Electronic Arts Inc.(EA) reported earnings of $1.12 per share in the third quarter of fiscal 2015 beating the Zacks Consensus Estimate of 82 cents. Following the news, the company’s shares rose over 12.8% in yesterday’s trading session to close at $54.6.
However, earnings declined about 4.3% from $1.17 reported in the year-ago quarter.
Revenues
Revenues surged 39.4% from the year-ago quarter to $1,126 million while the company’s non-GAAP revenues came in at $1,428 million. The Zacks Consensus Estimate for the reported quarter was pegged at $1,186 million.
Continued growth in the mobile gaming audience and new modalities of play across the world combined to make the last quarter one of the most dynamic periods in the history of interactive entertainment.
Non-GAAP Digital revenues (48.5% of revenues) jumped to $693 million from $517 million reported in the year-ago quarter. However, EA’s Packaging goods and other segment (51.5% of total revenue) revenues decreased to $735 million from $1,055 million reported in the year-ago quarter.
Mobile generated $139 million of revenues, up 13% on a year over year basis. EA mobile games drew 160 million monthly active users during the reported quarter.
EA’s FIFA, Madden NFL and Hockey Ultimate Team together witnessed growth of 82% on a year over year basis.
Calendar year-to-date, EA continues to be the #1 publisher on PlayStation 4 and Xbox One consoles in the western world led byDragon Age: Inquisition, FIFA 15, NHL15, Madden NFL 15, EA SPORTSTM UFC, Titanfall, Battlefield 4, and FIFA 14.
In the last quarter, gamers played about 3.1 billion hours across console, mobile and PCs.
Margins
EA’s non-GAAP gross margin expanded 500 basis points (bps) year over year to 73% in the third quarter. The solid margin expansion was primarily led by robust revenue growth in the Digital segment.
Operating expenses (before acquisition-related contingent consideration, amortization of intangibles, restructuring and other but including stock-based compensation) declined to $563 million in the reported quarter from $583 million reported in the year-ago quarter.
The year-over-year decline was primarily due to lower marketing & sales expense (down 21%), research & development expense (down 2.9%) and general & administrative expense (down 17.6%).
A higher gross margin base and lower-than-expected increase in operating expenses helped operating margin (including stock-based compensation expense but excluding one-time items) to expand to 36% from 34% in the year-ago quarter.
Earnings include stock-based compensation but exclude acquisition-related expenses, amortization of debt discount, change in deferred net revenue, gain on strategic investments, restructuring and other and related tax effect.
Balance Sheet and Cash Flow
EA exited the quarter with $2,940 million in cash, short-term investments compared with $2,070 million in the previous quarter. Operating cash flow was $682 million in the reported quarter.
During the quarter, the company repurchased 2.5 million shares for $97 million. A $750 million stock repurchase plan was initiated by the company in May 2014.
Outlook
For the fourth quarter of fiscal 2015, EA expects to generate non-GAAP revenues of approximately $830 million. The company expects non-GAAP earnings of 22 cents per share in the fourth quarter.
For fiscal 2015, EA expects to generate non-GAAP revenues of approximately $4.253 billion. Non-GAAP earnings are expected to be $2.35 per share.
Recommendation
We believe that EA’s strong games portfolio, strength in new consoles and continuing growth in the mobile market are key growth catalysts. Moreover, the strong growth in digital sales coupled with the cost optimization initiatives will be beneficial going forward.
However, the company faces a number of headwinds that include significant competition from other game makers such as Activision (ATVI), Glu Mobile Inc. (GLUU) and Take-Two Interactive (TTWO). Additionally, higher consumer spending on new consoles may cannibalize software sales in the near term.
Currently, EA sports a Zacks Rank #1 (Strong Buy).
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