EA biting off more than it can chew?

[Arles]

Just found this under a news service I get. It's probably just a small blip, but a loss of 91% in profit is quite a hit.


EA's Profit Tumbles With Poor Game Sales
A WALL STREET JOURNAL ONLINE NEWS ROUNDUP
May 3, 2005 4:30 p.m.

Electronic Arts Inc.'s profit shrank 91%, as a shortage of game consoles and stiff competition led to disappointing sales. The videogame publishing giant also said it expects to post a loss in the current quarter.

EA, based in Redwood City, Calif., Tuesday reported net income of $8 million, or two cents a share, for its fiscal fourth quarter ended March 31. That compares with earnings of $90 million, or 29 cents a share, in the same period last year.

Revenue slid 7.5% to $553 million from $598 million in the year earlier quarter. In March, EA lowered its guidance, forecasting revenue of $525 million to $550 million for the period.

EA, known for popular titles such as the Sims, Madden and Need for Speed franchises, said fiscal fourth-quarter results wouldn't meet its earlier forecast because of disappointing sales of some of its best-known games.

At the time, the company blamed the negative impact of a shortage of game consoles, particularly Sony Corp.'s popular Play Station 2, and also singled out poor performance by its "catalog" games, which include titles that have been on the market for over a month.

While EA has a broader portfolio of hit game titles than any other publisher, the company suffered during the holiday season, competing against blockbusters such as Microsoft Corp.'s Halo 2 and Take-Two's Grand Theft Auto: San Andreas.

Looking ahead, EA said it sees revenue for the fiscal first quarter, which ends in June, between $300 million and $340 million, down from $432 million for the prior year. The company expects a loss between 22 cents and 28 cents a share, reversing a year-earlier profit of eight cents a share.

EA reported results after the close of trading Tuesday. Shares gained 45 cents to $52.90 at 4 p.m. on the Nasdaq Stock Market.

[sterlingice]

Well, their biggest quarter is always the 3rd Quarter, not the 4th Quarter because a couple of their biggest games are seasonal (ie Madden, NCAA). Sure, they missed projected but it was by 10% (598 to 550M) not the precipitous 91% drop they quoted earlier. I'd love to see them choke on their own excess but it's not this easy.

SI

[SackAttack]

Well, their biggest quarter is always the 3rd Quarter, not the 4th Quarter because a couple of their biggest games are seasonal (ie Madden, NCAA). Sure, they missed projected but it was by 10% (598 to 550M) not the precipitous 91% drop they quoted earlier. I'd love to see them choke on their own excess but it's not this easy.

SI

You're confusing sales with profit margin. They did $550M in sales, but how much of that was games $30 and below as opposed to brand new, $50 titles?

[SackAttack]

Dola,

Additionally, sales reflect what they've sold, while profit reflects what they've spent in relation. The money spent to get the NFL license probably ate into their profit substantially, while the money they received in revenue didn't drop a whole lot.

[sterlingice]

You're confusing sales with profit margin. They did $550M in sales, but how much of that was games $30 and below as opposed to brand new, $50 titles?
Well, the article doesn't clearly state that so it's just speculation on your part. But it does state that they did $8M vs $90M in profits the previous year. So, yeah, they still made money, just less. Odds are (also speculation), a lot of this was the result of having to bargain price a couple of games like Madden due to increased competition but that was only a one year blip and probably what drove the exclusivity contracts. But without being able to look at their books, we can't know for sure.

SI

[Arles]

Well, their biggest quarter is always the 3rd Quarter, not the 4th Quarter because a couple of their biggest games are seasonal (ie Madden, NCAA). Sure, they missed projected but it was by 10% (598 to 550M) not the precipitous 91% drop they quoted earlier. I'd love to see them choke on their own excess but it's not this easy.

SI
Good points, but what's interesting to me is that while their revenue fell $65 million, their profit fell $81 million. That means that not only were their sales a little flat (-$65 million), but their expenses also increased over last year (+$16 million). You have to wonder if the price decreases their competition forced EA to make might be hitting more of their bottom line.

What's also interesting is that US video game sales rose 32% in March (http://news.com.com/U.S.+video+game+sales+up+in+March/2100-1043_3-5672719.html).

If it is indeed true that games like Halo and GTA are taking away sales from EA and the ESPN series was forcing them to charge a lower price (MVP was cheaper - on ave - in March 05 than it was in March 04), then their moves to get exclusive licenses for some of the sports makes more sense.

[Arles]

BTW, the more I look at this the more I think that EA's actions in locking up sporting lines may have been a good move for the company (from a financial standpoint). Being able to go back and charge $49.95 for console games without the fear of an ESPN 2K game coming in at $20 will probably get them back on solid footing in 06 and beyond.

[Arles]

Triple dola, just saw this as well:

http://news.com.com/Overtime+coming+to+Electronic+Arts/2100-1022_3-5611293.html

EA, publisher of the "Madden NFL" football game and a host of other popular video games, plans to make some employees eligible for overtime pay but not offer those workers bonuses or stock options.

The change, to begin next month, comes in the wake of employee lawsuits against EA and criticism about punishing hours in the game industry. It also marks a major shift from the Silicon Valley tradition of treating workers as professionals whose long hours are compensated in forms such as a stake in the company and annual bonuses.
I wonder if this will start impacting their bottom line as well. The last quote was interesting:

A lawsuit filed against EA in July claims that the company improperly classified image production employees as exempt from California overtime laws. EA was hit with another lawsuit by an employee in February. The company said the shift to overtime pay eligibility will not affect jobs involved in class-action litigation, specifically artists and software engineers.

Brown suggested that California labor rules and demands from employees could push the company to move more of its work elsewhere, including a new studio it has launched in China. "There is a point where the cost of doing business in California gets so high that we have to look at these other studio locations," Brown said.

[Marc Vaughan]

Brown suggested that California labor rules and demands from employees could push the company to move more of its work elsewhere, including a new studio it has launched in China. "There is a point where the cost of doing business in California gets so high that we have to look at these other studio locations," Brown said.

A lot of large publishers have looked 'east' for content and development in the past, the problem is that there's a very different look and feel between games developed in different cultures, some translate well - some don't.

I personally think there are some hugely talented dev's in China, however whether their work translates to Western cultures easily is debatable, for instance I've played a lot of 'Sane Sports' (Korean publisher, used to distribute SI's games over there) games - they're of a very high standard and fun to play (despite the problems I have with reading Korean) ... however only 'some' of the ones I've played would imho translate well to the mass market in England & America.

[Marc Vaughan]

PS> Its interesting that EA are starting to consider this at a time when the 'business' computing industry have started to move away* from out-sourcing development to cheaper countries because of problems with localisation and communication.

*at least in the UK, not sure of the situation elsewhere ..

[Arles]

A lot of large publishers have looked 'east' for content and development in the past, the problem is that there's a very different look and feel between games developed in different cultures, some translate well - some don't.

I personally think there are some hugely talented dev's in China, however whether their work translates to Western cultures easily is debatable, for instance I've played a lot of 'Sane Sports' (Korean publisher, used to distribute SI's games over there) games - they're of a very high standard and fun to play (despite the problems I have with reading Korean) ... however only 'some' of the ones I've played would imho translate well to the mass market in England & America.
I agree with your premise here. When I was at Honeywell, we had to recall about 30 positions from overseas because of project management issues. Some of the other issues dealt with the wide gap between how the work translates as well.

Usually when sales get tight in any industry, people look to outsource. But it is interesting given some of the issues many have had to see EA starting to look that way.

[SackAttack]

Brown suggested that California labor rules and demands from employees could push the company to move more of its work elsewhere, including a new studio it has launched in China. "There is a point where the cost of doing business in California gets so high that we have to look at these other studio locations," Brown said.

Translation: California allows unions, and has stricter rules about overtime pay than other places do, so in order to keep the gaming sweatshop going, EA's looking at places that aren't quite as regulated.

[Bearcat729]

Translation: California allows unions, and has stricter rules about overtime pay than other places do, so in order to keep the gaming sweatshop going, EA's looking at places that aren't quite as regulated.


Then maybe we should keep a look out for a EA & Kathie Lee Gifford merger?

[sterlingice]

Then maybe we should keep a look out for a EA & Kathie Lee Gifford merger?
EA-Nike. It's only natural :)

SI