Electronic Arts Inc. (EA) reported earnings (including stock based compensation but excluding all onetime items) of 10 cents per share in the first quarter of fiscal 2015 against the Zacks Consensus Estimate of a loss of 13 cents. The bottom line also improved from a loss of 51 cents reported in the year-ago quarter.
Revenues
Non-GAAP revenues surged 56.5% from the year-ago quarter to $775.0 million. Revenues were also much higher than management’s guidance of $700.0 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.
Digital revenues (62.0% of revenues) jumped to $482.0 million in the first quarter from $378.0 million reported in the year-ago quarter. EA’s
Packaging goods and other segment (38.0% of total revenue) revenues increased to $293.0 million from $117.0 million reported in the year-ago quarter.
Mobile generated $120.0 million of revenues, up 18.0% on a year-over-year basis. Smartphone and tablets (90.0% of total mobile revenue) contributed $109.0 million. EA mobile games drew 140 million monthly active users during the reported quarter.
EA’s Ultimate Team services grew 90.0% year over year. During the quarter, NHL Ultimate Team registered year-over-year growth of 50.0%, FIFA Ultimate Team grew 80.0% while Madden Ultimate Team grew over 350% year over year.
Calendar year-to-date, EA continues to be the #1 publisher on PlayStation 4 and Xbox One consoles in the western world led by FIFA 14, Titanfall, Battlefield 4 and EA Sports UFC.
In the last quarter, gamers played more than 13.6 billion online sessions of EA games, for a total of nearly 2.4 billion hours played across console, mobile and PCs.
Margins
EA’s non-GAAP gross margin expanded 640 basis points (bps) year over year to 61.6% in the first quarter. The solid margin expansion was primarily led by robust revenue growth in both the segments.
Operating expenses (before acquisition-related contingent consideration, amortization of intangibles, restructuring and other but including stock-based compensation) declined to $485.0 million in the reported quarter from $522.0 million reported in the year-ago quarter.
The year-over-year decline was primarily due to lower marketing & sales expense (down 1290 bps), lower research & development expense (down 2200 bps) and lower general & administrative expense (down 580 bps).
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 10.1% from 2.2% in the year-ago quarter.
Net income (including stock-based compensation) was $32.2 million or 10 cents per share compared with a loss of $49.1 million or 16 cents per share 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 $2.32 billion in cash, and short-term investments compared with $2.37 billion in the previous quarter. Operating cash flow was $964.0 million in the reported quarter.
During the quarter, the company repurchased 1.4 million shares for $50.0 million. A $750.0 million stock repurchase plan was initiated by the company in May and this will expire on May 31, 2016.
Outlook
For the second quarter of fiscal 2015, EA expects to generate non-GAAP revenues of approximately $1.14 billion. The company expects non-GAAP earnings of 50 cents per share in the second quarter Non-GAAP gross margin is expected to be 65.5%, better than prior year’s guidance of 62.0%. Non-GAAP operating expense is expected to be $530.0 million.
Management expects this quarter to benefit from the launches of Sims 4, FIFA 15, Madden NFL 15 and NHL 15.
For fiscal 2015, EA expects to generate non-GAAP revenues of approximately $4.10 billion, lower than the Zacks Consensus estimate of $4.11 billion. Non-GAAP earnings are expected to be $1.85 per share.
Management continues to expect gross margin of 68.5%, while operating expenses are projected to be approximately $2.0 billion (down 1.0% compared to fiscal 2014).
EA expects its operating cash flow to be approximately $800.0 million. Free cash flow is forecast to be approximately $700.0 million.
Digital revenue is forecast to be nearly $2.15 billion, up 17% on a year-over-year basis. Mobile revenue is expected to grow over 20.0%, as gamers’ engagement on smartphones and tablets continue to increase at a significant pace.
Extra-content and free-to-play is expected to continue to grow over 15.0% this year, fueled by live services. Subscription revenue is expected to grow approximately 30.0%, as a significant portion of Battlefield 4 Premium revenue will be recognized during this fiscal year.
Recommendation
We believe that EA’s strong digital portfolio and continuing growth in the tablet and smartphone market are key growth catalysts. EA’s strong portfolio of games will continue to boost its market share on new consoles, going forward. Moreover, the company’s efforts to optimize costs through overhead reductions 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 #1 (Strong Buy).
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