Accounting change muddles EA Q2 earnings

Exclusion of $296 million causes megapublisher to report 18 percent decline in revenue despite record-breaking sales; 350 layoffs announced, UK Chertsey office closing.

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This morning, the market was bullish about Electronic Arts. A poll of analysts taken by Thomson Financial predicted the world's biggest third-party publisher would report over $896 million in earnings for the three months ending September 30, 2007. However, shortly after the closing bell rang on Wall Street, the Redwood City, California-based publisher reported just $640 million in revenue during its second fiscal quarter--a massive 18 percent year-on-year decline.

Though technically accurate, the shortfall stems from a change in EA's accounting practices which will see $296 million in revenue from "certain online-enabled games" not being reported until unspecified "future periods." If included, the figure would have boosted EA's quarterly earnings to over $936 million--significantly above analysts' estimates.

"Our strategic priorities on quality, innovation and managing cost are showing progress," said EA CEO John Riccitiello in a statement. "Highly accessible new properties like Skate and MySims have broken through with consumers and EA Sports continues to deliver great experiences on every platform."

As one might expect in the July-September quarter, EA Sports' biggest hitters were on the gridiron and soccer pitch. American football favorite Madden NFL 08 sold 4.5 million copies on all platforms, and FIFA 08 just missed the 3 million-unit mark. In nonsports sales, EA said MySims sold over 1 million units internationally, but did not provide figures for Skate. According to the latest NPD report, the 360 version of the game sold 175,000 copies in the US after its September 14 debut.

Overall, EA said it sold $399 million worth of games for what it is now officially referring to as "current-generation consoles"--the Wii, Xbox 360, and PlayStation 3. In particular, it touted the fact it is the top third-party Wii publisher in North America and Europe, where it has a respective 12 percent and 13 percent market share. In a postreport conference call, EA announced it now considers the Xbox, GameCube, and PlayStation 2 "legacy systems" and said revenue from the platforms had sunk 50 percent from the prior year. On the handheld front, Jenson said North American DS revenue had tripled from the same period in 2006.

Riccitiello also alluded to the "routine" layoffs EA confirmed last week. "We've also announced a restructuring as part of a plan to better align cost with revenues," he said. The 24-month plan will cost EA between $90 million and $110 million, but will result in around $25 million to $30 million in annual savings.

In a conference call with investors, EA CFO Warren Jenson said that roughly 350 employees would be let go in all. Hardest hit by the plan will be EA's Chertsey office in the UK, which will be closed down in the coming months.

For its full 2008 fiscal year, which ends on March 31, 2008, EA expects $3.35 billion and $3.65 billion in revenue, an increase of $150 million over its previous prediction. For the current quarter--which includes major EA titles such as Crysis and Mass Effect--the company expects to reap between $1.325 billion and $1.575 billion in sales.

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