Expectations Were Too High for EA (EA), Long Term Thesis Intact - Stern Agee CRT

Stern Agee CRT analyst, Arvind Bhatia, believes the less than expected upside in the quarter for (NASDAQ: EA) came from slightly lower margins on StarWars but the underlying growth and margin expansion story at EA remains intact.

Over the last four quarters, EA has exceeded consensus revenue expectations, on average, by 7% and consensus EPS expectations by $0.20. As such, investors have come to expect meaningful upside each quarter. EA's F4Q revenue was essentially in line with consensus and EPS was "only" $0.02 above consensus.

Highlights in the quarter:

-Revenue/EPS of $1.803B/$1.83 were essentially in line with consensus $1.085B/$1.81.

-Full year guidance of $4.517B/$3.04 is up slightly from $4.5B/$3.00 and compares to consensus $4.554B/$3.10.

-Digital revenue: +16% y/y, while above our estimate, appears to have disappointed some –higher mix of physical versus digital mix for Star Wars Battlefront –helps explains it.

-Gross margins: 70.4%, 110 bps lower than guidance—impact of Star Wars Battlefront, which skewed more physical than digital (and we think discounting impacted margins).

-Op-Ex: 28.4% of revenue or 210 bps lower than guidance.

-Star Wars Battlefront: ship-in is already above full year guidance of 13M units.

-Need for Speed- engagement has doubled versus last year’s title.

-Ultimate Team Revenue +13% y/y (+22% FX-neutral). FIFA UT up 8% y/y (+18% y/y FX-neutral).

-Mobile Revenue: +17% y/y- Madden NFL Mobile and Star Wars Galaxy of Heroes were key drivers

-Full Game digital downloads: Revenue up 39% y/y.

-Strongest operating cash flow quarter in EA’s history

No change to Buy rating or $80.00 PT

For an analyst ratings summary and ratings history on Electronic Arts click here. For more ratings news on Electronic Arts click here.

Shares of Electronic Arts closed at $69.79 yesterday.

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