I’m on my way home from a quick trip to the Bay Area in California for another visit to my friends at EA. That’s Electronic Arts the gaming company. This visit was great. I did a half day of one-on-one executive coaching on Thursday afternoon then it was onto a high level HR executive training. As is often the case The CFO Blake Jorgenson joined us for an hour of Q and A.
Of course I was able to get score of good meals. I was staying at the San Mateo Marriott. From this hotel it’s an easy shot to downtown San Mateo. I hit two of my favorites, Curry Up Now and Kingfish. Curry up is a great street food Indian joint. It’s fast as the name indicates and it’s tasty. Kingfish is an old favorite this time it was Dungeness crab soup with my favorite, their fish tacos. The fresh jalapeños and the fruit salsa makes the tacos a big time winner. One thing you can count on when visiting the San Francisco area is good food. This trip did not disappoint.
The HR executive training on the income statement was a great class. The stock has been down this last week after their 3rd quarter earnings report. The class was very interested in why that was the case. The company had met or beat their guidance (Wall Street talk for forecast) yet the stock is down about 15%. When looking at the quarter I provided to the group this finance trainer’s take to the drop.
The 3rd quarter at EA is their biggest quarter in terms of revenue. This quarter was no exception. The company beat their revenue guidance by just under $30 million. It’s good to beat your forecast but on a quarter where revenue is nearly a billion dollars that is not beating forecast by much. The problem with this last quarter can found in the gross profit margin percent. Even though EA beat the forecast, they did it by selling a lot of their new Star Wars title. This title has significant royalties attached to it which caused EA to miss on their forecasted gross profit margin by 110 basis points…that’s 1.1 percent. While that seems like a small miss it was a big deal this quarter because it is EA’s biggest quarter and for the last five years the gross profit margin has been going up by at least 300 basis points per year driving significant improvement EA’s bottom line profit.
From FY 2009 that gross profit margin has gone up from 49% to 71% in FY 2015. So when EA announced a lower GP margin in the quarter and lowered that margin a lot of Wall Street investors decided the party was over. Remember that in 2009 the stock was sitting in the low teens and now it was in the high 60’s. So the recent sell off was fairly mild compared to the stock growth over the last 6 years. The market sometimes overreacts to changes, I think that is the case here.
When Blake met with us he talked about how important it is not to focus on the stock price day to day. If you do, as a manager you might go crazy. He said as long as EA continues to focus on the fundamentals of profit and strong cash flow the stock will continue to appreciate in the long run.
It was a beautiful day for finance on a crazy Super Bowl week. EA offices are about 10 miles from the 49ers Stadium. To be honest it was nice to get home before things got crazy there this weekend.