The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Electronic Arts (NASDAQ:EA) Q1 roughly in line with expectations. Revenue was $491 million, compared with our estimate and consensus of $500 million. EPS was $(0.41), compared with our estimate of $(0.39), and consensus of $(0.42). Quarterly guidance was for revenue of $500 million and EPS of $(0.45) – (0.40).
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The introduction of a lower MSRP for Star Wars in August and a free-to-play option in November should result in long-term incremental revenue growth and margin expansion. In the long-term, we believe the adjustments will result in incremental revenue and earnings growth as high-margin Cartel Coin purchases by a much larger pool of gamers and additional advertising generate more revenue than was lost through declining subscription fees and the lower MSRP.
Strong FY:13 earnings guidance maintained. Despite slightly lowered full-year revenue guidance, management maintained double-digit percentage EPS growth to $1.05 – 1.20 in FY:13, up from FY:12 EPS of $0.85. The revised earnings guidance likely reflects the positive impact of a new $500 million share repurchase program, early success for Battlefield 3 Premium (with high-margin sales to be recognized in Q4), and increased growth expectations for mobile and free-to-play.
Lower-than-expected Q2 guidance. EA (NASDAQ:EA) provided initial Q2:13 guidance for revenue of $1.05 – 1.10 billion and for EPS of $0.07 – 0.12, below our prior expectations due to revenue deferral for Battlefield 3 Premium DLC to Q4. All revenue from BF3 Premium will be recognized in Q4, with a significant margin and profit contribution that quarter. The service generated $37 million in June.
Strong digital growth continues. EA’s digital revenues increased to $324 million in Q1:13 from $209 million in Q1:12 due in part to the launches of SimCity, SimCity Social, and Star Wars, along with the continued success of Origin, which now has registered over 21 million users. We estimate that digital revenues will increase from ≈ $1.2 billion in FY:12 to $1.7 billion in FY:13 and $2.2 billion in FY:14.
Maintaining our OUTPERFORM rating and our 12-month price target of $29, which reflects a multiple of 16x our FY:14 EPS estimate of $1.58/share, plus an estimated $4/share in net cash. Our multiple is near the low end of EA’s historical range to reflect uncertain industry growth. Electronic Arts shares are on the Wedbush Securities Investment Committee’s Best Ideas List.
Michael Pachter is an analyst at Wedbush Securities.
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