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Electronic Arts' Focus on Fewer, Profitable Titles Pays Off in Sales, Earnings Gains

May 07, 2003|Alex Pham | Times Staff Writer

Electronic Arts Inc., the world's biggest video game publisher, kept to its strategy of pushing out a smaller number of more profitable games in its fiscal fourth quarter -- posting roughly the same level of sales on 40% fewer titles.

The maker of "The Sims" games said Tuesday that for the full fiscal year, sales were up 44% and net income tripled. The Redwood City, Calif., company projected more modest growth ahead, however, as the brisk video game sales of the last two years begin to level off.

EA said revenue was $463 million in the fourth quarter ended March 31, when it released a dozen new games, down slightly from $470 million in the same quarter last year, when it debuted 20 titles.

But quarterly net income was lower, at $9 million, or 6 cents a share, compared with $47 million, or 33 cents, a year earlier. In the recent quarter, the video game giant took a $72-million restructuring charge in the recent quarter, mostly because of its money-losing EA.com division.

Still, the company's performance appeared to validate the wisdom of EA's recent path: focusing its resources on a smaller quantity of games as rivals pumped out a record number of titles last year.

EA can "deliver more revenue per title than just about anybody out there," with the exception of Take-Two Interactive Software Inc., publisher of the 2002 blockbuster "Grand Theft Auto" series, said Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles. "It's just amazing," he said.

For the fiscal year, EA posted $2.5 billion in sales, up from $1.7 billion the previous year. Net income rose to $317 million, or $2.17 a share, from $101.5 million, or 71 cents a year earlier. It had $1.6 billion in cash at the end of the quarter.

EA counted 22 titles that sold more than 1 million copies last year, including "Madden NFL Football," "FIFA Soccer" and "Medal of Honor." In the quarter, four games sold more than 1 million copies, including "Command & Conquer: Generals," "The Sims," "Lord of the Rings: The Two Towers," and "SimCity 4."

In contrast, "The Sims Online" game, published by EA.com, has sold just 125,000 units since its release last year, according to market research firm NPD Group Inc.

"In fairness, we had a miss," Warren Jenson, EA's chief financial officer, said in a conference call with analysts. The Sims Online "is not where we want it to be."

EA has been concentrating greater resources on fewer games in an effort to release only blockbuster titles. Although that meant spending more on developing and marketing each game, EA succeeded in ringing up about $30 million a title, far more than many rivals, who average $8 million to $10 million in revenue a game, Pachter estimated.

Other game makers, crowded off store shelves by too many Christmas releases, have watched EA's restraint. This year, Calabasas-based THQ Inc. and Santa Monica-based Activision Inc. have both cut close to one-fifth of their projects, saying they too will focus on quality rather than quantity.

THQ releases its financial results today, Activision on Thursday. A survey of analysts by Thomson First Call expects THQ to post a 15-cent-per-share loss for its March quarter. Activision is expected to post a 13-cent loss in its March quarter, but an 8% growth in net income to 95 cents a share for the year.

EA projected breakeven earnings on flat sales of around $320 million for its first quarter ending June 30.

For the fiscal year, however, Jenson projected that revenue would grow 13% to 17% to $2.8 billion to $2.9 billion. He expected earnings will grow 43% to 50% to $3.10 to $3.25. EA executives said they believe console hardware and software retail prices to drop this year, with many titles releasing at $39.95, about $10 lower than last year.

EA shares fell 40 cents to $61.74 in the regular Nasdaq session, but rose to as high as $64.60 in after-hours trading after the earnings release.

"There's strong industry growth, and even better company performance," said Stewart Halpern, analyst with RBC Capital Markets in New York, which does not conduct business with EA or own the company's shares. EA shares trade at 20 times earnings. "But we think the stock is no longer cheap," Halpern said.

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