Yesterday, EA announced the layoffs of 1,500 employees, roughly 17 percent of the company's workforce. The move comes less than a year after the publisher's last major restructuring, when EA cut 1,000 employees from its global workforce.
Today, analysts' reactions to the move have been mixed. In a note to investors, Pacific Crest Securities' Evan Wilson was fairly positive on the move, calling the headcount reduction "a good thing." Citing his own contacts, Wilson said the cuts are primarily coming from the staff of recently finished holiday games.
"We are now more optimistic because EA seems to have realized its dire position, with heaps of unprofitable revenue and not much option to turn it into profitable revenue," Wilson said.
Wilson added that the size of the console and handheld market is near the top of his expectations for the current generation of systems, but the growth of the audience hasn't kept pace with the growth of development budgets. As a result, EA has to create more profitable hit games--something Wilson says the publisher struggles with--or reduce costs through things like restructuring and layoffs.
Wedbush Morgan Securities' Michael Pachter was more skeptical of the layoffs. In particular, he took exception to EA's cancellation of more than a dozen titles, saying it "raises the question as to why the company's management didn't recognize the low revenue and profit potential of these games when it conducted its last deep soul searching in early 2009." (Although EA announced its previous round of layoffs in December 2008, they were not completed until March of 2009.)
"It is also difficult for us to explain to investors that they should have confidence in a management team that is so lacking in transparency," Pachter said. "When asked about which games were being eliminated, the cavalier answer came back that the dozen or so games that were canceled were games 'we hadn't yet told you about.' One of the recurring complaints we have heard about Electronic Arts management is that they are dreamers rather than visionaries and that they see profits in places that others don't. If the company had a stellar track record in discovering heretofore undiscovered gems, its lack of transparency might be more palatable."
Pachter singled out one EA practice as being particularly opaque. He said the company pulls together unrelated businesses under its "digital" category, whether they be iPhone game sales, Warhammer: Age of Reckoning subscription fees, or Battlefield 1943 Xbox Live revenues. Pachter said that setup could allow EA to grow that area's revenues however it wants by simply adding more unrelated businesses to the pot.
While EA was readying its latest round of cuts, it was also taking on new employees, as the publisher announced the acquisition of casual online game developer Playfish in a deal that could total $400 million. That move also baffled Pachter, who said it had "the potential to confuse." Pachter estimated that the social gaming company generates about $75 million annually, where he pointed to Zynga as the leader in the space with an estimated $200 million in annual revenues.
"It is not clear that the social games opportunity is immediate and that buying is preferable to building," Pachter said, adding, "It seems to us that EA would have had equal success in building its own social games and in paying Facebook for slotting of its games in a preferable position to Zynga and PlayFish. However, the company chose to buy a private entity that is two years old, rather than building up its own presence."
Despite his misgivings about EA management, Pachter maintained his "Outperform" rating on the company stock and increased his revenue estimate for the publisher's fiscal year.
Janney Capital Markets' analyst Shawn Milne also weighed in on the PlayFish acquisition, saying it seemed expensive, with a total cost ranging up to $400 million, depending on performance incentives.
"However, Playfish should be able to accelerate EA Interactive's growth and better position the company as gaming expands on social networking sites and the iPhone," Milne added.
In his own note to investors, Signal Hill analyst Todd Greenwald said he expected the layoffs but was surprised by the magnitude of them. Like Pachter, he took notice of the publisher's digital revenues.
"EA is rapidly de-emphasizing its declining packaged goods business, and trying to offset this with a rapidly growing (but still small) digital business," Greenwald said. "While the transition to digital sounds appealing, the steps needed to get there will likely be painful to EA's [profit and loss statement], as EA is essentially trying to replace the sale of low margin $59.99 console games with an array of $4.99 iPhone games, as well as various high margin but low revenue monetization strategies such as online subscriptions, microtransactions, advertising, and virtual goods."