Video games developer and publisher,
Electronic Arts Inc.
) reported EPS of 57 cents in the third quarter of 2013, which
was significantly down from 99 cents posted in the year-ago
quarter. However, quarterly EPS was much better than 15
cents reported in the previous quarter.
Including stock-based compensation, EPS was 44 cents, which
exceeded the Zacks Consensus Estimate by 3 cents in the reported
Revenues (including deferred revenue of $260.0 million)
decreased 28.0% year over year to $1.18 billion, which missed the
management's guided range of $1.25 billion to $1.35 billion.
Revenue was also well short of the Zacks Consensus Estimate of
$1.29 billion. The year-over-year downside was primarily due to
weaker-than-expected performance of
Medal of Honor Warfighter
and continued headwinds for the packaged goods segment.
Both publishing and distribution revenue declined massively in
the reported quarter. Publishing and Other (62% of total revenue)
segment plunged 39.0% year over year in the quarter to $742.0
million. Distribution (3% of total revenue) revenues fell 33.0%
from the year-ago quarter to $33.0 million.
This weak performance from publishing and distribution was
partially offset by 8% increase in digital revenue (35.0% of
total revenue), which reached $407.0 million in the quarter. The
growth was fueled by a 50.0% year-over-year jump in revenues
generated from extra-content and free-to-play games. This was
driven by strong performance from
Star Wars: The Old Republic
Revenues from mobile and other handheld devices increased
18.0% year over year to $99.0 million. Smartphones and tablets
revenues were up 36% year over year to $79.0 million.
Subscriptions, advertising and other digital revenues grew 18%
from the year-ago period, driven by
Star Wars: The Old Republic
. This strong growth fully offset a 57% year-over-year decline in
full game downloads.
On a sequential basis, revenues increased 9.4% year over year,
primarily driven by a 29.6% jump in digital revenues.
Distribution revenue also surged 50% over the previous
Region wise, North American sales (44% of total revenue)
decreased 40% year over year to $489.0 million. Sales from Europe
(51% of total revenue) declined 15.0% year over year to $630.0
million. Asia (5% of total revenue) plunged 38% from the year-ago
quarter to reach $63.0 million in the reported quarter.
Gross margin expanded 600 basis points ("bps") from the
prior-year quarter to 53.0% due to favorable product mix. EA has
started its own digital distribution business, which replaced
third-party vendors. This also helped in driving gross margin
Operating expenses as a percentage of revenue, jumped to 48.0%
in the fourth quarter from 41.9% in the year-ago quarter. As a
result, operating margin (including stock-based compensation
expense) declined sharply from 25.5% in the year-ago quarter to
17.6% in the fourth quarter.
EA reported net income (excluding stock-based compensation and
other one-time items) of $176.0 million compared with $334.0
million in the year-ago quarter. Including stock based
compensation, net income was $135.5 million in the third
Balance Sheet & Cash Flow
EA exited the quarter with $1.43 billion in cash, short-term
investments and marketable securities, compared with $1.22
billion in the previous quarter. Cash flow from operations was
$363.0 million compared with cash outflow of $28.0 million in the
previous quarter. During the reported quarter, EA repurchased
12.2 million shares for $157.0 million.
For the fourth quarter 2013, EA expects non-GAAP revenues to
be in the range of $1.025 billion to $1.125 billion. EA forecasts
EPS in the range of 57 cents to 72 cents per share on a non-GAAP
basis. Non-GAAP operating expense is expected to be greater than
For fiscal 2013, management lowered its revenue guidance. EA
now expects non-GAAP revenue to be in the range of $3.778 billion
to $3.878 billion (down from $4.05 to $4.20 billion). EA
forecasts operating expenses of approximately $2.2 billion.
Non-GAAP EPS is expected to be in the range of 86 cents - $1.00
(down from $1.00-$1.15) per share for fiscal 2013.
EA expects operating cash flow of $350.0 million for fiscal
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. Reportedly, both
are expected to launch their next generation consoles this year,
which will be a significant growth catalyst going forward.
However, we believe that EA's lowered guidance reflects soft
video game industry outlook in the near term, particularly due to
weakness in retail sales amid an aging console system lifecycle.
Moreover, the cannibalizing effect of free-to-play games and
tough competition from
Activision Blizzard Inc.
) remains a concern.
Currently, EA has a Zacks Rank #4 (Sell).
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