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EA Slips To Quarterly Loss, Talks Next-Gen,  Spore

EA Slips To Quarterly Loss, Talks Next-Gen, Spore

May 3, 2006 | By Simon Carless

Electronic Arts has announced its preliminary financial results for the fourth quarter and fiscal year ended March 31, 2006, showing net revenue for the fourth quarter as $641 million, up 16 percent as compared with $553 million for the prior year. However, net loss for the quarter was $16 million, as compared to profit of $8 million for the prior year, showing continued console transition issues.

In the related earnings call, the company singled out The Godfather, Black, Fight Night Round 3 as particular highlights for the quarter. EA's CFO Warren Jenson, talking during EA's earning calls, called current market conditions "a lot more than a transition", suggesting that it is a "global transformation" that includes everything online and everything mobile.

In this context, EA's investment priorities start with next-gen platforms, with "next-gen leadership being a number one priority". It is also planning to support Microsoft's Vista roll-out with significant, unnamed titles. The company also revealed that it expects to launch its Pogo casual service on Xbox Live Arcade in the next year, and also launch two "advanced casual titles" in Asia.

EA commented that its R&D spending in its current console studios will increase by 5%-10%, but mobile R&D to increase significantly, and online by as much as 80%-90%, meaning that overall, R&D spending will increase more than previously expected - to 15%-20% for the year.

The company also commented on the state of the game market, noting that it believed that the overall video game business will be "flat to down" for the year, and re-iterated a belief that PlayStation 3 and Nintendo Wii will release "in late fall", though it noted a risk factor: "There could easily be delays, and shipments could fall below expectations", affecting software sales.

The company also announced that its Superman video game adaptation has slipped past the theatrical release of the movie, and will now ship in the fall, concurrent with the release of the film on DVD. The company also commented on its relinquishing of the James Bond license, noting that both EA and licensor MGM/Danjaq "no longer feel that this partnership fits with our corporate strategies."

In a Q&A as part of the earnings call, the company re-emphasized its priority on "building wholly owned intellectual property", which is currently pegged at around 40% of EA's total revenues, but the company wants to significantly increase. It noted that prices for licenses are increasingly significantly, so the company will be "much more selective" about which licenses it signs, with a much greater reliance on original IP.

Electronic Arts also confirmed in the earnings call that Will Wright's Spore will not ship in this fiscal year, meaning that the much-awaited title will not debut until at least April 2007. It also mentioned that it was "making investments" in its EA Digital Downloader for PC games, a possible competitor for Valve's Steam service.

When asked about online revenues through the PlayStation 3, EA commented that analysts and shareholders should not expect significant online revenues from the PS3 before March 2007, indicating that the company expects online revenue for the console to be negligible in that period, presumably due to the ramping-up of installed base - the company made no comment regarding exactly what the PS3's online structure is.

On Xbox 360, EA noted that it believed that retailers will be building up significant stocks of Xbox 360 into the May and June timeframe, and this will help its software sales significantly - the Xbox 360 hardware to software tie ratio is at around 4 games for each sold X360, too, an impressive figure. It also noted that "market feedback is good" for the $60 price point on Xbox 360 titles.

For the financial year, the company announced that net revenue is expected to be between $2.7 and $2.95 billion, compared to much larger analyst estimates of $3.2 billion, meaning that EA's results were disappointing to Wall Street, leading to after-hours losses of EA shares over 5% to $51.73.

[UPDATE: 05/03/06, 2.26pm - Added comments from Electronic Arts' earnings call - update 4.]

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