Outlook: Electronic Arts Continues to Beat Expectations
EA (NASDAQ:EA) filed an 8-K after the market close on Thursday stating that it intended to delay the 2014 Xbox 360 launch dates for Titanfall from March 11 to March 25 in the U.S. and from March 13 to March 28 in Europe. The blog posting of the announcement is reproduced on the following page. The company stated that based on current estimates, the release date changes will not affect its fourth-quarter fiscal year 2014 non-GAAP guidance for revenues or earnings. The planned release dates for the game of March 11, 2014 in North America and March 13, 2014 in Europe remain unchanged for the Xbox One and PC versions of the game.
Although the blog states that the two-week delay was due to the company’s desire to put finishing touches on the game, we suspect that a motivating factor was revenue management. We have modeled 3.5 million units of sell-in for the game in its release quarter, with the bulk of sales likely occurring on the Xbox 360 platform; we suspect that pre-order demand for the game is above this figure, and believe that EA expects to sell more than 7 million units overall in the game’s first three months following launch. We believe that by delaying the launch of the Xbox 360 version until several days before quarter end, EA can manage its sell-in of units to around 3.5 million, and still largely satisfy demand. This will allow EA to sell sufficient units to hit its Q4 revenue and earnings guidance, and ensure that its FY:15 starts on solid footing.
We believe EA has the lineup to deliver revenue and EPS growth for at least the next two years. In FY:15, EA has UFC, EA Sports 2014 FIFA World Cup Brazil, 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 $0.50 or more in EPS growth for the next two years.
The company has not given FY:15 guidance yet, but has provided upbeat commentary. EA expects to continue to deliver operating margin expansion and grow cash flow in FY:15, and recently commented that it expects next-generation consoles to see high software attach rates, implying that year-over-year software sales growth is likely. We have modeled 2014 addressable market software sales growth of 18 percent, including a current generation software sales decline of 29 percent. We have modeled EA sales growth of 10 percent.
We are 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.
We remain positive on the EA story, as the company has twice raised guidance in a difficult transition year based upon its better-than-expected cost control. Despite some recent execution missteps, EA has managed to grow its earnings by over 50 percent, primarily due to unrivaled digital strength and better expense management.
We believe the company has a better publishing line up next year, is likely to grow its digital revenues, and is best positioned among its peers to exploit what we expect to be an uptick in game sales now that both next-gen consoles have launched. We believe EA represents the best opportunity for investors to benefit from continued digital growth for the industry in the coming years, as well as from a likely rebound in packaged goods sales as the new consoles are adopted.
Risks to attainment of our share price target include changes to game release timing, greater-than-expected deterioration of the average selling price (or, ASP) for game software, the effects of competition, changing macroeconomic factors, and lower-than-expected consumer demand for video game hardware.
Michael Pachter is an analyst at Wedbush Securities.