A month has gone by since the last earnings report for Electronic Arts (EA - Free Report) . Shares have added about 18.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Electronic Arts due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
EA Q3 Earnings and Revenues Increase Y/Y
Electronic Arts reported third-quarter fiscal 2019 earnings of 86 cents per share against loss of 60 cents per share in the year-ago quarter. The bottom-line improvement was driven by robust performance of FIFA franchise and The Sims franchise.
The Zacks Consensus Estimate was pegged at $1.93.
Revenues increased 11.1% year over year to $1.29 billion but lagged the guided figure of $1.38 billion.
Net bookings declined 18.4% year over year to $1.6 billion. Digital net bookings were $1.2 million in the third quarter, down 3% year over year.
Delay in the launch of Battlefield V coupled with the absence of Battle Royale mode adversely affected EA’s top line. Management stated that Battlefield 1 has 4 million monthly active users (MAU) while Battlefield 4 has 2 million. The company will be rolling out Battle Royale mode for Battlefield V in March.
Moreover, the company also witnessed sluggish growth of Command & Conquer: Rivals, which resulted in a decline in net bookings year over year.
EA’s digital revenues (70.4% of revenues) increased 16.4% to $908 million. Notably, 47% of sales made by the company, in the past one year, were through digital channels. Revenues from EA’s Packaging goods and other segment (29.6% of revenues) stayed flat at $381 million.
Further segregating digital revenues, full game download revenues (19.2% of total revenues) increased 72.7% to $247 million.
Revenues from Live services (37.2%) were up 0.8% to $480 million. Live services net bookings were $784 million, down 0.4% year over year. The company witnessed year-over-year increase in monthly active players for The Sims 4. Additionally, the franchise crossed $1 billion in lifetime revenues. Its user base expanded 4.8 million in the past year.
FIFA Ultimate Team was up 6% year over year, an all-time high due to the addition of e-sports. However, the growth in FIFA Ultimate Team was inadequate to offset the decline in Battlefield 1 live services and FIFA Online in Asia.
EA mobile games revenues (14%) jumped 12.4% year over year to $181 million. Net bookings decreased 22% year over year to $142 million due to unfavorable changes made in Madden Mobile, which resulted in a decline in monetization. Further, the underperformance of Command & Conquer: Rivals is a concern. The company is witnessing slow growth in Asian markets and the transition to FIFA Online 4 has been slower than anticipated, which is affecting EA’s top line.
On the basis of platforms, revenues from console (68.7% of revenues) increased 9.3% to $885 million and revenues from mobile platform (14%) increased 9% to $181 million. Revenues from PC (16.8% of revenues) increased 20% to $217 million.
EA stated that it witnessed an addition of four million new players to FIFA franchise through consoles and PC. Notably, FIFA 19 was the best-selling console game in Europe last calendar year.
EA’s gross profit surged 32.9% from the year-ago quarter to $876 million. Gross margin was 68% compared with 56.8% in the year-ago quarter.
Operating expenses were $634 million compared with $680 million a year ago, down 6.8%
Operating income surged significantly year over year to $242 million against negative $21 million in the year-ago quarter. Operating margin was 18.8% against negative 1.8% in the year-ago quarter.
Balance Sheet and Cash Flow
As of Dec 31, EA had $5.17 billion in cash and short-term investments compared with $4.55 billion as of Sep 30, 2018.
Net cash from operating activities was $954 million against a negative $126 million in the previous quarter.
The company repurchased 3.2 million shares for $292 million in the quarter. EA has $1.59 billion available under its current buyback program.
For fiscal 2019, EA expects GAAP revenues of $4.88 billion, down from the earlier guidance of $5.25 billion. Management projects net bookings of $4.75 billion, down from the earlier guidance of $5.2 billion. The decline in guidance is attributed to the underperformance of Battlefield V and mobile revenues.
However, the company anticipates earnings of $3.20 per share, up from the earlier guidance of $3.11 per share.
Operating cash flow is estimated to be around $1.35 billion, down from the earlier guided figure of $1.65 billion. Capex is expected to be $125 million, resulting in free cash flow of $1.22 billion, down from the earlier guided figure of $1.5 billion.
For the fiscal fourth quarter, EA expects GAAP revenues of $1.16 billion. Net bookings are expected to be $1.17 billion. Further, the company expects earnings of 56 cents per share for the third quarter.
Following the release of Apex Legends, management noted that more than 2.5 million players were engaged with the game within 24 hours of its release. Further, it became the number one game on Twitch.
EA will launch Anthem on Feb 22. Notably, management stated that fans played more than 40 million hours in the game’s recent demo. The company will also be releasing Star Wars Jedi: Fallen Order in the near term.
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 -47.99% due to these changes.
Currently, Electronic Arts has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, 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 D. 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. It's no surprise Electronic Arts has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.