Electronic Arts Falls Despite Q3 Earnings & Revenue Beat

Electronic Arts Inc. EA reported third quarter fiscal 2016 adjusted earnings (including stock-based compensation expense but excluding all other non-recurring items) of $1.73, which easily surpassed the Zacks Consensus Estimate of $1.70. Moreover, non GAAP revenues of $1,803 million also exceeded the Zacks Consensus Estimate of $1,801 million.

On a non-GAAP basis, the company reported earnings per share of $1.83 a share, much higher than the prior-year quarter’s earnings of $1.22 a share.

However, shares plunged nearly 8% in the aftermarket following the results. Analysts observe that though the company raised its outlook, it fell short of expectations, thus making investors jittery. Also, Star Wars Battlefront sold over 13 million copies and that too before Mar 2016 but contrary to expectations, the title’s physical copies sold more than the digital one, thus proving to be a drag on the video game publisher’s margins.

Coming to revenues, Non-GAAP Digital revenues (44.8% of revenues) jumped 16% to $807 million while revenues from EA’s Packaging goods and other segment (55.2% of total revenue) increased 36% to $996 million.

Non-GAAP revenues from EA mobile games increased 17% year over year to $162 million due to the launch of Star Wars: Galaxy of Heroes. Full game download revenues grew 39% to $195 million. However, revenues from subscriptions, advertising and other was down 10% to $90 million mostly due to declining revenue recognition of Battlefield 4 Premium.

Margins

EA reported a non-GAAP gross margin of 70.4%, a sharp drop of 240 bps year over year and 100 bps lower than management’s guidance.

Balance Sheet and Cash Flow

EA exited the quarter with $3.2 billion in cash and short-term investments compared with $3 billion as of Mar 31, 2015. Operating cash flow was $889 million in the reported quarter compared with $682 million in the year-ago quarter. During the quarter, the company repurchased 1.8 million shares for $126 million.

Outlook

EA provided guidance for fiscal fourth quarter and updated its outlook for fiscal 2016.

In the fiscal fourth quarter, the company expects non-GAAP revenues of 875 million, a tad lower than prior year quarter revenues. The company projected non-GAAP earnings per share of 40 cents, a penny more than prior-year quarter reported earnings.

For fiscal 2016, EA expects to generate non-GAAP revenues of approximately $4.517 billion, slightly up from the earlier projection of $4.5 billion. Non-GAAP earnings are expected to be $3.04 per share, higher than the previous forecast of $3.00. Operating margin is expected to be 28%. Cash flow is expected to be $1.2 billion while free cash flow is likely to be $1.1 billion.

Zacks Rank

Currently, EA has a Zacks Rank #3 (Hold). Some better-ranked stocks in the tech space include Take-Two Interactive Software Inc. TTWO, MeetMe, Inc. MEET and TrueCar, Inc. TRUE. All the stocks sport a Zacks Rank #1 (Strong Buy).

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