EA beats Q1 expectations, but drops FY06 projections

Leading publisher Electronic Arts has seen its rating downgraded by a number of analysts today after the firm announced first quarter results which were better than expected, but still significantly lower than its performance last year.

The company also downgraded its projections for the full year to March 31st, setting its new guidance down $100 million to $3.3 to $3.4 billion - the third time that the firm has dropped its FY06 targets in just five months.

For the first quarter, revenues were at $365 million - down around 16 per cent compared with last year's first quarter revenues, but that's still well ahead of analyst expectations, thanks to the million unit plus performance of Battlefield 2 and Medal of Honor European Assault.

Earnings per share stood at a loss of 18 cents, which is also a significant disimprovement on last year's figures - a profit of 8 cents - but again, ahead of the expectations of Wall Street.

Although many analysts commented that the new FY06 projections appear to be attainable for EA, and some even believe the guidance to be conservative, many of them chose to drop their ratings of the stock regardless.

Both Wedbush Morgan and Smith Barney Citigroup dropped the stock's rating to "Hold" from "Buy", with Wedbush Morgan's Michael Pachter explaining that "we believe that Electronic Arts' results going forward will continue to be somewhat unpredictable, given uncertainty surrounding the transition to the next generation of video game consoles."

Other analysts are more positive; Banc of America Securities' Gary Cooper, who is retaining a Buy rating on the stock, pointed out that the vital third quarter is now looking much more solid for EA since The Godfather, which analysts consider to be a risky product, has been moved out of the quarter.

"Given the transition (and sluggish Xbox sales), the holiday quarter is still not promised," Cooper commented. "However, we believe our 3Q06 revenue estimate of $1.575 is now more achievable than EA's previous guidance of around $1.8 billion even without The Godfather."

"We remain sceptical that this year's edition of Need for Speed can achieve last holiday's 8.2 million units," he continued. "We have modelled 6.8 milion. Harry Potter is not what it once was, the Bond franchise needs to bounce back from poor FY05 results and Battlefield: Modern Combat will face an onslaught of competition from SOCOM III, Ghost Recon 3 and to a lesser extent Call of Duty: Big Red One. Still, we now believe EA will make Q3 primarily because the quarter's largest risk (The Godfather) has now moved to 4Q06."

Speaking in a conference call about the results, EA executives also revealed some information about the firm's next-generation development efforts - claiming that the company now has hundreds of Xbox 360 development kits (presumably counting both the old Alpha kits and the much more recent Beta kits) and between 30 and 50 PlayStation 3 kits.