Electronic Arts profit outlook disappoints
SAN FRANCISCO (Reuters) - Top video game publisher Electronic Arts Inc (ERTS.O) issued an annual profit outlook on Tuesday that fell short of Wall Street forecasts as a drive to improve quality jacked up costs. Its shares fell 3.7 percent.
The quality drive has been a centerpiece of Chief Executive John Riccitiello's strategy to bring growth back to EA after years of stagnation and increasingly tepid responses by gamers to its products.
Riccitiello, who has also sought to drive growth through acquisitions, reiterated his view that EA's $2 billion bid for Take-Two Interactive Software Inc (TTWO.O) fully accounted for the strong debut of that company's "Grand Theft Auto 4".
Although EA posted higher-than-expected profit and revenue for its fourth fiscal quarter ended in March, analysts voiced concern with their first glimpse of management's forecasts for its 2009 fiscal year.
"EA for a few years was choosing the timing of the game over the quality of the game. Now EA's shifting to a model where quality is more important," said Evan Wilson, an analyst with Pacific Crest Securities.
"However, maximizing quality is not always maximizing profit," Wilson said. "This is a do-or-die year."
EA said it expected a profit excluding items of $1.30 to $1.70 per share, below the average $1.74 expected by analysts.
Of particular concern was EA's expected operating margin of 12 percent to 14 percent for the year, up from 8 percent last year but below the 15 percent many analysts had anticipated.
That reflected the costs of delays to games, including the highly anticipated "Spore", as well as "Warhammer Online" that EA hopes will take on the popular "World of Warcraft".
"This is a mixed bag here, but it's pretty consistent with what we've been seeing from EA this year," said Todd Mitchell, an analyst with Kaufman Bros. "They have a pretty decent top-line story but they have no bottom-line story."
EA's fourth-quarter profit excluding special items was 9 cents a share on revenue that rose 50 percent to $919 million, driven by sales of "Rock Band" and "Burnout Paradise".
The company had been expected to show a profit of 1 cent per share on revenue of $840 million, according to the average expectations of Wall Street analysts on Reuters Estimates.
EA said fiscal 2009 revenue would grow by about $1 billion, or 25 percent, as it rolls out "Spore" and "The Sims 3".
EA said it finished the quarter with about 21 percent of North America's video game market, up 5 percentage points from a year ago, and it expected to take more share as it outpaces the broader industry's growth of 15 percent to 20 percent.
Apart from Take-Two, EA's main competitors are "Guitar Hero" publisher Activision Inc (ATVI.O) and France's Ubisoft (UBIP.PA).
Take-Two has rebuffed EA's $25.74-a-share offer as too low.
EA said revenue growth would come mostly in the second half of the fiscal year, helped by "Spore" and "The Sims 3". It also touted its upcoming all-new franchises such as "Dead Space".
Analysts said the company needs a couple big breakout hits that can attain the status of its "Madden" or "Need for Speed" games, which sell several-million units a year.
"I'm increasingly convinced that earnings leverage comes from unit volumes in this business more and more so," Kaufman Bros' Mitchell said. "They need to bring three or four more titles up to those big volumes."
Including special items such as stock-based compensation and restructuring costs, EA said its net loss for its fourth quarter was $94 million, or 30 cents per share, compared with a loss of $25 million, or 8 cents per share, a year earlier.
(Editing by Braden Reddall)
