EA Earnings Analysis: Taking a Blowtorch to Guidance

Electronic Arts’ (NASDAQ:EA) Q4:12 results were in-line with expectations.  Revenue was $977 million, compared with our estimate of $980 million and consensus of $960 million. EPS was $0.17, compared with our estimate of $0.20 and consensus of $0.16. Q4 guidance was for revenue of $925 – 975 million and EPS of $0.10 – 0.20.

A Closer Look: Electronics Arts Earnings Cheat Sheet>>

Strong digital growth continues. We expect recent momentum to continue due to increased adoption of Origin, Star Wars subscription payments, The Sims Social, and the release of SimCity. We estimate that digital revenues will increase from $1.2 billion in FY:12 to $1.7 billion in FY:13, an annual increase of roughly 40%, inline with bullish guidance.

Weak FY:13 revenue guidance.  Management provided initial specific FY:13 guidance for revenue of $4.30 billion, 3% above FY:12 revenue of $4.19 billion. As it previously provided high level guidance for double-digit percentage growth for non-GAAP EPS and revenue, actual FY:13 revenue guidance was well below expectations, magnified by concerns around a potential Star Wars decline in FY:13 and weak packaged goods sales for the video game industry.

We are decreasing our FY:13 estimates for revenue to $4.40 billion from $4.52 billion, and for EPS to $1.20 from $1.25 to reflect guidance. We are initiating our FY:14 estimates for revenue of $4.75 billion and EPS of $1.58.

Star Wars weakness.  As recently as two months ago at the Wedbush TMT Conference, management stated that the MMO had 1.7 million active subscribers, with a vast majority being recurring subscribers (those paying monthly subscription fees). However, on Monday, Electronic Arts Inc. (NASDAQ:EA) disclosed that Star Wars had only 1.3 million active subscribers, well below our expectations. The lower-than-expected active subs number should have a negative impact on valuation due to margin concerns.

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 Morgan.