Analyst: Here’s How We’re Adjusting Our Outlook for EA Now

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

EA (NASDAQ:EA): Despite the Q3 revenue miss, EPS was in line from digital growth and cost control. Revenue was $1.18 billion, compared with our estimate of $1.33 billion, consensus of $1.29 billion, and guidance of $1.25 – 1.35 billion, with the miss driven by Medal of Honor and sector headwinds. EPS was $0.57, compared with our estimate of $0.61, consensus of $0.56, and guidance of $0.50 – 0.60.

Lower FY:13 guidance. Management decreased FY:13 guidance for revenue to $3.778 – 3.878 billion from $4.05 – 4.20 billion and for EPS to $0.86 – 1.00 from $1.00 – 1.15. Decreased guidance reflects industry softness, volatility from the console transition, and the delay of Fuse (estimated $150 million) into FY:14.

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Adjusting our estimates. Decreasing our FY:13 estimates for revenue to $3.88 billion from $4.20 billion and for EPS to $1.00 from $1.15 to reflect revised guidance. Decreasing our FY:14 estimate for revenue to $4.25 billion from $4.75 billion to reflect industry softness and lower digital revenue expectations, but maintaining our…

EPS estimate of $1.58 to reflect digital growth and cost control.

The shift of Fuse sets up a nice comparison to FY:13. Although we lowered our overall revenue estimate for next year, we note that next year’s lineup contains at least three games that had no comparison in FY:13. Battlefield 4 should account for $400 million or more of revenue growth by itself, and EA can hit our revenue estimate even if the rest of the lineup sees sales down 20% compared to FY:13.

The range of Q4 and full-year guidance remains wide, suggesting a lack of confidence in the business. EA expects Q4 EPS of between $0.57 – 0.72, notwithstanding that it will generate approximately $0.25 in EPS contribution from Battlefield Premium deferred revenue. However,  Q4 has a very strong lineup, including Army of Two: Devil’s Cartel, Dead Space 3, Crysis 3, and SimCity. While we agree that the Q4 lineup is unlikely to exceed the profitability generated by Q3’s releases, management is likely being overly conservative in its Q4 EPS guidance at the low end of the range, signaling a lack of confidence in new releases.

Maintaining our OUTPERFORM rating and 12-month price target of $23, a multiple of 11x our FY:14 EPS estimate of $1.58/share, plus an estimated $5/share in 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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