The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Electronic Arts (NASDAQ:EA) will report third-quarter 2014 (ending December) results after the market close on Tuesday and will host a conference call at 2 p.m. Pacific Standard Time (dial-in: 773-799-3213, passcode: EA, webcast: ir.ea.com).
After a difficult start to the quarter, we expect EA to limp to guidance due to Battlefield 4 staying power and the positive impact of the next-gen console launches. We have modeled revenue of $1.675 billion and earnings per share of $1.23 versus consensus of $1.658 billion and $1.24, and guidance of $1.65 billion and $1.22. According to NPD retail data, EA’s Q3 console/handheld sell-through was up 39 percent year-over-year, roughly in line with sell-in guidance of up 40 percent year-over-year. Its most high-profile new release, Battlefield 4, launched with weak sales in October, likely caused by consumer uncertainty ahead of the next-gen launches, but rebounded in the latter two months of the quarter, and its unit sales were down just over 10 percent versus its predecessor. Madden and FIFA also saw a lift from the two next-gen consoles.
Our conviction that EA can achieve guidance is strengthened by a few other factors. Implied 2H:14 digital revenue guidance is close to $1 billion, and we note that EA’s next-gen titles were available day-and-date digitally for both PS4 and Xbox One. In addition, EA provided Q3:14 guidance on Battlefield 4’s release day, meaning management knew initial sell-in figures. Also, if Q3 results had been well below guidance, we believe management would have preannounced in order to avoid its new CEO, Andrew Wilson, disappointing investors so early in his tenure.
We expect EA to maintain FY:14 guidance for revenue of $4 billion and EPS of $1.25. We expect March release Titanfall to be an industry top-seller for the quarter, and believe that its sales can offset any Battlefield 4 reorder weakness.
EA has the lineup to deliver revenue and EPS growth for at least the next two years. In FY:15, EA has UFC, FIFA World Cup, Dragon Age, and a likely fall shooter to replace Battlefield 4. In FY:16, Battlefield should return, plus Mirror’s Edge and Star Wars. We believe that EA can grow revenues by $400 million per year and deliver 50 cents or more in EPS growth each of the next two years.
Maintaining our OUTPERFORM rating and our 12-month price target of $30. Our PT is based upon a forward P/E of 18x our $1.65 EPS estimate for FY:15 and reflects improving execution and the positive impact of digital and next-gen. We recommend investors accumulate shares while they trade at a discount to our PT.
Michael Pachter is an analyst at Wedbush Securities.