Electronic Arts (EA) Down 5.5% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Electronic Arts (EA). Shares have lost about 5.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Electronic Arts due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Electronic Arts Q3 Earnings Fall Y/Y, Revenues Rise

Electronic Arts reported third-quarter fiscal 2021 earnings of 72 cents per share, which plunged 39% year over year.

Revenues increased 5% year over year to $1.6 billion.

The Zacks Consensus Estimate for earnings and revenues was pegged at $2.94 per share and $2.3 billion, respectively.

Net bookings increased 18.8% year over year to $2.4 billion, better than management’s guidance of $2.35 billion, driven by robust live services performance.

Moreover, fiscal third-quarter bookings benefited from the late launch of Madden NFL 21 compared with Madden NFL 20. Moreover, launch of FIFA 21 in the third quarter aided net bookings growth.

Quarter Details

EA’s full-game revenues (43.2% of total revenues) increased 4.8% year over year to $722 million. Net bookings from full games increased 10% year over year to $858 million.

Further segregating full-game revenues, full-game download revenues increased 21% year over year to $347 million. Revenues from packaged goods plunged 7% year over year to $375 million.

Moreover, live services and other revenues (56.8% of total revenues) rose 5.2% year over year to $951 million. Net bookings from live services increased 24% year over year to $1.5 billion.

Live services performance was primarily driven by Ultimate Team and Apex Legends.

Based on platforms, revenues from console increased 2% year over year to $1.1 billion in the reported quarter. Net bookings from console increased 17% year over year to $1.8 billion.

Revenues from PC/browser increased 25% year over year to $326 million. Net bookings from PC/browser increased 40% year over year to $399 million.

However, revenues from mobile platform declined 8% year over year to $156 million. Net bookings from mobile increased 3% year over year to $191 million.

Important Game & Player Metrics

EA launched FIFA 21, Medal of Honor: Above and Beyond, Need for Speed Hot Pursuit Remastered and NHL 21 in the reported quarter besides the launch of season 7 of Apex Legends and the Snowy Escapes Expansion Pack for The Sims 4. Madden NFL 21 had nearly 30% more players on a year-over-year basis.

Additionally, during the fiscal quarter, the company extended the availability of Star Wars: Jedi Fallen Order on Google Stadia, FIFA 21 and Madden NFL 21 on PS5 and Xbox Series X, and EA Play on Microsoft Game Pass in the reported quarter.

While NHL engagement is up 4% year over year, UFC 4 has consistently had 20% more daily players than the previous game since its launch in the fiscal second quarter. Further, Apex Legends witnessed 30% growth in new players year over year.

Additionally, the company set a new record of nearly 6 million daily active players in FIFA Ultimate Team in December. FUT matches grew a staggering 177% year over year. Moreover, FIFA Mobile Asia now has nearly 21 million players.

Markedly, measured over the last 10 fiscal years, the FIFA franchise witnessed a CAGR of nearly 50% and Madden grew nearly 60%.

Moreover, nearly 33 million people have played The Sims 4 life-to-date, and daily, weekly, and monthly average players in the game all reached all-time highs for the fiscal third quarter in December.

Further, EA Play now has more than 13 million active players across platforms, reflecting the growing popularity of the platform.

Markedly, EA SPORTS franchises have engaged more than 230 million people over the past fiscal year.

The Star Wars franchise has also gained immense popularity with an expanding portfolio that includes Star Wars: Knights of the Old Republic, Galaxy of Heroes, Battlefront, Jedi: Fallen Order and most recently, Squadrons. They collectively represent over $3 billion life-to-date net bookings and 52 million games sold.

Operating Details

EA’s GAAP gross profit decreased 1.2% from the year-ago quarter to $1.07 billion. Gross margin contracted 400 basis points (bps) on a year-over-year basis to 64.1%.

Operating expenses increased 13.4% from the year-ago quarter to $821 million. As a percentage of revenues, operating expenses expanded 360 bps on a year-over-year basis to 49.1% in the reported quarter.

As a percentage of revenues, marketing & sales (M&S), research & development (R&D) and general & administrative (G&A) expenses increased 20 bps, 250 bps and 100 bps respectively.

Operating income on a GAAP basis decreased 30.5% year over year to $251 million. Operating margin contracted 770 bps on a year-over-year basis to 15%.

Balance Sheet and Cash Flow

As of Dec 31, 2020, EA had $6.71 billion in cash and short-term investments compared with $6.03 billion as of Sep 30, 2020.

Net cash from operating activities in the reported quarter was $1.12 billion compared with $61 billion in the previous quarter and $1.1 billion in the year-ago quarter.

EA repurchased 2.5 million shares for $326 million during the quarter, bringing the total for the last twelve months to 5.9 million shares for $695 million.

The company also declared a quarterly cash dividend of 17 cents per share. The dividend is payable on Mar 24 to shareholders of record as of the close of business on Mar 3.

Guidance

For the fourth quarter of fiscal 2021, EA expects GAAP revenues of $1.317 billion, cost of revenues to be $302 million, and operating expenses of $837 million. EA anticipates a loss per share of 7 cents for the fourth quarter.

Net bookings are expected to be $1.375 billion, which indicates an increase of $75 million over the prior guidance.

For fiscal 2021, EA expects revenues of $5.6 billion, cost of revenues to be $1.477 billion, and earnings per share of $2.54.

The company raised net bookings expectations for the year to be $6.075 billion, up $125 million from the prior guidance. This is driven by continued strength in its live services, particularly FIFA and Apex Legends. The Apex Legends franchise is expected to deliver well over $500 million in net bookings this fiscal year compared with the original expectations of $300 million to $400 million.

Operating cash flow is estimated to be $1.85 billion.


Note: The EPS data mentioned in the text of this section differs from the rest of report due to the difference in calculation or consideration of one-time items.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 6.82% due to these changes.

VGM Scores

Currently, Electronic Arts has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Electronic Arts has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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