EA Spells Trouble For Video Game Sector (ERTS)

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Video game leader Electronic Arts Inc. (NASDAQ: ERTS) has just reported earnings, and this sector might not be quite as immune to economic woes as you might have hoped.  The company reported a loss of $0.06 on revenue of $1.126 billion.  First Call had non-GAAP estimates at $0.06 and $1.08 billion in revenue.  On a net basis, the company posted revenue of $894 million and a loss of $0.97.  While earnings are always important, there are undercurrents here at work which are not going to sit well for long-term holders.

EA had a net deferral of $232 million related to certainonline enabled packaged goods games and digital content as comparedwith $296 million in the prior year.

The company’s guidance is on a non-GAAP basis.  EA now sees $1.00 to$1.40 EPS, which compared with $1.06 from fiscal March-2008 and it seesnet revenues between $5.0 and $5.3 billion, a gain of 24% to 32% fromthe $4.02 billion in the March-2008 year.  There is just one problemhere.  First Call estimates are $1.42 EPS and $5.04 billion in revenues.

EA slipped in a "cost reduction plan" that is a workforce reduction ofabout 6%. The savings estimates pre-tax will be approximately $50million.  As large as the company, it shouldn’t have botheredannouncing this.  The negative PR of all of the job cuts is not worththat $50 million, particularly considering the negative employeerelations it has had in the fairly recent past.

The company’s CEO, John Riccitiello, even said, “Considering the slowdown at retail we’ve seen in October, we are cautious in the shortterm….”   There are many ways to cut down on headcount without havingto make any announcements.  This CEO should know this. 

Shares of EA closed down 1% at $27.73 today, and shares are downanother 13% in after-hours trading at $24.00.  Its 52-week tradingrange is $22.73 to $61.50.  Amazingly enough, this has not spilled overinto other video game retailers.

What was bad before at EA looks like it has to get worse before it can get better.

Jon C. Ogg
October 30, 2008