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It's Time to Test EA's Game Plan

Priya Ganapati

Video-game publisher Electronic Arts(ERTS Quote) is a company in transition.

EA is struggling to retain its position as the market leader even while restructuring its business units last month, when it brought in new hires to revitalize its game development and publishing process.

EA's first-quarter fiscal 2008 results are likely to reflect some of these challenges with losses up from a year ago.

Analysts will also be closely watching new CEO John Riccitiello for clues about his plans to further cut costs and release innovative and cost-effective games.

"I am much more confident about their prospects now than I was nine months ago," says Roger Ehrenberg, president of Monitor 110, which offers a real-time online information monitoring service for institutional investors.

"John really understands the importance of building a mass-market franchise and going beyond hardcore gamers," says Ehrenberg, who does not own any shares of EA.

In the first quarter of fiscal 2008, analysts polled by Thomson Financial expect the company to post a loss of 35 cents a share, up from a loss of 12 cents a share in the year-before quarter. Revenue for the quarter is likely to hit $389.4 million, down from $413 million a year ago.

For the second quarter, analysts are expecting revenue of $960.1 million, up from $784 million, and earnings of 34 cents a share.

For fiscal 2008, consensus is for revenue of $3.71 billion with earnings of $1.14 a share.

EA's stock is down 1.2% in the three months since April 30 and off 2.5% since the beginning of the year.

Competitor Activision(ATVI Quote) is down 1.8% since the beginning of the year, and THQ(THQI Quote) is down 11.5% in the same period.

Shares of EA closed down 97 cents, or 1.96%, to $48.64 Tuesday.

Despite its large and diverse portfolio of games, EA lost its position as the No. 1 independent publisher of games in June to smaller and more aggressive rival, Activision, which has a monstrous hit in the Guitar Hero franchise.

The Redwood City, Calif.-based EA has also been dogged by criticism for its dependence on sequels to generate hits, failure to produce innovative games and its inability to foresee that Nintendo's Wii could emerge as the market favorite.

EA is trying to address some of the problems.

In June, EA announced it would divide itself into units or "labels," including EA Sports, EA Games, EA Casual Entertainment and The Sims, in an attempt to consolidate its decision-making process and improve the company's focus and its ability to bring new ideas quickly to market.

"John [Riccitiello] has come clean and said EA's strategy is broken, and it is his responsibility to build the culture back," says Ehrenberg. "Now it is an execution issue and the next two to three quarters will show us if it is flowing through to the income statement."

EA has also hired new senior executives and announced plans to release a slew of much-awaited games including Rock Band, Army of Two and The Simpsons.

The efforts are likely to pay off, believes Todd Greenwald, an analyst with Nollenberger Capital, which does not own shares or have a banking relationship with EA. "We believe the June quarter will mark the end of EA's year-on-year revenue declines and market share losses," Greenwald wrote in a report.

Of EA's upcoming games, Rock Band, EA's answer to Guitar Hero, will be watched closely. Greenwald and other analysts will be looking for details on when EA plans to release the game and how it will price it.

Rock Band, which comes with three different instrument-based peripherals -- a guitar, a drum-shaped peripheral and a microphone for a lead singer -- could be a huge hit for EA and take some of the sheen off rival Activision.