Pachter anticipates weak EA fiscal Q3 09 results

By Mike, Friday, 30 January 2009 13:48 GMT

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Wedbush Morgan’s Michael Pachter has issued a research note declaring that the analyst foresees “weak results” ahead of EA fiscal Q3 09 results that are due to be published this Tuesday, February 3.

“We expect EA to report pro forma Q3 revenue of $1.88 billion and pro forma EPS of $0.88 (excluding deferred revenue, charges for restructuring, acquisition, amortization, and stock compensation expense), compared to consensus estimates for revenue of $1.92 billion and EPS of $0.90,” says the note.

However it’s not all bad, as Pachter admits that EA’s US sales are doing better than Wedbush anticipated.

“EA’s U.S. sales are tracking ahead of our estimates for the quarter, according to data from the NPD group,” he states.

“The company’s U.S. retail sales are up 17% over the same period last year, compared with our estimate for +8% pro forma revenue growth.

“However, we expect large additions to the company’s reserves, limiting revenue upside. Much of the revenue upside is expected from the co-published Rock Band and Left 4 Dead and from new releases such as Mirror’s Edge and Dead Space (which we believe had significant development costs), so we expect tempered earnings contribution,” concluded Pachter.

Full thing after the break.

By Mike Bowden

Electronic Arts (ERTS)
Q3 Preview: Expect Weak Results As Company Restructures; We Expect Significant Lowering of FY:09 EPS Guidance And A Cautious Outlook in Line with Negative Preannouncement

EA will report its fiscal Q3 2009 (ending December) results after market close on Tuesday, February 3 with a conference call at 2:00pm PT (877-874-1565 passcode 220497 or at http://investor.ea.com).

• We expect EA to report pro forma Q3 revenue of $1.88 billion and pro forma EPS of $0.88 (excluding deferred revenue, charges for restructuring, acquisition, amortization, and stock compensation expense), compared to consensus estimates for revenue of $1.92 billion and EPS of $0.90. There may be downside to our estimates.

• EA’s U.S. sales are tracking ahead of our estimates for the quarter, according to data from the NPD group. The company’s U.S. retail sales are up 17% over the same period last year, compared with our estimate for +8% pro forma revenue growth. However, we expect large additions to the company’s reserves, limiting revenue upside. Much of the revenue upside is expected from the copublished Rock Band and Left 4 Dead
and from new releases such as Mirror’s Edge and Dead Space (which we believe had significant development costs), so we expect tempered earnings contribution.

• In early December, EA significantly lowered its guidance due to weaker than expected sales across the board. Management stated that it will not be able to achieve its previously issued FY:09 guidance for pro forma revenue of $5.0 – 5.3 billion, and EPS of $1.00 – 1.40, and expects to be “significantly below” the low end of the range. The company attributed the shortfall to retailer focus on “top 5” games, and lamented its lack of such titles. We think that revised FY:09 pro forma EPS guidance may be below
current consensus estimates of $0.64.

• EA stated it will further reduce its cost structure, producing fewer SKUs in FY:10 than FY:09, and intends an absolute reduction in R&D costs in FY:10. The company announced a 10% reduction in its workforce (1,000 people), currently being implemented. We see significant execution risk near term due to the magnitude of the
restructuring. Notwithstanding management’s insistence that it finally is taking the necessary steps to generate operating leverage, the share price indicates investor indifference. EA is a “show me” story, and we do not expect appreciation until management communicates a sustainable plan to complete the turnaround.

• Maintaining BUY, and our $25 price target, reflecting a multiple of 12x our adjusted FY:10 EPS estimate of $1.42/share, plus $8/share in cash. Our target is below the low end of the company’s historical range, reflecting recent market contraction and poor execution by the company.

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