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Electronic Arts posts wider loss, announces more cuts

The video game maker now plans to shed 11% of its workforce, about 1,100 people, from the payroll this year and close a dozen facilities after disappointing holiday sales.

February 04, 2009|Alex Pham

Electronic Arts Inc. has hit the reset button on its video game business.

The publisher of such franchises as the Sims and Madden NFL posted a deeper quarterly loss Tuesday. It also said it would cut 100 more jobs and close three more facilities than announced in December because of disappointing holiday sales.

The Redwood City, Calif., company now plans to shed 11% of its workforce, about 1,100 people, from the payroll this year and shut down a dozen facilities. It's trying to cut its 2010 operating budget to $2.1 billion, a savings of $150 million from this year's budget.

EA would not say how its California operations would be affected.

"We've made the hard calls," Chief Executive John Riccitiello said during a call with analysts. "Now it's all about execution. We have been and will continue to focus on game quality and innovation."

EA lost $641 million, or $2 a share, on sales of $1.65 billion in the crucial Christmas quarter, which ended Dec. 31. That compared with a loss of $33 million, or 10 cents, on $1.5 billion in sales a year earlier.

Much of EA's fiscal third-quarter losses stemmed from two one-time charges. The first was a $368-million charge to write down the value of its $680-million purchase in 2005 of Jamdat, a mobile games company in Los Angeles. The second charge resulted from reserving $244 million for deferred taxes.

But Riccitiello made no bones about the company's "disappointing" performance. Sales of its latest entry in the bestselling racing franchise, Need for Speed, fell 7% compared with the previous title in the series.

As the economy contracted, EA said, consumers tended to buy well-known franchises rather than take a risk on new titles. This coincided poorly with EA's plans, laid two years ago when Riccitiello took the helm at EA, to develop homegrown franchises.

"As consumers focused on titles they knew well, EA did not do well on new intellectual properties such as Dead Space and Mirror's Edge," said Shawn Milne, an analyst at Janney Montgomery Scott, an investment firm in San Francisco. "Retailers also cut them off at the knees by chasing top titles and not reordering on others."

Although retailers were conservative in their orders, Milne said, many entered the new year with unsold games. As a result, stores are likely to slash prices much more quickly this year to goose sales, which will be good for shoppers but bad for video game companies' bottom lines.

"The key risk to the industry at this point is software pricing," Milne said. "We have seen aggressive pricing of second-tier titles."

Determined not to be stuck in that second tier, EA said it would cut the number of titles it developed. It also postponed three major games that were set to be launched by the March 31 end of its 2009 fiscal year to give the games more polish and a bigger marketing push. The Sims 3, Godfather 2 and Dragon Age will instead hit stores sometime in the next fiscal year.

EA, which was late to align itself with Nintendo Co.'s popular Wii console, also plans to shift more of its resources to developing games for that platform. It plans to make half its future games for the Wii, with the other half split between Microsoft Corp.'s Xbox and Sony Corp.'s PlayStation 3, Riccitiello said.

"Nintendo's the leader," he said. "They're getting half our emphasis."

Investors, who already had muted expectations, did not seem perturbed by EA's woes. Its shares, which rose 64 cents to $15.50 before the earnings report, gained an additional 57 cents in after-hours trading.


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