Electronic Arts Slides - Analyst Blog

Electronic Arts Inc. (ERTS) reported strong fourth quarter 2010 results, slightly ahead of the company’s guidance provided on the third quarter earnings conference call. The company successfully implemented its strategy of stringent cost control, fewer but bigger games of superior quality and growth in digital revenue.

The company gained significant market share in 2010, compared to 2009, despite a 20% reduction in the number of titles. Packaged goods boosted games sales in the last quarter, with the company achieving substantial growth in post-release downloadable content sales of titles like Dragon Age, Mass Effect 2 and Battlefield Bad Company 2.

The hottest selling titles in fiscal 2010 were FIFA 10, Madden NFL 10, The Sims 3, Battlefield: Bad Company 2 and Need for Speed, each of which saw unit sales growth of more than four million units. Additionally, the recently-launched EA SPORTS Active, Dragon Age and Dante’s Inferno also did well.

However, despite strong revenue and earnings growth, management’s guidance for the upcoming quarter remains conservative. The first quarter has always been seasonally weak for the company but this quarter’s sales will also be impacted by fewer title releases. The weak guidance dragged the shares down 4.10% after hours.

Net income, excluding non-recurring items increased to $23.0 million from a fourth quarter 2009 net loss of $120.0 million. Diluted earnings per share increased to 7 cents in the fourth quarter of 2010 from a loss per share of 37 cents in the year-ago period. Earnings per share were slightly ahead of company guidance of 2 cents to 6 cents.

Earnings significantly beat the conservative Zacks Consensus Estimate of a 6-cent loss, driven by strong revenue growth and cost control.

Due to lower cost of sales and favorable product mix, gross margin on a non-GAAP basis increased to 65.2% in the fourth quarter from 59.4% a year ago. Non-GAAP operating income increased to $83.0 million from an operating loss of $62.0 million in the year-ago period.

Revenue

The company achieved significant top-line growth in the fourth quarter of 2010. Total non-GAAP net revenue, adjusted for deferred revenues of $120.0 million related to certain online-enabled packaged goods and digital content increased 39.6% year over year to $850.0 million in the fourth quarter of 2010.

Non-GAAP revenue was in line with the high-end of the company’s outlook of $800.0 to $850.0 million. This was primarily driven by strong sales performance of Battlefield: Bad Company 2, Mass Effect 2 and Dante’s Inferno. Higher revenues from digital businesses also contributed to the growth. Revenues on a GAAP basis increased 13.8% year over year to $979.0 million in the fourth quarter of 2010. This was significantly higher than the Zacks Consensus Estimate of $966.0 million.

On a non-GAAP basis, FY 2010 net revenues increased 2.0% year over year to $4,159.0 million. The company ended the year with $766.0 million in deferred net revenues from packaged goods and digital content.

Sales from publishing (92.5% total revenue) increased 60.0% year over year, while revenue from Distribution (7.5% of total revenue) decreased 46.0% in the quarter. By geography, North American sales increased 24.0% year over year, Europe increased 67.0% and Asia was higher by 38.0% in the fourth quarter of 2010.

By products, packaged good software sales increased 41.0% year over year, reflecting a 4.0% market share gain over the year-ago period. The company remained the number 1 publisher in packaged goods and services in North America and Europe year to date. Management said that EA was the number 1 publisher of Sony’s (SNE) PlayStation 3, PC and PSP, Microsoft’s (MSFT) Xbox 360 and Nintendo’s (NTDOY) Wii platforms.

The company sold three million packaged and digital units of Battlefield Bad Company 2, 1.6 million units of Mass Effect 2 and one million units of Dante’s Inferno in the quarter for Europe and North America combined.

Wireless, Internet-derived and Advertising (Digital) revenue increased 42.0% year over year, while licensing and others increased 19.0% from the year-ago period. Mobile sales continue to grow year over year and the company had a strong launch of games on the iPad in April, 2010.

EA had 1.8 million total paying subscribers in the quarter. At the end of the quarter, EA had over 58 million registered users, up 18% from the prior quarter, driven by strong demand for Battlefield Bad Company 2, FIFA 10, and Madden 10 in fourth quarter.

Balance Sheet and Cash Flow

The company generated an operating cash flow of $253.0 million in the fourth quarter of 2010, versus $215.0 million in the year-ago period. The company ended the quarter with cash, short-term investments and marketable securities of $1, 996.0 million and no long-term debt.

Guidance

Management believes that 2011 will be a strong year, driven by quality titles and strong growth of the packaged goods and digital business. Management expects the market, inclusive of packaged goods and digital to grow 8% year over year in calendar 2010.

The company expects top 20 titles for FY 2011 to generate approximately 80.0% of total packaged goods revenue. On a non-GAAP basis, management expects FY 2011 revenues from published packaged goods titles between $2.75 billion to $3.00 billion, non-GAAP distribution revenues of approximately $150.0 million and total digital revenues to increase 30.0% year over year to $750.0 million.

Electronic Arts Inc. maintained its first quarter 2011 and FY2011 non-GAAP guidance. On a non-GAAP basis, management expects a diluted loss per share of 35 cents to 40 cents on weaker revenue growth expectation of $460.0-$500.0 million, primarily attributable to fewer title releases in first quarter 2011 (five versus ten) compared to first quarter 2010.

For the full year 2011, on a non-GAAP basis, management forecasts diluted earnings per share of 50 cents to 70 cents on revenues of approximately $3.65 billion to $3.90 billion, driven by restructuring efforts, growth in digital business and a strong portfolio of titles. Management expects 36 frontline titles to ship in FY2011.

The company expects consistent revenue growth in fiscal 2011 with approximately 13% of total revenues to come in the first quarter, 21% in the second quarter, 42% in the third quarter and 24% in the fourth quarter. The company has rescheduled the launching of Medal of Honor to October 12, 2010, which is expected to have a 25-cent drag on second quarter earnings.