Video-game powerhouse Electronic Arts (EA) is due to report after the close, and I believe the company will beat the analyst consensus estimate. EA has a strong pipeline of new games and that should propel earnings through next year.
After the close tonight, Electronic Arts is expected to report fiscal first-quarter revenue of $713.20, and a loss of $0.04 a share. Its gross margin is expected to come in at 67.31%.
On May 6, the company capped off a transformative year, becoming the undisputed No. 1 video-game publisher for PlayStation 4 and Xbox One titles. Games such as FIFA 14, Titanfall, Battlefield 4 and Need For Speed helped the company bring in more than $4 billion in revenue.
Management has been improving operations. Operating cash flow for fiscal 2014 was $712 million, more than double last year's. In fiscal 2010, the EA's gross margin was just 55% and its operating margin was a disappointing 5%. Last year it ended the year with a 66% gross and 13% operating margin.
Electronic Arts is riding a huge wave of digital revenue. Digital revenue is flooding in from mobile handsets and tablets, advertising and full-game downloads. Since 2010, digital revenue has grown at a compounded annual rate of 31%.
According to NPD Research, in 2005 digital made up just 20% of the industry's $25 billion in revenue. By 2013, 70% of the industry's $60 billion in revenue was from digital.
For the year, mobile gaming brought in $460 million in revenue and reached more than 130 million users. Not too shabby!
This quarter is a seasonally slow one. However, things are set to pick back up next quarter. The September and December quarters are expected to be huge, and the company is planning a bunch of new releases for the holiday season. Next quarter, revenue is expected to up almost 60% sequentially and 9.5% year over year.
Besides a bunch of new games, EA has announced a big stock buyback. The board of directors has authorized management to repurchase up to $750 million in common shares.
At the same time, sales of new video-game systems continue to soar. As of June 30, gaming-system revenue rose for the ninth consecutive month. According to NPD, sales of game systems, software and accessories totaled $735 million, making for a 24% increase over last June's numbers.
Meantime, software sales have lagged. While hardware sales grew 106%, software sales declined 3%. But that should begin to change as early hardware buyers turn into software buyers.
Also, the holiday season will see a surge of new gaming titles, including EA's highly anticipated Battlefield Hardline.
With so many new gaming consoles being sold, I think it's inevitable software will be pulled through, and EA is bound to be a major beneficiary.