January 12, 2010 / 8:45 PM / 10 years ago

Electronic Arts' CEO in hot seat after repeated misses

NEW YORK (Reuters) - High costs, low margins and a knack for missing forecasts have tarnished the credibility of Electronics Arts Inc’s management and put the video game maker’s chief executive, John Riccitiello, in the hot seat.

The publisher of games like “Madden NFL” and “The Sims” slashed its fiscal 2010 forecast on Monday, citing weak December holiday sales in Europe and a shift to lower-margin products.

It was the second year in a row that EA significantly cuts its guidance, and Riccitiello — who has been CEO for three years — faces growing negative sentiment if he cannot lead the maker of software for game consoles and handheld devices to a comeback.

“Anytime you underperform, you should be worried about your job,” said Janco Partners analyst Mike Hickey. “An inability to execute on his performance objectives this year could put him at risk.”

Shares of EA fell 8 percent on Tuesday to $16.79, shaving even more value from Electronics Arts’ stock, which, before Tuesday’s slump, had risen only 2.7 percent in the past year.

EA is not the alone in crying woe about the video game industry, which has seen sluggish sales due to the economy. Retailer GameStop Corp last week said its holiday hardware and software sales failed to improve from 2008, even with the inclusion of Activision Blizzard Inc’s blockbuster “Call of Duty: Modern Warfare 2.” British retailer Game Group cut its full-year profit forecast on Tuesday.

But by comparison, EA’s chief rival Activision’s shares rose 17 percent in the past year, while Take-Two Interactive Software shares rose 35 percent, and THQ Inc rose 8 percent.

POTENTIAL HITS

Despite the slashed forecast, analysts say EA has a solid roster of potential hit games due this year, and that its efforts toward online games and software for mobile devices like Apple Inc’s iPhone may pay off in the long run.

But they were far less forgiving of EA’s leadership under Riccitiello — the stock has declined about 70 percent during his tenure. Investors have expressed concerns that EA overpaid for social gaming concern Playfish last year and remember its failed hostile bid in 2008 for Take-Two.

Wedbush Morgan analyst Michael Pachter said the EA management team has “zero credibility” with investors, who he said have felt disregarded as EA has continued to miss its sales and earnings targets.

“Investors feel betrayed, and the comment I got most from investors today is ‘They don’t seem to care about investors.’ This management team is running out of room to underperform. I think investor tolerance is gone ... they don’t get another year to turn around,” Pachter said.

Arvind Bhatia of Sterne, Agee & Leach added that the company has “consistently been underperforming,” and that there is going to be need for “some drastic action” at EA, whose high operating costs leave it with margins of 7 percent or less.

“For a $4 billion-plus company, that just isn’t acceptable,” he said. “Something is going to happen here — drastic costs cuts or them buying someone or getting sold — something has got to give in the next 12 to 18 months.”

Riccitiello’s career as a top executive for big brand names spans from Wilson Sporting Goods to Sara Lee Corp’s Bakery division. He was with EA from 1997 to 2004, when he left his job as chief operating officer to become a co-founder and managing partner at Elevation Partners, a media and entertainment buyout firm.

EA’s stock traded at about $52 when he returned to the company in 2007, compared to $16.75 now.

Still, despite shareholder pressure, Pachter stopped short of saying EA’s management is imperiled, noting that the company’s March and June quarters are shaping up to be strong.

“I think their lineup is going to save them,” he said.

On a conference call on Monday Riccitiello maintained that the company is executing on the right strategy.

“I think we have the right strategies going forward and the right team executing them,” he said referring to the full complement of EA’s workforce.

EA spokesman Jeff Brown on Tuesday added: “The results aren’t immediate, but step by step we are doing the things we need to lead this industry.”

Reporting by Franklin Paul in New York, additional reporting by Gabriel Madway in San Francisco; Editing by Tiffany Wu, Phil Berlowitz

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