A month has gone by since the last earnings report for Electronic Arts (EA - Free Report) . Shares have lost about 0.1% in that time frame, outperforming 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 Incurs Loss in Q1, Revenues Up Y/Y
EA reported first-quarter fiscal 2020 adjusted loss of 2 cents per share. The Zacks Consensus Estimate for earnings was pegged at 1 cent.
Including tax benefits and other items, earnings were $4.75 per share, much better than 95 cents reported in the year-ago quarter.
EA expects to recognize a $1.7-billion tax benefit in the fiscal, out of which $1.08 billion was recognized in the first quarter. The remaining $620 million will be recognized when the Swiss tax rates change, which the company expects in the second quarter.
Revenues increased 6.3% year over year to $1.21 billion. Product revenues (13.7% of total revenues) decreased 17.8% to $166 million. Service and other revenues (86.3% of total revenues) increased 11.6% to $1.04 billion.
Excluding deferred revenues worth $427 million and mobile platform fees of $39 million, net bookings declined 0.8% to $743 million.
Digital net bookings were $701 million, up $8 million year over year. Additionally, digital net bookings were $3.73 billion over the last 12 months, increasing 5% year over year and representing 76% of total net bookings.
EA’s digital revenues (86.8% of total revenues) increased 9.6% year over year to $1.05 billion. Packaged goods and other segment revenues (13.2% of total revenues) decreased 11.1% year over year to $160 million.
Further segregating digital revenues, full game download revenues increased 14% year over year to $132 million. Net bookings declined 22% year over year to $75 million.
Live services revenues increased 20% year over year to $731 million. Net bookings increased 12% year over year to $504 million, driven by Apex Legends and The Sims 4. The Sims 4 base game promotion delivered nearly 7 million new installs.
FIFA Ultimate Team revenues were up 11% year over year at constant currency. FIFA Online 4 performed well in Korea and Southeast Asia. Meanwhile, FIFA Online 3 outperformed the company’s expectations in China. EA plans to switch to FIFA Online 4 in the country, which is likely to drive adoption.
Mobile games revenues decreased 19% year over year to $186 million. Net bookings declined 17% year over year to $122 million.
Based on its platforms, revenues from console increased 8% year over year to $760 million. Revenues from PC/Browser were up 26% year over year to $249 million. Other revenues surged 100% year over year to $4 million.
However, revenues from mobile platform decreased 16% year over year to $196 million.
Important Game & Player Metrics
During the quarter, FIFA Ultimate Team had more than three million players logging in daily during the Team of the Season in-game event.
Moreover, The Sims 4 expansion packs and game pack downloads increased 55% year over year.
Further, Star Wars: Galaxy of Heroes had nearly 80 million players’ life-to-date.
Notably, the company launched season 2 of Apex Legends on Jul 2. On Jul 24, EA Access was launched on PlayStation 4.
Notable game launches in the second quarter include FIFA 20, Madden NFL 20, NHL 20 and Sea of Solitude.
EA’s GAAP gross profit increased 10.8% from the year-ago quarter to $1.02 billion. Gross margin expanded 340 basis points (bps) on a year-over-year basis to 84.5%.
Operating expenses were $607 million, down 2.4% year over year. As a percentage of revenues operating expenses declined 450 bps to 50.2%.
As a percentage of revenues, research & development (R&D), marketing & sales (M&S) and general & administrative (G&A) expenses shrank 30 bps, 320 bps and 90 bps, respectively.
Operating income jumped 38.3% year over year to $415 million. Operating margin expanded 790 bps to 34.3% in the reported quarter.
Balance Sheet and Cash Flow
As of Jun 30, 2019, EA had $5.19 billion in cash and short-term investments compared with $5.45 billion as of Mar 31, 2019.
Net cash from operating activities in the reported quarter was $158 million compared with $599 million in the previous quarter.
EA repurchased 3.2 million shares for $305 million in the reported quarter. The company has $979 million available under its current program.
For the second quarter of fiscal 2020, EA expects GAAP revenues of $1.315 billion. Net bookings are expected to be $1.230 billion.
EA anticipates operating expenses to be $679 million. GAAP earnings are expected to be $2.60 per share, including roughly $2.08 related to the income tax benefits.
For fiscal 2020, EA expects GAAP revenues of $5.375 billion and net bookings of $5.100 billion. Digital net revenues are expected to be $4.175 billion. Packaged goods & other net revenues are anticipated to be $1.200 billion.
Management continues to expect The Sims 4 and Apex Legends to deliver net bookings of $300-$400 million each.
Moreover, EA anticipates operating expenses of $2.746 billion for the fiscal.
Additionally, earnings are expected to be $9.22 per share, including $5.61 of income tax benefits.
Operating cash flow is estimated to be around $1.575 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -10.9% due to these changes.
Currently, Electronic Arts has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. 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 F. 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.