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EA shares slump to year-long low after losing 007 licence

05-May-2006 • Gaming

Shares of Electronic Arts Inc. on Thursday notched a 52-week low after the company said its profit would come in lower for a third straight year while pointing to higher-than-expected investment spends in an increasingly uncertain video game industry - reports MarketWatch.

The outlook spawned a flurry of share ratings downgrades from the analyst community, some of whom saw added investment risk and lower stock valuations due to muted growth at the world's largest video game publisher.

EA shares closed down 10.9% to $48.55 after falling as low as $47.17 in early action. Late Wednesday the company swung to a fiscal fourth-quarter loss, partly due to a soaring tax bill.

EA received at least four broker downgrades as CIBC World Markets, Pacific Crest Securities and Kaufman Brothers cut their ratings from the equivalent of buy to the equivalent of hold. Deutsche Bank cut its rating to sell from hold.
Jeetil Patel of Deutsche Bank, who also lowered his price target to $40, based his downgrade on "the deterioration in EA's profitability coupled with an industry that is undergoing several structural changes places significant risks upon [its] business model."

Similarly, Brendan D. McCabe of CIBC World Markets cited added costs, increased risks associated with research and development investments, potential market share losses, and EA's stock valuation.

But not all Wall Street analysts were bearish, including P.J. McNealy of American Technology Research, one of at least 13 Wall Street analysts who maintained a buy rating.
"We believe investors should be buying this stock when expectations are low and things are ugly," wrote McNealy in a note to investors. "We are more positive on the name, because we believe the bottom for earnings expectations has now been set after seeing expectations drift down over the last four quarters."

For the March quarter, Redwood City, Calif.-based Electronic Arts posted a fiscal fourth-quarter loss of $16 million, or 5 cents a share, compared to a profit of $8 million, or 2 cents a share, a year earlier. Electronic Arts said its tax bill rose more than 13-fold to $54 million after the company repatriated $375 million in overseas earnings.

Excluding the tax charge and restructuring costs, the company said its profit would have been 14 cents a share, up from 9 cents a share in the corresponding period a year ago. On that basis, the company topped the average estimate of analysts polled by Thomson First Call of 9 cents a share.

Like its smaller rivals, Electronic Arts has been struggling for a year with disappointing sales and profit, partly because of the staggered release schedule of new game consoles. Game buyers have been saving their dollars for titles designed for new consoles such as the Xbox 360 from Microsoft Corp., while others are waiting for Sony Corp. and Nintendo Co. Ltd. to ship the newest versions of their consoles in November.

"We feel that what we are going after today is a lot more than a console transition," said Chief Financial Officer Warren Jensen. "The interactive industry as we see it is really going through a global transformation that involves not only the consoles and PCs but everything online and everything mobile, too."

Revenue for the period rose 16% to $641 million compared to $553 million last year. Analysts were expecting sales of $581 million. Sales of new titles such as "Black" and "The Godfather," made for Sony's PlayStation 2, and "Fight Night: Round 3," for Xbox 360, were the main drivers of EA sales during the quarter.

Marketing and sales expenses, however, rose 17% as the company spent more on "Black" and "The Godfather" promotions.

For the fiscal year, which ended in March, EA said sales for games on the Xbox 360 came in at $140 million. Revenue from hand-held devices and cell phones grew to $393 million, up more than three-fold, aided by the introduction of new products and the company's acquisition of Jamdat Mobile Inc.

EA's forecast pointed to continued uncertainty in the video-game industry, marked by the potential for hiccups in manufacturing of new consoles, delays in game development, as well as a shift to new revenue streams from online content.

For the current quarter, ending in June, EA forecast a loss in the range of 36 to 42 cents a share. Excluding certain charges including 9 cents a share in stock option compensation, EA sees a loss of 22 to 28 cents a share.
Sales are expected to range $300 million to $340 million. Analysts were expecting a loss of 19 cents a share on sales of $411.9 million.

EA also said it will push out the release of its "Superman Returns" game for Xbox 360 to coincide with the release of the movie's DVD. The company also cited difficulty associated with developing the game's "open world" environment.

For its fiscal year, EA expects its bottom line to range between a loss of 15 cents a share to a profit of 15 cents a share. Excluding certain items, the company expects a profit between 35 cents and 65 cents a share. It pegged sales at $2.7 billion to $2.95 billion.

Analysts were expecting a profit of $1.07 a share on sales of $3.12 billion.

The range in the bottom line reflects what Jensen calls "a year with many uncertainties." As with the Xbox 360's slower-than-expected retail roll-out, Jensen said there could "easily be [Sony and Nintendo] delays, and shipment quantities could fall below our estimates."

"Should this happen, it would cause our numbers to drop materially," said Jensen. "Likewise, while it looks like Microsoft is successfully ramping production, any significant Xbox 360 interruptions would negatively impact our performance."

In the current fiscal year, the company said it will spend 15% to 20% more in research and development dollars to maintain its market-share lead in console games, mobile games and online. EA plans to spend 55% to 60% more in mobile-game spending, and an aggressive increase of 80% to 90% for its online efforts.

With the cost and risks associated with games based on licensed properties, EA also said it expects revenue growth from wholly-owned intellectual properties, which currently stands at 40% of overall sales. On Wednesday, rival Activision Inc. said it has locked up rights to games based on the James Bond character.

For console players, EA said it now has more than 30 titles for next-generation systems in development.

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