Analyst Ups EA Estimates Ahead of Earnings Release

Electronic Arts Inc (NASDAQ:EA) will report Q4 fiscal 2012 (March) results after the market close on Monday, May 7th.

Revising estimates to reflect Game Group bankruptcy. On its Q3:12 results call, EA (NASDAQ:EA) warned that a European retailer may not be able to meet payment obligations, impacting Q4.  Game Group declared bankruptcy in March, and its UK assets were purchased by OpCapita on April 1. We estimate EA represented 25% of the reported £40 million owed, with over half attributed to the UK. As under half of Game Group’s UK stores were closed, we estimate a sales impact of $5 million.

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We expect Q4 results in-line with our revised estimates for revenue of $980 million and EPS $0.20, compared to consensus for revenue of $960 million and EPS of $0.16, and guidance for revenue of $925 – 975 million and EPS of $0.10 – 0.20. We expect EA’s (NASDAQ:EA) results at high end of guidance due to better-than-expected sales of Mass Effect 3, solid Star Wars subscriber figures, and repurchases ($312 million remaining in authorization at Q3). At Wedbush TMT Conference, EA’s CEO disclosed the vast majority of Star Wars’ 1.7 million subs were recurring, likely placing paying subs in-line with our estimate of 1.5 million.

We expect management to provide FY:13 guidance for  revenue and nonGAAP EPS of at least $4.55 – 4.60 billion and $1.10 or more in EPS, respectively, depending on Q4 results.  On the Q3 results call, management disclosed it expected double -digit percentage growth for revenue and non-GAAP EPS in FY:13. We expect 30% or more earnings growth, as the bulk of EA’s (NASDAQ:EA) revenue growth is likely to come from high-margin digital sales.

Digital revenue strength continues. We expect momentum to continue in FY:13 from Origin, Star Wars, mobile/tablet sales and the release of SimCity and Plants vs. Zombies social games (likely in 1H:13). We estimate digital revenues will increase from $1.2 billion in FY:12 to $1.7 billion in FY:13 (over 40% growth). Maintaining our OUTPERFORM rating and our 12-month price target of $29, which reflects a multiple of 20x our FY:13 EPS estimate of $1.25/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.