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The game industry as a sector has been riding out the recession with reasonable success but the performance of individual companies within the industry has been less consistent. Some companies are faring well while others are announcing subpar sales. Electronic Arts (ERTS) announced its Q3 Fiscal 2009 results Tuesday and fell in to the category of the latter. EA’s performance was dismal (Call transcript).

Based on GAAP standards, the net loss reported for the quarter was $641m, or $2.00 a share, in the red. That compares to a loss of $33m, or 10 cents a share, for the same period a year ago. Sales, including deferred revenue, would have totaled $1.74b.

Excluding the onetime charges, EA said they would have earned $179m, or 56 cents a share. Analysts had projected 88 cents on revenue of $1.9b; both targets EA failed to hit.

The news wasn’t entirely a surprise. EA reset expectations in early December after Thanksgiving period sales turned out worse than expected. Even so, the shortfall was worse than many anticipated.

EA’s CEO John Riccitiello candidly acknowledged the failures in the analysts call. This wasn’t about currency (though a strengthening dollar cost EA about $55m) and it wasn’t solely a factor of the economy.

Consumers spent on games this holiday season, they just didn’t direct as much of their money toward EA’s titles as the company expected. EA missed because, Riccitiello said, “clear and simple – our titles did not perform to our expectations.”

To the extent the macro mix was a factor- retailers were carrying fewer titles and EA was depending more heavily than usual on new releases to carry the quarter. The marketing didn’t generate enough demand and cash-conservative consumers veered toward more known franchises. EA’s sales suffered as a result.

EA had only one of the top five titles in North America and Europe vs. typically two or more,” Riccitiello said.

So what’s EA doing about this? Onward and upward, the company hopes. To try and get ahead of the problems the company has set forth an ambitious plan for its Fiscal 2010. (Note: EA’s fiscal year does not match the calendar year. EA is currently in Q4 of Fiscal 2009 now. The fiscal year ends in March.)

The plan will start out by cutting back another $500m in operating expenses. The projection is now for a target of $2.1b on the 2010 fiscal year. The reduction will come from a mix of title cuts, staffing reductions and facilities changes. Notably:

• On SKUs, EA plans 30% fewer in Fiscal 2010. The new projection is 50 titles and 125 SKUs.
• Staff reductions will total 11%, 1,100 jobs. That’s about 100 more than previously announced.
• 12 facilities, instead of the nine mentioned Dec. 19th, will be shut down.

Capital spending will also pare back by about 40%.

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EA share

On the other side of the equation, to boost revenue, EA will emphasize Wii titles in its product slate and manipulate release schedules (see below) to allow marketing to better build demand for titles. The direct to consumer component of the company’s focus will also feature more heavily. Between MMOGs, mobile games and Pogo, more than $500m in revenue is projected.

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EA guidance slide

Based on the changes, and performance, looking ahead in forward guidance EA has now revised FY09 revenue guidance $900 below prior forecasts. The new target is $4.2 to $4.25b. Of the $900m shaved off prior estimates, $500m is attributed to weaker sales, $300m to the shift of some titles to Fiscal 2010 (Godfather 2, Sims 3, etc) and $100m to currency.

In other metrics, rounding out FY09, GAAP and non-GAAP gross margin are expected at about 50%. Op. Expenses are forecast to fall near $2.95b [GAAP] and EPS to be a loss of between $3.29 and $3.56 per share.

For Fiscal 2010, Net Revenue is forecast mostly flat to FY09 at between $4.2 and $4.35 billion. Gross margin should be up to 57-59% and EPS in the range between a 5 cents a share loss and a forty cent a share gain. The company also is saying R&D will be approximately 27% of revenue and sales and marketing expenses will target 15% of revenue.

Other title and schedule details announced with earnings:

Platform Share and Title Performance
• Based on NPD numbers, EA’s platform market share in North America for Q3 2009 was 29% for the Xbox 360, 27% for the PS3 and 13% for the Wii.

• Based on EA estimates, European share for Q3 2009 was 19% for the Xbox 360, 19% for the PS3 and 7% for the Wii.

• FIFA 09 was the company’s bestselling title in Q3. It sold 7.8m copies, number one for all platforms in Europe for the holiday quarter. It was up 4% over FIFA ’08 in the same period.

• Need for Speed Undercover sold 5.3m copies, down 7% from last year’s prior version in the franchise.

• Littlest Pet Shop sold 2.8m copies on the DS, Wii and PC in Q3.

• Dead Space, Mirror’s Edge, Madden ’09, and NBA Live ’09 sold at least 1 million units in the quarter.

• Rock Band 2 (partnership with Harmonix / MTV) sold 1.9m copies on the quarter. Left 4 Dead (partnership with Valve) sold 1.8m.

• In calendar 2008, Madden ’09 was the #6 title across all platforms in North America.

Digital Direct, Mobile and MMOG
• Digital Direct Revenue (online and wireless) was up 27% year to date to more than $300m. In Q3, it was up 28% Y/Y to $116m in revenue.

• Pogo hit a high of 1.7m paying subscribers.

EA Mobile has $141m so far year to date, up 29%. In Q3, revenue was $50m.

• Warhammer Online, EA’s latest MMOG has 300K paying subscribers in N. America and Europe.

Game Release Schedule Fiscal 2010

Q1 will focus on EA sports to start. The company will debut a Tennis franchise for the Wii, Fight Night and EA Sports Active. Harry Potter and the Half Blood Prince will release in conjunction with movie. Also from the movie inspired genre, the Godfather 2 will debut (moved from planned FY09). Lastly, on June 3rd, the company will launch Sims 3 (moved from prior schedule).

Q2 will launch new Need for Speed titles and NCAA Football and Madden 2010.

Q3 will debut Dragon Age from Bioware (PC launch moved to match console launch), Brutal Legend (fantasy game starring actor Jack Black), and NBA Live with “Dynamic DNA”.

Q4 will debut Battlefield Bad Company, Mass Effect 2 and a new title called Dante’s Inferno.

The Beatles game in partnership with Harmonix / MTV will also launch in fiscal 2010 but EA is not pegging an official release period at this time. (Check out the Fan Poll on song requests here.)

Disclosure: None

Source: Electronic Arts Stumbles in Q3, Plans to Walk in Next Fiscal Year