GamesBeat

EA loses more even as digital game sales grow

Electronic Arts reported a bigger loss than a year ago, blaming a lack of video-game hits during the holiday season. But the Redwood City, Calif.-based company touted the growth of its digital online game business as a reason for optimism.

EA, one of the world’s largest video-game publishers, is struggling with a tough balancing act: staying focused on delivering high-quality console games at the same time that it is expanding into the fast-growing online and mobile markets. It’s worth watching because the company has a presence in almost every game market, and its ambition remains to regain its lost glory and wipe out both old and new rivals in the game market.

The jury is still out as to whether EA, and many of its console game competitors, can thrive in the new age of social and mobile games. Having said that, EA’s digital game revenues already dwarf the sales of many smaller companies, such as Zynga (which is valued more than EA), DeNA, or CrowdStar. But those companies are among the hot ones now because they aren’t saddled with volatile console game businesses.

We still have yet to see whether the giants of the video game era are going to stomp all over the upstarts of social and mobile games. EA is trying, but it faces big competition in titles such as Activision Blizzard’s World of Warcraft, Zynga’s CityVille, and DeNA’s mobile games.

“We are scratching the surface (on digital games),” said John Riccitiello, chief executive of EA, in a conference call. “We are trying a lot of things.”

In the core game business, however, EA’s strategy is “fewer, better, bigger” titles, said John Schappert, chief operating officer. He said that EA’s average revenue per title was up 25 percent in 2010.

EA said net losses in the third fiscal quarter ended Dec. 31 were $322 million, or 97 cents a share, compared to a loss of $82 million, or 25 cents a share a year ago. Revenues were $1.05 billion, down 15 percent from $1.24 billion a year ago. Adjusted revenues were $1.41 billion and non-GAAP earnings were 59 cents a share. Analysts had expected 57 cents a share non-GAAP earnings and $1.44 billion in revenue.

EA’s shares actually jumped 9 percent to $17.10 a share in after-hours trading, presumably because of the faster growth of digital revenues, which include sales of virtual goods in Facebook games, iPhone game sales, and downloadable content for connected game consoles. Digital revenue grew 47 percent in the quarter to $195 million. For the fiscal year, digital revenues are expected to hit $750 million. EA also said it will buy back $600 million in stock, a move that will encourage shareholders.

EA said its unadjusted loss was related to a big increase in deferred revenue, stemming from online sales of its games which EA recognizes over six months. Without the deferral and other charges, EA said it earned non-GAAP net income of $196 million, compared with $109 million a year ago. Those numbers are at the high-end of EA’s own quarterly forecast.

One reason EA didn’t hit its revenue target was because it de-emphasized its distribution business, where it ships other companies’ games to retail stores. It also delayed a major title, Crysis 2, until the fourth fiscal quarter.

During the quarter, EA said it was the No. 1 publisher on high-definition consoles, or the PlayStation 3 and the Xbox 360, in Western markets. It was also the No. 1 publisher on the Apple App Store for both the iPhone and iPad. It is also No. 1 on Microsoft Windows Phone 7 phones. To date, two recent titles — Medal of Honor, Need for Speed Hot Pursuit — have sold more than 5 million units each.

During 2010, EA said five games sold more than 5 million units each: FIFA 11, Medal of Honor, Madden NFL 11, Need for Speed Hot Pursuit and Battlefield: Bad Company 2. And last week, EA launched Dead Space 2, which scored a Metacritic rating (average review score rating) of 91 out of 100. That title is outselling the original Dead Space game by two-to-0ne. EA’s also got some big titles coming such as Crysis 2, Need for Speed Shift 2, Rango, Bulletstorm, and Dragon Age 2.

For the fourth fiscal quarter, EA is expecting GAAP revenue of $975 million to $1.075 billion, and non-GAAP revenue of $750 million to $950 million. GAAP earnings per share is expected to be 38 cents to 51 cents, or 15 cents to 25 cents on a non-GAAP basis.

One of EA’s biggest bets is Star Wars: The Old Republic, a massively multiplayer online game being created by EA’s BioWare division. The game is expected to come out later this year and it will be the biggest challenge to World of WarCraft, which has 12 million users. Riccitiello said that getting more than 1 million users for The Old Republic would make the game highly profitable for EA. He said he hopes the market is eager for fresh content, “light sabers instead of swords, if you will.”

Riccitiello said in the conference call that EA is trying to launch a big first-person title every year. He said the company would have something to announce on that front later this year. So it seems like EA isn’t about to concede the leadership in combat games to Activision Blizzard’s Call of Duty series.


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