EA lowers outlook, confirms cutbacks

[UPDATE] Publisher slashes outlook following lower-than-expected holiday retails sales; indicates more layoffs, studio consolidation, SKU reductions.

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Yesterday, prolific Wedbush Morgan Securities analyst Michael Pachter warned of imminent financial turmoil at megapublisher Electronic Arts. Citing the poor performance of Mirror's Edge, Rock Band 2, and Need for Speed Undercover, the analyst projected that EA would see a 16 percent decline in fiscal-year revenues.

It didn't take long for present events to catch up to Pachter's predictions.

EA announced today that it has lowered its net revenue and earnings-per-share guidance for its fiscal year 2009, which runs through March 31. No specific figures were revealed as part of today's announcement, with EA saying only that it would provide updated fiscal guidance as part of its third-quarter report, which is expected in early February.

The publisher attributed the revised outlook to lower-than-expected retail sales in North America and Europe. It also said that it expects to trim its product portfolio--that is, game releases--for fiscal year 2010 and, as a result, plans to make further staff cuts and facility consolidations.

"While we saw significant improvement in the overall quality of our key products this year, we are disappointed that our holiday slate is not meeting our sales expectations," EA CEO John Riccitiello said in a statement. "Given this performance and the uncertain economic environment, we are taking steps to reduce our cost structure and improve the profitability of our business."

Riccitiello further noted that despite the cost-cutting measures, his company plans to proceed with previously stated initiatives to amp up EA's overall game quality, as well as continue investing in new properties and direct-to-consumer operations. The executive also stated that EA plans to launch "several new titles and online games in fiscal 2010," a period that runs from April 1, 2009, through March 31, 2010.

Today's news is the latest in EA's ongoing financial struggles. In October, the publisher announced a greater-than-expected $310 million loss, or 97 cents per share, for its fiscal second quarter. That loss comes despite net revenues spiking 40 percent to $894 million during the July-September reporting period. At that time, EA also revealed that it would be cutting 6 percent of its workforce--or roughly 600 jobs--across a variety of divisions within the company.

[UPDATE] Following EA's earnings revision, the publisher held a conference call with analysts to provide further color on today's development. As part of the call, Riccitiello noted that a primary factor contributing to the publisher's lower guidance was the decision by many retailers to end the year with lower inventory. The executive also noted that while this decision won't necessarily be felt by consumers, it will have a dramatic effect on product sell-in to retailers.

Riccitiello also further expounded on EA's plans to trim its upcoming product portfolio. He said that sports games won't be affected by these cuts, with the reductions divided evenly between core and casual games. The EA executive also said that these reductions will primarily be made to product SKUs that have exhibited a lower profitability margin and that the publisher plans to ramp up advertising on games that have the biggest "hit potential."

Riccitiello declined to provide specific figures on any given game's performance. He did express satisfaction over the new franchises Dead Space and Warhammer Online, saying of the latter that "we expect [it] to continue to perform very, very well." Riccitiello also addressed DICE's first-person action adventure game Mirror's Edge, saying that while the overall quality met expectations, the publisher plans to "take a look" at its franchise potential.

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