Citi analyst Brent Thill is reducing his price target and estimates on Electronic Arts (ERTS) after the company reported weaker-than-expected Q2 earnings. Revenue came in at $609 million, short of the Street’s $639 million, and EPS came in at -$0.42, missing the consensus estimate of -$0.33.
Thill attributed the miss to a weak catalogue and higher-than-expected bonus expense. Thill remains upbeat on EA, however, and insists that Q2 results aren’t representative of the company’s potential:
FQ1 is not an accurate representation of the potential for FY09 due to a back-end loaded game pipeline and in our view the potential of the stock hinges on the success of key FY09 releases starting in FQ2 with Madden (8/12) followed by Spore (9/7), and in FQ3 Dead Space and Mirrors Edge. Near term, concern over Madden preorders will likely pressure the stock until we get sales data, but as we progress through FY09 ERTS’ laser focus on game quality should translate into higher sales which in a scale economics business should drive EPS leverage and a higher stock.
Thill also believes that EA will complete a deal with Take-Two (TTWO) by August and that EA will raise its bid slightly:
We expect FTC approval in August and for ERTS to raise its bid slightly upon approval to $27-$28 in order to potentially seal a deal in time for holiday season GTA orders. If TTWO rejects a raised offer we expect ERTS will walk as the near-term economics to ERTS of a deal would deteriorate.
Thill cuts target to $64 from $69 but maintains Buy/High Risk rating.
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