Video game developer and publisher Electronic Arts (ERTS), better known as EA, reported first quarter 2012 results, which was worse than the Zacks Consensus Estimate of a loss of 45 cents per share.
EA’s non-GAAP loss (excluding one-time items but including stock-based compensation) of 49 cents per share was much wider than 38 cents per share reported in the prior-year quarter. This was, however, in line with the high end of management’s guided range of a loss of 49 cents to 44 cents.
The disappointing result was primarily attributed to lower revenues in the quarter that failed to beat the Zacks Consensus Estimate. However, despite reporting a loss in the first quarter, EA reaffirmed its fiscal 2012 earnings per share guidance.
Operating Performance
Gross profit on a non-GAAP basis decreased 10.3% year over year to $287.0 million. Gross margin declined 460 basis points (bps) due to higher sales from the low-margin distribution segment.
Total operating expenses increased 4.8% year over year to $499.0 million in the quarter. Operating expense, as a percentage of revenue, increased significantly from 88.3% in the prior-year quarter to 95.2% in the reported quarter.
The year-over-year growth in operating expense was primarily ascribed to higher marketing & sales expenses (up 310 bps as a percentage of sales and 10.2% year over year on a dollar basis), general & administrative (up 40 bps, despite remaining flat year over year on a dollar basis) and research & development expenses (up 340 bps and 3.6% year over year on a dollar basis).
Operating loss was $212.0 million compared with a loss of $156.0 million in the prior-year quarter. Net loss on a non-GAAP basis was $161.0 million compared with a loss of $125.0 million in the year-ago quarter.
Revenue
Revenues, excluding negative deferred revenue of $475.0 million, decreased 2.8% year over year to $524.0 million, way below the Zacks Consensus Estimate of $796.0 million. Traditionally, EA’s first quarter is seasonally weak and this contributed to this miss.
Reported revenue, however, was ahead of management’s guided range of $460.0 million to $500.0 million. The beat was primarily driven by improved Digital and catalogue performance in the quarter. Strong performance of FIFA 11, Crysis 2, Tiger PGA TOUR 12 and Battlefield: Bad Company 2 propelled catalogue growth, which was 27.0% of first quarter revenue.
Sales from Publishing (37.2% of the total revenue) decreased 34.6% year over year, while revenues from Distribution (22.9% of the total revenue) increased 126.4% year over year.
Digital revenues (39.9% of the total revenue) jumped 11.2% year over year to $209.0 million in the quarter, primarily driven by growth in mobile and other handheld revenues and downloadable content (DLC).
DLC and free-to-play micro transaction content increased 32.0% year over year to $70.0 million in the first quarter.
Mobile and other handheld digital revenue was up 9.0% year over year to $59.0 million, driven by strong smartphone-related revenue, which more than offset a reduction in feature phone-related revenue.
Full game downloads were $32.0 million, up 39.0% year over year. Revenue from subscriptions, digital advertising and others decreased 17.0% year over year to $48.0 million.
At quarter end, core registered users were 125 million, significantly up from 67 million in the year-ago quarter.
In social network gaming, EA boasts 32 million monthly active users and 5 million daily active users. Playfish experienced improved monetization based on continued strength of Pet Society, Restaurant City, FIFA Superstars and Madden Superstars, with revenue increasing 75% year over year.
Region-wise, North American sales plunged 2.0% year over year. Sales from Europe also decreased 6.0%, while Asia achieved a growth of 11.0% in the reported quarter.
EA was the #1 publisher in the western world with 16.0% segment share in the quarter. EA enjoyed 16% and 17% market share in North America and Europe, respectively.
Balance Sheet
In the first quarter of 2012, cash used from operations was $274.0 million compared with $253.0 million in the prior quarter. EA ended the quarter with cash, short-term investments and marketable securities of $1.85 billion compared with $2.08 billion at the end of March 31, 2011.
Recently, EA agreed to buy PopCap Games for an estimated $1.3 billion, of which $650 million will be paid in cash and $100 million in new shares. The remaining $550 million payment is subject to PopCap’s ability to deliver $343 million or more in EBIT over a two-year period through December 2013.
The exact amount is subject to adjustments. Additionally, EA will shell out $50 million in long-term equity retention awards to PopCap employees over the next four years.
To finance the acquisition, EA issued convertible senior notes worth $632.5 million, carrying an interest of 0.75% and maturing in 2016.
In the quarter, EA repurchased 4 million shares for $91 million. The company has $451 million remaining under its existing share repurchase authority over the next 12 months.
Outlook
For the second quarter of 2012, EA expects revenue on a non-GAAP basis in the range of $925.0 million to $975.0 million. The increase is primarily based on additional revenue of $50.0 million to $75.0 million from the acquisition of PopCap Games.
For the second quarter of 2012, non-GAAP gross profit margin is expected to be approximately 58.0%. Operating expense is expected in the range of $580.0 million to $600.0 million.
Loss per share on a non-GAAP basis is expected in the range of 13 cents to 3 cents. The Zacks Consensus Estimate is currently pegged at a loss of 17 cents for the quarter.
The company raised its 2012 revenue guidance and reiterated the earnings guidance. Revenue on a non-GAAP basis is projected between $3.90 billion and $4.10 billion (previous guidance was $3.80 billion to $4.025 billion).
Earnings on a non-GAAP basis are expected in the band of 70 cents to 90 cents per share for fiscal 2012.
EA forecasts Publishing and other revenue in the range of $2.55 billion to $2.70 billion (up from $2.50 billion and $2.65 billion) for fiscal 2012. Distribution revenue is expected to be approximately $250.0 million (previous guidance $200.0 million) and Digital revenue in the range of $1.1 billion to $1.15 billion (previous guidance $1.05 billion to $1.1 billion) for fiscal 2012.
For fiscal 2012, non-GAAP gross profit margin is expected to be approximately 63.0%. Operating expense is estimated to be $2.15 billion.
EA expects to release 22 titles for fiscal 2012, with 5 titles scheduled for the second quarter.
EA on a GAAP basis expects operating cash flow in the range of $250.0 million to $300.0 million for fiscal 2012.
Recommendation
Despite a weak first quarter, management remained optimistic regarding its outlook and believes that EA will surpass its guidance based on the upcoming Star Wars game and incremental revenue from the acquisition of PopCap Games.
We believe EA has a strong product pipeline for fiscal 2012 and beyond that will drive top-line growth going forward. We believe that high quality titles, impressive product line, increasing online exposure, social games and portfolio diversification guarantees market share gains over the long term.
However, interest expense will weigh on the company due to the issuance of debt, which along with competition from Activision Blizzard Inc. (ATVI) and Take-Two Interactive Software Inc. (TTWO) will be headwinds going forward.
We have a Neutral recommendation on Electronic Arts over the long term (for the next 6 to 12 months). Currently, Electronic Arts has a Zacks #3 Rank, which implies a Hold rating in the short term.
ACTIVISION BLZD (ATVI): Free Stock Analysis Report
ELECTR ARTS INC (ERTS): Free Stock Analysis Report
TAKE-TWO INTER (TTWO): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment