Q3 Preview: Electronic Arts (ERTS) Better Make A MMO-ove Soon

Electronic Arts Inc. (Nasdaq: ERTS) is trading lower ahead of the company's third quarter earnings release, expected out after the market closes. Shares are down 1.5% today.

ERTS is expected to post EPS of $0.57 on revs of $1.44 billion. Last quarter, the Redwood City, CA-based company posted EPS of $0.10, excluding certain items, with revs of $884 million, both topping consensus views. For Q409, the company reported EPS of $0.33, ex-items, on revs of $1.24 billion, which was mixed to the Street consensus.

Shares fell 0.4% through the quarter to $16.38 at the end of December. The stock is down 5.9% since then, and ended 2010 about 9.8% worse.

A simple valuation puts ERTS with a forward P/E of 18.4x FY12 EPS estimates, compared to 14.0x at Activision Blizzard (Nasdaq: ATVI) and 15.5x for Take-Two Interactive Software (Nasdaq: TTWO).

Data from Bloomberg has 15 analysts with a Buy on ERTS, 11 with a hold, and two suggesting to Sell. The analyst price target average is $19, with a high of $25 and low of $12. Shares have traded in a range of $20.24 - $14.06 over the last 52-weeks.

Summary
Electronic Arts guided Q311 revs of $1.375 - $1.500 billion and a non-GAAP EPS of $0.50 - $0.60.

• Janco sees continued weight on shares until the potential for Star Wars: The Old Republic (SWTOR), a MMO (Massively Multiplayer Online) offering from their Bioware studio. Other points that investors will be watching include litigation with Activision and growth from the Playfish game portfolio. They believe that the Street is betting negatively on SWTOR, given the industry's and company's track record of releasing successful new MMO's, "a suspected subscription pricing model versus a market that is quickly transitioning to free to play, generally modest pre-views of the game and elevated development expense and suspected aggressive royalty to Lucas Arts."
  
  Otherwise, Janco is looking for Q311 performance coming in high to their guidance range. They're looking for revs of $1.475 billion and non-GAAP EPS of $0.59.
  
  Janco looking for the following unit shipments:
  • Need for Speed: Hot Pursuit - 4.2 million units;
    
    
  • Medal Of Honor - 4.5 million units;
    
    
  • MMA - 500K or less units;
    
    
  • Sims 3 - 2 million units; and
    
    
  • Harry Potter and the Deathly Hallows - 1.2 million units.
  Looking at Q411 pipeline, key releases include: Dead Space 2, Dragon Age 2, Bulletstorm, Crysis 2, Need for Speed SHIFT 2, Mass Effect (PS3), and Fight Night Champion.
  
  In terms of catalog sales, they sees FIFA '11 selling 4 million units, and adding $175 million, and Madden '11 selling 3 million units and $123 million in sales.
  
  Janco has a Buy rating on the shares, with a price target of $19.15.
  
  
• Wedbush expects that Q311 results will come in below their estimates calling for EPS of $0.62 on revs of $1.44 billion, and more likely EPS of $0.57 on revs of $1.44 billion. FY11 guidance is expected to be maintained.
  
  Wedbush notes that EA's Q3 U.S. NPD sales tracked down 22%, versus their guidance of a 2% - 11% increase. They "think that the company had strong international sales of FIFA Soccer 11, Medal of Honor, Need for Speed: Hot Pursuit, and The Sims 3, offsetting some of the U.S. weakness. [They] also think digital sales were up significantly year-over-year, driven by the addition of PlayFish and Chillingo, and by a phenomenally successful iPhone game sale in December."
  
  In terms of Star Wars: The Old Republic, they're looking for a mid-FY12 launch, and contributions of $150 million or more to revs. Another $150 million is expected in growth from their digital business. Together, this could add $0.35 or more to FY12 EPS.
  
  Wedbush has an Outperform on the stock, with a price target of $21.50.

Electronic Arts Inc. is expected to release their Q311 earnings on Tuesday, February 1, 2011, at approximately 4:00pm EST. Stay tuned to StreetInsider.com's EPS Insider section to see our analysis of the highly-anticipated quarterly results withi0 n seconds of their release.

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