ERTS
| Electronic Arts Inc | (EA – NASDAQ) |$130.81 |
Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 4Q18 Earnings Update
Prev. Ed.: Mar 23, 2018: News Update and Changes in Estimate
Brokers’ Recommendations: Positive: 80.0% (16 firms); Neutral: 20.0% (4); Negative: 0.0% (0) Prev. Ed: 15, 4, 0
Brokers’ Target Price: $138.18 (↑2.36 from last edition; 17 firms) Brokers’ Avg. Expected Return: 5.6%
Note: Although dated May 17, 2018, the data in the tables below are as of May 15, 2018
Note: The tables below (Revenues, Margins and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table are taken from reports that did not have accompanying spreadsheet model.
Note: We do not have access to firm reports presenting neutral rating on EA
Portfolio Manager Executive Summary
Electronic Arts Inc. (EA) is a leading developer, publisher and distributor of interactive entertainment software and peripheral products. The company develops and publishes games for multiple hardware platforms including PCs, Sony's Playstation, Microsoft's Xbox, Nintendo's Wii and DS platforms as well as for mobile devices based on Apple’s iOS and Google’s Android operating systems. The company also publishes games on Facebook.
Key factors for evaluating an investment strategy in Electronic Arts are as follows:
• EA is a leading video game publisher and develops popular titles such as FIFA, Battlefield, Madden NFL, The Sims, Need for Speed and Star Wars.
• Primary competitors are Activision Blizzard, Take-Two Interactive Software and Zynga.
Of the 20 firms in the Zacks Digest group covering the stock, 16 firms assigned a positive rating and four firms provided a neutral rating. None of the firms rated the stock negatively. Target prices range from a low of $97.00 to a high of $158.00, with the average being $138.18. On an average, the firms expect a return of 5.6% from the stock based on the current price.
Bullish Stance (Buy or equivalent outlook) – 16 firms or 80% – These firms remain bullish backed by better-than-expected console sales. The company’s digital business, especially live services,
continues to gain traction. Continued expansion of its mobile game portfolio is also one of the positives. The firms are hopeful about EA’s favorable product mix and the upcoming FIFA, new Battlefield title and Anthem. Besides, EA’s initiatives to expand subscription offerings also make them optimistic. Moreover, the company’s increasing focus on the lucrative e-sports market is likely to fuel growth. A lean cost structure and developed recurring revenue model are tailwinds for the company.
Cautious (Neutral or equivalent) — 4 firms or 20%
Conclusion- EA’s innovative product pipeline and strong digital growth expectations are significant positives. However, intensifying competition and underperformance of any title pose threats to near-term growth.
May 17, 2018
Overview
Electronic Arts, based in Redwood City, CA, is one of the world’s leading interactive-entertainment software companies. The company develops markets, publishes and distributes game software content that can be played by consumers on a variety of video game machines and electronic devices. These include video game consoles (such as Microsoft Xbox 360 and One, Sony PlayStation 3 and 4 and Nintendo Switch), personal computers (PCs), and mobile phones and tablets.
The firms identified the following key factors for evaluating the investment merits of Electronic Arts:
|Key Positive Arguments |Key Negative Arguments |
|EA continues to develop its next-generation gaming titles, with a larger |Competition is high in the video game publishing industry. |
|focus on generating digital revenues. |There is lack of visibility on the future size and monetization techniques|
|A strong balance sheet will enhance the company’s liquidity and provide |of the mobile and social gaming market. |
|flexibility to make acquisitions. |The macroeconomic environment remains a major laggard for the video game |
|Acquisitions have boosted the company’s presence in mobile and social |industry. |
|network games. | |
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May 17, 2018
Long-Term Growth
EA has a strong portfolio of brands and licenses, comprising several proven properties and supplemented by the new IP that will drive revenues and earnings. The company remains optimistic about the digital version of the games. The long-term EPS growth rate for EA is 15%.
The firms believe that on a long-term basis, the company will benefit from a more efficient cost structure, a strong product portfolio, potentially lower console prices, new hardware technologies that enhance game play and a better sales climate. Moreover, the company’s strong cash position gives it ample scope to make meaningful acquisitions in order to enhance its competitive position.
Most of the firms believe incremental revenue streams, primarily digital downloads, mobile phone games and the online market in Asia are becoming increasingly important and will scale further in the long term. Digital revenues include downloadable content for new console games, PC, and browser-based offerings from core franchises, mobile gaming for devices such as the iPhone and iPad, and online social/casual games via Facebook and the company’s own Pogo platform. Specifically, mobile games are expected to grow at an unprecedented rate, which is likely to benefit the company in the long run.
Despite the growth of the video game business, costs to compete, develop and launch a branded product in the market have become too high for the average-sized publishers, thereby creating a higher barrier to entry. Some media conglomerates have established ownership positions among the larger interactive entertainment publishers (Viacom Inc. and Take-Two Interactive Software). Others are focused on the acquisition of smaller publishers/distributors to extend their R&D efforts and secure exclusive license agreements (i.e. EA with Ubisoft SA, Digital Illusions and Criterion Software).
Moreover, most of the bullish firms believe that EA’s long-term growth will be driven by its initiatives in the e-sports market. Besides, the company’s focus on building its action franchise is also expected to drive growth in the long run.
The firms believe that if EA succeeds in managing its cost structure, it will be at an advantage compared to its peers to capitalize on the expected double-digit industry growth going ahead. They believe that EA represents a solid opportunity for investors to benefit from continued digital growth in the industry over the next several years, as well as from a likely rebound in packaged goods sales. Software sales gains for new consoles are expected to more than offset declines in legacy software sales in the long run.
May 17, 2018
Target Price/Valuation
Provided below is a summary of target price/valuation as compiled by Zacks Digest:
|Rating Distribution |
|Positive |80.0%↑ |
|Neutral |20.0%↓ |
|Negative |0.0% |
|Max Target Price |$158.00↑ |
|Min Target Price |$97.00 |
|Average Target Price |$138.18↑ |
|Firms w. Target Price/Total |17/20 |
Risks to the target price include changes to game release timing, greater-than-expected deterioration of the average selling price (ASP) for game software, the effects of competition, changing macroeconomic factors, and lower-than-expected consumer demand for video game hardware.
Recent Events
On May 8, 2018, EA announced fiscal 4Q18 results. Highlights are as follows:
• Net bookings came in at $1.255 billion, up 14.9% y/y.
• Non GAAP EPS of $1.31 increased nearly 81.9% from the year-ago quarter.
On Apr 30, 2018, EA announced that it is giving a free 2018 FIFA World Cup Russia content update to EA SPORTS FIFA 18.
On Mar 23, 2018, EA launched A Way Out worldwide on Xbox One, PlayStation 4 and Origin for PC in partnership with Hazelight Studios.
On Mar 8, 2018, EA announced the addition of six Warner Bros Interactive Entertainment titles from Batman: Arkham series and LEGO Batman series to Origin Access.
On Mar 7, 2018, EA’s Maxis division announced the launch of The Sims Mobile — the much awaited latest version of the popular The Sims franchise — worldwide on iOS and Android device.
Revenue
According to the 4Q18 press release, net bookings came in at $1.255 billion, up 14.9% y/y.
Revenues (excluding deferred revenues) came in at $1.582 billion compared with $1.527 million in the year-ago quarter. Strength in digital business backed by live services and mobile games was a key growth driver.
EA’s digital revenues (70% of total revenues) increased 18% to $1.102 billion due to Battlefield 1, Ultimate Team and Madden NFL 18 full game downloads. Revenues from EA’s Packaging goods and Other segment (30% of total revenue) were down 19% to $480 million.
Further segregating digital revenues, full game downloads revenues (15% of total revenues) declined 10% to $232 million from 4Q17. Star Wars Battlefront II and FIFA 18 were key drivers. However, underperformance of other titles compared with Battlefield 1 in the year-ago quarter was a dampener.
Revenues from Live services (44%) increased 37% to $698 million. Live services net bookings were up 31% y/y to $679 million driven by Ultimate Team, The Sims 4 and Battlefield 1.
EA mobile games revenues (11%) increased 4% y/y to $172 million on the back of Star Wars: Galaxy of Heroes and FIFA Mobile. However, an expected decline in some of the older games was an overhang.
Geographically, revenues in North America (38% of total revenue) declined 7% y/y to $600 million. Internationally (62% of total revenue), revenues increased 11% from the year- ago quarter to $982 million.
On the basis of platform, revenues from console (76%) grew 8% to $1.196 billion. Sales from Xbox One, PlayStation 4 and Switch, which accounted for 74% of total revenues, increased 12% from year-ago period to $1.167 billion.
However, revenues from PC (13%) declined 15% to $210 million and Other revenues dropped 57% to $3 million.
Provided below is a summary of revenues as compiled by Zacks Digest:
|Revenues ($ in million) |4Q17A |
|Copy Editor |Debasmita Banerjee |
|Content Ed. | |
|QCA |Aniruddha Ganguly |
|Lead Analyst | |
|Reason for Update |4Q18 Earnings Update |
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May 17, 2018
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