The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Electronic Arts (NASDAQ:EA) Q4 results came in line with the negative pre-announcement. Revenue was $1.04 billion, compared with our estimate of $1.025 billion, the consensus estimate of $1.03 billion, and guidance of $1.025-$1.125 billion. New release SimCity performed better than expected, while other new releases, Crysis 3 and Dead Space 3, underperformed expectations. EPS was $0.55, compared with our estimate of $0.56, the consensus estimate of $0.58, and guidance of $0.57-$0.72. EPS was below expectations due in large part to $16 million of severance costs.
Bullish FY:14 guidance. Management provided initial FY:14 guidance for revenue of $4.0 billion and EPS of $1.20, compared to FY:13 results of revenue of $3.793 billion and EPS of $0.84. FY:14 top-line guidance reflects packaged goods softness, the challenges of the console transition, and fewer major titles. Packaged goods and distribution revenue is expected to be up 7 percent y-o-y, driven in large part by the release of Battlefield 4. Digital revenue is expected to be up 4 percent.
Decreasing our FY:14 estimates for revenue to $4.06 billion from $4.25 billion and for EPS to $1.25 from $1.58 to reflect guidance.
Strong digital growth continues. Digital revenue increased by 45 percent year-over-year to $618 million in Q4:13 as extra content and free-to-play grew 45 percent (driven primarily by FIFA, Bejeweled Blitz, and Star Wars) and subscriptions, advertising and other digital revenue grew 54 percent (driven by Battlefield 3 Premium). EA’s Origin platform contributed 65 percent in full game downloads growth. The company projected digital revenues to grow from $1.66 billion in FY:13 to $1.7 billion in FY:14.
New console introductions from Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) are expected in FY:14, with the potential to reinvigorate consumer interest in games. While only Sony has announced a new console so far, Microsoft has an event scheduled for later this month, and we expect both to launch consoles during the year.
Maintaining our OUTPERFORM rating, but raising our 12-month price target to $26 from $25. Our revised price target values EA at a forward P/E of 18x our $1.25 EPS estimate, plus roughly $4 in net cash per share. The P/E multiple we have assigned is a discount to EA’s historical multiple, but is in line with the current market multiple, reflecting superior growth prospects offset by recent execution missteps. Electronic Arts shares are on the Wedbush Securities Investment Committee’s Best Ideas List.
Michael Pachter is an analyst at Wedbush Securities.