2/13/2008

Electronic Arts Throws A Touchdown
By Brian Sozzi

Similar to a “place-kicker” in Electronic Art’s Madden football game, management kicked one through the uprights at its analyst conference on February 13.  Management detailed some pretty bullish revenue and operating income targets to be attained by FY11, which we believe are achievable given market opportunities, EA’s industry positioning, and internal operating factors.  The company plans to reach net sales of $6.0 billion and operating margin of 25.0%, fueled by a mix of improved execution on franchise titles, contribution from new intellectual properties, and a significant boost from digital content.  Additionally, management announced that the highly anticipated Spore title will ship on September 7, later than its initial spring release, but solidly ahead of the critical holiday shopping season.

All told, this news flow should help to dissuade investors from becoming a bit nervous on EA’s long-term prospects given recent product missteps and competition from newly formed Activision/Blizzard.  The revenue and operating income targets serve to further reinforce our positive bias on the stock.

Items Outlined by EA at Analyst Day

• FY'11 revenue: $6.0 billion 
• FY'11 operating income/margin: $1.5 billion/25.0%
• FY'11 EA Sports segment revenue: $1.6-$1.7 billion, up from $1.25 billion in FY`08
• FY'11 EA Casual segment revenue: $1.0 billion, up 138.0% from $420.0 million in FY`08

WSS Analysis

• FY'11 revenue implies +54.0% growth from FY`08 mid-point guidance of $3.9 billion
• FY'11 operating margin of 25.0% approximately 300 basis points higher than rate hit in peak of prior console cycle in 2005
• FY'11 earnings per share projected at $3.30 based on our modeling, up approximately 247.0% from FY`08 mid-point guidance of $0.95 non-GAAP

Written by Brian Sozzi, a Research Analyst for Wall Street Strategies (www.wstreet.com) specializing in the apparel/hardline goods sectors of the retail industry.