Caution Clouds Electronic Arts

Analysts are anxious that the video-game developer will lower its full-year outlook Tuesday.
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With the grief it has given investors lately,

Electronic Arts

(ERTS)

has been more like a typical teenager than a market leader. Now, some investors are wondering when this phase will end.

The video-game software publisher may give some indication when it reports first-quarter earnings after the bell Tuesday. Analysts are expecting relatively weak results, but there's already trepidation about whether the company will lower its outlook for the year. Fueling that anxiety is EA's recent decision to delay its game based on

The Godfather

movie series.

"Given the

earnings estimates that are currently out there, that's probably going to require them to really execute on everything else," says Joe Spiegel, a fund manager with Dalek Capital, which has no current position in EA's shares. "That's not to say they can't do it," Spiegel adds, but investors are "concerned."

The recent concerns about the company date back at least to March, when

Electronic Arts slashed its revenue and earnings outlook for last fiscal year. In response, investors sent the stock down nearly 17% the next day.

In recent months, EA has given investors other reasons for pause.

EA cautioned analysts in May to lower their earnings estimates for its first quarter and full year. And earlier this month, the company renewed its licensing deal with John Madden. While the deal keeps Madden's name and face on EA's market-leading National Football League game, it likely adds further costs to the title.

EA officials have already warned that exclusive licensing deals signed with the

National Football League and

Disney's

(DIS) - Get Report

ESPN sports media division will kick in this year and drive up some of its costs in the near term.

"Everyone is most likely getting more money, so the margin on that game has to be declining," says Spiegel.

The Godfather

delay adds to those concerns.

The company and some analysts have had big hopes that the game would be a strong seller, and EA's next franchise title. But

EA warned earlier this month that it won't ship the title until the first calendar quarter of next year, which is the company's fourth quarter. The company declined to say how the move will affect results, but the delay means the game will miss out on the holiday sales season and will have one less quarter of sales results included in this fiscal year.

"That's a pretty sizeable issue in my opinion," says Erik Swords, a portfolio manager with Exis Capital, adding that the move could force the company to lower its guidance.

The company has forecast earnings of $1.55 to $1.70 a share for its full fiscal year on sales ranging from $3.4 billion to $3.5 billion. Wall Street analysts polled by Thomson First Call have predicted EA will earn $1.63 a share for the year on $3.4 billion in sales.

Last fiscal year, the company earned $504 million, or $1.59 a share, on revenue of $3.13 billion.

EA attributed the

Godfather

delay to production issues; the game's development was running behind schedule for its expected fall quarter launch. That's a red flag that not only raises questions about how successful the game will be when it comes to market, but also about EA's broader development efforts, says Swords, who does not have a position in EA shares but follows the sector.

"It makes you wonder if their developers are strained in terms of the time they're spending on these titles and how quickly EA is trying to put them out in the open market," he says.

However, few investors or analysts are ready to totally write off EA just because of recent troubles. Most expect the company to maintain its current dominance into the next console cycle, which will begin later this year when

Microsoft

(MSFT) - Get Report

releases the Xbox 360.

Indeed, despite the recent setbacks, the company's stock has regained much of its lost ground. The shares are up 28% since their nadir in May following the earnings report and 10% since the warning-inspired March selloff.

Besides the stock's recovery, EA has given investors other reasons to stick with it. Last week, for instance,

Electronic Arts announced a deal with independent developer Valve to publish and distribute the company's top-selling

Half Life 2

game.

The deal may have been an expensive one for EA, but it might be able to ameliorate some of the lost revenue from the

Godfather

delay and help reinvigorate the company's PC game sales, analysts say.

"The Valve pickup is great," says Spiegel. "It's a net positive."

And on Monday, EA was granted the rights to develop additional

Lord of the Rings

games based on characters from the novels that were not included in the recent movie trilogy.

Meanwhile, recent results may come in better than expected.

EA predicted in May that it would lose 22 cents to 28 cents a share in the just-completed period on sales ranging from $300 million to $340 million.

The gloomy guidance had to do with a light lineup of new game releases, the company explained at the time. Analysts reset their expectations accordingly.

But data released last week by NPD indicates that analysts may have set the bar too low. Banc of America analyst Gary Cooper, for instance, had predicted that EA's sales would fall 20% year over year in June; instead, they grew 6%, according to NPD. U.S. retail sales of the company's games fell 17% in the just-completed quarter, according to NPD data. While not a direct comparison, Cooper had predicted that the company's worldwide sell-through would drop 46%.

"These results were much better than expected," Cooper said in a research report last week.