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business newsElectronic Arts: Not a Digital Gaming Company
By
Michael Comeau
May 05, 2011 9:30 am
In its latest earnings report, the company noted digital game sales were 27% of its business, with a minimal growth forecast.
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Here’s a quick timeline of Wednesday afternoon’s sequence of events:
1) 4:01 PM: EA issues its earnings release. Soft guidance convinces trigger-happy traders that the world is ending and the stock drops.
2) 4:20 PM: EA hits an after-hours low of $17.76, 11% below the closing price of $19.92.
3) 4:21 PM: Traders decide that the world is not ending, and start buying EA.
4) 5:27 PM: EA hits an after-hours high of $20.74, 17% above that 4:20 PM low.
So in the span of less than 90 minutes, EA went from $19.92 to $17.76 to $20.74.
If you can handle this kind of volatility, then more power to you. Trade away.
It certainly isn’t for me. No, I prefer more sensible activities like dumping half my portfolio into smartphone stocks. (Also read The Smartphone Song Remains the Same.)
But enough of that. Let’s go through the important facts and figures from the quarter:
1) EA reported a profit of 25 cents a share on $995 million in revenue, handily beating Wall Street’s expectations for earnings of 22 cents a share on sales of $924 million.2) Big sellers in the quarter included Crysis 2, Dead Space 2, and Dragon Age 2.
3) Digital-gaming revenue rose 72% to $268 million, or 27% of sales
4) For the June quarter, EA expects to lose 44-49 cents a share on $460-500 million in revenue, numbers that are below analysts’ expectations.
5) Full-year earnings guidance for fiscal 2012 is 70-90 cents a share, the midpoint of which is below the 86-cent consensus. Revenue guidance is also weaker-than-expected..
6) The soft guidance was attributed to variability in the launch window of Star Wars: The Old Republic, and potential NBA/NFL team lockouts.
The mixed nature of the news explains the after-hours trading action. The short-term guys were clearly freaked out by the guidance, while cooler heads decided the downside action was overdone and/or that EA’s fiscal-2012 challenges were temporary in nature.
So now it’s time to ask a big question:
Is EA a Digital-Gaming Company?
EA clearly wants investors to view it as a digital-gaming company. I say this because its press releases, conference-call talking points, and IR information sheet have a very strong focus on the company’s digital business.
EA uses the word digital to denote sales of downloaded games and related online services.
Many of these titles are casual and social games favored by non-hardcore gamers, and are often played through web browsers, Facebook, or on mobile devices like the Apple (AAPL) iPhone.
EA’s digital focus is sensible PR, because as we’ve seen with tech giants like Microsoft (MSFT) and Intel (INTC), it’s extremely tough for a stock to get off the ground once the market decides it’s yesterday’s news. So here’s the thing.
The numbers tell me that EA is a non-growing traditional software publisher with a pretty decent digital business. But it’s not the digital-focused juggernaut it wants to be.
As I noted in my bullet points above, digital revenue was $268 million in Q4, or 27% of sales. For the full fiscal year, it was $833 million, or 22% of sales.
Based on guidance for fiscal 2012, that number is expected to go to $1.075 billion, or just 28% sales.
It’s good that digital is becoming a bigger part of EA’s revenues, but it’s plain to see that the company is still weighed down by its weak legacy business. The digital business is growing quickly, but it’s not pulling the entire company up along with it.
Otherwise, EA would be forecasting something stronger than a 0.6% revenue increase for this year.
So please, pass the Kool-Aid.
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No positions in stocks mentioned.
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