EA Profit Slides 31% as Gamers Opt to Wait
Electronic Arts Inc., best known for the Madden football video game franchise, has a problem with consumers sitting on the sidelines.
EA said Thursday that its fiscal third-quarter profit fell 31% and warned of a tough 2006 in part because consumers are hesitating to buy software before new consoles hit store shelves. Gamers are waiting for Sony Corp.’s PlayStation 3 and Nintendo Co.’s Revolution to be released later this year or have been unable to buy Microsoft’s Xbox 360 because it is in such short supply.
The world’s largest independent video game publisher had warned in December that it might miss its earnings forecast. EA reported net income of $259 million, or 83 cents a share, compared with $375 million, or $1.18, a year earlier. Revenue for the period ended Dec. 31 declined 11% to $1.27 billion.
Excluding certain expenses, the company earned 86 cents a share, missing by 4 cents the average profit estimate of analysts surveyed by Thomson Financial.
“It was worse than they warned,” said P.J. McNealy, an analyst at American Technology Research. “I think people were hoping for a flat holiday and growth next holiday, and that’s now been shifted out to down last holiday to flat next holiday.”
The earnings were released a day after the Redwood City, Calif.-based company, which also publishes the “Sims” games, announced plans to lay off about 5% of its staff, or nearly 350 employees.
The cuts, an EA spokeswoman said, would allow the company to realign its workforce to develop software for the new game consoles and expand its mobile game business.
EA and others in the $10.5-billion U.S. video game industry have underestimated the number of consumers opting to wait for new consoles. During a conference call with analysts Thursday, executives also said they anticipated more Xbox 360s to be available in the U.S. and Europe during the holiday season.
As a result of the transition, EA warned investors to expect a significant drop in demand for current-generation software as well as declining prices.
“You should expect a tough 2006 where profits are squeezed given the challenge of transition and our focus on investing for long-term growth,” EA Chief Financial Officer Warren Jenson said.
EA shares rose to $54.86 in after-hours trading, after losing $1.18 to $53.58 in regular trading.
Michael Pachter, an analyst with Wedbush Morgan Securities in Los Angeles, said the stock increase suggested that investors have analyzed the numbers and believe that EA has been conservative in its accounting measures.
“They’re just setting themselves up to never miss forecasts again,” Pachter said.
Pachter issued a revised U.S. and European software sales forecast Thursday, taking into account declining sales toward the end of last year. He expects combined revenue to shrink 3% in 2006 and grow 16% in 2007 and 17% in 2008.
