Electronic Arts’ Net Income Falls 90%
Electronic Arts Inc. posted a steep drop in its fiscal fourth-quarter profit Tuesday and forecast disappointing earnings for the year ahead, sending shares of the world’s biggest video game publisher tumbling 11% in late trading.
The maker of “Madden Football” and “The Sims” series said lower prices for games and higher development costs for titles for the next generation of consoles were squeezing its bottom line.
Net income for the period ended March 31 fell 90% to $8 million, or 2 cents a share, from $90 million, or 29 cents, a year earlier. Revenue dropped 8% to $553 million.
EA projected per-share earnings for its current fiscal year of $1.55 to $1.70, excluding one-time expenses. Last year, the Redwood City, Calif.-based company earned $1.59, including one-time charges. Without those expenses, EA earned $1.71.
“For a company like this, investors expect growth,” said analyst Michael Pachter at Wedbush Morgan Securities.
EA shares, which gained 45 cents to $52.90 on Nasdaq, fell $5.90 in after-hours trading after the earnings announcement.
Because EA is considered a bellwether for the $25-billion game industry, shares of other publishers also took a hit in late trading. Activision Inc., which rose 48 cents to $15.20 on Nasdaq, fell to $14.70 after hours. THQ Inc. dropped to $24.81 after rising 36 cents to $26.27 in regular trading. Take-Two Interactive Software Inc. fell to $23.90 after rising 30 cents to $24.25.
“This is clearly a challenging period as the industry is in transition,” EA Chief Financial Officer Warren Jenson said. “This creates volatility. It is also a critical period for investment.”
Console manufacturers launch new, more powerful consoles about every five years. That means game developers must make large upfront investments to develop more-sophisticated games for the new machines.
Microsoft Corp., for example, has said it will release its Xbox 2 console for this holiday season, and Sony Corp. and Nintendo Co. are widely expected to release their new boxes by Christmas 2006.
“They’re in an investment phase where they have significant ramping costs for the new hardware systems that aren’t offset by any revenue until those systems are actually on the market,” said Edward Williams, an analyst at Harris Nesbitt Gerard.
At the same time, prices are dropping for games played on existing consoles because they are no longer perceived as cutting edge.
“You’re going to see more and more titles coming out at the $39 price point as opposed to the $49 price point,” Jenson said. “Overall price points will go down. No doubt about that.”
Even EA’s top franchises are not immune. Its newest “Medal of Honor” game, for example, can be ordered in advance of the June release for $39.99, versus the $49.99 that the franchise historically commands.
EA was hit harder than expected by a shortage of game consoles, particularly of the slimmed-down PlayStation 2, in the U.S. and Europe in the last holiday season. Buyers of a new console typically purchase two or three games to go with it.
But analysts also noted that EA had to cut the prices of its games more aggressively than it had expected because of higher competition from rival titles such as “Gran Turismo 4” from Sony and “World of Warcraft” from Vivendi Universal.
“Their games weren’t selling as well as they had anticipated,” Wedbush Morgan’s Pachter said.
For the current quarter, EA projected sales of $300 million to $340 million, compared with $432 million a year ago. It also projected a loss of 22 cents to 28 cents a share, its first quarterly loss since September 2002.
