Electronic Arts (NASDAQ:ERTS) will report Q2 FY:12 (September) results after market close on Thursday, October 27 with a call at 2:00pm PT (dial-In: 773-799-3213, passcode: EA; webcast: ir.ea.com).
The popularity of EA’s sports games and The Sims Social should lead to a Q2 beat and raise. We expect Q2 results in-line with our estimates for revenue of $968 million and EPS of $(0.03), compared with consensus for revenue of $965 million and EPS of $(0.04), and guidance for revenue of $925 – 975 million and EPS of $(0.03) – (0.13). Sales for each key EA sports title have increased at least 10%, and subs figures for the high-margin The Sims Social exceeded expectations.
Management has beaten expectations but failed to increase guidance in the past. The failure to pass through EPS upside results in lower estimates going forward. We believe that company management understands that forward guidance matters, and we expect a beat and raise in Q2. Current FY:12 guidance is for revenue of $3.90 – 4.10 billion and EPS of $0.70 – 0.90.
Earlier this month, we added EA shares to the Wedbush Securities Investment Committee’s Best Ideas List due to several near-term catalysts. In addition to the likelihood of a Q2 beat and raise, improving industry trends as measured by NPD (console software sales were up 3% in September, with double digit growth expected in October), and The Sims Social, we also expect EA shares to benefit from strong sales of Battlefield 3 (to be released on October 25) and the Star Wars: The Old Republic MMO (December 20), which has had the highest preorders in the company’s history. We expect Battlefield 3 to sell 4 million units on the PC, and to sell at least 4 million units on consoles. For each million of upside on consoles, EA’s earnings are expected to go up by $0.05/share.
Battlefield may have technical issues. The game will apparently ship with a patch, and the company may withhold review copies until the October 25 release date. This could impact average review scores by 5% or more.
Maintaining our OUTPERFORM rating, and 12-month price target of $27, which reflects a multiple of 18x our FY:13 EPS estimate of $1.15/share, plus an estimated $6/share in cash. Our multiple is near the low end of the company’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.