Electronic Arts (NASDAQ: ERTS) beat expectations for its second fiscal quarter thanks to strong performances from perennial sports franchises like FIFA and Madden NFL, but despite lowering losses the video game publishing giant is still beleaguered by poor sales for marquee titles, layoffs, and the cancellation of software over quality concerns.
The company lost just $201 million during their second quarter, compared to $391 million during the same period in 2009. EA did have some good news for investors. Robust sales of both FIFA 11 and 2010 FIFA World Cup South Africa drove sales to $884 million and netted Electronic Arts profits of $32 million, a -23% decline for the quarter but still well above analyst projections. These sales also brought earnings to shareholders of 10 cents per share as opposed to the analyst predicted 10 cent loss per share. The publisher’s software for the Sony (NYSE: SNE) Playstation 3 grew by +7% over the year previous while sales on Microsoft‘s (NASDAQ: MSFT) Xbox 360 stayed flat, growing by just +1%.
EA is facing serious trouble going into the holiday season though. Software sales on Nintendo‘s (PINK: NTDOY) Wii console fell by -82% year on year, and while third party publishers like Electronic Arts have fared poorly on the system compared to Nintendo themselves, franchises like Tiger Woods PGA Tour and fitness simulator EA Active have performed very well in the past.
EA’s major non-sport software for high definition consoles, military shooting game Medal of Honor, released to tepid sales and a critical drubbing in October. The game sold 2 million copies across both major home consoles and PCs—numbers that cannot compete with Microsoft’s Halo: Reach, which sold 3 million on single platform in September, and Activision Blizzard‘s (NASDAQ: ATVI) Call of Duty: Black Ops which is expected to sell five times that number when it releases next week.
Also, after delaying the title from its original release date of October 5th to early 2011, EA cancelled basketball game NBA Elite before reporting their earnings. The NBA property has been shifted away from the publisher’s EA Black Box studio to EA Tiburon, the team already in charge of the Madden NFL series. The restructuring comes after EA reported “seasonal roll-offs” of staff.
EA’s other major titles in the action game space, horror game Dead Space 2 and Epic Games’ Bulletstorm, have been pushed outside of the holiday season, with release dates spread across the first quarter of calendar 2011. This leaves Dragon Age 2, Rock Band 3, NBA Jam, and a handful of other titles expected to move only modest numbers to carry Electronic Arts holiday.
Shareholders haven’t been as hurt by the post earnings dip as they were by the announcement of the company’s guidance for fiscal year 2011 last May. EA shares plummeted -30% down to $14.06 at the time, so the drop of more than -4% following the after market conference call yesterday hurts less at a price of $15.50. The end of 2010 and beginning of 2011, however, will be a period that decides the future of the publisher. Electronic Arts has, historically, been a retail based publisher, seeing its greatest profits come from packaged products for high end consoles like the Madden NFL series and massive PC properties like The Sims.
Now, though, EA is seeing its console business struggle while its digital, mobile, and social games divisions are steadily growing. EA announced during the earnings call that it has signed a five-year deal with social network Facebook to use the Facebook Credit virtual currency for in-game purchases in EA’s social games like Pet Society and Restaurant City. EA CEO John Riccitello emphasized his company’s interest in emerging IPTV offerings from groups like Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG), with those outlets representing new opportunities for their social and digital games.
That Electronic Arts is actively growing their business in emerging markets like social and digital games should be reassuring to shareholders. The problem is, however, that digital, social, and mobile games are not generating the same massive revenue that EA’s traditional retail products have in the past. Those holding on to EA stock need to be prepared to weather the storm this holiday and should expect a recovery in the spring when titles like Bulletstorm finally release. If EA doesn’t report positive guidance for FY 2012 next spring though, the company’s long run as one of the game industries power publishers may reach its end.
As of this writing, Anthony Agnello did not own a position in any of the stocks named here.
