Electronic Arts Posts Better-Than-Expected Q4 Earnings, Revenues

Source: Electronic Arts

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

EA (NASDAQ:EA) delivered sharply higher-than-expected revenues and earnings for Q4. The company delivered EPS of 48 cents compared to our estimate of 10 cents, the consensus estimate of 11 cents, and guidance of 10 cents. Revenues were higher than we expected, and gross margin sharply higher, as the EPS upside came primarily from cost control and a better mix of digital revenues.

EA provided initial guidance for FY:15, expecting $1.85 in EPS on revenues of $4.1 billion. The company’s revenue guidance reflects $300 million in digital revenue growth, $200 million in packaged goods sales declines, and flat operating expenses. We expect some upside to guidance, as we believe that packaged goods may be closer to flat for the year.

We believe EA has the lineup to deliver solid revenue and EPS growth in its out year. With the return of Battlefield and Need for Speed, EA is positioned to deliver significant revenue growth in FY:16. We expect digital revenues to grow by at least $200 million per year and believe that EA can grow its overall revenues by $400 million next year. Assuming it keeps its costs in check, the company should be able to deliver 50 cents or more in EPS growth in FY:16.

We believe quality issues remain a concern, as EA has seen a handful of its franchises wither over the past two years. Following FY:13’s disaster with Medal of Honor, EA produced another poor game with its NBA Live offering in FY:14. Many investors are skeptical about quality control, and we believe it is essential that EA maintain minimum quality standards going forward. We suspect that one reason it suspended Need for Speed for a year was to ensure better quality for the franchise.

We are adjusting our FY:15 estimates for revenue to $4.2 billion from $4.31 billion and for EPS to $1.90 from $1.65 to reflect guidance. Management provided initial FY:15 guidance for revenue of $4.1 billion and EPS of $1.85. In FY:14, revenue was $4.02 billion and EPS was $1.69. Initial Q1:15 guidance is for revenue of $700 million and EPS of 5 cents.

Maintaining our OUTPERFORM rating and raising our 12-month price target to $43 from $37. Our price target reflects our sharply higher EPS estimate for FY:15. We arrive at our price target by assigning a 20x multiple to our $1.90 EPS estimate plus $5 in net cash per share on the balance sheet.

Michael Pachter is an analyst at Wedbush Securities.

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