EA's holiday revs flatline, stock rises

Today Electronic Arts reported its earnings for the third quarter of its fiscal year, which ended on December 31, 2006. During the three months, the company saw a modest year-on-year increase in quarterly net revenue, going from $1.27 billion to $1.28 billion.

The Redwood City-based publisher's net income, however, fell precipitously, going from $259 million in October-December 2005 to just $160 million during the same period in 2006. [UPDATE] However, the numbers were better or in line with most analysts' expectations, and EA stock rose sharply in after-hours trading. After closing on the Nasdaq at $50.54, the company's share price had shot up over $3 as of press time.

One likely factor contributing to EA's decline income was the short supply and poor tie-in ratio of the PlayStation 3, which NPD estimated sold just over 600,000 units in the US during 2006. EA released four PS3 games during the quarter and now claims it has a 32 percent share of the PS3 market in North America. Nonetheless, EA sold $41 million worth of PS3 games $29 million of Wii games during the quarter. Chairman and CEO Larry Probst said his company "was pleased with the performance of our products on next-generation consoles."

Wedbush Morgan Securities analyst Michael Pachter said the constrained supply of PS3s was certainly a factor EA didn't make more money. However, he predicts the setback is only temporary. "It's not like there will never be PS3 games again," he told GameSpot. "My belief is that people will ultimately buy games, and EA will get its fair share of those sales."

Pachter also said the main culprit for EA's less-than-stellar quarter was the rising cost of developing games for the newest batch of consoles. "Earnings are lower because their R&D spending went from $206 million to $330 million," he told GameSpot. "That's over $0.25 a share all by itself." EA spent $23 million in October completing its takeover of Battlefield developer Digital Illusions CE (DICE) and founded a Wii-centric studio in November.

In a statement, EA CFO Warren Jenson alluded to the cost of his company's expansion of in-house development. "The past several years have been about investment," he said. "The coming years are about growth and reward." Jenson also played up the fact that EA's revenue from digital content hit a record $115 million during 2006, a number Pachter found "impressive." During the quarter, the company made $37 million from digital content, which includes items sold on Xbox Live Marketplace and casual games sold on Pogo.com.

Game-wise, the quarter's biggest sellers were the latest entries in EA's storied franchises. More than 10 million games from the Sims franchise were sold during the three months, with The Sims 2 Pets selling 5 million by itself. More than 8 million copies of Need for Speed Carbon were sold during the quarter, and more than 6 million copies of FIFA 07 were sold worldwide. Madden NFL 07 also topped 3 million units and ended the year with more than 8 million copies sold in North America alone--making it the most popular game on the continent in 2006, according to EA.