Electronic Arts Beats on Q4 Earnings, Revs - Analyst Blog

Electronic Arts Inc. EA reported earnings of 35 cents per share in the fourth quarter of fiscal 2014, which comfortably beat the Zacks Consensus Estimate of 3 cents per share. However, earnings declined 28.5% from the year-ago quarter.

Revenues

Non-GAAP revenues declined 12.1% from the year-ago quarter to $914.0 million but beat the Zacks Consensus Estimate of $810.0 million. Revenues were also higher than management's guidance of $800.0 million.

The introduction of two new consoles, continued growth in the mobile gaming audience and new modalities of play across the world combined to make the last year one of the most dynamic periods in the history of interactive entertainment.

Digital revenues jumped 80 basis points (bps) year over year to $550.0 million (60.2% of revenues) in the quarter. EA's publishing and other segment (38.3% of total revenue) revenues surged 20 bps from the year-ago quarter to $350.0 million. Distribution revenues declined 100 bps on a year-over-year basis to $14.0 million.

Mobile revenues set a new record contributing nearly $460.0 million in fiscal 2014. EA's mobile business reached more than 130 million monthly active users in the fiscal year, and in the fourth quarter alone, EA mobile games were downloaded 143 million times.

EA's Ultimate Team services generated more than $380 million in fiscal 2014, with Madden Ultimate Team growing 90% year over year.

Calendar year-to-date, EA's FIFA 14, Titanfall and Battlefield 4 were three of the top five best-selling titles across all platforms in the Western World.

Currently, EA happens to be the number one publisher on the new consoles with 40% segment share in calendar year 2014 across North America and Europe.

During the quarter, EA launched the much-awaited FIFA World Cup 14 comprising all the 203 FIFA-sanctioned national teams as well as 21 stadiums and 11 game modes. The company believes that this game will soon become a huge hit with the masses and will drive growth and profitability going forward.
 
Margins

EA's non-GAAP gross margin expanded 150 basis points (bps) year over year to 61.6% in the fourth quarter. The solid margin expansion was primarily led by robust digital revenues.

Operating expenses (before acquisition-related contingent consideration, amortization of intangibles, restructuring and other but including stock-based compensation) as a percentage of revenues declined to 55.4% from 57.9% reported in the year-ago quarter.

The year-over-year decline was primarily attributed to lower marketing & sales expense and research & development expense, which decreased 450 bps and 110 bps, respectively. On the other hand, general & administrative expense increased 310 bps from the year-ago quarter.

A higher gross margin base and lower-than-expected increase in operating expenses helped operating margin (including stock-based compensation expense but excluding one-time items) to expand to 10.1% from 2.2% in the year-ago quarter.

Net income (including stock-based compensation) was $113.0 million or 35 cents per share compared with $152.0 million or 50 cents per share reported in the year-ago quarter.

Earnings include stock-based compensation but exclude acquisition-related expenses, amortization of debt discount, change in deferred net revenue, gain on strategic investments, restructuring and other and related tax effect.

Balance Sheet and Cash Flow

EA exited the quarter with $2.37 billion in cash, short-term investments compared with $1.74 billion in the previous quarter.

Future Plan

In the near future, EA plans to deliver new editions of its major EA SPORTS franchises, Madden NFL 15, FIFA 15 and NHL 15. Madden NFL 15 will bring the deepest defensive game play in franchise history and a new Madden Ultimate Team that builds on last year's success. NHL 15 will mark the game's debut on PlayStation 4 and Xbox One.

Moreover, in October, BioWare is scheduled to release Dragon Age: Inquisition. Two more EA SPORTS titles are scheduled for launch in the third quarter and fourth quarter of fiscal 2015. EA will also debut its new EA SPORTS golf game, the first on next-gen consoles.

Additionally, three map packs are planned for Titanfall and two more expansion packs for Battlefield 4.

Stock Repurchase Program

EA's board of directors authorized a new program to repurchase up to $750 million of common stock. This new stock repurchase program expires on May 31, 2016.

Outlook

For the first quarter of fiscal 2015, EA expects to generate non-GAAP revenues of approximately $700.0 million, which is higher than the Zacks Consensus Estimate of $613.0 million. The company expects non-GAAP loss to be 5 cents per share.

Non-GAAP gross margin is expected to be 67.0%. Non-GAAP operating expense is expected to be $485.0 million, $8.0 million higher than the year-ago quarter.

Management expects this quarter to benefit from the launches of UFC, FIFA World Cup and Titanfall for Xbox 360.

For fiscal 2015, EA expects to generate non-GAAP revenues of approximately $4.10 billion, lower than the Zacks Consensus estimate of $4.11 billion. Non-GAAP earnings are expected to be $2.37 per share. The Zacks Consensus Estimate for the same is pegged at $1.20 per share.

Management continues to expect gross margins of 68.5%, while operating expenses are projected to be approximately $2.0 billion (down 1.0% compared to fiscal 2014). Operating margin is expected to be 20.0%.

 EA raised its operating cash flow forecast to approximately $800.0 million. Free cash flow is forecast to be approximately $700.0 million.

Digital revenue is forecast to be nearly $2.1 billion, up 17% on a year-over-year basis. Mobile revenue is expected to grow over 20.0%, as gamers' engagement on smartphones and tablets continue to expand at a significant pace.

Extra-content and free-to-play is expected to continue to grow over 15.0% this year, fueled by live services. Subscription revenue is expected to grow approximately 30.0% this year, as a significant portion of Battlefield 4 Premium revenue will be recognized during this fiscal year.

Recommendation

EA's revenue outlook fails to impress us. The company faces a number of headwinds that include significant competition from other game makers such as Activision ATVI, Glu Mobile Inc. GLUU and Take-Two Interactive TTWO. Additionally, higher consumer spending on new consoles may cannibalize software sales in the near term.

Nevertheless, we believe that EA's strong digital portfolio and continuing growth in the tablet and smartphone market are key growth catalysts. EA's strong portfolio of games will continue to boost its market share on new consoles, going forward. Moreover, the company's efforts to optimize costs through overhead reductions will be beneficial going forward.

Currently, EA has a Zacks Rank #3 (Hold).