Tuesday, May 03, 2005

EA Q4 Earnings: Not a Tasty Milkshake

Electronic Arts announced their Q4 earnings today. From Marketwatch:SAN FRANCISCO (MarketWatch) - Electronic Arts reported late Tuesday fiscal fourth quarter net income plunged 91% as consumers delayed purchases of its video game titles while they await a new generation of console hardware. The world's largest entertainment software firm also forecast an unexpected loss for the first quarter.The news sent shares of EA down more than 11% to $46.85 in late trading.

The Redwood City-based company said profit fell to $8 million, or 2 cents a share, compared to $90 million, or 29 cents, a year ago. Excluding certain charges, the company said it would have earned $30 million, or 9 cents, in line with analyst estimates.

Revenue fell 7%, less than expected, to $553 million from $598 million...

For the fiscal year ending in March 2006, the company said it expects revenue to fall between $3.4 billion and $3.5 billion, slightly above analysts' estimates of $3.39 billion.
Electronic Arts forecast 2006 earnings of $1.55 a share to $1.70 a share, which falls shy of analysts' estimates of $1.73 a share, but stands to top the fiscal 2005 total of $1.59 a share.

EA forecast a loss of 22 cents a share to 28 cents a share for the fiscal first quarter ending in June. Analysts were expecting a profit of 4 cents a share

That might be the funniest first line of a story ever—“…as consumers delayed purchases of its video game titles while they await a new generation of console hardware.” Um, I call bullshit. That is the worst spin I’ve heard in a long, long time. Do you have any friends saying “I’m not going to buy any more new games until Xbox360 comes out in November”? No. Gamers don’t go nine months without games because a new console is coming out. That’s so transparent a lie that it’s embarrassing.

Yes, there’s a console transition, and yes, it’s going to affect earnings, but not now. Try Q4 of next year, when the transition is actually underway.

Here’s my best guess. One, EA pulled in everything they could for several quarters in a row to make their numbers line up properly. They might have stuffed the channel with product or reduced reserves for uncollectible receivables. There are plenty of things that can be done legally that aren’t entirely honest. However, the payback for doing things like that is that they can’t be done forever, and at some point they blow up in your face.

Two, EA has gotten too big for the existing gaming market, at least at the growth rate they’re trying to sustain. They need growth rates over thirty percent to justify the price/earnings ratio on their stock, and trying to sustain that growth rate as a three billion dollar company is almost impossible. Companies that big just don’t grow that fast. And they’re not, by the way. They’re now projecting earnings for fiscal year 2006 to be flat or, at the high end, up seven percent. Before the earnings announcement, their PE was around 32. Stocks with growth rates of (optimistically) seven percent do not have PE’s of 32.

Three, maybe we’re just getting tired of EA’s shit. One of the high-level people on Madden said in an interview a few weeks ago that they were working on pass defense this year because they basically hadn’t touched it for ten years. That’s right, Sparky, and it shows. So for the last decade, the pass defense has sucked, but at least I can now set the price for hot dogs, right? EA’s sports games, in particular, never seem to get finished. And sports games are one of EA’s primary growth engines. They can market all they want, but when they only have the best game in one sport (baseball), all the commercials in the world aren’t going to fix that.

EA does a very good job of signing talent. Then they have them put out a game and flog it to death with sequels. Maybe that’s part of the problem as well.

One thing I do know, though. It’s not people “delaying purchases.” We’re gamers, man. We have poor impulse control.

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