MOST ANALYSTS UPBEAT WITH ELECTRONIC ARTS RESULTS
After Electronic Arts (EA) reported strong results for its core game business in 3rd quarter ended Dec. 31, most analysts maintained their bullish take on publisher despite continued losses reported by its online business. EA executives told analysts in conference call after our Wed. deadline that its game based on movie Harry Potter and the Chamber of Secrets for multiple game platforms was performing far better than at least some reports were suggesting (CED Jan 30 p6). Company said it sold more than 9 million units of game across all platforms in quarter. But EA said online version of its successful Sims franchise -- The Sims Online (TSO) -- was performing weaker than expected.
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EA reported 89% increase in profit to $250.2 million ($1.69 per diluted share) from $132.3 million profit (92?) year ago on 48% boost in revenue to $1.2 billion. Gross margin rose to 55% from 52%. For 4th quarter ending March 31, company said it expected to report sales of $420-$460 million and earnings per share (EPS) of 27-35?. But EA said that range didn’t factor in studio restructuring charges it expected to report that were “still being determined.” Company said it was starting consolidation in 4th quarter of its L.A., Irvine and Las Vegas studios into one “major game development studio” in L.A. For fiscal year ending March 31, EA said it expected to report revenue of $2.439-$2.479 billion and diluted EPS of $2.37-$2.45, also not factoring in studio restructuring charges.
In conference call, EA CFO Warren Jenson told analysts company was continuing to reap rewards from its large focus on PlayStation 2 (PS2). In holiday season and 2002 overall, he said, “PS2 delivered as expected and we delivered right alongside it.” He said company’s 3rd quarter revenue from PS2 games in quarter climbed 102% to $459 million and “if you include affiliate label PS2 sales” -- most prominent game Kingdom Hearts on Square EA label -- “close to 44% of our revenue is on this platform.” He said company’s U.S. market share on PS2 games was 27% in quarter and it had 5 of top 10 titles. In Europe, he said, EA had 25% market share on PS2 games and had 4 titles in top 10. Jenson said GameCube and Xbox combined represented 18% of EA revenue in quarter and PC games 18%. He said company had 11 titles in quarter that sold more than 1 million units.
But Jenson said EA.com revenue was flat in quarter from year ago at $22 million. As for TSO, he said: “From the outset, one month in, we are behind where we thought we would be. That said, we're okay with the performance of this product. And make no mistake -- we are committed to the success of Sims Online.” EA sold through 105,000 units of game and had 82,000 active registered players, he said. About 90% of those with free subscription trials were converting to paid subscriptions, he said: “Long term, we don’t think this is sustainable but it is a positive sign.” Jenson said EA wanted to build up number of players, add content and continue marketing it: “We do not intend to let up on our marketing efforts.” For full year, he said, company expected EA.com loss of $70 million “as a result of higher-than-anticipated marketing spent on TSO, slower than expected ramp in TSO purchasers and subscribers and lower AOL advertising revenue.” Company expects to report $75-$80 million revenue for year in EA.com segment, he said, adding: “This financial performance is not acceptable for us and we are committed to aggressively minimizing these losses.”
Announcement by EA that it had filed shelf registration statement with SEC for right to sell as much as $2 billion in debt and securities prompted at least some analysts to assume company was looking to build its war chest for acquisitions. But Jenson told analysts that wasn’t necessarily case and there were no specific deals that company had in mind. He said its acquisition strategy hadn’t changed: “We continue to look at every competitive company in the industry on a regular basis. At the top of [EA list of criteria] we look for companies that would be strategic acquisitions and the things we look for first are companies that own significant intellectual property and companies that have world-class development organizations within the company. So, [when EA] can find those 2 elements… and the financial deal makes sense and the company is well managed and our companies can be culturally compatible, we will pull the trigger. We don’t [however] have anything to announce [now].”
Wedbush Morgan Securities analyst Michael Pachter maintained “buy” rating for EA stock Thurs. and said results company reported for 3rd quarter were “outstanding.” But he said “partially offsetting this incredible performance was another lackluster quarter for EA.com… We remain pessimistic that the EA.com business will ever generate the level of profits necessary to justify the diversion of management resources required… We have modeled continuing dot-com losses during [fiscal year 2004], and are skeptical that the business will ever reach breakeven… We believe that the business is a difficult one under any circumstances, and was made especially difficult by EA’s choice of its Sims franchise for its flagship online game… We believe that the company would be rewarded for abandoning the online effort.” W.R. Hanbrecht analyst William Lennan downgraded EA stock to “hold” from “buy” based on his concerns over EA.com. In late afternoon trading Thurs., EA stock was up 97? (1.90%) at $51.94 but still was far from 52-week high of $72.44.