What’s in Store for Electronic Arts (EA) in Q3 Earnings?

Electronic Arts Inc. EA is scheduled to report fiscal third-quarter 2018 results on Jan 30.

The company has beaten the Zack Consensus Estimate in three of the trailing four quarters, delivering an average positive surprise of 24.78%.

Last quarter, the company reported non-GAAP earnings of 66 cents per share, which beat the Zacks Consensus Estimate of 55 cents. Net bookings, which matched the consensus mark, came in at $1.18 billion, up 7.4% year over year.

However, Electronic Arts’ outlook for the third quarter of fiscal 2018, which includes the important holiday season, is lower than expected. For the quarter, the company expects net bookings to be $2 billion whereas the Zacks Consensus Estimate stands at $2.03 billion.

Factors at Play

EA’s popularity is primarily driven by its well-known franchises, which has been the key growth driver for the company. EA SPORTS titles, along with Battlefield, Titanfall and Star Wars are some of its biggest franchises.

In third-quarter fiscal 2018, Electronic Arts released the highly-awaited Star Wars Battlefront II game, Need for Speed Payback and The Sims 4 (Console). The quarter will also include the sale of FIFA 18 that was released on Sep 29, 2017. FIFA remains one of the most popular titles among gamers.

Apart from popular titles, it is the shift to digital that has proved to be a major growth driver for Electronic Arts. Digital sales now contribute to the majority of revenues. Additionally, the live services component (includes revenues from extra content and subscriptions, advertising, and others) of EA games has also emerged as a big growth driver.

However, the launch of Battlefront 2 was a disappointment for the company. The game did not receive very positive reviews. The outrage over the exorbitant pricing of in-games purchases compelled EA to temporarily turn off all micro transactions in the game, apparently.

The controversy regarding Battlefront 2 has been a dampener and thus sales are anticipated to be lower than its predecessor, which recorded tremendous success in the third quarter of fiscal 2017. The underperformance of The Sims 4 will also remain an overhang on results.

In the quarter, the company also completed the acquisition of Titanfall maker, Respawn Entertainment in a cash and stock deal worth $315 million.

Rise in operating expenses, mainly due to higher investments in games and live services will weigh on the bottom line.

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

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. The Sell-rated stocks (Zacks Rank #4 or 5) are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Electronic Arts has a Zacks Rank #4 and its Earnings ESP is -1.15%. Therefore, the company is unlikely to deliver a positive surprise this quarter.

You can see the complete list of today’s Zacks #1 Rank stocks here.

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