In their latest investor notes, both Wedbush Morgan's Michael Pachter and Lazard's Colin Sebastian predict a strong Q4, fiscal 2008 and general 'dramatic earnings growth' for Electronic Arts, following the publisher's record breaking $1.281 billion third quarter.
"Several items addressed during the conference call impressed us," said Pachter in his most recent note, "First, the company expects more robust growth than we expect. We believe that the company is more optimistic about the staying power of current generation games." Pachter warns , though, that "the Xbox and GameCube platforms have all but been abandoned, and our forecast calling for a decline of 60% in current generation software sales incorporates a decline of only 53% on the PS2 platform."
"Second," he continued, "we were impressed by the company’s performance in the digital arena," noting that EA generated $115 million from online games, casual games, in-game advertising and microtransactions, and is "well positioned" to grow this figure to over $200 million in 2007.
Third, Pachter was "impressed by the strong growth generated from cellular phone games, and by management’s guidance for 20 – 25% growth in 2007. This figure is below competitor Gameloft’s 36 – 42% growth expectations, and may well prove to be conservative."
And finally, looking internally, Pachter said he was "impressed that the company has finally begun to show its intent to curb R&D spending. We have consistently believed that R&D spending was 'under control,' and have consistently expected the rate of growth in spending to subside, but it is reassuring to hear management commit to a reduction in growth in 2007."
Looking forward, Pachter said that, especially with R&D spending becoming more moderate, "we are confident that the company can grow its operating margins from packaged goods sales to somewhere near its peak margins in the last cycle. As its digital revenue continues to grow, we expect to see dramatic operating margin contribution, with growth continuing well into the next decade. We believe that the transition will continue for the next several months, and expect further hiccups as observers see next generation console sales wax and wane. However, over the long run, we expect mid-teen revenue growth to be the norm, and think that EA can expect to grow its revenues at least in line with the industry average."
In his note, Lazard's Colin Sebastian continued the bullish line, saying "We expect that the three next-generation video-game consoles and a healthy handheld market will be the biggest drivers for significantly higher sales at Electronic Arts over the next several years."
Specifically, he expressed interest in how EA "appears to be more focused on diversifying its portfolio of internally owned franchises," and is "beginning to build material revenue streams from emerging growth areas such as online subscriptions (e.g., massively multiplayer games and Pogo), in- game advertising, mobile content, and digital downloads/micro-transactions."
"The company’s acquisitions of Jamdat (mobile) and Mythic Entertainment (MMOGs) are obvious cornerstones of this growth strategy," he added, "however, recent partnerships in China and in-game advertising facilitators are also key strategic initiatives, in our opinion."
He concluded, "We anticipate that contributions from emerging businesses will better leverage EA’s wealth of video game content and could ultimately provide some margin insulation from ongoing higher development and licensing costs in the core console and handheld business."