Electronic Arts Inc.
) 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.
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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
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
EA's Ultimate Team services generated more than $380 million in
fiscal 2014, with Madden Ultimate Team growing 90% year over
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.
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
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.
In the near future, EA plans to deliver new editions of its major
EA SPORTS franchises,
Madden NFL 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
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.
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
FIFA World Cup
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
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.
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
Glu Mobile Inc.
). 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).