Electronic Arts Is Looking Up

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Electronic Arts (NASDAQ:EA) will report Q4 FY:13 (ending March) results after the market close on Tuesday, May 7, and will host a conference call at 2:00pm PT (dial-In: 773-799-3213, passcode: EA, webcast: ir.ea.com).

Expecting Q4 in line with preannouncement. On March 18, EA announced that its CEO had resigned and that it expected Q4 results at or slightly below the low end of the ranges provided in January, for revenue of $1.025 – 1.125 billion and EPS of $0.57 – 0.72. We estimate revenue of $1.025 billion and EPS of $0.56, vs. consensus of $1.036 billion and $0.58. We note initial EPS guidance for FY:13 was $1.05 – 1.20, above current consensus of $0.88. We believe a number of factors led to the EPS miss, including: (1) weak Medal of Honor, (2) no NBA title, (3) the delay of Fuse, and (4) the decline of EA’s social games.

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We do not expect EA to announce a new CEO in conjunction with earnings. John Riccitiello, previously CEO and Director since April 2007, resigned from both positions effective March 30. In its press release, EA disclosed the parties had decided it was the right time for a leadership transition; however, in his resignation letter, Mr. Riccitiello attributed his decision to accountability around guidance.

We expect EA to guide FY:14 EPS in a range that meets or exceeds the Street’s expectations. With a stronger performance from Battlefield 4 (we estimate at least incremental 8 million units in sales compared to Medal of Honor), the inclusion of UFC and NBA games in FY:14, and cost cutting (according to Kotaku, layoffs of up to 10 percent of total headcount), we expect FY:14 EPS guidance with a midpoint that meets or exceeds consensus of $1.10. We believe our current EPS estimate of $1.58 is achievable, but expect management to be cautious.

We believe EA shares will react positively to the next Microsoft (NASDAQ:MSFT) Xbox announcement on May 21. We note EA was not included in Sony’s (NYSE:SNE) PlayStation 4 event in February, potentially indicating that EA will have a significant presence at the Xbox reveal.

Maintaining our OUTPERFORM rating and 12-month price target of $25. Our price target reflects a forward multiple of ≈ 16x our FY:14 EPS estimate of $1.58. This multiple is in line with industry peers, and reflects an improving outlook for video game publishers ahead of the next-gen consoles. 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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