Electronic Arts Inc. (ERTS) reported third-quarter of 2010 results with a steep fall in net earnings and revenue due to weakness in its EA business, dismal holiday sales for the overall packaged goods sector in Europe and product mix shifts to lower-margin distribution business in North America .
Despite higher cost controls, delay in launching new titles, a difficult packaged goods software business, lower restructuring benefit and the negative impact of foreign exchange led to disappointing guidance for the upcoming quarters. As a result, the shares fell 8.29% after hours.
Net income, excluding non-recurring items decreased 41% to 33 cents in the third-quarter of 2010 from the year-ago earnings per share of 56 cents. Earnings per share came in line with the company’s reduced outlook on Jan 13, 2010 of 29 cents to 33 cents.
However, earnings surpassed the conservative Zacks Consensus Estimate of 21 cents per share driven by effective cost management. The company has reduced operating costs in the quarter and projects fiscal year 2011 non-GAAP costs down $100 million versus fiscal year 2010.
Due to the lower cost of sales, gross margin on a non-GAAP basis increased to 52% from 47% in the year-ago period. Despite lower operating expenses (a decline of 7.8% year over year) in the quarter, operating margin decreased to 11% from 13% in the year-ago period impacted by lower revenue.
Revenue
The company continues to experience a year over year decline in the top-line. Total non-GAAP net revenue, adjusted for deferred revenue of $103 million related to certain online-enabled packaged goods and digital content decreased 23% year over year to $1.35 billion in the quarter.
Non-GAAP net revenue was in line with the company’s reduced outlook of $1.33 billion to $1.35 billion given out on Jan 13, 2010. Revenue declined due to fewer game titles launched during the quarter versus the 2008 holiday quarter and a weak overall packaged goods sector in Europe, which represents one-third of the total revenue.
However, it came in line with the Zacks Consensus expectation, driven by the launches of Dragon Age Origins, Left 4 Dead 2, NBA Live, catalog sales of FIFA 10, Madden NFL 10 and The Sims 3 which provided a slight edge to the revenue. In fiscal 2011, management plans to increase focus on titles with higher margins. Revenue on a GAAP basis decreased 25% year over year to $1.24 billion.
Sales from Publishing (80% of total revenue) slipped 18% year over year, while revenue from Distribution (20% of total revenue) decreased 38% in the quarter. By geography, North American sales declined 14% from the year-ago period, Europe declined 33% and Asia declined 20%.
By products, packaged good software sales were impacted by weak consumer spending and as a result, declined 28% year over year. However, the company was the number 1 publisher in Packaged Goods and services in North America and Europe year-to-date. Management said that it was the number 1 publisher of Sony’s (SNE) PlayStation 3, PC, and PSP and the number 2 publisher of Microsoft’s (MSFT) Xbox 360 and Nintendo’s (NTDOY) Wii platforms. EA’s online games subscribers totaled 1.9 million in the quarter.
However, Wireless, Internet-derived and Advertising (Digital) revenue increased 30% in the quarter and licensing and others increased 15% year over year. Digital revenue in the quarter was the highest in the company’s history. The growth, however, was unable to compensate for declining sales of the company’s traditional video games.
Balance Sheet and Cash Flow
The company generated operating cash flow of $221 million in the quarter and ended the quarter with cash, short-term investments and marketable securities of $1.78 billion and no long-term debt.
Guidance
Electronic Arts provided a weak outlook for the video game industry and expects a decline in the disc-based games revenue. As a result, the guidance fell short of Wall Street expectations.
Electronic Arts forecasted fourth-quarter 2010 non-GAAP earnings per share of 2 cents to 6 cents, excluding one-time items. Revenue, adjusted for deferrals is estimated to be $800- $850 million due to the launch of several big-name titles. The company’s new game pipeline includes Mass Effect 2, Army of Two and Dante’s Inferno.
For the first quarter of fiscal 2011, the company expects non-GAAP diluted loss per share to be approximately 35 cents to 40 cents on revenue of $460 million to $500 million. The company will release 36 titles next fiscal year, down from 54 in the current year.
For the full-year 2011, EPS is expected to be in the range of 50 cents to 70 cents per share on revenues of approximately $3.65 billion to $3.90 billion, driven by strong cost controls and growth in the digital business. The company expects consistent revenue growth in fiscal 2011 with approximately 13% of total revenue to come in the first quarter, 25% in the second quarter, 40% in the third quarter and 20% to 25% in the fourth quarter. Electronic Arts expects a 3% decline in packaged goods game sales for fiscal 2011.
Electronic Arts is facing intense competition from Activision Blizzard, Inc.’s (ATVI) Modern Warfare 2, which led to overall lower games sold in stores such as GameStop Corp. (GME) and Best Buy Co. Inc. (BBY).
Read the full analyst report on “ERTS”
Read the full analyst report on “SNE”
Read the full analyst report on “MSFT”
Read the full analyst report on “NTDOY”
Read the full analyst report on “ATVI”
Read the full analyst report on “GME”
Read the full analyst report on “BBY”
Zacks Investment Research
