Updated from Jan. 25

Investors and analysts have said they're focusing on the future with Electronic Arts ( ERTS). But on Wednesday, investors at least seemed to be more attuned to the recent past.

In its earnings report Tuesday afternoon, EA handily beat the Street's consensus. But its numbers got a boost from currency fluctuations. Worse yet, the video-game software giant gave disappointing guidance for its current quarter, and warned of an uncertain environment over the next couple of years.

In a slew of reports issued Wednesday morning, many analysts, pointing to the company's guarded guidance and current valuation, reduced their earnings estimates and reiterated their previous lukewarm ratings on EA's shares.

EA's earnings report "reinforces our thesis that the new console transitional period will require higher levels of R&D, and pricing should continue to be under pressure," said Merrill Lynch analyst Karen Russillo in her note, restating her previous "neutral" rating on EA shares. "We maintain that it is difficult for us to see much in the way of earnings leverage in the next couple of years as the company increases its investment ahead the next cycle. ... We believe that investors will not likely continue to pay a premium for growth that may not come for another two years."

(Electronic Arts has been an investment and noninvestment banking client of Merrill Lynch in the last year.)

Despite such sentiments, investors focused on the positive. Shares of EA were up $1.38, or 2.4%, in recent trading to $58.92.

They may have been taking their lead from the company's executives, who, on a conference call, touted the recent signing of exclusive deals with the National Football League and ESPN -- and that EA's results met its earlier guidance.

"We held our own in a highly competitive quarter and year," said Warren Jenson, the company's CFO, on the call.

The video-game software giant earned $375.1 million, or $1.18 a share, in its just-completed quarter. That was off its third-quarter performance in fiscal 2004, when it earned $392.3 million, or $1.26 a share.

The company's sales fell 3% to $1.43 billion.

Excluding amortization, stock-based compensation and other charges, the company would have earned $390.63 million, or $1.23 a share, compared to $393.16 million, or $1.26 a share in the year-earlier period.

On this basis, analysts polled by Thomson First Call on average were expecting the company to earn $1.18 a share on $1.42 billion in sales. In October, the company projected it would earn $1.11 to $1.21 a share -- $1.16 to $1.26 a share, excluding charges -- on sales ranging from $1.4 billion to $1.475 billion.

Although the company topped these estimates, it warned that it likely won't do so in its coming quarter.

For its full fiscal year, EA predicted that it would earn $1.82 to $1.87 a share -- or $1.90 to $1.95 a share, excluding charges -- on sales ranging from $3.275 billion to $3.325 billion. Given the company's performance through its first three quarters, that outlook implies that it expects to earn 25 cents to 30 cents a share -- 28 cents to 33 cents a share excluding charges -- on sales ranging from $700 million to $750 million in its fourth quarter.

In contrast, Wall Street has predicted that the company will earn 38 cents a share on a pro forma basis on $736.11 million in sales in the current quarter.

Weighing on the company's fourth-quarter results and its potential performance in its coming fiscal year are increased investment in research and development and uncertainty concerning the video-game market, company officials said. Company officials said they didn't know when the next generation of consoles would be released or how that might affect EA's results.

Likewise, Jenson offered a guarded outlook for the overall market for video-game software in calendar 2005, saying that the company expected sales to be flat to up 5% in both the U.S. and Europe, compared with 2004.

"We view Electronic Arts' Q3 results positively, but were disappointed with the company's tempered outlook," said Wedbush Morgan Securities analyst Michael Pachter in his own note. "Management expects increased R&D expenses for development. ... Though we think that these investments are both necessary and prudent, we believe that the company may be accelerating some spending into Q4 in order to set the bar low so that it can grow fiscal 2006 earnings at a growth rate somewhat lower than we had anticipated."

(Wedbush does not have investment banking business with EA.)

EA's report came after the close of regular trading. Earlier in the day, EA's shares ended the regular session off 13 cents, or less than 1%, to $57.54.

EA's revenue and earnings decline was widely predicted by both the company and analysts. Jenson blamed it largely on the fact that EA released 11 titles in the quarter, compared with 13 in the year-ago period.

Jenson did not say why the company had a lighter release schedule in the just-completed quarter, compared with the holiday period a year earlier. However, many publishers moved titles out of the holiday quarter so they wouldn't have to compete with Microsoft's ( MSFT) Halo 2 and Grand Theft Auto: San Andreas from Take-Two Interactive ( TTWO), which were expected to -- and did -- garner the lion's share of sales in the quarter.

EA expects to release 26 games in the coming quarter, compared with 11 in the fourth quarter last year.

EA's results in the just-completed quarter would have been worse if not for the decline of the dollar vs. other major currencies. That decline helps boost the dollar value of overseas sales. In EA's case, currency fluctuations added about $47 million to its top line, helping it top both its own and analysts' revenue expectations.

Jenson declined to say how much the change in exchange rates affected EA's bottom line.

"We have a series of natural hedges in place to minimize the bottom-line impact," he said, in an interview with TheStreet.com.

Helped by the dollar's decline, the company's international operations posted a revenue gain of 2%, compared with the third quarter of EA's fiscal 2004. Without the currency change, the company's international sales would have declined by 5%.

Still, that wasn't as bad as the company's North American operations. Sales on EA's home turf fell 8% in the quarter, attributable largely to the fewer number of releases, according to Jenson. EA's revenue was also affected by a price war, as it was forced to cut prices on Madden NFL 2005 and its other sports titles to compete with rival games from Take-Two. However, the price cuts had a greater affect on the company's gross margin and bottom line than its revenue, Jenson said.

EA's gross profit margin fell to 64.7% of sales from 65.2% of sales in the third quarter of fiscal 2004. Gross profit margin represents the difference between what a company charges customers for its products or services and its direct costs, including royalties, of producing them.

The company's deals with the NFL and ESPN came in response to the competitive threat from Take-Two. However, Jenson declined to give any financial details on those agreements.

Such exclusive arrangements are "expensive," Jenson said, but the company didn't focus on their cost.

The deals are "about building our sports properties," he said. "The investments ... are about our long-term strength and securing our long-term future."

As expected, the company also saw sales on games designed for Sony's ( SNE) PlayStation 2. Last fall, Sony struggled to meet demand for its console after it started replacing its original PlayStation 2 device with a new, slimmer version. With software and hardware sales strongly linked, analysts expected many publishers to struggle in the quarter with PlayStation 2 games.

EA's saw its sales from PlayStation 2 games fall 10% from the previous holiday quarter to $661 million.

With an accounting change looming on expensing stock options, EA gave details to investors in its report on how it might be affected. In the holiday quarter, the company would have posted a profit of $358 million, or $1.14 a share, if it had to include options costs in its income statement. In the first three quarters of its fiscal year, options expenses would have reduced its net income to $437 million, or $1.39 a share, from its reported $497 million, or $1.44 a share.

Last month, accounting regulators passed a rule that will require all companies to recognize the cost of issuing stock options in their income statements beginning with their calendar year third-quarter reports this year. To date, many companies that issue a lot of options have chosen to exclude them from their income statements using a loophole in current rules.

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