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Analyst: More Cuts Likely For EA As Mirror's Edge, Need For Speed Underperform

As he reduces his estimates for Electronic Arts' earnings, Lazard's Colin Sebastian says titles like Need for Speed Undercover and Mirror's Edge aren't selling as well as planned, and expects the company to cut future projects -- and further
Electronic Arts is likely to cut franchise titles -- and possibly even further staff -- as part of ongoing cost-cutting measures, says Lazard Capital Markets analyst Colin Sebastian, who believes the publisher's titles are not meeting estimates. "Specifically, we believe several EA titles are tracking below plan at retail this holiday, including Need for Speed Undercover (with disappointing reviews), new franchise Mirror's Edge, and Rock Band 2," said Sebastian, as he lowered his estimates for the company's third fiscal quarter revenue slightly from $2.14 billion to $2.07 billion. Still, the analyst says, "solid sales" of Dead Space, FIFA 09 and Valve's Left 4 Dead are helping to offset the weaknesses in EA's portfolio. Sebastian sees "greater uncertainty" in the company's product slate for next year, including the Rock Band franchise and the publisher's EA Casual revenue. Though EA has announced new projects in collaborations with developers like Grasshopper and id Software, Sebastian suggests these could be "lower margin" revenue generators. EA recently laid off approximately 6 percent, or 600 employees, of its global staff, and as losses widened even among ramping revenue in October, the publisher expressed caution at weakening retail, citing an "ongoing imperative to manage our cost structure." "We believe further cost and franchise reductions are likely," said Sebastian. "Importantly, we believe EA is continuing to review its cost structure and franchise base, and it is possible that management will announce further cuts in headcount and the development pipeline (including existing franchises) over the coming quarters." Sebastian's prediction is consistent not only with EA's own admitted cost management plans, but with CEO John Riccitiello's assertion that killing underperforming projects in development is essential to overall portfolio quality. He recently told Gamasutra that "EA will kill a game or two a year. Forever," as he discussed the recent cancellation of Tiberium. Long term, though, uncertainty in the industry landscape "could ultimately benefit EA," says the analyst. EA's John Riccitiello recently spoke about sacrificing short-term profitability in favor of longer-term investments like digital distribution, and Sebastian seems to support the strategy. "While product execution and sell-through trends continue to be a challenge for EA midway through the current console cycle, we believe the company will be able to leverage longer-term its early investments in online distribution, emerging business models (e.g., free-to-play), and geographical diversity," he says. "In addition, ongoing M&A opportunities and strength in the partners/distribution business should help to generate ongoing year-over-year revenue growth."

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