U.S. News

Electronic Arts Shares Surge, But Analysts Are Cautious


Shares of Electronic Arts rose sharply Friday after adjusted fourth-quarter earnings exceeded Wall Street's expectations. But financial analysts wondered whether the world's biggest video game publisher was becoming overvalued.

The company said Thursday net income for the three months ended Dec. 31 dropped 38% to $160 million, or 50 cents per share, compared with $259 million, or 83 cents per share, during the same period last year.

Executives blamed much of the decline on a $28 million charge resulting from a major accounting change in stock-based compensation. Not including that charge and other one-time expenses, EA earned $201 million, or 63 cents per share.

Revenue for the quarter that ended Dec. 31 rose less than 1% to $1.28 billion from $1.27 billion a year earlier.

Excluding special charges, analysts surveyed by Thomson Financial expected Redwood City-based EA to earn $184 million, or 57 cents per share, on sales of $1.27 billion.

EA has been a solid investment with long-term investors, and the stock has increased nearly 70% since 2002. The company has a lock on sports titles--one of the biggest, most reliable and most lucrative segments of the gaming industry.

Most Popular Titles

EA's most popular titles in the last quarter were "Need for Speed Carbon," "FIFA 07," "The Sims 2 Pets" and "Madden NFL 07," with each game selling more than 3 million copies.

But critics wonder whether EA has been too long resting on the laurels of established hits. They worry that innovative startups--which distribute games inexpensively on the Internet-- could generate more buzz and eventually dethrone the reigning video game leader.

"EA just mass-markets these sports titles every year, but they've been sucking on that pig for a long time and it's kind of painful to watch," said technology analyst David Gardner, co-founder and co-chairman of Alexandria, Va.-based Motley Fool. "I've been a happy investor for the last five years, but I don't know how long that will last. The company needs more innovation."

One of the most highly anticipated new titles in the gaming world is "Spore," the brainchild behind "Sims" developer Will Wright, considered one of the gaming industry's most creative artists. Through its Maxis Software brand, EA will release "Spore"--an interactive game where players evolve from single-celled organisms into intelligent beings that are part of a complex, real-time civilization--later this year.

Executives were bullish about "Spore" and the growing amount of revenue derived from interactive entertainment, a category that includes subscriptions to online gaming sites, in-game advertising and micro-transactions from online players.

The company will take in roughly $115 million in 2007 in interactive revenue sources, up from about $75 million last year, said Chief Financial Officer Warren Jenson.

Beginnings of Digital Area

"We're starting to see the beginnings of the digital area in interactive entertainment," Jenson said Thursday in an interview.

Jenson said revenue for the current quarter would be in the range of $550 million to $600 million. He said earnings, excluding special expenses, is expected to be 3 cents per share.

The company expects net revenue for fiscal 2007 to total $3.025 billion to $3.075 billion, better than the bottom-line estimate of $2.95 billion that the company had previously forecast.

The company expects fiscal 2007 earnings, excluding special expenses, to be 70 cents to 74 cents per share, up from previous estimates of 55 cents to 70 cents per share.

Last quarter, EA sold $41 million in titles for the PlayStation 3, a highly anticipated gaming console that debuted in November. It sold $29 million in titles for Nintendo Co.'s Wii, and Chairman and CEO Larry Probst emphasized Thursday that EA would increase availability of Wii-friendly games.

EA also sold $400 million in titles for the older PlayStation 2 and $172 million in titles for Microsoft's Xbox 360 last quarter.