Skip to main content

Updated from May 3

The bad news just keeps coming at

Electronic Arts



After warning of an earnings miss in March, the company said it met lowered Wall Street expectations for its fourth quarter, thanks in part to currency changes that inflated its overseas results. But the video-game publisher cautioned analysts that its top and bottom lines will likely fall short of estimates in the first quarter and its full-year profit could also fail to meet expectations.

Despite the disappointments, company officials tried to reassure investors. The company's dour outlook has a lot to do with investments the company is making to maintain and extend its lead in the game publishing business, they said.

"We're trying to balance our short-term results with long-term investments," said company CFO Warren Jenson in an interview with

. "Right now, we can't afford to skimp, given the stakes."

But investors apparently weren't mollified. In early trading Wednesday, investors slapped EA's stock, sending it down $4.83, or 9.1%, to $48.07.

In its just-completed quarter, EA earned $8 million, or 2 cents a share. That was down from the $90 million, or 29 cents a share, the company earned in the year-earlier period.

But the company included in its bottom line this year a $21 million charge related to an employment lawsuit against it. Without that expense and certain other items, EA would have earned $30 million, or 9 cents a share, down from $70 million, or 25 cents a share, a year ago.

The company's sales in the quarter fell 7.5% from the year-earlier period to $553 million.

The consensus estimate of analysts polled by Thomson First Call was 9 cents a share in earnings excluding items on sales of $549.31 million. EA

warned analysts in March that it wouldn't meet their then-current targets or its previous outlook. Instead, the company predicted that it would earn 5 cents to 7 cents a share on both a GAAP and a pro forma basis on sales ranging from $525 million to $550 million.

Looking forward, EA predicted it would lose 22 cents to 28 cents a share on a GAAP basis in its current, fiscal first quarter on sales ranging from $300 million $340 million. For the full year, the company forecast GAAP earnings of $1.55 to $1.70 a share on revenue of between $3.4 billion and $3.5 billion.

That guidance appeared to be far below the Street's estimates, although analysts expressed confusion over EA's outlook on the company's earnings call.

Wall Street had predicted a profit of 4 cents a share on a non-GAAP basis on $450.2 million in revenue in EA's current quarter. For the company's fiscal full year, analysts were calling for pro forma earnings of $1.73 a share on revenue of $3.39 billion.

On the call, Jenson noted that the top end of the company's outlook is roughly flat with its pro forma earnings for its just-completed year.

In fiscal 2005, EA earned $504 million, or $1.59 a share, on revenue of $3.13 billion. Sans items, the company would have earned $543 million, or $1.71 a share.

However, Jenson also noted that if the company's GAAP earnings game in at the bottom of its range, its pro forma earnings would like fall below its non-GAAP results for this past year.

In its fiscal first quarter last year, EA earned $24 million, or 8 cents a share -- $25 million or 8 cents a share excluding items -- on $432 million in sales. That means that the company expects sales to decline 21% to 31% from the first quarter last year.

EA expects to release just eight console or PC titles in the current quarter, down from 11 a year ago, Jenson told


, explaining the expected revenue decline.

In its just completed quarter, sales fell due to revenue drops at many of its geographic and operating segments. North American sales, for instance, fell 4%, while international sales fell 11%. The drop in international sales came despite an $11 million boon in the value of those sales thanks to currency effects. The decline of the dollar vs. other major currencies helped inflate the dollar value of EA's overseas sales.

Jenson declined to say what effect currency changes had on EA's bottom line.




PlayStation 2 console in short supply, sales of EA's PS2 software fell 20% in the quarter from the year earlier period. But its other console software didn't fare much better. Sales of software for


GameCube dropped 25% and revenue from games for older consoles fell 80%.

One slightly bright spot was that sales from games for



Xbox rose 5%.

Another positive was sales of games for Sony's PlayStation Portable. Even though Sony didn't release the PSP until near the end of EA's fiscal year, games for the device still brought in $18 million in sales for EA. Three of the top 10 best-selling games on the PSP are published by EA, Jenson said.

The company's results in its fourth quarter were hit not only by declining sales, but increasing costs. EA's gross profit margin -- the difference between total sales and direct costs of producing its games and services -- declined to 57.9% of revenue from 62.2% of revenue in the fourth quarter a year earlier.

On the earnings call, Jenson chalked up the declining margin to lower overall prices for its titles and higher reserves set aside for price protection. Those factors were partially offset by lower royalties, he said.

Operating expenses also rose in the quarter, in some cases dramatically. Marketing costs, for instance, jumped 30% to $87 million. Thanks to the litigation charge, the company's general and administrative costs swelled 43% to $66 million.

The litigation charge relates to a suit filed against EA last summer that accused the company of illegally failing to pay overtime to certain employees, said Jenson. The suit is still ongoing; the parties have neither settled nor has a judgment been entered against EA. Accounting rules require companies to make their best estimate of potential lawsuit losses and take them as a charge to their earnings.

With the lawsuit continuing, EA could be forced to take further charges in coming quarters, Jenson acknowledged.

"It's impossible to know," he said. "From what we see today, this is what we estimate the liability to be. It could be too much, it could be too little."

One other expense that swelled in the quarter was EA's research and development costs, which nudged upward 4% -- or 3 percentage points as a fraction of sales -- to $161 million. For the full year, EA devoted about 20% of its sales to research and development, compared to 17% in the previous year.

Those costs will continue to rise, Jenson said. The company expects to allot 20% to 25% of revenue to research and development in fiscal 2006, he said. That works out to be about $750 million to about $875 million, compared to $633 million in R&D expenses in its just completed fiscal 2005.

EA is investing in developing games for next generation consoles; handhelds, particularly the PSP; and for mobile phones, Jenson said. The company sees the investments as crucial to maintaining its position as the leading game publisher, he said.

With new game consoles expected to be on store shelves as early as this fall, the video-game industry is entering one of its periodic transitions. In the past, publishers such as EA have seen declining sales and increased costs during such console transitions.

The company's disappointing news appeared to rattle not only EA investors, but those who hold stakes in its rivals. In recent after-hours trading, shares of



were off 30 cents, or 2%, to $14.90;



stock was off $1.46, or 5.6%, to $24.81; and

Take-Two Interactive


shares were down 16 cents, or less than 1%, to $24.09.