Electronic Arts Inc.
) 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
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.
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
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
During the quarter, EA repurchased 27.7 million shares for
$529.0 million and completed the $600 million share repurchase
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.
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.
Take-Two Interactive Software Inc.
). 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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