Electronic Arts Inc.
) reported earnings of 25 cents per share in the second quarter
of fiscal 2014, comprehensively beating the Zacks Consensus
Estimate by 23 cents. Earnings were much better than the year-ago
quarter earnings of a penny.
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Earnings include stock-based compensation but exclude
acquisition-related expenses, amortization of debt discount,
change in deferred net revenue, college football settlement
expenses, gain on strategic investments, restructuring and other
and related tax effect.
Revenues (including change in deferred revenues) decreased 3.7%
from the year-ago quarter to $1.04 billion but were much better
than the Zacks Consensus Estimate of $976.0 million. Revenues
were also higher than management's guidance of $975.0 million.
The year-over-year decline in revenues was primarily attributed
to sluggish sales of some EA Sports published titles such as
NCAA Football 14
Madden NFL 25
. However, this was partially offset by another strong
performance from the digital segment.
Digital revenues jumped 11.0% year over year to $348.0 million
(33.5% of revenues) in the quarter. EA's publishing and other
segment (64.4%of revenues) revenues declined 10.0% from the
year-ago quarter to $670.0 million. Distribution revenues
remained flat on a year-over-year basis at $22.0 million.
The improvement in digital revenues was fueled by a 11.0%
increase in extra content and free-to-play segment. Revenues were
positively impacted by strong sales of
FIFA Ultimate Team
Star Wars: The Old Republic
FIFA Online 3
Mobile business' revenues improved 30.0% from the year-ago
quarter in which games such as
The Simpsons: Tapped Out
The Sims FreePlay
Real Racing 3
were the main contributors. During the quarter, the company
Plants vs. Zombies 2
, which also contributed to growth.
Moreover, buoyed by the robust performance of
and deferral of SimCity first quarter revenues, last quarter full
game downloads recorded 42.0% year-over-year growth. However,
advertising and other digital revenues declined 16.0% from the
Region-wise, North American sales (42.0% of revenues) decreased
14.0% year over year to $439.0 million while international
revenues (58.0% of revenues) increased 5.0% from the year-ago
quarter to $601.0 million.
EA's gross margin (excluding acquisition-related expenses and
change in deferred net revenues) expanded 150 basis points (bps)
year over year to 61.6% in the second quarter. The solid margin
expansion was primarily led by robust digital revenues and
reduction in online support cost.
Operating expenses (before acquisition-related contingent
consideration, amortization of intangibles, restructuring and
other but including stock based compensation) as a percentage of
revenues declined 250 bps from 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.
General & administrative expense increased 310 bps from the
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 $69.0 million
compared with $5.5 million in the year-ago quarter.
Balance Sheet and Cash Flow
EA exited the quarter with $1.42 billion in cash, short-term
investments compared with $1.41 billion in the previous quarter.
Cash used in operating activities were $6.0 million.
For the third quarter of fiscal 2014, EA expects to generate
non-GAAP revenues of approximately $1.65 billion. The company
expects non-GAAP earnings to be $1.22 per share.
Non-GAAP operating expense is expected to be $600.0 million,
impacted by phasing of operating expenses from previous quarters.
In the third quarter, EA is expected to release four major
titles, including Battlefield 4 and Need for Speed.
For FY14, EA expects to generate non-GAAP revenues of
approximately $4.0 billion. The company upped its earnings
guidance to $1.25 from the earlier outlook of $1.20 per share.
Management continues to expect gross margins of 66.0% while
operating expenses are projected to be approximately $2.10
billion (down from $2.15 billion).
We believe that EA's strong digital portfolio and continuing
growth in the free-to-play and online segment will drive top-line
growth, going forward. Additionally, the company is gaining
traction in the tablet and smartphone market, though games
) iOS and
) platforms are commendable.
We believe that the upcoming launch of new console systems will
boost EA's overall top-line growth in the near term. Moreover,
the company's efforts to optimize costs through overhead
reductions will be beneficial.
However, we believe that the company faces a number of headwinds
that include significant competition from other game makers such
Currently, EA has a Zacks Rank #4 (Sell).