Electronic Arts Inc.
) reported earnings of $1.26 per share in the third quarter of
fiscal 2014 per share, which were much better than the 57 cents
reported in the year-ago quarter.
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Revenues (including change in deferred revenues) jumped 33.0%
from the year-ago quarter to $1.57 billion but lagged the Zacks
Consensus Estimate of $1.66 billion. Revenues also missed
management's guidance of $1.65 billion.
The miss was primarily attributed to the decline in sales of
major games for old consoles such as PlayStation 3 and Xbox 360.
During the quarter, both
) launched their next generation consoles namely, PlayStation 4
and Xbox One, respectively.
EA released 6 games for new consoles, which helped it to gain 40%
segment share on the PlayStation 4 and 30% segment share on the
Xbox One in the U.S.
Digital revenues jumped 27.0% year over year to $517.0 million
(33.0% of revenues) in the quarter. EA's publishing and other
segment (65.0% of total revenue) revenues surged 38.0% from the
year-ago quarter to $$1.03 billion. Distribution revenues
declined 15.0% on a year-over-year basis to $28.0 million.
The improvement in digital revenues was driven by a 157.0% jump
in full-game downloads, 26.0% increase in mobile and 15.0% growth
in extra content. Smartphones and tablets (88.0% of mobile
revenues) jumped 39.0% on a year-over-year basis in the reported
Region-wise, North American sales (44.0% of revenues) soared
41.0% year over year to $690.0 million, while international
revenues (56.0% of total revenue) increased 27.0% from the
year-ago quarter to $882.0 million.
EA's gross margin (excluding acquisition-related expenses and
change in deferred net revenue) expanded 240 basis points (bps)
year over year to 68.1% in the third 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 36.9% from 48.1% reported in the year-ago
The year-over-year decline was primarily attributed to lower
marketing & sales expense and research & development
expense, which decreased 500 bps and 600 bps, respectively.
General & administrative expense declined 10 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
31.2% from 17.6% in the year-ago quarter.
Net income (including stock-based compensation) was $363.9
million compared with $144.1 million in the year-ago quarter.
Earnings were $1.15 per share compared with the Zacks Consensus
Estimate of $1.16 in the last 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 $1.74 billion in cash, short-term
investments compared with $1.42 billion in the previous quarter.
For the fourth quarter of fiscal 2014, EA expects to generate
non-GAAP revenues of approximately $800.0 million, which is lower
than the Zacks Consensus Estimate of $826.0 million. The company
expects non-GAAP earnings to be 9 cents per share, much lower
than the Zacks Consensus Estimate of 13 cents.
Non-GAAP gross margin is expected to be 71.0% down from 74.0%
reported in the year-ago quarter. Non-GAAP operating expense is
expected to be $525.0 million.
For FY14, EA expects to generate non-GAAP revenues of
approximately $3.91 billion, lower than the Zacks Consensus
estimate of $4.02 billion. The company upped its earnings
guidance to $1.30 per share from the earlier outlook of $1.25,
which is higher than the Zacks Consensus Estimate of 93 cents.
Management continues to expect gross margins of 66.0%, while
operating expenses are projected to be approximately $2.04
billion (down from $2.10 billion). EA raised its operating cash
flow forecast to approximately $600.0 million. Free cash flow is
forecasted to be approximately $500.0 million.
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
). 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).