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Electronic Arts' Gift

The stock surges after a big earnings beat, but next-generation woes may not be over.

While investors cheered

Electronic Arts


on Friday after the gamer posted

easy revenue and earnings wins, not everyone believes the company is out of the woods.

EA shares recently moved up 12.3%, adding $6.50 to $59.50.

Boosted by robust sales in its sports franchise, the gaming company's revenue for the second quarter of 2007 hit $784 million, surpassing $657 million from the year-ago period and the average analyst estimate of $672.5 million.

Likewise, the company boasted $65 million, or 21 cents a share, running roughshod over analysts' forecast of 2 cents a share on the bottom line, without special items.

EA also raised its guidance for the year ending March 2007, forecasting sales between $2.95 billion and $3.125 billion, and an EPS excluding items to the range of 55 cent to 70 cents.

Jeetil Patel, an analyst with Deutsche Bank, agreed that the quarter is "impressive" but noted there are "bearish themes" looming and reiterated his sell rating.


Madden NFL 07


NCAA Football 07

and other sports games were particularly strong during the September quarter, he noted that a lack of competition left titles by EA dominating retail shelves.

More importantly, "we believe we have yet to see the PS2

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game console transition, which will be almost

three times as large as the Xbox transition," Patel wrote. The Xbox transition resulted in a mere 6% year-over-year revenue growth for Xbox-related games.

He says he's encouraged that sales for the PS2, made by


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are still solid, but believes it's "merely delaying the inevitable transition to come."

"The longer consumers buy lower-priced PS2 games, the slower the next-gen ramp will be, and the slower future industry growth will be," he wrote.

"With competition ramping up next year, PS3 hardware shortages a major problem, and an industry growth rate of 15% to 20% in fiscal 2008, we think expectations for next year could still be overly optimistic," Patel wrote. His firm owns shares of EA, and has received non-investment-banking compensation from the company.

"We continue to believe that the Street is pricing in the very best scenario into shares of EA," Patel noted.

CIBC World Markets analyst Brendan McCabe, who has a hold rating on the stock, pointed out that research-and-development costs will affect the second half of the year.

"R&D spend

ing is now expected to increase 25% to 30% in fiscal year 2007 -- nearing $1 billion in whole-dollar terms," he noted. "This target was raised from 15% to 20% and 10% to 15% before that." His firm makes a market in EA.

But optimism prevailed for other EA observers.

Michael Pachter, an analyst with Wedbush Morgan Securities, called EA's revised full-year guidance conservative, believing that the recent industry growth trends of (13% over the last six months in the U.S.) will continue, and favorable comparisons in the second half of the year indicate that EA can hit the high end of guidance.

His firm makes a market in Electronic Arts.

Other observers found reason to believe in the company's ability to grow its mobile phone games, in-game advertising and micro-transactions for downloadable content. In addition, the company is expected boost revenue as it further develops its own portfolio of brands (and thus, its own intellectual property), releases its solid pipeline of new titles and expands internationally.