EA announces profit warning as catalogue sales disappoint

Leading publisher Electronic Arts has been forced to announce a profits warning for the fourth quarter, which ends on March 31st, after catalogue sales of key products fell significantly short of the company's expectations.

Almost $200 million has been wiped off EA's projected revenue for the quarter, with the company now expecting to see $525 - $550 million in sales, compared with its previous estimates of $700 to $750 million.

This shortfall will also have a major effect on bottom line profits, with the firm expecting earnings per share of $0.08 to $0.10 for the quarter - a major decline from the previous projection of $0.27 to $0.33.

The knock on effect on the full year results will be less substantial, but analysts have still been forced to drop their estimates for the company - and in a perhaps more damaging move, EA also announced preliminary guidance for the next financial year, FY06, which was well below expectations.

The company does expect to see revenue growth of 8 to 12 per cent during the year, presumably driven by new platforms such as PSP and Xbox 2, but earnings per share will remain flat by comparison with FY05.

So what's gone wrong? The problem, it appears, lies not so much with the firm's actual releases in Q4, but rather with the knock-on effect of a disappointing holiday season, which has led to a much more rapid fall-off in back catalogue sales than EA expected.

"These results are clearly disappointing," admitted EA chairman and CEO Larry Probst. "While our new releases are performing reasonably well, they have not been able to offset a significant falloff in catalogue sales."

Some of that fall off can be put down simply to well stocked channels - titles such as Need for Speed Underground 2 have sold well, especially in Europe, but retail reorders have been slow because of high initial shipments. A major factor, however, is the fact that several key Q3 games - such as GoldenEye: Rogue Agent and The Urbz were simply poor quality, and the combination of a critical drubbing and negative word of mouth killed off any chance of significant catalogue sales for them.

Despite the profit warning, most analysts remain upbeat about the company's prospects, pointing out that this Christmas saw an uncommonly strong line-up from EA's rivals - with products such as Grand Theft Auto: San Andreas, Halo 2 and Half-Life 2 all squeezing the giant publisher's market share, while cut-price competition from Take Two's sports titles squeezed its margins in the crucial EA Sports range.

Analysts have also been quick to note that while games stocks in general will undoubtedly be hit by the EA announcement, it's a misconception that this represents any malaise in the industry as a whole.

"As the industry leader, we expect EA's preannouncement to affect the other companies in the industry," commented Wedbush Morgan Securities analyst Michael Pachter. "We believe that EA's shortfall is a company specific issue and does not represent deteriorating industry conditions. So far in 2005 US retail software sales are up 6%, with several publishers' sales up significantly."

"We believe no company will escape Wall St's broad brush," concurred Gary Cooper of Banc of America Securites. "However, we believe EA's shortfall is unique to the company and does not impact the fundamentals of any other video game company."