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Electronic Arts (EA) Down 9.2% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Electronic Arts (EA). Shares have lost about 9.2% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Electronic Arts due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Electronic Arts Q3 Earnings & Revenues Increase Y/Y

Electronic Arts reported third-quarter fiscal 2020 earnings of $1.18 per share, which increased 37.2% year over year and comfortably beat management’s guidance by 26 cents.

Revenues rose 23.6% year over year to $1.59 billion. Product revenues (44% of total revenues) were up 27% to $701 million. Service and other revenues (56% of total revenues) grew 21% to $892 million.

Excluding the change in deferred revenues of $428 million and mobile platform fees of $43 million, net bookings improved 22.9% year over year to $1.98 billion.

The Zacks Consensus Estimate for earnings and revenues were pegged at $2.52 per share and $1.96 billion, respectively.
 
Quarter Details

Digital net bookings were $1.44 billion, increasing 20% year over year and representing 77% of total net bookings.

EA’s digital revenues (70.6% of total revenues) grew 23.8% year over year to $1.12 billion. Packaged goods and other segment revenues (29.4% of total revenues) were up 23.1% year over year to $469 million.

Further segregating digital revenues, full game download revenues increased 16% year over year to $286 million. Net bookings increased 16% year over year to $317 million.

Live services revenues rose 41% year over year to $677 million. Net bookings improved 27% year over year to $993 million, driven by Apex Legends, FIFA and Madden NFL Ultimate Teams (double-digit growth), and Star Wars Jedi: Fallen Order. FIFA Online performed well in Asia.

However, mobile games revenues decreased 11% year over year to $161 million. Including IP licensing deals, mobile revenues grew year over year at constant currency (cc). Net bookings declined 6% year over year to $134 million.

Based on its platforms, revenues from console increased 31% year over year to $1.16 billion. Net bookings from console rose 25% year over year to $1.05 billion.

Revenues from PC/browser were up 18% year over year to $257 million. Net bookings from PC/browser improved 21% year over year to $258 million.

However, revenues from mobile platform dropped 7% year over year to $169 million. Net bookings from mobile were down 6% year over year to $134 million.

Other revenues plunged 33% year over year to $4 million.

Important Game & Player Metrics

EA launched three games in the reported quarter — Need for Speed Heat, Plants Versus Zombies: Battle for Neighborville, and Star Wars Jedi: Fallen Order.

Sales of Star Wars: Jedi Fallen Order surpassed EA’s fiscal year unit sales expectations of $6-8 million, the higher end of which was hit by the game in the third quarter itself. EA now anticipates selling more than 10 million units in the fiscal.

Moreover, Madden NFL 20 is delivering the best performance in Madden’s more than 30-year history.

Further, FIFA grew year over year in the third quarter. The addition of VOLTA Football to FIFA 20 and the updates to FIFA Ultimate Team have boosted player engagement, with FUT matches up nearly 40% year over year since launch through the reported quarter.

Notably, FIFA 20 is also the #1 most-engaged title in EA’s subscription services. The company is set to launch South American club tournaments, CONMEBOL Libertadores and CONMEBOL Sudamericana as well as the eLibertadores — a new expansion to FIFA 20 Global Series esports competitions.

Additionally, The Sims 4 now has more than 20 million unique players worldwide on a life-to-date basis.

Operating Details

EA’s GAAP gross profit increased 23.9% from the year-ago quarter to $1.09 billion. Gross margin expanded 20 basis points (bps) on a year-over-year basis to 68.1%.

Operating expenses rose 14.2% from the year-ago quarter to $724 million. As a percentage of revenues, operating expenses contracted 370 bps to 45.4%.

As a percentage of revenues, marketing & sales (M&S) shrank 180 bps. Research & development (R&D) and general & administrative (G&A) expenses also contracted 150 bps and 30 bps, respectively.  

Operating income on a GAAP basis surged 49.2% year over year to $361 million. Operating margin expanded 390 bps to 22.7% in the reported quarter.

Balance Sheet and Cash Flow

As of Dec 31, 2019, EA had $5.60 billion in cash and short-term investments compared with $4.88 billion as of Sep 30.

Net cash from operating activities in the reported quarter was $$1.10 billion compared with $37 million in the previous quarter.

EA repurchased 3.1 million shares for $305 million in the reported quarter. The company has $674 million available under its current program.

Guidance

For the fourth quarter of fiscal 2020, EA expects GAAP revenues of $1.325 billion. Net bookings are expected to be $1.152 billion.

EA anticipates operating expenses of $724 million. GAAP earnings are expected to be $1.05 per share.

For fiscal 2020, EA expects GAAP revenues of $5.475 billion (up from the previous guidance of $5.410 billion) and net bookings of $5.150 billion (up from the previous guidance of $5.125 billion).

Digital net revenues are expected to be $4.255 billion. Packaged goods & other net revenues are anticipated to be $1.220 billion.

Moreover, EA anticipates operating expenses of $2.730 billion for the fiscal.

Additionally, earnings are expected to be $9.90 per share.

Operating cash flow is estimated to be $1.725 billion.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

Currently, Electronic Arts has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision has been net zero. Notably, Electronic Arts has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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