The Gaming News Thread

**naut** · 10-31-2008, 03:07

Ha, doesn't bother me. Since I wouldn't buy an EA game anyway.

**Veho Nex** · 10-31-2008, 04:25

EA just wants us to hate them huh?

**TevashSzat** · 11-01-2008, 00:38

You know Veho, your wishes may just get answered...

EA laying off 6% of workforce

Spoiler Alert, click show to read:

[UPDATE 2] Despite 40% jump in quarterly revenue, losses lead megapublisher to pink-slip more than 500 employees; Madden sells 4.5 million, Spore 2 million; Warhammer subscribers hit 800,000.

It's been a rough year for Electronic Arts. Last Halloween, the Redwood City, California-based publisher had a share price of $61.12 and was riding high on the acquisition of superdeveloper BioWare/Pandemic. Today, the company's stock ended at $27.73, after a steady decline accelerated by the past month's economic bloodbath on Wall Street.

Unfortunately for many EA employees, 2008 is about to get a whole lot rougher. Today, Electronic Arts announced that it is laying off six percent of its global workforce as part of a company-wide cost-reduction plan. With a payroll of about 9,000 worldwide, the layoffs will affect approximately 540 people. In a conference call this afternoon, executives said the layoffs will come from EA's publishing and corporate divisions, as well as from its various studios and labels.

Today's battery of pink slips may not be the last. Executives also said that EA "will manage head-count decisions aggressively going forward." The company plans to reduce hiring in high-cost territories, and will expand operations in "lower-cost locations."

By EA's own estimates, the layoffs announced today will save it more than $50 million annually--money the company sorely needs. Today, EA announced a greater-than-expected $310 million loss, or 97 cents per share, during the July-September quarter. During the same period last year, the company lost $195 million, or 62 cents a share.

The loss is doubly harsh because it comes in the face of a 40 percent surge in quarterly revenue for EA. For the quarter, the second in the company's fiscal year, earnings totaled $894 million, up $254 million from the same quarter in the prior year. Best-sellers for the period include Madden NFL 09, with 4.5 million copies sold worldwide, and Spore, with 2 million units sold worldwide. Another high point was the launch of Warhammer Online: Age of Reckoning, which now boasts 800,000 players on 1.2 million units sold. NCAA Football 09 sold 1.8 million copies, and Tiger Woods PGA Tour 09 sold 1.9 million--the same number as Mercenaries 2: World in Flames. Combined, Rock Band and Rock Band 2 moved 1.5 million units during the quarter.

In a statement, EA CEO John Riccitiello put a brave face on things. "Considering the slow down at retail we've seen in October, we are cautious in the short term," he said. "Longer term, we are very bullish on the game sector overall and on EA in particular. The industry is growing double-digits on the strength of three new game consoles and increases in the number of homes with broadband Internet connections. EA is well-positioned to benefit from these technology drivers due to the strength of our creative studios and our broad collection of game properties."

Unfortunately, the markets were not as upbeat as Riccitiello. As of press time, EA stock was down nearly 14 percent in after-hours trading.

[UPDATE] In the conference call, Riccitiello and other executives laid out the reasons for the major shortfall. One major factor was the postponement of Harry Potter and the Half-Blood Prince, which was slated for a late summer release to lead up to its film tie-in's November debut. When that film was suddenly delayed until summer 2009, EA was forced to sit on a nearly finished game it had already spent million marketing. As a result, EA had to move $120 million of revenue into its next fiscal year. Of that, roughly $48 million was expected in the July-September quarter, when the game was slated for release.

[UPDATE 2] Besides international exchange rate issues, which cost EA 12 cents a share, the other big reason for the shortfall is EA's lavish investment in future ventures. The company spent over $100 million in expanded development costs, and invested a further $150 million in building a direct-to-consumer download business. The company also spent $35 million in upfront expenses for its EA Partners deals. Those include the recent publishing agreements with Epic Games, id Software, and Grasshopper Manufacture, as well as the just-announced agreement to distribute MTV and Harmonix's rhythm game based on the music of The Beatles.

Analysts sour on EA

Spoiler Alert, click show to read:

Lazard Capital Market's Colin Sebastian downgrades publisher's stock as industry-watchers take management team to task.

Analysts never like to hear bad financial news from the companies they cover, but yesterday's glum quarterly report from Electronic Arts seems to have hit a nerve. A flurry of investor notes this morning weighed in on the publisher's results, and there was little sympathy to be found, starting with Lazard Capital Markets' Colin Sebastian lowering his rating on the stock from "Buy" to "Hold."

Sebastian noted that EA has been stagnant at a point in the console cycle where it should be ramping up for significant growth. With time running out before publishers have to start investing in software for the next generation of consoles, he noted EA is becoming less likely to generate strong profits before the downturn of the cycle starts. The publisher's recent stated emphasis on quality might not be paying off either, according to Sebastian.

"While we are encouraged by improving quality ratings of several annualized EA Sports titles, as well as recently released Dead Space, we continue to believe the improving product execution is coming at a high cost," Sebastian noted, "and EA's margins are ramping more slowly than we originally expected at the beginning of the year."

Some analysts were clearly frustrated with the publisher's malaise. Pacific Crest Securities' Evan Wilson said the firm had become bored writing investors notes about EA lowering its profit expectations.

"The justification for the delay in profits is always heaped into 'digital investments for the future,'" Wilson wrote. "While it was a different management team singing the tune, the commentary was the same in 2005 as we entered this cycle. The investment needs to be justified eventually, but as of yet it has not been. Today's negative reaction to the delay in profitability is not surprising, but management's continued insensitivity to investors' desire for profit growth in the fourth year of the video game cycle is. ... EA is positioning itself as a victim of its circumstances--that the best is yet to come as the company makes its way through these difficult times. However, we continue to believe that its actions exacerbate the negatives that the videogame industry is facing. EA's results have been mediocre for too long."

In his own investors note, Wedbush Morgan Securities' Michael Pachter was similarly unhappy with management's approach to its quarterly report.

"EA management was somewhat aloof during the earnings call," Pachter said. "With the stock hovering near a seven-year low, management continued its recent history of disappointment, and spent an inordinate amount of time sowing seeds of fear about the potential for a tepid holiday sales season."

Despite lowering his 12-month guidance on EA stock from $53.50 to $38, Pachter retained his "Strong Buy" rating on the publisher. He noted that the company has been producing better games, has been maintaining "robust sales" of new games, and has a number of big releases in the pipe.

"However, management has demonstrated an uncanny ability to snatch defeat from the jaws of victory in the eyes of investors," Pachter wrote, "and we think that these old habits will take a long time to die."

As of press time, EA stock was trading at $22.98, down more than 17 percent from yesterday's pre-quarterly-report closing price of $27.73.