $150 million. EA has $778 billion worth of shares left under its two-year $1.2 billion buyback program announced this May.

Outlook

For the fourth quarter, the company expects GAAP revenues of $1.53 billion. Change in deferred revenues will be ($307) million. Net bookings are expected to be $1.225 billion, which is 12% higher than the year-ago figure backed by growth in live services.

The company projects earnings per share of $1.86. Rise in operating expense mainly due to higher investments in games and live services will weigh on the bottom line.

For fiscal 2018, EA now expects GAAP revenues of $5.1 billion, up from the earlier projection of $5.075 billion. Change in deferred revenues will be around $50 million compared with $75 million projected earlier.

EA continues to expect net bookings of $5.15 billion.

The company projects earnings per share of $3.25, lower than $3.63 projected earlier.

The company reaffirmed expectations for operating cash flow, capex and free cash flow. Operating cash flow is estimated to be around $1.6 billion. Capex is expected to be $120 million, resulting in free cash flow of $1.48 billion.

Electronic Arts Inc. Price, Consensus and EPS Surprise

Electronic Arts Inc. Price, Consensus and EPS Surprise | Electronic Arts Inc. Quote

Zacks Rank and Stocks to Consider

Electronic Arts carries a Zacks Rank #4 (Sell).

Better-ranked stocks in the broader technology sector include Micron Technology Inc. (MU - Free Report) , Lam Research Corporation (LRCX - Free Report) and The Trade Desk Inc. (TTD - Free Report) , all sporting a Zacks Rank #1 (Strong Buy).  You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Micron, Lam Research and The Trade Desk is projected to be 10%, 14.85% and 25%, respectively.

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