More games and more red ink for EA
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Electronic Arts, the world’s biggest video game company, posted a wider quarterly loss Tuesday despite better-than-expected sales, triggering a nearly 4% drop in its shares after hours.
EA, whose titles include ‘The Sims,’ ‘Madden Football’ and ‘Medal of Honor,’ raked in revenue of $1.1 billion in its fiscal fourth quarter, ended March 31. That was up 84% from a year earlier. But higher costs to create games led to a loss of $94 million, or 30 cents a share, compared with a loss of $25 million, or 8 cents a share, a year earlier.
“On balance, we’re very pleased with our revenue growth, but not yet happy with our profit margins,” EA Chief Executive John Riccitiello said in a statement.
The trend is likely to continue. The Redwood City, Calif.-based company said it expected to report per-share earnings of $1.30 to $1.70 for its current fiscal year on sales of more than $5 billion. Wall Street analysts polled by Thomson Financial had on average anticipated per-share earnings of $1.74 on $4.6 billion in sales. EA’s projections spooked investors, who sent the company’s shares down $1.77 to $52.80 in after-hours trading following the earnings release. They had gained 30 cents to $54.57.
“The good news is that they’re growing revenues faster than anybody expected,” said Michael Pachter, an analyst with Wedbush Morgan Securities. “The bad news is they’re also growing expenses faster than anybody expected.”
Riccitiello, in a conference call with analysts, said salaries for developers in studios outside of the U.S. swelled because of the weak dollar. The company also is investing more heavily...
...in creating its own game franchises, which can have higher profit margins than externally licensed properties for which EA has to pay royalties.
“They view this as a long-term investment in their studios,” said Colin Sebastian, an analyst with Lazard Capital Markets. “They’re building out a lot more franchises than they have before, so the risk and reward scenario is higher. If they perform well, they will have big successes. On the other hand, if they don’t do well, the pressure on their margins will continue.”
Riccitiello said the company aimed to get research and development costs below 25% of revenue, down from 28% last quarter.
After rejoining EA last year as CEO, Riccitiello in July launched a companywide reorganization focused on improving the quality of its games. Because the games made under the new regime would not hit store shelves until September or later, Riccitiello counseled patience.
“When you go through these long-term changes, some will have a longer fuse than others,” he told analysts. “But most of our games have a 12- to 18-month gestation period if not longer.”
-- Alex Pham