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EA's Loss Narrows in 1Q

Zacks Equity Research

Electronic Arts Inc. (EA) reported non-GAAP loss of 40 cents per share in the first quarter of 2014, which not only improved from the year-ago quarter’s loss of 41 cents but was also narrower than management’s expected loss of 62 cents.

However, including stock-based compensation, the loss came in at 50 cents, which was narrower than the Zacks Consensus Estimate of a loss of 73 cents per share.


Non-GAAP revenues came in at $495 million, up 0.8% from the year-ago quarter, primarily due to robust revenue growth from the Digital segment. Reported revenues not only beat management’s guidance of $450.0 million but were significantly ahead of the Zacks Consensus Estimate of $460.0 million, primarily due to strong sales of Battlefield 3, FIFA 2013 and other titles.

Solid performance from EA’s Digital segment, which increased 16.7% year over year, more than offset the 30.1% year-over-year slump in revenues in EA’s Publishing segment and 28.6% decline in the Distribution segment.

The improvement in digital revenues was fueled by a 35.0% 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 and FIFA Online 3.

Mobile business’ revenues improved 30% from the year-ago quarter in which games such as The Simpsons: Tapped Out and Real Racing 3 were the main contributors.

Moreover, buoyed by the robust performance of Battlefield 3 and The Sims 3, full game downloads recorded a 12.0% year-over-year growth. However, advertising and other digital revenues declined 25.0% from the year-ago quarter.

Region wise, North American sales (41.4% of total revenue) increased 11.0% year over year to $205.0 million while international revenues (58.6% of total revenue) declined 5% from the year-ago quarter to $290.0 million.


EA’s non-GAAP gross margin expanded 230 basis points (bps) year over year to 63.8% while gross profit increased 4.6% during the same period to $316.0 million. The solid margin expansion was primarily led by robust digital revenues and reduction in online support cost.

Operating expenses, as a percentage of revenue, declined to 96.4% in the first quarter from 98.4% in the year-ago quarter.

On a non-GAAP basis, EA’s reported operating loss of $161.0 million, which improved from the year-ago quarter’s loss of $181.0 million. Including stock-based compensation, operating loss came in at $194.0 million versus $220.0 million loss reported in the year-ago quarter.

EA’s non-GAAP net loss came in at $121 million, narrowed from a loss of $130 million in the year-ago quarter. Including stock based compensation, EA reported net loss of $154 million.

Balance Sheet and Cash Flow

EA exited the quarter with $1.41 billion in cash, short-term investments compared with $1.68 billion in the previous quarter. EA reported $248.0 million of cash used in operating activities. During the reported quarter, EA did not repurchase any shares.


For the second quarter of 2014, EA expects to generate non-GAAP revenues of approximately $975.0 million (down 10.0% from the year-ago quarter). EA expects non-GAAP earnings per share to be 12 cents (down 20.0% from the year-ago quarter).

Non-GAAP operating expense is expected to be $550.0 million, impacted by phasing of operating expenses from the first quarter.  During the quarter, EA is expected to release five major titles, including a free-to-play game, and five mobile titles.

The company reiterated fiscal 2014 guidance. EA expects to generate non-GAAP revenues of approximately $4.0 billion which includes $2.2 billion from Publishing and $1.7 billion from the Digital segment. EA expects its Distribution segment to generate $100 million in revenues.

EA expects its FY14 non-GAAP earnings to be $1.20 per share. The company expects its gross margins to be 66.0% while operating expenses is projected at $2.15 billion. EA has planned to release 11 titles in 2014, which includes FIFA 14, Battlefield 4 and the Sims 4.


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. Moreover, the company’s efforts to optimize costs through overhead reductions will be beneficial.

Additionally, the company is gaining traction in the tablet and smartphone market, though games released on Apple’s (AAPL) iOS and Google’s (GOOG) platforms are commendable. Further, EA’s partnership with Tencent in China is expected to bode well for the company in the long run.

However, we believe that EA faces a number of headwinds that include a soft video game industry performance, particularly due to weakness in retail sales amid an aging console system lifecycle.

Competition from other game makers, such as Activision (ATVI), is also a headwind, going forward. Moreover, the company’s tepid second-quarter guidance is expected to remain an overhang.

Currently, EA has a Zacks Rank #2 (Buy).

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