EA's quarterly profits fall 31 percent

[UPDATE] Megapublisher reports Q4 2005 net income is down $116 million; names Sims 2, Need for Speed as top sellers; claims 70 percent sports-game market share.

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When Electronic Arts announced yesterday it was laying off 5 percent of its worldwide workforce--around 350 people--cynical observers saw it as a preemptive strike to a lackluster earnings report. As a rule, news of layoffs at an ailing company shows stockholders that said company is taking action to cut costs and shores up the stock price.

Whether the layoffs propped up EA's stock is debatable, as its share price lost over 2 percent of its value, $1.18. Trading was heavy indeed--twice normal volume, in fact, with 7.3 million shares changing hands. And no wonder: Shortly after the US markets closed, EA announced its earnings for its third fiscal quarter, which ran from October to December 2005. Besides being of great import to stockholders in the world's biggest third-party publisher, the report was seen by many as being a bellwether of the game industry's overall health.

Most analysts had predicted EA to have quarterly earnings of $1.26 billion, or 90 cents a share--pretty close to the actual numbers. For the quarter ending December 31, 2005, the publisher saw $1.27 billion in sales, $160 million less--or 11 percent below--the $1.43 billion it enjoyed during the same period in 2004. However, EA's $0.83 per-share earnings were below analysts estimates and far below the $1.18 per-share earnings the year before.

EA's net income for the quarter saw an even steeper year-on-year decline. The company's profits were slashed by nearly a third, going from $375 million in calendar Q4 2004 to $259 million in calendar Q4 2005--a drop of $116 million. Part of that shortcoming was due to the publisher's December purchase of mobile-game-maker Jamdat in a deal valued at $680 million.

Still, EA tried to put a brave face on things. "We ended 2005 in a very strong competitive position," said CEO Larry Probst in a statement. "We were number one on the PlayStation 2, the Xbox, PSP, and PC in both North America and Europe. We also had a successful launch on the Xbox 360 and expect that we will be the number one publisher on this platform in 2006."

In a press release, EA also played up its successes during the quarter. Five titles--NBA Live 06, SSX on Tour, Tiger Woods PGA Tour 06, From Russia With Love, and Battlefield 2: Modern Combat--all sold more than 1 million units during the quarter. Five more--Need for Speed Most Wanted, FIFA 06, Harry Potter and the Goblet of Fire, The Sims 2, and Madden NFL 06--sold more than 2 million copies during the all-important holiday quarter. As of the end of 2005, Madden NFL 06 had sold nearly 5.5 million copies on all platforms in the US, and Need for Speed Most Wanted had sold more than 7 million, counting international sales.

EA also played up the fact that it still has the biggest slice of the game-market pie. The company touted its overall 22 percent revenue share in North America and 23 percent revenue share in Europe.

[UPDATE] In a conference call after the earnings report was issued, EA chief financial officer Warren Jenson broke down EA's dominant market share on several platforms. "EA was the number one publisher on PS2, Xbox, and PC in North America and in Europe," said Jenson. "Specifically on the PSP we ended the year with 31 percent revenue share in North America and we estimate 25 percent in Europe." The company also claimed to hold 30 percent of the Xbox 360 market in North America and 24 percent in Europe.

Another big factor in EA's earnings was sports. "In sports we had 70 percent category share on consoles in North America," Jenson told analysts. "We had 15 of the top 20 sports titles on the PS2 and 14 on both the Xbox and PC." He also said the company's latest sports title, NCAA 2006 MVP Baseball, had sold more than 200,000 copies in its first two weeks at retail.

As far as guidance is concerned, EA said it expects net revenue for the current quarter, ending March 31, to be between $550 and $600 million. It predicted per-share earnings to be between $0.06 and $0.14. The quarter will see the release of three of EA's most anticipated games of 2006--The Godfather, Black, and Fight Night Round 3.

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