Analysts: New Structure, New IP Will Maintain EA's Market Lead

Whether you call it a restrucuring or a reorganization, Wedbush Morgan's Michael Pachter and Janco's Mike Hickey have expressed their confidence that Electronic Arts is serious about "maintaining its market share leadership and growing margins" and will reap benefits in 2009. Though EA said in its Q1 earnings call that it was 'too early' to increase its full year guidance, Pachter adds that "we do not feel similarly constrained," and says that though its first quarter showed a difficult comparison to last year's FIFA World Cup enhanced results, "for the balance of the fiscal year, we expect industry growth of 18%, and think that EA’s release schedule favors the company to again grow above the industry average." He adds, though, that "we are somewhat confused by the company’s guidance for Q2," with EA's new properties Boogie, SKATE, My Sims, and Medal of Honor comparing quite favorably against's last year's modest The Godfather and Lord of the Rings second quarter. "In our view," said Pachter, "the company’s lineup positions it to gain market share during the quarter," saying Wedbush's own sales estimates of $925 million, "could be as much as $75 million higher." "Investors appear to be skeptical about the company’s resolve" to make better use of its R&D structure, but Pachter says "the company’s recent business realignment, and management appointments demonstrate that it is serious about maintaining its market share leadership and growing margins." "We expect to see gradual improvement in the areas of game quality, consumer satisfaction, and cost cutting over the balance of the fiscal year," he concludes, "and anticipate that EA management will be more outspoken about enforcing accountability throughout the organization in the coming months." Janco's Hickey concurs, adding on the new four-label corporate structure that "we expect the new label heads to motivate their current developers, attract new developers, help with acquisitions, and realign compensation to product performance." "The Company continues to attract talented management including Peter Moore and Kathy Vrabeck," he added, "a distinct reversal from the talent drain they have experience over the last couple of years. We expect the new label heads to motivate their current developers, attract new developers, help with acquisitions, and realign compensation to product performance." "Management was very optimistic over the future release of Spore," noted Hickey, saying "we believe Spore could be for Electronic Arts what Guitar Hero was for Activision, a killer internally developed and owned IP that benefits from a new video game category and high gamer demand." "we believe their fiscal year ’09 will provide a potentially powerful earnings harvest from anticipated new game releases including Spore, Sims 3, Rock Band 2, Warhammer Online (anticipated fiscal Q408 release), a growing portfolio of casual content (Wii, NDS, Online, etc.), and their perennial game franchises like Madden, which will benefit from a larger next-gen installed base and higher price points." Hickey concluded, "We believe the new management team will announce a quantifiable cost reduction plan after their fiscal Q208 period, a time period sufficient for the completion of their recently announced organizational re-alignment, while insuring their developer force remains focused on holiday ship objectives." "We believe the combination of a strong product pipeline and a meaningful cost reduction plan could have a material impact on their fiscal ’09 earnings power relative to the Street’s expectations," he said. "We also expect management to look beyond the organic creation of new IP by acquiring IP, considering their enormous cash position and the proven difficulties of creating new IP internally."