EA Guidance Sees Weakness From Halo 3 & Grand Theft Auto Competition (ERTS, THQI, TTWO, MSFT)

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Electronic Arts Inc. (NASDAQ:ERTS) has posted results with a gross profit of $229 million, but its actual net loss was $132 million.  Its diluted EPS was -$0.42 net and -$0.22 on a non-GAAP basis on a 4% drop on revenues to a total of $395 million.  First Call estimates were -$0.34 non-GAAP and revenues were expected at $389.5 million.  The stock was down somewhat in sympathy with THQ Interactive (NASDAQ:THQI) after a lower loss but forecasts including higher spending.

Fiscal March-2008 Guidance: revenues $3.2 to $3.5 Billion, up $100 million from prior guidance and net revenue excluding impact of deferrals $3.65 to $3.85 Billion (up $50 million from prior guidance). Non-GAAP EPS $0.90-$1.20, in line with prior guidance.  Unfortunately its GAAP EPS is still a loss, even if narrower: -$0.63 to -$0.10 instead of -$0.77 to -$0.23 prior.  First Call estimates for Fiscal march-2008 are $1.14 EPS and $3.7 Billion revenues, so the mid-point is under EPS targets and somewhat in-line to a tad under the mid-point on revenues.

Next quarter guidance: $465 to $570 million revenues, but $825 to $910 million excluding impact of change in deferred net revenue.  Non-GAAP EPS targeted at $0.10 to $0.20 outside of deferrals.  First Call pegs estimates at $0.33 EPS and $960 million revenues, so it looks like that is a shortfall.

The truth is that these are the throw-away quarters for video game companies.  The companies have slower sales in this quarter so the only issue at hand is each company’s outlook.  The most important issue to watch for all videogame producers in the next couple or three months is if the mega-hit releases of Halo 3 from Microsoft (NASDAQ:MSFT) and the new Grand Theft Auto release from Take-Two Interactive (NASDAQ:TTWO).  Halo 3 comes in late September and GTA comes in October as of now, and these two releases at the last coincidental calendar timing caused available gaming dollars to migrate away from all other producers for a period of 60 to 90 days as game players dwelled on those titles.  It looks like Halo 3 and GTA spending are going to exact a toll again against the other gamers.

Here is the ‘feel good ahead’ commentary part from Warren Jenson, Chief Financial and Administrative Officer: "Looking ahead, we have a strong slate.  In the balance of the fiscal year, we plan to launch our full EA SPORTS lineup, Need for Speed Pro Street, MySims, Medal of Honor Airborne and ten new properties, including Army of Two, The Simpsons, SKATE, Boogie and Rock Band."

Shares closed down 1.1% at $48.10 in normal trading, and shares are down over 1% more in after-hours trading to about $47.50.  That is within spitting distance of the $46.14 and well under the $58.85 highs seen in the last 52-weeks.

Jon C. Ogg
August 1, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.