Positive Takeaways from EA (EA) Executive Meetings - Baird

Baird analyst, Colin Sebastian, hosted management meetings with Electronic Arts (NASDAQ: EA) CEO Andrew Wilson and CFO Blake Jorgensen. Now that impact from the StarWars game has been digested by investors, going forward, attention will focus on product releases and the company's improving capital return policy fueled by a debt offering. No change to the Outperform rating or $80 PT.

Star Wars is now out of the way and the sales and associated margin impact is largely understood. Going forward, sentiment should be pivoting towards EA’s product slate for FY17, which includes AAA titles Battlefield and Titanfall (both expected F3Q17 against a lighter competitive backdrop), annual sports releases, along with sequels to Mirror’s Edge and Mass Effect. Management also expects to continue benefiting from longer-tail digital monetization (i.e., Ultimate Team, Star Wars DLC, live-services), which coupled with an easier Y/Y digital comp in FY17, we believe could generate upside to gross margin estimates (currently modeling 50 bps expansion Y/Y FY17).

Management highlighted the use of data analytics and machine learning to capture insights about consumer behavior across franchises, and have found “sweet spots” of engagement as measured by session days/month which maximizes a user’s LTV.

Management believes that the strategy to consolidate the previously fragmented software development infrastructure largely into a single engine (Frostbite) has proven successful and is an important driver of cost efficiencies and more consistent product quality. In addition, EA is more quickly able to capitalize on consumer adoption of new hardware platforms as they gain traction over the intermediate/long-term (e.g., augmented reality/virtual reality).

The $1B of new debt boosts on-shore cash balances for the buyback program, and management indicated they plan to consider increasing the portion of FCF allocated repurchases (currently 50% @ annual FCF of ~$1.2B), and could even support incremental leverage if necessary over the long term to facilitate accelerated capital return objectives.

For an analyst ratings summary and ratings history on Electronic Arts click here. For more ratings news on Electronic Arts click here.

Shares of Electronic Arts closed at $64.45 yesterday.

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