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Electronic Arts Plays Badly

Posted: Feb 12, 2010 09:04 AM by Greg Sushinsky

Tickers in this Article: ATVI, DIS, ERTS, GME, THQI, TTWO

Electronic Arts (Nasdaq: ERTS) was slammed by the market for unwelcome results. The game publisher reported a confluence of things that made the market cringe: missed estimates, bad earnings and uninspiring guidance. In the face of this, the market did what it usually does: punished the stock.

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EA's Numbers Game
Despite strong games like "Dragon Age: Origins," and "NBA Live," Electronic Arts posted a 25% decline in revenue, to $1.24 billion in the quarter. The GAAP figures for income were a loss of $82 million versus a loss of $641 million last year. On a non-GAAP basis, the net income was $109 million, or 33 cents a share.

The Street really disliked the weak forecast despite potentially strong-selling recent releases that should figure into next quarter's numbers. "Mass Effect 2" is already out, "Dante's Inferno" has just been released, and "Battlefield Bad Company 2" is due out in March. Yet the forecast for next quarter is for two to six cents on a non-GAAP basis, instead of the 13 cents expected by analysts. For the year, it's more of the same. The company now forecasts revenue at $3.65 billion to $3.9 billion instead of the $4.07 billion analysts were looking for, and earnings of 50-70 cents instead of 74.The street found these numbers underwhelming, as well as the lack of a visible plan by EA to emerge from this operations dungeon.

Industry Troubles
While the video game industry has been rocked by the economy, EA's competitors are handling it differently. Retail outlet Game Stop (Nasdaq: GME) has faced pricing pressure from other sellers but is weathering this. As for other game publishers, THQ (Nasdaq: THQI), which is best known for publishing the "WWE Smackdown vs. Raw" series, also had a miserable earnings report. Yet it announced a turnaround plan that the market reacted to as feasible.Then there is the large stake taken by Carl Icahn of more Take Two Interactive (Nasdaq: TTWO) shares. There are turnaround implications when a heavyweight like Icahn dramatically ups his stake. (Learn more about activist shareholders, see: Could Your Company Be A Target For Activist Investors?)

Meanwhile, Activision Blizzard (Nasdaq: ATVI) has managed to leverage its properties into positive earnings in a crummy environment. So why can't EA? Activision is fighting through the tough times in a way that Electronic Arts is not. EA has been regarded as unfocused, and an overlooked issue is the lack of innovation. The company's lineup features many good titles, but not all of these are cutting edge. "Madden 10" is one such example; an update of an old concept.

What Needs to Change
Electronic Arts needs to show faster improvement and perform a convincing turnaround. This could involve streamlining its game lineup and expanding the new mobile gaming niche. Digital and mobile gaming will become more important segments in the industry, so EA needs to be on top of that. Whether something like the online generation and play of content, a staple of Chinese gaming, will ever be a big factor in the US market or not, it's at least another area to be looked at.

Bottom Line
The stock isn't worth getting into until Electronic Arts shows it can more effectively run its business. There is the possibility of consolidation in the industry, so the company may end up being bought by a large entertainment company such as Disney (NYSE: DIS). EA stock fell on fundamentals and may have more to go.

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By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.

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