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The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Electronic Arts (NASDAQ:EA) Q2 beat offset by lowered FY guidance that reflects the disappointing Medal of Honor: Warfighter sales. Revenue was $1.08 billion, vs. our estimate of $1.09 billion, consensus of $1.07 billion, and guidance of $1.05 – 1.10 billion. EPS was $0.15, compared with our estimate of $0.12, consensus of $0.10, and guidance of $0.07 – 0.12. Management decreased FY:13 guidance for revenue to $4.05 – 4.20 billion from $4.10 – 4.25 billion and for EPS to $1.00 – 1.15 from $1.05 – 1.20.
Leaving our estimates largely unchanged as management is likely being overly conservative. Increasing our FY:13 estimate for revenue to $4.20 billion from $4.16 billion, but maintaining our EPS estimate of $1.15 to reflect Q2 results and updated guidance. Maintaining our FY:14 estimates as well.
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We believe guidance is too conservative overall. The company expects earnings in Q4 (excluding Battlefield Premium) to be close to Q3 EPS, which we think is unlikely on approximately $100 million in lower revenue. While it is possible that some expenses (including reserve additions) could be pulled into Q3, we think it is more likely that EA (NASDAQ:EA) will deliver Q3 upside, and Q4 in line with implied guidance.
Medal of Honor negatively impacted guidance, and the brand may be damaged. With Warfighter receiving an extremely low Metacritic score of only 50, guidance reflects a dramatic decline in sales, and makes the introduction of a service similar to Battlefield Premium exceedingly unlikely. As a result, the $204 million of digital revenue that Battlefield is expected to generate in FY:13 is likely to sharply decline in FY:14. This creates a hole in digital FPS revenues that may persist until Battlefield 4 Premium digital revenue is recognized in late FY:15.
Packaged goods revenue growth in FY:14 will remain challenged despite the debut of Wii U. We do not expect the Wii U to move the needle for EA, as it has increasingly focused on devices that appeal to hardcore gamers (such as the Xbox 360 and PS3), not devices for casual gamers, likely including the Wii U.
Maintaining our OUTPERFORM rating but lowering our 12-month price target to $23 from $29, a multiple of 12x our FY:14 EPS estimate of $1.58/share, plus an estimated $4/share in cash. Our multiple is near the low end of EA’s historical range to reflect uncertain industry growth. Electronic Arts shares are on the Wedbush Securities Investment Committee’s Best Ideas List.
Michael Pachter is an analyst at Wedbush Securities.
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