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Why Is Electronic Arts (EA) Up 10.6% Since Its Last Earnings Report?

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It has been about a month since the last earnings report for Electronic Arts Inc. (EA - Free Report) . Shares have added about 10.6% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is EA due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Recent Earnings

Electronic Arts reported fourth-quarter fiscal 2018 results, wherein the company’s non-GAAP earnings of $1.31 per share beat the Zacks Consensus Estimate of $1.15 and increased nearly 81.9% from the year-ago quarter.

Net bookings came in at $1.255 billion, up 14.9% year over year and surpassed the Zacks Consensus Estimate of $1.230 billion.

Revenues (excluding deferred revenues) came in at $1.582 billion compared with $1.527 million in the year-ago quarter.

Strength in digital business backed by live services and mobile games was a key growth driver.

Quarterly Details

EA’s digital revenues (70% of total revenues) increased 18% to $1.102 billion due to Battlefield 1, Ultimate Team and Madden NFL 18 full game downloads. Revenues from EA’s Packaging goods and Other segment (30% of total revenues) were down 19% to $480 million.

Further segregating digital revenues, full game downloads revenues (15% of total revenues) declined 10% to $232 million from the fourth quarter of fiscal 2017. Star Wars Battlefront II and FIFA 18 were key drivers. However, underperformance of other titles compared with Battlefield 1 in the year-ago quarter was a dampener.
   
Revenues from Live services (44%) increased 37% to $698 million. Live services net bookings were up 31% year over year to $679 million driven by Ultimate Team, The Sims 4 and Battlefield 1.

EA mobile games revenues (11%) increased 4% year over year to $172 million on the back of Star Wars: Galaxy of Heroes and FIFA Mobile. However, an expected decline in some of the older games was an overhang.

Geographically, revenues in North America (38% of total revenues) declined 7% year over year to $600 million. Internationally (62% of total revenue), revenues increased 11% from the year- ago quarter to $982 million.

On the basis of platform, revenues from console (76%) grew 8% to $1.196 billion. Sales from Microsoft’s Xbox One, Sony’s PlayStation 4 and Nintendo’s Switch, which accounted for 74% of total revenues, increased 12% from year-ago period to $1.167 billion.

However, revenues from PC (13%) declined 15% to $210 million and Other revenues dropped 57% to $3 million.

Margins

EA’s gross margin of 85% contracted 200 basis points (bps) on a year-over-year basis.

Operating income was $753 million compared with $717 million reported in the year-ago quarter. Operating margin of 48% expanded 100 basis points (bps) on a year-over-year basis.

Balance Sheet and Cash Flow

As of Mar 31, 2018, EA had $5.33 billion in cash and short-term investments compared with $4.89 billion as of Dec 31, 2017. Net cash provided by operating activities in the quarter came in at $615 million.

The company repurchased 1.2 million shares for $148 million. EA has now replaced its old share repurchase program with a new two-year $2.4 billion buyback program.

Outlook

For fiscal 2019, EA now expects GAAP revenues of $5.55 billion, up 7% year over year led by live services and mobile. The company anticipates the new Battlefield title and the much hyped game — Anthem — expected to release in the fourth quarter of fiscal 2019 to be the key drivers.

EA SPORTS titles are also expected to keep up the momentum with innovations in Madden NFL, NBA Live and NHL this year.

Change in deferred revenues will be around $250 million. EA projects net bookings of $5.550 billion.

The company expects live services net bookings to grow 10-15% backed by Ultimate Team, expansion packs for PC and console version of The Sims 4 as well as rising subscription for EA Access and Origin Access. Net bookings for mobile business are expected to grow around 15-20% on the back of The Sims Mobile, FIFA Mobile, Star Wars: Rise to Power and one unannounced title.

The company anticipates earnings per share of $3.55.

Operating cash flow is estimated to be around $1.825 billion. Capex is expected to be $125 million, resulting in free cash flow of $1.7 billion.

For the first quarter, the company expects GAAP revenues of $1.080 billion. Change in deferred revenues will be ($300) million. Net bookings are expected to be $720 million.

The company projects earnings per share of 64 cents. Rise in operating expense mainly due to higher investments in games and live services will weigh on the bottom line.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. There have been eight revisions lower for the current quarter. In the past month, the consensus estimate has shifted downward by 189.8% due to these changes.

Electronic Arts Inc. Price and Consensus

VGM Scores

At this time, EA has a strong Growth Score of A, though it is lagging a lot on the momentum front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for growth based on our styles scores.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, EA has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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