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Electronic Arts (EA) Tops on Q2 Earnings, Falls on Weak View

Electronic Arts EA reported second-quarter fiscal 2018 results, wherein the company’s non-GAAP earnings of 66 cents per share easily beat the Zacks Consensus Estimate of 55 cents.

However, shares fell 3% in the aftermarket session as Electronic Arts’ outlook for the third quarter of fiscal 2018 (which includes the important holiday season) was lower than expected. For the current quarter, the company expects net bookings (total revenues plus change in deferred revenues for online-enabled games) to be $2 billion whereas the Zacks Consensus Estimate stands at $2.05 billion.

Coming to the second-quarter details, the company reported loss of 7 cents, narrower than loss of 13 cents reported in the prior-year quarter.

Electronic Arts Inc. Price, Consensus and EPS Surprise

Electronic Arts Inc. Price, Consensus and EPS Surprise | Electronic Arts Inc. Quote

Net bookings came in at $1.18 billion, up 7.4% year over year. The Zacks Consensus Estimate was $1.18 billion.

The company witnessed continued increases in digital revenues and strength in games like Star Wars: Galaxy of Heroesas well as EA Sports titles like Madden NFL 18, FIFA 18, NHL 18 and Battlefield 1.

Revenues (excluding deferred revenues) came in at $959 million compared with $898 million in the year-ago quarter.

EA’s digital revenues (71.8% of revenues) increased 21.7% to $689 million due to Battlefield 1, Ultimate Team and Madden NFL 18 full game downloads. Revenues from EA’s Packaging goods and Other segment (28.2% of total revenue) were down 18.7% to $270 million.

Further segregating digital revenues, full game downloads revenues were up 31% to $123 million from the second quarter of fiscal 2017.EA mobile games revenues increased 6% year over year to $158 million.

Revenues from Live services increased 26% to $408 million. It now includes revenues from extra content and subscriptions, advertising, and others. Live services net bookings were up 22% year over year to $310 million driven by FIFA, Madden, Ultimate Team and Battlefield 1 as well as growth of FIFA Online 3 in Asia and The Sims 4.

Margins

EA’s gross margin came in at 59.4% compared with 55.3% reported in the prior-year quarter.

Operating loss was $41 million, narrower than loss of $49 million reported in the prior-year quarter.

Balance Sheet and Cash Flow

As of Sep 30, 2017, EA had $4.36 billion in cash and short-term investments compared with $3.834 billion as of Mar 31, 2016. Net cash provided by operating activities in the quarter came in at $52 million.

During the quarter, the company repurchased 1.3 million shares for $153 million. EA has $928 billion worth of shares left under its two-year $1.2 billion buyback program announced this May.

Outlook

EA provided guidance for the third quarter and reiterated fiscal 2018 guidance. Strength in franchises like Battlefield, FIFA and Star Wars will boost the top line in the fiscal year. Management expects live services of the franchises to emerge as a big future growth driver.

For the third quarter, the company expects GAAP revenues of $1.14 billion. Change in deferred revenues will be $865 million. Net bookings are expected to be $2 billion, which is 3% lower than the year-ago figure as growth in live services is being marred by several product launches.

The company projects loss per share of 21 cents. Rise in operating expense mainly due to higher investments in games and live services will weigh on the bottom line.

For fiscal 2018, EA continues to expect GAAP revenues of approximately $5.08 billion. Change in deferred revenues will be around 75 million.

Net bookings are expected to be $5.15 billion.

The company projects earnings per share of $3.63, higher than $3.57 projected earlier. Operating cash flow is estimated to be around $1.6 billion compared with $1.58 billion projected earlier. Capex is expected to be $120 million, resulting in free cash flow of $1.48 billion.

Live services are expected to grow 10-15% in fiscal 2018.

Our Take

One of the leading names in the video game industry, Electronic Arts continues to benefit from its popular franchises as well as the shift to digital. Additionally, revenues from the live services component are fast emerging as a key growth driver. Ongoing cost-optimization initiatives are also expected to cushion the company’s top-line performance.

Stiff competition from other game makers such as Activision Blizzard Inc. ATVI, Take Two Interactive TTWO and Glu Mobile Inc. GLUU remains a major concern.

In the last year, Electronic Arts returned 53.7% compared with the industry’s gain of 39.4%.

Currently, Electronic Arts has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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