A Less Artful EA

5/14 - "EA was forecast to only break-even on a non-GAAP basis, so the difference was a nice $0.09. In terms of operational cash flow, EA increased the metric by 33% during the fourth quarter, but for the full year, operational cash flow decreased 15%. Ah, such is life, I guess. Nevertheless, EA produced 27 titles that sold over a million units this year -- three more than in the previous year. Fifteen of its titles sold over 2 million units -- five more than the last fiscal period. Titles such as Army of Two and Rock Band, as well as various sports franchises, drove the results."

"But EA has had some challenges during this console cycle, and there is the perception that it needs a major merger to combat the threat posed by the Activision and Vivendi Games transaction. And let's not forget that Activision is on fire all on its own. That's what the whole attempted takeover of Take-Two is all about."

"Personally, I'm playing Activision right now, having held it for a long time...I'm happy holding onto my Activision shares, but for those who are interested in getting in on a game-publisher, EA is probably worth some due diligence since its stock isn't at the top-end of the yearly range. EA has a great software portfolio full of franchises, and these earnings results indicate that it can still play one heck of a game."

5/15 - "EA posted some big software sales across the board, but Sony benefitted the most from EA sales. Combined numbers across the PlayStation 2, PlayStation 3, and PlayStation Portable paint a rosy picture for Sony's platforms for both Sony and EA—especially once you take into account the sales trends of Sony's platforms, which saw some pretty substantial increases over last year."

"Throughout the year, Sony's two consoles contributed significantly to EA's overall revenue. Figures from the fourth quarter indicate that the two platforms contributed 29 percent of overall revenue for the company, compared to 11 percent for the Xbox 360, 7 percent for the Wii, 10 percent for the PC, 6 percent for the PSP, 3 percent for the DS, and 4 percent for Mobile."

"Sony has also reported its earnings which, when paired with EA's report, paint a bright future for the company. The PlayStation 2 continued to outsell the PlayStation Portable and PlayStation 3 in most quarters despite sales slowing down for the aging platform. However, the PSP and PS3 managed to demonstrate significant improvement through the fiscal year with a 46 percent and 156 percent increase in hardware sales for a total of 13.89 million units and 9.24 million units, respectively."

"The good news for Sony extends further than that, as well. Two important studios were purchased by Electronic Arts in 2007: legendary RPG house Bioware and its sister studio Pandemic were scooped up in a deal worth an estimated $620 million in cash and an additional $155 million in equity. Both of the companies were known for producing content exclusively for the Xbox and PC platforms, but EA's ownership will ensure that more multiplatform titles will be released which, in the long run, will benefit Sony as once-potential Xbox 360 exclusives become multiplatform titles."

5/14 - "Q4 results were above guidance and consensus estimates...Management guided to dramatic revenue growth and modest EPS growth in FY:09, expecting a surprising 30% increase in R&D spending. The company expects pro forma revenues of $5.0 – 5.3 billion and pro forma EPS of $1.30 – 1.70, compared to consensus estimates of $4.6 billion and $1.74, respectively...We are raising our pro forma revenue estimate to $5.25 billion from $4.6 billion, and are maintaining our pro forma EPS estimate of $1.75. We are modeling significantly higher R&D expense than we had previously."

"EA’s share price has lagged its peers over the last four years, with virtually no appreciation. We believe that this is attributable to investor concern about steady growth of R&D spending without corresponding revenue growth...We expect EA shares to appreciate when investors believe that the company can deliver operating leverage. In order for this to occur, we think that the company has to demonstrate discipline over the spending process, and show that its investment in R&D will yield a reasonable return."

"EA provided little color on its proposed acquisition offer for Take-Two for $25.74 per share. We note that EA’s offer expires on May 16, so we expect a resolution one way or another by the end of the week. We do not expect a competing offer from other parties, and think EA is serious about its intention to withdraw this offer if the parties remain too far apart."

"Maintaining STRONG BUY and our $66 price target on EA, which reflects a multiple of 25x adjusted FY:10 EPS of $2.26/share, plus an estimated $10/share in cash...We think that accretion from a combination with Take-Two will accelerate the path to achieving these profit goals, and expect EA to trade higher once a combination is completed."