Monday, January 31, 2011

Electronic Arts Inc. (NASDAQ: ERTS): Q3 Earnings Preview 2010

Electronic Arts Inc. (NASDAQ: ERTS) is scheduled to release its fiscal third-quarter financial results after the closing bell on Tuesday, February 1, 2011. Analysts, on average, expect the company to report earnings of 57 cents per share on revenue of $1.44 billion. In the year ago quarter, the company reported earnings of 33 cents per share on revenue of $1.35 billion.

Electronic Arts Inc. develops, markets, publishes, and distributes video game software and content. During the fiscal year ended March 31, 2010 (fiscal 2010), the Company was organized into three Labels: EA Games, EA SPORTS and EA Play, its EA Interactive organization (EA Mobile, Pogo and Playfish) and Global Publishing Organization.

In the preceding second quarter, the Redwood City, California-based company's net loss was $201 million, or 61 cents a share, compared to a loss of $391 million, or $1.21 a share, in the year-earlier quarter. On an adjusted basis, the company earned 10 cents a share in the latest quarter. Revenue dropped 23.5% to $884 million from $1.15 billion. Analysts, on average, expected the company to post a loss of 10 cents per share on revenue of $814.61 million.

At its last earnings call in November, EA predicted that December quarter earnings would come in between 50-60 cents a share on a sales range of $1.375 billion and $1.5 billion.  Non-GAAP gross profit margin is expected to be approximately 58%.

The company expects March quarter  non-GAAP revenue between $850 million and $975 million, and a non-GAAP EPS of $0.13 to $0.23. Non-GAAP gross profit margin is expected to be approximately 63% to 64%.

EA said that it continues to expect the total of $3.65 billion to $3.9 billion in fiscal '11 revenue on non-GAAP basis. In terms of non-GAAP EPS, the company maintained guidance for the full year at $0.50 to $0.70 per share on 334 million diluted shares. This corresponds to a non-GAAP operating income margin of approximately 68%, with approximately $5 million in other income and expense.

EA also said that the last half of the 2011 fiscal year will include restructuring charges of about $180 million

The company has been hurt by an industry-wide slump in video game salesT. he video game industry continued its dismal run for the second straight year, with sales down 6.0% year over year in 2010 to $18.58 billion, according to the research group NPD. Software sales declined 6.0% year over year to $9.36 billion. Including Personal Computer (PC) sales, software sales declined 5.0% to $10.1 billion in fiscal 2010.

The video game industry is undergoing a significant transition, with increasing contribution from digital downloads, used game sales, game rentals, subscriptions, social network games and mobile game apps as compared to retail sales. The consumer demand for video game is likely to increase with the gradual improvement in the overall U.S. economy for 2011. The sector has seen an increasing amount of its casual gamers shift towards gaming on smartphones or Facebook applications recently. 

EA has scaled back the number of titles in its development pipeline and is pushing further into digital through acquisitions of social gaming companies Playfish and Chillingo, the publisher of the popular Angry Birds title. In its most recent quarter, digital comprised more than 19% of the company's revenue, up from 12% during the year-ago quarter. This year, EA's digital business could make $750 million in sales, about a fifth of its revenue and enough to draw notice from investors seeking exposure to hot trends in mobile and social games. The company's upcoming Star Wars multi-player game, to be released in 2011, is expected to further boost its digital revenue stream.  Early in November, the company signed a five-year deal to use Facebook Credits as the only accepted method of payment for its games on the social networking site.Last month, the video game publisher also announced that it had expanded its Pogo casual games business to include mobile apps for the iPhone and iPod touch. The move places Electronic Arts in direct competition with Zynga, which offers similar games for mobile devices.

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