EA's adjusted rev figures send stock sliding

Shares trade significantly lower day after publisher says revenues are trending down for current quarter; CEO partially blames World of Warcraft.

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Yesterday after the markets closed, Electronic Arts issued a statement adjusting its forecasted earnings for the current fiscal quarter, which ends March 31. This morning, analysts and investors reacted swiftly--and harshly.

The company adjusted expected revenues for the current quarter down from $700 to $750 million to $525 to 550 million. In a call to analysts yesterday, execs cited a number of factors behind the adjustment, among them the unexpected shortfall of consoles in the channel during the holiday quarter, EA's underperforming back catalog, lower-than-expected sales of its top-tier titles in the holiday quarter, and the delayed PSP launch in Europe.

Execs also identified several major hits from rival publishers, including Take-Two Interactive's Grand Theft Auto: San Andreas, Microsoft's Halo 2, and VU Games and Valve's' Half-Life 2, as taking a chunk out of EA's market share. Blizzard Entertainment's World of Warcraft was singled out as being particularly intrusive in the PC space, which EA has traditionally dominated with its Sims franchise.

"Everybody in the industry has been surprised with World of Warcraft," Larry Probst, EA chairman and chief executive officer, reportedly told analysts in a conference call. "There are people who haven't played games in years who are now spending 20 hours a week playing [the game]... It has had an impact on everyone in the industry."

Probst also conceded his company's lackluster numbers. "These results are clearly disappointing," he said in a statement. "While our new releases are performing reasonably well, they have not been able to offset a significant falloff in catalog sales."

Analysts wasted no time sending their interpretation of the news to clients and the media. Electronic Arts is "throwing the kitchen sink at Q4," said Shawn Milne of Friedman, Billings, Ramsey. "Ouch!" is how Wedbush Morgan analyst Michael Pachter summed up the situation. "The March quarter is a bust," said Piper Jaffray's Tony Gikas.

Gikas went on to say that EA was paying the price for "credibility issues" that have "creeped up on management." Gikas may have been referring to a number of lawsuits that allege unfair working conditions in EA's various development studios.

Overall, the reaction to the news was palpable, with one analyst expressing shock that the powerful publisher could weaken so noticeably. "In our opinion, one of Electronic Arts' greatest strengths is the predictability of revenues from its impressive stable of recurring franchises, so we are surprised at the magnitude of the shortfall," said Pachter.

Investors were also swift in their judgment, shedding EA stock and driving its sky-high price sharply down. At press time, EA shares were trading almost $10 below yesterday's close of $66.35 on heavy trading.

But while most analysts said EA's woes were not indicative of broader industry weakness, UBS analyst Mike Wallace signaled that something larger was afoot. In his memo, he balanced his comments on EA's revenue shortfall with a warning that investors need to look at and reconsider the sector at large. "Given the strong run the video game stocks have had, we expect weakness in the entire group today. We [also] expect people will start to think about transition issues and realize that potential problems could occur the next year."

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