Video game developer and publisher, Electronic Arts Inc. (ERTS) is scheduled to release its fourth quarter 2011 results after the market closes today.
Since the third quarter release, shares of Electronic Arts have increased 10.7% compared to a 2.4% decline in the shares of its closest competitor Activision Blizzard Inc. (ATVI). For the same period, the S&P 500 increased 3.5%.
Despite outperforming the broader market in the last three months, sluggish revenue growth remains the primary headwind for the company. In the nine months ended December 31, 2010, revenue decreased 14.4% year over year, primarily due to lower number of game releases.
After losing 41 cents in the first half of 2011, Electronic Arts reported earnings per share (EPS) of 45 cents in the third quarter, which missed the Zacks Consensus Estimate of 47 cents.
Currently, the Zacks Consensus Estimate is pegged at 12 cents per share for the fourth quarter, well below management’s guided range of 15 cents to 25 cents a share. Electronic Arts reported a loss of 6 cents in the prior-year quarter.
Electronic Arts posted an average earnings surprise of 36.07% in the trailing four quarters, implying that it has outpaced the Zacks Consensus Estimate by the same magnitude over the last four quarters. We expect Electronic Arts to beat the conservative Zacks Consensus Estimate in the fourth quarter.
Electronic Arts is also expected to provide 2012 outlook in the upcoming earnings call, which will be a key catalyst for share price appreciation in the near term.
Third Quarter Recap
Electronic Arts reported non-GAAP earnings (excluding one-time items of $1.42 per share) of 45 cents, significantly up from 20 cents reported in the prior-year quarter. However, this failed to meet management guidance range of 50 cents to 60 cents a share.
Revenues, excluding deferred revenue of $357.0 million, increased 4.8% year over year and 59.5% sequentially to $1.41 billion. This was well above the Zacks Consensus Estimate of $1.05 billion and was within management’s guided range of $1.375 billion to $1.5 billion.
The year-over-year growth was primarily driven by strong Digital revenues in the quarter. Electronic Arts released fourteen titles in the third quarter of 2011.
For the fourth quarter 2011, Electronic Arts expects revenue on a non-GAAP basis to be in the range of $850.0 billion to $950.0 billion.
The company revised its fiscal 2011 revenue and earnings guidance. Revenue on a non-GAAP basis is projected in the $3.682 billion to $3.782 billion range (previous range $3.65 billion to $3.90 billion).
Earnings on a non-GAAP basis are anticipated in the range of 60 cents to 70 cents (previous range 50 cents to 70 cents) per share for fiscal 2011. For further details please see Electronic Arts Misses, Shares Up.
Estimate Revision Trends
Of the 4 analysts providing estimates for the fourth quarter of 2011, only 1 analyst made a downward revision, while none made any upward revisions in the last thirty days. The downward revison was primarily due to lack of visibility over the long term.
Of the 7 analysts providing estimates for the fiscal year 2011, only one analyst revised estimates upward, while another analyst moved in the opposite direction.
The net impact of the estimates revisions was nil.
Currently, the Zacks Consensus Estimate for fiscal 2011 is pegged at 27 cents per share.
Recommendation
Electronic Arts remains focused on delivering quality titles, which we believe will drive significant top-line growth going forward. The company’s impressive product pipeline guarantees market share gains over the long term.
Moreover, Electronic Arts’ increasing exposure to online social gaming and mobile applications and growing contribution from the Digital business will likely drive revenue over the long term.
However, we believe that cut-throat competition within the video game industry will make it difficult for any single company to gain significant market share in 2011. Moreover, increasing competition from social networking companies, such as Zynga, is a major concern for Electronic Arts.
Zynga has become one of the fastest-growing technology companies by using Facebook Inc.’s social network to distribute games. The company is a dominant player in the social gaming sector with more than 210 million monthly active users.
Six of the 10 most popular apps on Facebook belong to Zynga, led by “FarmVille” with 57.6 million users. We believe Electronic Arts existing tie-up with Facebook will improve its position in the social gaming market going forward.
We remain Neutral on Electronic Arts on a long-term basis (6-12 months).
Currently, Electronic Arts has a Zacks #5 Rank, which implies a Strong Sell rating over the short term.
ACTIVISION BLZD (ATVI): Free Stock Analysis Report
Be the first to comment