Analysts: EA On The Right Track At Last

Analysts say that Electronic Arts may finally be on the right track after nearly two years of investor disappointments, and that this time, the fiscal year guidance the publisher offered might actually be attainable -- if not conservative. Kaufman Bros.' Todd Mitchell calls EA's recently-announced third quarter "pretty abysmal, but as expected." And while EA did narrow its losses, it's also scaling back distribution and modeling for a 3 percent decline in packaged goods. With no Rock Band titles in fiscal 2011, EA says its distribution revenue will decline as much as $450 million. Plus, says Signal Hill's Todd Greenwald, since the publisher's made big cuts to its SKU slate, its owned IP business could be down too -- "but may be more profitable if EA has successfully picked the winners and cut the losers." Adds Greenwald: "We think Medal of Honor, Crysis 2, and Dead Space 2 have the potential to be breakout hits, but keep in mind EA will be comping a year with many big hits, including Sims 3, FIFA 10, Dragon Age, and Mass Effect 2." But even so, EA's being too conservative when it predicts $3.65-$3.90 billion in revenue for its fiscal 2011, says Kaufman Bros.' Mitchell: "it assumes a 3 percent drop in package goods sales versus most expectations for 0 percent to 4 percent growth," he points out. Secondly, Mitchell continues, that estimate assumes a further loss of marketshare and operating leverage -- even though in his view EA's volume-per-title will improve and its revenue mix will become more favorable, incorporating more diverse streams and business models. Wedbush Morgan's Michael Pachter agrees: "We think that EA management is being abundantly cautious about [fiscal 2011], after having been burned by an overly optimistic forecast last year," he says. "They were not the only ones who estimated robust results for last year, only to be proven dramatically wrong," he added. "We, too, thought that last year would result in solid industry growth, and we, too, were wrong." Pachter says EA's efforts to establish a new and bigger digital business seem to be progressing well -- the company plans to report about $575 million in digital revenues at the close of the current fiscal year, by which point it will have owned Playfish and its contribution for a quarter, too. "The definition of insanity is doing the same thing over and over again, each time hoping for a different result," says Pachter. "This time, while we are again hoping for a different result, we see evidence that the company is not doing the samethings over and over again: lower headcount, fewer facilities, fewer games, and a growing digital business. This time, we think that EA is on the right path."