Electronic Arts Inc. EA reported earnings of 27 cents per share in the fourth quarter of fiscal 2015, beating the Zacks Consensus Estimate of 14 cents. Following the news, the company’s shares rose 3.6% in yesterday’s trading session to close at $59.16.
However, earnings declined about 22.9% from 35 cents reported in the year-ago quarter.
Revenues
Revenues surged 5.5% from the year-ago quarter to $1.185 billion. The company’s non-GAAP revenues came in at $896 million. The Zacks Consensus Estimate for the reported quarter was pegged at $860 million.
The year-over-year growth was driven by sales of Battlefield Hardline and better-than-expected growth in catalog titles. Continued increase in mobile gaming audience and new modalities of play across the world also drove quarterly revenues.
Non-GAAP Digital revenues (67% of revenues) jumped to $602 million from $550 million reported in the year-ago quarter. However, EA’s Packaging goods and other segment (33% of total revenue) revenues decreased to $294 million from $365 million reported in the year-ago quarter.
Mobile generated $150 million of revenues, up 22% on a year-over-year basis. EA mobile games drew 165 million monthly active users during the reported quarter.
For fiscal 2015, EA continues to be the #1 publisher on PlayStation 4 and Xbox One consoles in the Western world, led by Battlefield Hardline, Dragon Age: Inquisition, FIFA 15, NHL15, Madden NFL 15, Battlefield 4 and FIFA 14.
During the quarter, gamers played about 30 million game sessions of Battlefield Hardline.
Margins
Though, EA’s non-GAAP gross margin contracted 200 basis points (bps) year over year to 75.4% in the fourth quarter, it was higher (up 140 bps) than management’s guidance primarily led by strength in Battlefield Hardline.
Operating expenses increased to $513 million in the reported quarter from $503 million reported in the year-ago quarter. The year-over-year increase was primarily due to higher marketing expenses for Battlefield Hardline.
A lower gross margin base and increase in operating expenses led the operating margin (including stock-based compensation expense but excluding one-time items) to contract to 18.2% from 22.3% in the year-ago quarter.
Earnings include stock-based compensation but exclude acquisition-related expenses, amortization of debt discount, change in deferred net revenue, and other and related tax effect.
Balance Sheet and Cash Flow
EA exited the quarter with $3.021 million in cash, short-term investments compared with $2.940 billion in the previous quarter. Operating cash flow was $198 million in the reported quarter.
During the quarter, the company repurchased 1.8 million shares for $95 million. The board of directors authorized a new repurchase program of up to $1 billion of EA’s shares.
Outlook
For the first quarter of fiscal 2016, EA expects to generate non-GAAP revenues of approximately $1.140 billion. The Zacks Consensus Estimate for revenues is pegged at $752 million. The company expects to break even in the first quarter (on a non-GAAP basis).
For fiscal 2016, EA expects to generate non-GAAP revenues of approximately $4.400 billion. The Zacks Consensus Estimate for revenues is pegged at $4.464 billion. Non-GAAP earnings are expected to be $2.75 per share.
Our Take
EA delivered encouraging fourth quarter fiscal 2015 results. We believe that EA’s strong games portfolio, strength in new consoles and continuing growth in the mobile market are key growth catalysts. Also better-than-expected sales of Battlefield Hardline are contributing to the top line. 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 has a Zacks Rank #3 (Hold).
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