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Analysts Remain Confident In EA's F2008 Outlook

Following EA's Q4 results, which showed sales down four percent and net losses of $25 million, as well as its highly anticipated Spore slipping to 2008, Wedbush's Michael Pac
Following EA's Q4 results, which showed sales down four percent and net losses of $25 million, as well as its highly anticipated Spore slipping to 2008, Wedbush's Michael Pachter and Lazard's Colin Sebastian remain upbeat on the company's growth opportunities for the coming year. Quarterly sales fell four percent to $613 million from last year's $641 million, which the company said was primarily due to "the transition to next generation systems," and net losses of $25 million, up from $16 million a year prior. EA also said it expected sales in fiscal 2008 of $3.1 to $3.4 billion, including first quarter sales of $300 to $360 million. In a conference call following the results, EA officials said the company “has tremendous confidence” in Will Wright's ambitious Spore, but added that the title on the edge of slipping from EA's fiscal 2008 release schedule, saying “it's right on the bubble of Q4, if not some time in early fiscal '09” -- anywhere between January and June of 2008. [UPDATE: Shares in EA took a morning fall following the results, from around $53 down over four percent to as low as $50.50 -- currently trading slightly higher at $50.67 -- but analysts have remained confident in the publisher.] "The company’s guidance for FY:08 is actually quite remarkable," said Pachter, "insofar as it incorporates a shift of the highly anticipated Spore out of the year. This is significant, as we had expected Spore to contribute as much as $200 million in revenues at an 80% gross margin." However, he added that "revenues from EA Partners games like Crysis, Rock Band, Hellgate and Mercenaries... are replacing the revenues from Spore. As such, we are not particularly troubled by the company’s EPS guidance." Pachter said that the company's guidance for F2008 "reflects the beginning of the end of out of control R&D spending" and that "we expect to see signs of R&D leverage beginning in Q2." Pachter added that "several items addressed during the conference call impressed us," including EA's expectation of robust industry growth, its strong growth in the mobile sector following the acquisition of JAMDAT mobile, and that intent to curb R&D spending. That second point was echoed by Lazard's Sebastian, who highlighted EA's growth in emerging businesses -- specifically its mobile division, the acquisition of Mythic Entertainment to enter the MMO world, and its growing revenue streams from digital markets (microtransactions, online/casual games). Sebastian said these diversified focuses "will better leverage EA’s wealth of video game content and could ultimately provide some margin insulation from ongoing higher development and licensing costs in the core console and handheld business." "Over the next two years, we expect to see dramatic earnings growth for EA," Pachter concluded, adding that "while many investors may remain skeptical about the company’s resolve, and question whether it has the discipline to align its cost structure with revenues, we think that the company’s Q4 results and FY:08 revenue guidance demonstrate the company is well positioned to grow."

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