Electronics Arts Maintains Outperform Rating
Electronic Arts (NASDAQ:ERTS) had strong Q2 led by FIFA 12 (8 million units) and Madden NFL 12 (3 million units), and The Sims Social. Pro forma revenue was $1,034 million, compared with our estimate of $968 million, and consensus of $965 million. Pro forma EPS was $0.05, compared with our estimate of $(0.03), and consensus of $(0.04). Q2 guidance was for revenue of $925 – 975 million, and EPS of $(0.03) – (0.13).
Management again beat expectations but did not increase EPS guidance. FY:12 pro forma revenue guidance was raised to $4.05 – 4.20 billion from $3.90 – 4.10 billion, but adjusted EPS guidance only went to $0.75 – 0.90 from $0.70 – 0.90. EA provided initial Q3 pro forma revenue guidance of $1.55 – 1.65 billion, and EPS of $0.85 – 95.
We are raising our FY:12 pro forma estimates for revenue to $4.20 billion from $4.11 billion, and for EPS to $0.95 from $0.94. We are raising our FY:13 revenue estimates to $4.40 billion from $4.20 billion, and for EPS, to $1.25 from $1.15.
Digital revenue continued its strong growth, (+30% y-o-y). We view the PopCap acquisition as a long-term positive; though the costs may be high, the opportunities in digital casual gaming are large and growing much faster than EA’s (NASDAQ:ERTS) traditional packaged goods business.
We expect EA (NASDAQ:ERTS) shares to benefit from strong sales of Battlefield 3 (10 million units shipped to date) and the Star Wars: The Old Republic MMO (December 20), which has had the highest PC pre-orders in the company’s history. We believe that the Battlefield sell-in exceeded most expectations, and that the company is merely being conservative in its forward guidance. With cost control, share buyback, and growth in digital, we think EA can grow earnings by $0.20 or more each of the next two years.
Maintaining our OUTPERFORM rating, and raising our 12-month price target to $29 from of $27, 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 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.