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OCTOBER 20, 2004
By Sarah Lacy Electronic Arts' Holiday Face-Off The dominant video-game maker isn't projecting a bang-up yearend, thanks to pressure from rivals Microsoft and Take-Two Video-game giant Electronic Arts (ERTS ) disappointed investors Oct. 19 with lower-than-expected second-quarter earnings, and as a result, the stock will likely suffer in the near term. But considering the challenges facing the gaming sector this fiscal year, and EA's market-leading position, many analysts see the weakness as an opportunity to load up on a premier stock that's still a good long-term hold. Optimistic investors had buoyed the stock up 0.3%, to $46.66, before Tuesday's announcement, but shares fell more than 6% in after-hours trading. The Redwood City (Calif.) company announced fiscal second-quarter earnings of $97.3 million, or 31 cents per share, on sales of $715.7 million. That's up from $76.6 million, or 25 cents per share, on $530 million in revenues for the same period last year. It's also within EA's guidance of 28 cents and 34 cents per share, but below analysts' consensus of 36 cents. Projections for the all-important holiday season were also lower than expected. EA expects earnings per share of $1.11 to $1.21 on sales of $1.4 billion to $1.48 billion. Wall Street anticipates EPS of $1.27 on sales of $1.5 billion. If EA's guidance pans out, it will earn slightly less than during last year's holiday season, which drew profits of $1.26 a share on sales of $1.48 billion. COMPETITIVE STREAK. That's not because fewer people will be buying games, says research analyst Evan Wilson of Pacific Crest Securities. They just won't be buying as many EA games. Although it has some strong releases slated for the holiday season, nothing has quite as much hype as Halo 2, by Microsoft (MSFT ) and Grand Theft Auto: San Andreas, by competitor Take-Two Interactive (TTWO ). "Retailers I've talked to have said Halo 2 is by far the most anticipated game," Wilson says. Take-Two is also going after EA's lock on the sports-gaming market and has slashed the price of its ESPN games to $19.95, vs. EA's average of $49.95. That hurt EA in the second quarter, though it still took 80% of the market in terms of dollars spent on sports games, according to Chairman and CEO Larry Probst during an Oct. 19 conference call. In the quarter's last weeks, EA issued a "buy two, get one free" promotion, which helped boost dollar market share to 84% three weeks ago and 88% last week, Probst says. Pacific Crest's Wilson calls the promotion a smart move to keep sales moving, without hurting the premium price of EA's popular Madden 2005. HARDWARE GRIDLOCK. The upgrade cycle for game consoles adds more pressure to EA's story. Current models of Sony's (SNE ) PlayStation 2, Microsoft's Xbox, and Nintendo's (NTDOY ) GameCube are long in the tooth, but new models aren't due out until 2005. Typically, the lag in new hardware can spill over to sales of game titles. So as revenue tapers off, EA and other video-game outfits must invest R&D dollars into game titles for the next generation of consoles. Though EA told investors it could hold operating margins flat and increase earnings during this transition, the lowered guidance has Wall Street closely watching EA's near-term strategy. Further out, many analysts still see EA as a top gaming company with dominant market share, a bevy of popular titles, and a cash horde of more than $2 billion. To ease the Street's concerns, though, EA could use a holiday home run.  Lacy is a reporter for BusinessWeek Online in the Silicon Valley bureau
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