A month has gone by since the last earnings report for Electronic Arts (EA - Free Report) . Shares have lost about 5.6% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Electronic Arts due for a breakout? 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.
EA Q2 Results Benefit From Record Digital Net Bookings
EA reported second-quarter fiscal 2019 earnings of 83 cents per share against loss of 7 cents per share in the year-ago quarter. The bottom-line growth was driven by increased sales, better gross margin and lower operating expenses.
The Zacks Consensus Estimate for earnings was pegged at 58 cents per share.
Revenues surged 34% year over year to $1.29 billion and were better than the guided figure of $1.27 billion.
Net bookings increased 3.6% year over year to $1.22 billion. Digital net bookings were $637 million in the second quarter, up 10% year over year.
Robust performance of FIFA 19, FIFA and Madden Ultimate Teams helped EA deliver encouraging results.
EA’s digital revenues (60.7% of revenues) increased 13% to $780 million. Revenues from EA’s Packaging goods and other segment (39.3% of revenues) surged 87% to $506 million.
Further segregating digital revenues, full game download revenues (11.5% of total revenues) increased 20% to $148 million.
Revenues from Live services (32%) were up 1% to $412 million. Live services net bookings were $328 million, up 5.8% year over year driven by FIFA, Madden and Madden Ultimate Teams, and The Sims 4, offset by FIFA Online 3 to FIFA Online 4 transition in Asia. Notably, The Sims 4 monthly average players grew year over year and approximately 30 million expansion packs were downloaded life-to-date.
EA stated that more than 20 million players participated through the course of FIFA 18 Global Series. The FIFA eWorld Cup Final led to four times increase in global viewership from last year.
EA mobile games revenues (17.1%) jumped 39% year over year to $220 million. Net bookings increased 1.3% year over year to $152 million driven by growth in FIFA franchise, which was offset by decline in Madden mobile.
Management noted that FIFA Mobile witnessed a significant increase in daily active players year over year in the reported quarter.
EA launched FIFA 19 during the quarter, which was recognized as one of the best FIFA games in the franchise. Additionally, the company also released NBA LIVE 19 and NHL 19 in second-quarter fiscal 2019.
On the basis of platforms, revenues from console (71.3% of revenues) surged 54.1% to $917 million and revenues from mobile platform (17.1%) increased 35.8% to $220 million. However, revenues from PC (11.6% of revenues) declined 24% to $149 million.
EA’s gross profit surged 52% from the year-ago quarter to $868 million. Gross margin was 67.5% compared with 59.4% in the year-ago quarter.
Operating expenses were $610 million compared with $611 million a year ago.
Operating income surged 729% year over year to $258 million. Operating margin was 20.1% compared with negative 4.3% in the year-ago quarter.
Balance Sheet and Cash Flow
As of Sep 30, EA had $4.55 billion in cash and short-term investments compared with $4.97 billion as of Jun 30, 2018.
Net cash provided by operating activities was negative $126 million compared with $120 million in the previous quarter. The decline can be attributed to the timing of cash receipts and royalty payments coupled with increased tax expense.
The company repurchased 2.3 million shares for $299 million in the quarter. EA has $1.88 billion available under its current buyback program.
For fiscal 2019, EA expects GAAP revenues of $5.25 billion, down from the earlier guidance of $5.60 billion. Management projects net bookings of $5.2 billion, down from the earlier guidance of $5.55 billion. Net bookings from full-game downloads are anticipated in the range of 20% to 25%. The company anticipates earnings of $3.11 per share, down from the earlier guidance of $3.55 per share.
Operating cash flow is estimated to be around $1.65 billion, down from the earlier guided figure of $1.83 billion. Capex is expected to be $125 million, resulting in free cash flow of $1.5 billion, down from the earlier guided figure of $1.7 billion.
The reduction in guidance was due to lower net income from the delayed Battlefield V release.
For the third quarter, EA expects GAAP revenues of $1.38 billion. Net bookings are expected to be $1.73 billion.
Operating expense is expected to be $730 million. The company expects earnings of 61 cents per share for the third quarter.
Ahead of the EA’s Battlefield V release, management noted that more than 10 million unique players are engaged with the existing Battlefield games. Additionally, two weeks after the game is released, players will have access to Battlefield V’s Tides of War live service, which will bring a new dimension to the game.
Moreover, EA will launch Command & Conquer: Rivals globally for mobile players on Dec 4 and Anthem on Feb 22. Notably, Anthem has won over 90 awards including the best PC game and best action game awards at Electronic Entertainment Expo (E3) 2018.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -23.64% due to these changes.
At this time, Electronic Arts has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Electronic Arts has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.