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EA's Outlook Disappoints

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Electronic Arts Inc. (EA - Free Report) reported fourth quarter 2012 non-GAAP earnings (including stock based compensation but excluding other one time items) of 11 cents, comfortably surpassing the Zacks Consensus Estimate of 6 cents per share. However, the reported earnings was at the lower end of management’s guided range of 10 cents-20 cents and slumped 45.0% from the previous-year quarter.


Revenues, including deferred revenue of ($391 million), moved down 1.8% from the previous-year quarter to $977 million and missed the Zacks Consensus Estimate of $1.24 billion. Despite the dismal performance, reported revenues surpassed managements’ guided range of $925.0 million to $975.0 million.

The quarter’s revenues were negatively impacted by a 22.9% slump in the Publishing Packaged Goods and Other Revenue (54.2% of revenue) and 43.9% decrease in the Distribution Packaged Goods Revenue (2.3% of revenue), which more that offset the 58.6% surge in the revenue from Digital segments (43.5% of revenue).

The growth in digital revenue was fuelled by 23% rise in revenue from the mobile and other handheld devices. Moreover, the Sims Social and PopCap Games also contributed to the uptrend in digital revenue. Revenue from EA’s digital platform, Origin, came at $48 million during the quarter on the back of Mass Effect 3, and subscription additions of Star Wars: The Old Republic and from other third-party publishers who used Origin as a platform.

Region wise, North American sales (48% of non-GAAP revenue) decreased 2% year over year. Sales from Europe (45% of non-GAAP revenue) also decreased 5%, while Asia (7% of non-GAAP revenue) achieved a growth of 22% in the reported quarter.

Operating Performance

Non-GAAP gross profit (including stock based compensation but excluding other one time items) decreased 6% year over year to $630 million. Gross margin decreased 280 basis points from the prior-year quarter to 64.5% due to lower revenue base coupled with higher mix of low margin titles.

Non-GAAP operating profit (including stock based compensation but excluding other one time items) decreased 50.6% from the comparable previous year to $36 million. Operating margin was 3.7% compared with 7.3% in the prior- year quarter due to higher Marketing and sales expenses (14.4% increase year over year) and General and administrative expenses (53.3% increase year over year).

Non-GAAP net income (including stock based compensation and other one time items) was $37.9 million compared with $65.8 million reported in the comparable previous quarter.

Balance Sheet and Cash Flow

EA exited the quarter with $1.85 billion in cash, short-term investments and marketable securities, compared with $1.79 billion in the previous quarter. Cash from operation for the quarter was $287 million compared with $475 million in the previous quarter.

During the quarter, EA repurchased 27.7 million shares for $529.0 million and completed the $600 million share repurchase program.


For the first quarter 2013, EA expects non-GAAP revenues to be $500 million, significantly lower than the Zacks Consensus Estimate of $735 million. Loss per share on a non-GAAP basis is expected in the range of (45 cents) and (40 cents) in the first quarter 2013. The Zacks Consensus Estimate is currently pegged at a loss of (46 cents) for the quarter.

For fiscal 2013, management expects non-GAAP revenue to be $4.3 billion with non- GAAP earnings in the range of $1.05-$1.20. The Zacks Consensus Estimate expects EA to earn revenues of $4.35 billion with earnings per share of 70 cents.

EA expects the shift towards digital transition of its titles to continue in this fiscal also and expects a higher mix of digital revenue that would positively impact its margins going forward.

Our Take

EA’s shift of focus to the digital format, its diversified portfolio, and its strong product pipeline are expected to drive top-line growth going forward. Nonetheless, we currently have a Neutral recommendation on the stock owing to the soft video game industry scenario coupled with competition from Activision Blizzard Inc. (ATVI - Free Report) , Zynga Inc. and Take-Two Interactive Software Inc. (TTWO - Free Report) . Moreover, a tepid outlook for the forthcoming quarter will also remain a headwind going forward.

Currently, Electronic Arts has a Zacks #4 Rank, which implies a ‘Sell’ rating in the short term.

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