It has been about a month since the last earnings report for Electronic Arts (EA - Free Report) . Shares have added about 4.2% 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 catalysts.
Electronic Arts Q2 Earnings Decline Y/Y, Revenues Rise
Electronic Arts reported second-quarter fiscal 2020 adjusted earnings of 78 cents per share, which excluded tax benefits worth $2.11.
The company had reported earnings of 83 cents per share in the year-ago quarter.
The Zacks Consensus Estimate for earnings was pegged at 85 cents.
Notably, EA recognized an income tax benefit of $1.705 billion in fiscal 2020, out of which $625 million was recognized in the second quarter.
Revenues increased 4.8% year over year to $1.35 billion. Product revenues (42.1% of total revenues) decreased 8.8% to $568 million. Service and other revenues (57.9% of total revenues) increased 17.6% to $780 million.
Excluding deferred revenues of $35 million and mobile platform fees of $36 million, net bookings increased 4.5% to $1.277 billion.
Digital net bookings were $790 million, up 24% year over year. Additionally, digital net bookings were $3.883 billion over the last 12 months, increasing 8% year over year and representing 78% of total net bookings.
EA’s digital revenues (68.4% of total revenues) increased 18.2% year over year to $922 million. Packaged goods and other segment revenues (31.6% of total revenues) decreased 15.8% year over year to $426 million.
Further segregating digital revenues, full game download revenues increased 22% year over year to $180 million. Net bookings increased 11.5% year over year to $175 million.
Live services revenues increased 39% year over year to $573 million. Net bookings surged 50.3% year over year to $493 million, driven by Apex Legends, Ultimate Team in FIFA and Madden NFL, The Sims 4, and FIFA Online.
FIFA Online 4 performed well in Korea and saw growth in China during the quarter. Madden and FIFA benefited from early access sales on PlayStation through EA Access. Both were up in double-digit percentages year over year.
Mobile games revenues decreased 23% year over year to $169 million driven by aging titles. Net bookings declined 19.7% year over year to $122 million.
Based on its platforms, revenues from console increased 1% year over year to $923 million. Revenues from PC/browser were up 62% year over year to $242 million. Other revenues surged 100% year over year to $6 million.
However, revenues from mobile platform decreased 20% year over year to $177 million.
Important Game & Player Metrics
During the quarter, total players in FIFA increased nearly 15% year over year, and with the addition of the VOLTA Football street soccer experience, new-to-franchise players grew 7% year over year. The number of FIFA Ultimate Team unique players increased 22% year over year.
Moreover, unique players increased 12% year over year across the Madden franchise. Games played in franchise mode more than doubled to around 100 million in the second quarter. Also, the number of Madden Ultimate Team unique players increased 19% year over year.
Notably, the Sims 4 monthly average players increased more than 40% year over year in the second quarter. The Sims franchise surpassed $5 billion in lifetime sales.
Further, Apex Legends has 70 million players life to date. FIFA Mobile had been downloaded more than 250 million times life to date.
The company launched games such as FIFA 20, Madden NFL 20, NHL 20 and Sea of Solitude during the quarter.
Notable game launches in the next quarter include Need for Speed Heat, Plants vs. Zombies: Battle for Neighborville and Star Wars Jedi: Fallen Order.
EA’s GAAP gross profit increased 8.6% from the year-ago quarter to $943 million. Gross margin expanded 250 basis points (bps) on a year-over-year basis to 70%.
Operating expenses increased 10.7% from the year-ago quarter to $675 million. As a percentage of revenues, operating expenses expanded 260 bps to 50.1%.
As a percentage of revenues, marketing & sales (M&S) declined 10 bps. However, research & development (R&D) and general & administrative (G&A) expenses expanded 230 bps and 40 bps, respectively.
Operating income increased 3.9% year over year to $268 million. Operating margin contracted 20 bps to 19.9% in the reported quarter.
Balance Sheet and Cash Flow
As of Sep 30, 2019, EA had $4.88 billion in cash and short-term investments compared with $5.19 billion as of Jun 30, 2019.
Net cash from operating activities in the reported quarter was $37 million compared with $158 million in the previous quarter.
EA repurchased 3.3 million shares for $306 million in the reported quarter. The company has $674 million available under its current program.
For the third quarter of fiscal 2020, EA expects GAAP revenues of $1.510 billion. Net bookings are expected to be $1.940 billion.
EA anticipates operating expenses to be $733 million. GAAP earnings are expected to be 92 cents per share.
For fiscal 2020, EA expects GAAP revenues of $5.410 billion and net bookings of $5.125 billion. Digital net revenues are expected to be $4.230 billion. Packaged goods & other net revenues are anticipated to be $1.180 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 $9.57 per share, including $5.74 of income tax benefits.
Operating cash flow is estimated to be around $1.625 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision.
At this time, Electronic Arts has a poor Growth Score of F, however its Momentum Score is doing a bit better 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 F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Electronic Arts has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.