Electronic Arts Earnings Preview: Here’s Your Deep Analytical Dive

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

Electronic Arts (NASDAQ:EA) will report Q3 FY:13 (ending December) results after the market close on Wednesday, January 30, and will host a conference call at 2:00pm PT (dial-In: 773-799-3213, passcode: EA, webcast: ir.ea.com).

Expecting Q3 results at the mid-point of guidance. Our estimates for revenue of $1.33 billion and EPS of $0.61 are probably too high, compared with consensus for $1.29 billion and $0.56, and guidance for $1.25 – 1.35 billion and $0.50 – 0.60. We believe sales were led by new releases Medal of Honor: Warfighter and Need for Speed: Most Wanted, and catalog titles FIFA Soccer 13 and Madden NFL 13.

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International sales of FIFA and Need for Speed to offset domestic weakness. According to NPD, EA’s Q3 U.S. software sales were down 43% y-o-y, implying an ≈ $527 million drop in packaged goods (“PG”) revenue in our model (we estimated a decline of ≈ $316 million). However, EA likely made up for this shortfall through international sales (not captured by NPD) of FIFA  and  Need for Speed, both of which have historically performed much better overseas. In addition, we modeled only $14 million (≈ 4%) of digital growth, with the most upside potential from Origin. We note that EA also has $392 million remaining in its share repurchase program.

We expect EA to…

lower the high end of FY:13 guidance. At the end of Q2, FY:13 guidance was lowered to reflect Medal of Honor weakness. On Wednesday, we expect management to tighten the FY:13 ranges again to reflect conservatism around Star Wars and its big Q4:13 releases, given continuing industry weakness.

Our FY:14 estimates may be too conservative. We modeled $350 million of digital growth, and $200 million of net PG growth, notwithstanding our expectations for $400 – 500 million of PG growth from new consoles software and a loaded release slate. We expect Battlefield 4, Dragon Age 3, a UFC title, an NBA title, and possibly the Respawn game in FY:14, along with spillover from  Fuse. A 40% contribution margin on our forecasted revenue growth of $550 million results in incremental EPS of ≈ $0.50, and we think that revenue and margin could be higher.

Maintaining our OUTPERFORM rating and 12-month price target of $23, a multiple of 12x our FY:14 EPS estimate of $1.58/share, plus an estimated $4/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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