Electronic Arts posts strong results, but weaker than expected guidance
Market leading games developer and publisher Electronic Arts (EA) saw its share price penalized on the back of its latest quarterly earnings. This drop in value wasn’t down to the company’s earnings – they slaughtered the Street’s expectations, and handily beat their own guidance – but its forward-looking statements. In brief, EA is not as positive about the coming quarter and full year as analysts and investors would like it to be, and that’s what drove share price declines last week.
After losses are taken into account, EA’s share price is still up by 27% year to date
SOURCE: Yahoo Finance
EA’s results were all down dramatically from the same period a year ago – but they weren’t down by as much as analysts had expected. The reason for this decline is straightforward: in the year-ago quarter, EA released Mass Effect: Andromeda – one of its most anticipated titles ever (the long awaited sequel to 2012’s blockbuster Mass Effect 3).
The latest installation of the Mass Effect franchise sold millions of copies and won multiple awards. Just two months after its release, Michael Pachter at Wedbush Securities estimated that it had already contributed well in excess of $100 million to EA’s sales. This creates a comparable that is, frankly, almost impossible to live up to – but that is a reality of the video games market, where a company’s biggest franchises may only release games every four years or so.
That explained, here’s what happened: EA said its earnings for the first quarter came in at 95¢ per share on revenue of $1.14 billion. That’s a massive drop of 54% (earnings) and 22% (revenue) year on year, but a significant beat against analysts’ expectations, which were for just 7¢ per share on revenues of $743 million. It’s also a decent beat against the company’s own revenue guidance for the quarter, which was $1.08 billion.
While analysts and investors may have liked these figures, they were far less enthusiastic about the company’s guidance for the rest of the year. Analysts were hoping that EA would predict earnings of $5.02 per share on bookings of $5.61 billion. The company’s actual guidance fell far short of that, at $3.55 per share on $5.55 billion in bookings.
While investors have every right to be disheartened at EA’s guidance, there are two things they should remember: first, the stock is still up almost 30% so far this year. And second, these fluctuations in earnings are a fact of life in the video game industry: EA’s biggest franchises will be back.
Dominion holds Electronic Arts in its Global Trends Ecommerce Fund.
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