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Why Is Electronic Arts (EA) Up 5.8% Since the Last Earnings Report?

It has been about a month since the last earnings report for Electronic Arts Inc. EA. Shares have added about 5.8% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Electronic Arts Posts Better-than-Expected Q3 Earnings

Electronic Arts reported third-quarter fiscal 2017 results wherein adjusted earnings per share (including stock based but excluding deferred revenue and other onetime items adjusted for taxes) of $2.45 surpassed the Zacks Consensus Estimate of $2.15.

Revenues (including deferred revenues) came in at $2.070 billion.

Per EA, total revenue (on a GAAP basis) came in at $1.149 billion, up 7.4% year over year. Continued increases in digital revenues and strength in mobile games and EA Sports titles like Battlefield 1 and FIFA 17 were the driving factors.

On a GAAP basis, the company reported breakeven earnings compared to the prior-year quarter’s loss of $0.14 per share.

EA’s (GAAP) digital revenues (60% of revenues) increased 20.4% to $685 million while revenues from EA’s Packaging goods and other segment (40% of total revenue) decreased 7.4% to $464 million.

Further segregating digital revenues, full game downloads revenues were up 51% to $169 million from the third quarter of 2016 while EA mobile games increased 16% year over year to $147 million. Revenues from subscriptions, advertising and other increased 15% to $102 million. Extra content revenues were up 11% to $267 million.

Margins                                                            

EA’s gross margin came in at 55.1% compared with 49% reported in the prior year quarter.  

Operating loss was $4 million, much narrower than $31 million reported in the prior-year quarter.

Balance Sheet and Cash Flow

As of Dec 31, 2016, EA had $4.22 billion in cash and short-term investments compared with $3.266 billion as of Sep 31, 2016. During the quarter, the company repurchased 1.5 million shares for $127 million. It still has $156 million worth of shares remaining in the buyback authorization.

Outlook

EA provided guidance for the fourth quarter and upped its fiscal 2017 projections. Strength in franchises like Battlefield, FIFA and Star Wars: Galaxy of Heroes will continue to fuel long term growth. Management expects the “live services components” of these franchises to emerge as a big future growth driver.

For the fourth quarter, the company expects GAAP revenues of $1.482 billion. Change in deferred revenues will be to the tune of negative $407 million. The company projects earnings per share of $1.64.

For fiscal 2017, EA now expects to generate GAAP revenues of approximately $4.800 billion, ahead of $4.775 billion projected earlier. Change in deferred revenues will be to the tune of $125 million. The company projects earnings per share of $2.91. Operating cash flow is estimated to be around $1.35 billion.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last one month period as none of them issued any earnings estimate revisions.

Electronic Arts Inc. Price and Consensus

 

Electronic Arts Inc. Price and Consensus | Electronic Arts Inc. Quote

VGM Scores

At this time, Electronic Arts's stock has a strong Growth Score of 'A', though it is lagging a lot on the momentum front with a 'C'. Charting a somewhat similar path, the stock was allocated a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'B'. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for growth investors than momentum investors.

Outlook

The stock has a Zacks Rank #4 (Sell). We are looking for a below average return from the stock in the next few months.


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