EA Filing Reveals GameStop/Wal-Mart Reliance, SEC Options Settling

Author: by Leigh Alexander, Simon Carless

Major publisher Electronic Arts has filed its 10-Q, with voluminous details regarding the company's finances for the quarter ended September 20th, 2007 - for which the firm recently announced results. Hidden in there are several interesting details on EA's product mix, retailer reliance, and other matters, which we're laying out as follows: Publisher Reliance On Specific Retailers? The company's filing revealed some interesting facts -- among them, that EA's direct sales to GameStop stores (its larger single customer) comprised approximately 15 percent and 13 percent of its total net revenue for the three and six months ended September 30, 2007, respectively, down one percentage point for each on the previous year. In addition, sales to Wal-Mart stores represented approximately 12 percent and 11 percent of its total net revenue for the three and six months ended September 30, 2007, respectively - actually down two percentage points each on the previous year. This means that over a quarter of EA's total revenues are controlled by two customers. In fact, another stark contrast between the U.S. and European markets was made, in terms of retailer diversity. The EA filing stated that during the six months ended September 30, 2007, over 72 percent of EA's U.S. sales were made to seven key customers. Yet in Europe, the company's top ten customers accounted for just 33 percent of its sales in that same period. EA's Options Investigation Closed EA has disclosed that an informal SEC inquiry, requested on September 14th, 2006, has recently been terminated, with no enforcement action recommended. The inquiry had been part of a wider effort on the part of regulators to scrutinize more closely the practices surrounding stock markets in numerous industries. Other major game companies, including THQ, have been investigated by the SEC in various ways. The Associated Press has noted that more than 60 different companies currently being investigated by the SEC over stock option irregularities, in particular the practice of “backdating” stock option grants to time them at share price lows, thus increasing their sale price value. EA's Revenues By Platform Revealed Fascinatingly, the company also provided numbers on the distribution of its software sales by platform in the 3 months ending September 30th, comparing it to the previous year. Obviously, the company's mix depends to a certain extent on what major titles were released in that quarter, but some obvious next-gen trends were evident. Firstly, the revenue total in the 3 months to September 30th for the Xbox 360 was $218 million, up significantly from $166 million the previous year. In addition, new line items were established for the Wii, which had $59 million of Electronic Arts games sold for it in the quarter to September 2007, and the PlayStation 3, which had just $17 million of revenue booked. One notable change was for the PlayStation 2, which saw $73 million in game sales this quarter, compared with a massive $269 million in the previous year. Finally, the DS' game sales also surged, up from $14 million in 2006 to $47 million in 2007 - but the PSP's plummeted, down from $64 million in 2006 to $21 million in 2007. EA R&D Costs Soaring? Finally, the filing contained details on EA's R&D expenses -- which increased by $54 million, or 12 percent, as compared to the six months ended September 30, 2006. The company attributes the increase primarily to an increase of $35 million in additional personnel-related costs from headcount increases, higher external development costs of $26 million to support new or upcoming titles such as The Simpsons Game, Crysis and Skate, and an increase in "facilities-related" expenses of $6 million to support worldwide research and development. Thus, it appears to be those costs that the firm is attempting to get under control by its recent changes including the closing of the EA Chicago studio and its other restructuring changes of late.