The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Second-quarter earnings per share exceeds expectations primarily from expense phasing. Revenue was $1,040 million, compared with our estimate and guidance of $975 million, and the consensus estimate of $976 million. The top-line beat was driven primarily by packaged goods sales upside, as sell-in was stronger than expected. EPS was 33 cents (excluding a $1.22 per share net charge), compared with our estimate, consensus, and guidance of 12 cents, due primarily to lower-than-expected operating expenses and some flow through of the revenue upside.
Full-year EPS guidance was raised. Management maintained FY:14 guidance for revenue of $4 billion but raised EPS guidance to $1.25 from $1.20. Revised EPS guidance reflects the aforementioned expense phasing. We are adjusting our FY:14 estimates for revenue to $4.05 billion from $4.06 billion, and for EPS to $1.27 from $1.25 to reflect Q2 results and revised guidance, as the console transition could limit upside for the next several months. We are maintaining our FY:15 estimates for revenue of $4.40 billion and EPS of $1.65.
We believe Andrew Wilson has the experience and versatility necessary to effectively lead Electronic Arts (NASDAQ:EA) into the next-gen console transition. It appears Mr. Wilson’s charisma, history of accomplishments at EA Sports (highlighted by FIFA and UFC), leadership, and relative youth won out over the strong track records of his peers. Mr. Wilson spoke on the earnings call and provided his core beliefs, which are consistent with the strategy put in place by his predecessor, John Riccitiello.
EA has the lineup to deliver revenue and EPS growth for at least the next two years. Next year, EA has UFC, FIFA World Cup, Dragon Age and a likely fall shooter game to replace revenues from Battlefield 4, with expected catalog sales growth and solid digital growth. The following year, we should see the return of Battlefield, plus Mirror’s Edge and Star Wars Battlefront. We believe that EA can grow revenues by $400 million per year and can deliver 50 cents or more in EPS growth each of the next two years.
Maintaining our OUTPERFORM rating and our 12-month price target of $30. Our PT is based upon a forward P/E of 18x our $1.65 EPS estimate for FY:15 and reflects improving execution, the positive impact of digital on top- and bottom-line expansion, and a strong next-gen slate of games. We recommend investors continue to accumulate EA shares while they trade at a discount to our price target.
Michael Pachter is an analyst at Wedbush Securities.