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Analysts: Contrite EA 'Refreshing', But Has Much To Prove
by Leigh Alexander
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February 4, 2009
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Analysts are largely taking a wait-and-see approach to Electronic Arts' turnaround plans following the publisher's disappointing third quarter -- but after CEO John Riccitiello's blunt discussion on yesterday's call to investors, they seem at least a little heartened.
Riccitiello spoke directly about how the company's costs had swelled beyond its ability to generate revenue.
He focused on why EA needed to do better on the market-leading Wii, and how the company had significantly overestimated its near-term earnings potential. As EA has disappointed analysts several times over the year, they saw this kind of language as a positive sign.
When the company first warned it would miss its estimates and initiate a cost reduction, Electronic Arts largely credited the weak economy, hesitant retailers and an unusually hit-driven holiday for its poor performance.
"Given that backdrop, we expected more of the same during yesterday’s conference call," says Wedbush Morgan analyst Michael Pachter. "We are happy to say that management failed to live up to our expectations. The call was refreshing, with CEO John Riccitiello taking full responsibility for the Q3 shortfall in revenues."
"According to Mr. Riccitiello, few of EA’s games lived up to the company’s expectations, and the CEO took responsibility for planning expenses that would support a much higher sales level," added Pachter.
"Mr. Riccitiello and CFO Eric Brown acknowledged that it was imprudent to have costs misaligned with revenues, and committed to a significant reduction in operating expense next year."
Analysts generally appear to concur that Electronic Arts' decision to delay The Sims 3, The Godfather II and BioWare's Dragon Age: Origins into the latter half of 2009 was an attempt to bolster its fiscal 2010 with more key titles, rather than a quality issue for any of the games.
Not all analysts are convinced that these titles are all portfolio jewels, however. "We are less excited about the Company’s Dragon Age release, new IP with unproven market demand," says Janco Partners analyst Mike Hickey.
"We approximate the game could sell-in 1.3 million units. We are mystified at how management could characterize the game as being 'too high' of a quality," adds Hickey, who by contrast predicts 4 million units for The Sims 3.
Pachter says EA remains a "show me" story, while Cowen Group's Doug Creutz is less optimistic, suggesting that EA might have blown its chance for some time: "Although the company's valuation is becoming interesting, we think EA has missed this cycle and is unlikely to achieve meaningful earnings growth until the next one," he says.
Investors seem to have appreciated EA's presentation yesterday, however; the company's shares are up about 11.6 percent to $17.30 and rising as of press time.
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Therefore if the company succeeds with a reduce staff/costs, the financial rewards should be passed to the survivors (not just the execs and shareholders).
Unfortunately, I think this does not happen. I know many in this plight (doing three jobs) have asked for more compensation from management only to be told this BS line 'be glad you have a job'.
The volume of titles in development is being cut, which is one reason why people were laid off.
Secondly, EA (and even more so THQ) was known for having considerable redundancy in managerial areas, etc. Another obvious place to look for for lay off candidates.
I'm not stating that all of the layoffs are warranted and that there won't be increased workloads, but your statement lacks a number of facts on the current worldwide economic situation and its relationship to the Game Industry here and abroad.
Speaking of which - you mention the plight of the American Worker - but you do realize this is happening all over the world, correct?
As Rob said, it is probably more a matter of them cutting back their release portfolio to make sure they are putting out games that will make them the most money.