Electronic Arts announces weak Q4, but full-year revenues top $3 billion

Publisher Electronic Arts has announced a weak set of fourth quarter results, in line with its downgraded expectations from a few weeks ago, but the market leader still managed to top $3.1 billion in full-year revenue.

Fourth quarter revenue fell eight per cent year on year to $553 million, within the lowered guidance which EA presented a few weeks ago, while net income for the quarter dropped over 90 per cent to a mere $8 million, from last year's $90 million.

That drop in income affected the company's full-year income figure adversely, with the company bringing in $504 million - a drop of almost seven per cent from last year's $577 million, despite a six per cent rise in revenue to $3.129 billion.

Speaking in a conference call after the announcement of the results, EA's chief financial officer Warren Jenson admitted that the figures were "an earnings disappointment," and the stock markets apparently agreed, wiping over 8 per cent off the company's share price in today's trading so far.

For the 2006 financial year, EA provided revenue guidance of $3.4 to $3.5 billion, while earnings per share are expected to be $1.55 to $1.70 - below the company's 2005 EPS figure of $1.71.

The figures disappointed analysts, who pointed out that the company's release schedules for the first half of the year are weak, with EA relying heavily on a strong second half - a move which will make it unattractive to investors in the near term, according to Banc of America Securities analyst Gary Cooper.

"EA took some pain last night and prepared itself for a variety of competitive factors but we believe it did itself no favours in pushing more games into a full 3Q06 and creating a very steep hill," Cooper explained in a research note today. "By effectively back-end weighting the year, ERTS has in our view increased investor scepticism and put many investors on the sideline at least until the fall and perhaps until after the holiday."

Wedbush Morgan Securities analyst Michael Pachter concurred with this analysis. "The disappointing guidance is likely to lead to a sell-off of ERTS shares," he commented. "We believe that investors will penalize the company for recent market share losses, and its guidance implies that these losses will continue through the September quarter."

However, both analysts continue to recommend Electronic Arts to their investors in the long term. "We believe that Electronic Arts will maintain its market leadership position," Pachter informed investors today, "and expect its share price to rebound dramatically later this year."

"We believe EA remains in the midst of one of its worst years on a fundamental basis since the heyday of EA.com," according to Cooper, who cites "poor development quality (on some titles), a price war, skyrocketing R&D spending, and overly-ambitious growth expectations" as major issues facing the company at present.

However, he too continues to recommend the stock in the long term. "We expect the video game industry to enjoy enormous growth in the next several years," he explained. "Buoyed by strong momentum in the video game industry, ERTS should once again return to form and deliver the type of results - and valuation multiple - we have come to expect."