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Electronic Arts (EA) Up 1.5% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Electronic Arts (EA - Free Report) . Shares have added about 1.5% 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.

Apex Legends Aided EA Q4 Net Bookings

Electronic Arts reported fourth-quarter fiscal 2019 earnings of 69 cents per share that came well below the year-ago figure of $1.95 per share. However, earnings were better than the guided figure of 56 cents.

Revenues declined 22% year over year to $1.24 billion. However, revenues were better than the guided figure of $1.16 billion.

The Zacks Consensus Estimate for earnings and revenues was pegged at 97 cents per share and $1.2 billion, respectively.

Net bookings increased 8.7% year over year to $1.36 billion due to solid performance of sports titles and Apex Legends, partially offset by Anthem. Digital net bookings were $1.19 billion in the reported quarter, up 14% year over year due to strong digital sales of Apex Legends and Anthem.

Additionally, digital net bookings were $3.72 billion over the last 12 months, up 5% year over year.

Quarter Details

EA’s digital revenues (86% of total revenues) declined 3% year over year to $1.07 billion. Revenues from the company’s Packaging goods and other segment (14% of revenues) plunged 64% year over year to $173 million.

Further segregating digital revenues, full game download revenues (15.9% of total digital revenues) declined 27% year over year to $169 million.
    
Revenues from Live services (67% of total digital revenues) were up 2% year over year to $714 million. Live services net bookings were $845 million, up 24.4% year over year primarily driven by Apex Legends.

EA stated that more than 45 million unique players were engaged with FIFA 19 and FIFA 18 on both PC and console in fiscal 2019. Additionally, the number of players engaged with FIFA franchise on mobile and PC crossed 100 million during the same period.

Also, solid FIFA content generated a lot of interest in users. The series garnered “more than half a billion minutes watched” and witnessed 60% year-over-year growth in the total number of unique views. Moreover, The Sims 4 witnessed 35% year-over-year growth in active players in fiscal 2019.

Notably, the company had more than 500 million active player accounts in fiscal 2019 owing to new releases, increased engagement in popular franchises and live services growth.

Apex Legends, released in fourth-quarter fiscal 2019, became an instant hit and helped EA reach about 30% new users. Notably, Apex Legends garnered 50 million players within a month of its release. EA stated that it will soon introduce the game to new markets and platforms.

Moreover, Battlefield V witnessed growth in active players by 60% after the first week launch of the new Battle Royale mode, Firestorm. Although the launch of Anthem in the reported quarter did not meet EA’s expectations, it will boost the game experience by introducing more content and in-game events in the near term.

EA mobile games revenues (17.1% of total digital revenues) increased 6% year over year to $182 million. Net bookings however declined 23.3% year over year to $135 million due to underperformance of older titles.

On the basis of platforms, revenues from console (66.7% of total revenues) declined 31% year over year to $826. However, revenues from PC/Browser (17.5%) increased 3% year over year to $217 million and revenues from mobile platform (15.3%) increased 10% year over year to $190 million. Additionally, revenues from other surged 67% year over year to $5 million.

Operating Details

EA’s gross profit fell 29% from the year-ago quarter to $962 million. Gross margin was 77.7% compared with 85.3% in the year-ago quarter.

Operating expenses were $766 million compared with $596 million a year ago. The increase was due to higher marketing and sales expense.

Operating income fell 74% year over year to $196 million. Operating margin was 15.8% in the reported quarter compared with 47.6% in the year-ago quarter.

Balance Sheet and Cash Flow

As of Mar 31, 2019, EA had $5.45 billion in cash and short-term investments compared with $5.17 billion as of Dec 31, 2018.

Net cash from operating activities in the reported quarter was $599 million compared with $954 million in the previous quarter. Net cash from operating activities in fiscal 2019 was $1.55 billion compared with $1.56 billion in the previous quarter.

EA repurchased 3.2 million shares for $301 million in the quarter and 11 million shares for $1.19 billion in fiscal 2019.

Guidance

First-Quarter Fiscal 2020

EA expects GAAP revenues of $1.13 billion. Net bookings are expected to be $690 million. Additionally, the company expects earnings of $5.84 per share.

EA anticipates operating expense to be $650 million.

Fiscal 2020

EA expects GAAP revenues of $5.38 billion. Management projects net bookings of $5.1 billion. The company anticipates earnings of $8.56 per share.

EA anticipates operating expense to be $2.75 billion. Operating cash flow is estimated to be around $1.58 billion.

The company noted that it will release new titles in its popular franchises and boost content offerings for its games. Additionally, EA is expected to boost live services for recently released games like Anthem and Battlefield V.

Moreover, the company will strengthen its gaming portfolio and bring games to more platforms to boost subscriptions.

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 -209.18% due to these changes.

VGM Scores

Currently, Electronic Arts has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, 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.

Outlook

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 #2 (Buy). We expect an above average return from the stock in the next few months.


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