EA Earnings: It's in the Drain

By Barbara Ortutay
|  Wednesday, Aug 5, 2009  |  Updated 10:41 AM CDT
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EA Earnings: It's in the Drain

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Changes in accounting for deferred revenue drove Electronic Arts Inc. to report a larger loss and lower sales for its fiscal first quarter amid a seasonal slump for the industry.

But adjusted results soundly surpassed Wall Street's expectations, boosted by strong launches of such games as "The Sims 3" and "EA Sports Active."

Redwood City, Calif.-based EA said Tuesday it lost $234 million, or 72 cents per share, before adjustments in the April-June period, compared with a loss of $95 million, or 30 cents per share, in the same quarter a year earlier.

Revenue fell 20 percent to $644 million from $804 million.

Excluding restructuring charges and other adjustments, EA lost 2 cents per share in the latest quarter. On that basis, analysts polled by Thomson Reuters had expected a loss of 13 cents a share.

Adjusted revenue was $816 million, up 34 percent from last year and above the $729.5 million that analysts were expecting.

EA provides adjusted sales figures because it counts revenue from the sale of online services included in some of its packaged games, as well as other online content, over an estimated service period rather than when the game is sold.

In the latest quarter, that meant the deferral of $172 million of revenue to later periods, which led to the lower net sales. In the year-ago period, however, it meant a benefit of $195 million.

EA's results came amid a slump for the video game industry, due not only to the recession but also an unusually light game release schedule in the first half of the year. On top of that, an unusually strong spring last year has made for difficult year-over-year comparisons. The first half of 2008 saw the launch of blockbuster games such as "Grand Theft Auto IV," "Wii Fit" and "Mario Kart Wii." There have been few blockbuster launches so far this year.

Nonetheless, sales are expected to perk up in the latter half of 2009.

Chief Financial Officer Eric Brown said that while industry data from the NPD Group show a 12 percent decline in packaged video game sales for the first six months of the year, EA is actually seeing "very high growth rates" in digital services and online components.

The company's adjusted digital revenue grew 38 percent to $124 million year-over-year. Brown said in an interview that EA is taking "the broadest-base approach" when it comes to digital revenue models. That includes selling virtual items in "The Sims 3," as well as subscription-based online games.

Along those lines, the company is launching "Tiger Online," a Web-based game that requires no disk and no installation, in the third quarter.

"We have got other franchises in development, much more to come on this," Peter Moore, the president of EA Sports, said in a conference call with analysts.

Looking ahead, EA reaffirmed its previous adjusted guidance for fiscal 2010. It also said it expects a net loss of 85 cents to $1.35 for the year, compared with its earlier outlook of a loss of 85 cents to $1.45 per share.

On an adjusted basis, EA is forecasting a profit of about $1 per share on sales of $4.3 billion. That compares with analysts' expectations of a profit of 97 cents per share on sales of $4.28 billion.

EA's shares rose 41 cents, or 1.9 percent, to $22.30 in after-hours trading. Before the release of results, EA shares closed up 34 cents, or 1.6 percent, at $21.89.

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