Electronic Arts (EA) Gets a Big Boost from Digital Distribution

Shares of video game publisher Electronic Arts (EA: Charts, News) rallied last week after the company posted strong third quarter earnings, despite a painful contraction in video game sales throughout 2011. The company posted adjusted non-GAAP earnings, which excludes one-time charges, of 87 cents per share on revenue of $1.65 billion.

This came in at the low end of EA's previous guidance of 85 to 95 cents per share, but beat the analysts' expectations of non-GAAP earnings of 83 cents per share. It also beat the consensus revenue forecast of $1.61 billion, which was in line with its previous guidance of $1.55 to $1.65 billion. GAAP-adjusted earnings came in at a net loss of 62 cents per share, or $205 million, an improvement over the loss of 97 cents per share, or $322 million, it posted in the prior year quarter. The company attributed its stronger than expected performance to the successful launches of Battlefield 3, FIFA 12 and Star Wars: The Old Republic, as well as an increase in higher margin digital purchases. However, EA provided weak guidance for the fourth quarter, expecting non-GAAP revenue between $925 and $975 million, and non-GAAP earnings between 10 to 20 cents per share. Analysts on average expected the company to earn 29 cents per share on revenue of $983.22 million in its fourth quarter. Daily Chart
In the third quarter, Battlefield 3 and FIFA 12 were EA's top titles, selling over 10 million units each, while Star Wars: The Old Republic sold over 2 million units within its first month. Star Wars, a MMORPG (massive multiplayer online role playing game), is subscription based and intended to compete against its arch rival Activision Blizzard's ATVI flagship title, World of Warcraft. To date, Star Wars has 1.7 million active subscribers. World of Warcraft, which debuted in 2004, has over 12 million. EA's digital revenue rose 79% to $377 million, contributing to 23% of total revenue, up from the 15% it contributed a year earlier. This marks a shifting trend in video gaming, in which players are now opting to purchase games online via digital distribution channels such as Amazon (AMZN: Charts, News) and Steam, rather than visit brick-and-mortar game retailers. Downloadable content (DLC), or purchasable add-ons to retail games, have also contributed to this shift. DLC and free-to-play micro transaction content, in which players of a free online game choose which individual products to purchase, grew 86% year-over-year to $123 million. This bodes well for EA, which sells its products at a far higher margin digitally due to the lack of optical discs, manuals and packaging. Full game downloads rose 442% on year-over-year basis to $103 million, while revenue from subscriptions and digital advertising rose 14% to $67 million. EA uses a digital platform called Origin to distribute and manage its games. EA also reported growth in its other business segments. It posted a 25% increase in mobile and handheld digital revenue to $85 million, attributed to the rising popularity of smartphone and tablet games. Revenue from publishing, in which EA publishes titles from independent game studios, rose 10.6%. Its publishing segment accounts for 74% of the company's total revenue. The company also posted growth in all geographic regions, with a revenue increase of 16.2% in North America, 15.6% in Europe and 38.4% in Asia. EA also increased its cash flow from $1.5 to $1.79 billion from the previous quarter. The company also repurchased 1.8 million shares for $141 million during the quarter, with a remaining $312 million available for further repurchases. While EA's results were undoubtedly strong, the company has a few blemishes on its balance sheet. The company's operating expenses on a non-GAAP basis rose 15.1% to $692 million, due to higher expenditures across the board, in marketing & sales, general & administrative and research & development. Revenues at its distribution segment, which accounts for 3% of total revenue, plunged 46%. In 2012, its main competitor Activision Blizzard has several big titles coming out - such as Diablo 3, Starcraft 2: The Heart of the Swarm, ts new Skylanders toy line, as well as another Call of Duty title - that may dent EA's top line. Lastly, an unstable macro environment could derail consumer confidence and cause a further decline in video game sales. Shares of EA trade at 16.6 forward earnings, with a 5-year PEG ratio of 1.3. Other News About EA EA's Impressive 3Q EA posts an impressive quarter despite the odds. Electronic Arts Results Top Estimates; Outlook Weak A look at where EA posted the most strength. Other Stocks in the News The Walt Disney Company First Quarter Earnings Sneak Peek Disney is set to report earnings tomorrow. Las Vegas Sands Corp. : Buy momentum Can shares of LVS continue to rally and break through resistance? Copyright 2011 by InvestorGuide.com, Inc. 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Published on Feb 6, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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