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Janco: EA To Announce Major Cost Reductions, IP Acquisitions

Mike Hickey of analyst group Janco Partners has predicted that EA will soon execute a major "cost reduction plan," as well as turn to acquiring IP rather than producing it internally, with Take Two noted as a recommended target -- also, Rock Band a
Ahead of Electronic Arts' fiscal 2008 Q1 results expected on August 1st, Mike Hickey of analyst group Janco Partners has predicted that Q2 will see the publisher execute a "quantifiable cost reduction plan," as well as look more strongly at acquiring IP rather than producing it internally, with Take Two noted as a recommended target. Q1 Performance Hickey expects the publisher will report Q1 results in line with its guidance and continue to maintain its fiscal 08 goals, with strong performance of Harry Potter, Command and Conquer 3, and titles from its Sims franchise. "While we believe their operating prospects look exceptional deeper into the current console cycle, they have suffered in the near term from poor product quality, escalating operating costs, and a misaligned resource allocation focus," said Hickey, adding that fiscal '09 might change that with a lineup of potential big earners including Spore, Sims 3, Rock Band 2, Warhammer Online and a slate of casual content for Wii, DS and online. The titles are in addition to perennial hits like Madden. Cost Reductions In Store Though he stops short of predicting downsizing and layoffs for the publisher, Hickey says the new management team recently put in place will announce "a quantifiable cost reduction plan after their fiscal Q208 period, a time period sufficient for the completion of their recently announced organizational re-alignment, while insuring their developer force remains focused on holiday ship objectives." Hickey sees the move as having, in conjunction with the aforementioned lineup, "a material impact on their fiscal ’09 earnings power relative to the Street’s expectations." Take Two An Attractive Target? He also notes that he expects EA to "look beyond the organic creation of new IP by acquiring IP, considering their enormous cash position and the proven difficulties of creating new IP internally" -- adding "we continue to believe [EA] would benefit from acquiring Take-Two Interactive." A Casual Glut On the casual game front, Hickey says it will be "very hard for the company to distinguish themselves in this market" with so many developers turning to the Wii with broadly-marketed titles. "By CY08 we believe the casual game channel will become cluttered with games," says Hickey, "most of which will not be good and will likely force retail game prices lower for the Wii," which, he adds, can have "profoundly negative impact on a game’s potential economics." "The land slide of planned casual games," he continues, "will also create havoc on retail shelves," but he notes that EA "will benefit at retail by winning shelf space from smaller publishers/developers," an important playing field with "relatively bulky" Rock Band on its way this holiday. A Shortage Of Rock Finally, on Rock Band itself, while Hickey himself sees the game as "one of the most exciting games shown at E3," he notes EA "will only share in a portion of the games revenues and distribution margins are on the low end." "We believe the game will prove difficult to distribute and consumer demand will likely outpace supply as we expect initial sales expectations from management to prove conservative," said Hickey. "Regardless of any sales expectations from management, we expect initial shipments of the game to be negatively impacted by retailers’ reluctance to devote material shelf space for the bulky game. Potential supply shortages will likely not be immediately fixable as we do not believe there is much flex in the manufacturing unit output."

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