EA Reduces Forecast, Talks Xbox 360, PS3 Issues

Game publishing and development giant Electronic Arts has announced that it expects net revenue and earnings per share for the third and fourth fiscal quarters and fiscal...
Game publishing and development giant Electronic Arts has announced that it expects net revenue and earnings per share for the third and fourth fiscal quarters and fiscal 2006 to be well below both the previous financial guidance provided by the company on November 1, 2005, as well as current consensus estimates. In a fascinating conference call accompanying the news, EA's CFO Warren Jenson outlined the specific reasons that sales have been below expectations for November, and, EA believes, even further below expectations for December, commenting: "While we expect several positives, we have no reason to believe that this abrupt change in demand for current generation software will reverse itself." Jenson then specifically cited the Xbox 360 launch, although commenting that "it's gone extremely well: in North America and Europe", he indicated that he and his colleagues "don't see [the Xbox 360] getting to the installed base numbers we expected." In addition, he mentioned the consumer belief that the PlayStation 3 may be launching in Spring 2006, noting that it's "causing some people to stay on the sidelines", even though EA believes that a second-half 2006 launch is much more likely for the console in America. Finally, Jenson also cited the lack of a price drop on the PlayStation 2, suggest that this "would have had a positive effect this year", and also mentioned that EA doesn't see the PSP getting to installed base that the company had previously expected, either in North America or Europe. In response to analyst questions, Jenson said that he believed that overall game sales in 2005 for the entire game market would be somewhere between negative 5 percent and negative 10 percent compared to 2004 in North America, and somewhere between flat and negative 5 percent in Europe, significantly down on previous positive expectations. Jenson and EA CEO Larry Probst also commented on the range of fortunes of Electronic Arts games for the Christmas period, singling out the company's sports titles and Need For Speed series as continuing to perform strongly, noting that the Harry Potter franchise was doing "OK," and pointing out clearly seen weaknesses in titles such as the James Bond series (From Russia With Love), the SSX series, and the Battlefield series. The EA execs touches on a number of other interesting issues, with Jenson admitting, over the entire industry: "If you take a look at the assortment of titles out there this holiday's probably not as compelling a selection of titles as last year". However, Probst noted that EA seemed to be keeping its 25% game market share for 2005 on current-gen game platforms, and was looking at closer to a 30% market share on both the Xbox 360 and PSP, meaning that, though the company was doing relatively well, it was still down on expectations. Finally, the EA execs mentioned specifically: "Our expectation is that both the PlayStation 3 and Revolution will launch in calendar '06... our expectation would be the second half of calendar '06", meaning that the next-gen installed base can start to be built up starting next year. EA's official statement released alongside the conference call talks of "unanticipated market declines in both North America and Europe", as EA sees similar trans-generational market issues as a number of the other major publishers, following NPD confirmation of November 2005 sales that were overall down 18 percent compared to November 2004. "Holiday sales are not meeting expectations," said Larry Probst, Chairman and Chief Executive Officer in the statement. "For the December quarter, it is likely the industry will be down double digits on a percentage basis." EA share were suspended before the news, but after-market trading saw them down almost $2 to $51.23 on this disappointing news, which was hinted at earlier this month during a call relating to EA's Jamdat acquisition. [UPDATE: 3.09pm PST - added comments from conference call.]

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