Electronic Arts cuts forecast, shares fall
World's largest video game publisher cuts quarterly earnings outlook on weak performance of older games and shortages of game consoles.
The company's shares fell nearly 13 percent and weighed heavily on the sector in after-hours trade following the news, the first time in EA's history as a publicly traded company that it issued a profit warning during a quarter.
Electronic Arts' U.S. market share on a dollar basis for the year to date is roughly twice that of its closest competitor, Japan's Nintendo.
"It certainly doesn't bode well for the rest of the sector," said P.J. McNealy, an analyst with American Technology Research.
"I think this is a carry-over of not only the hardware shortage but also them not having a 'Halo 2' or 'GTA,'" he said, referring to the two hottest games of last holiday season, neither of which EA published.
New releases were unable to offset a "significant falloff" in sales of older, catalogue games, the company said. It also blamed strong competition from new games, in particular the breakout hit of Vivendi Universal's online game "World of Warcraft."
EA said it now expects to earn between $1.70 per share and $1.72 per share, excluding one-time items, for fiscal 2005 ending in March. The company's previous estimate was for earnings of between $1.90 per share to $1.95 per share.
Net earnings were forecast to fall between $1.62 per share and $1.64 per share, compared with a previous estimate of $1.82 per share to $1.87 per share. Revenue is forecast to be in a range of $3 billion to $3.13 billion.
"We clearly underestimated the impact of the hardware shortages on our Q4 sales," EA Chief Financial Officer Warren Jenson told Reuters, adding that the company's fourth-quarter titles were performing well, "but we had expected more."
For fiscal 2006, starting in April, EA forecast revenue growth of about 8 percent to 12 percent over fiscal 2005, with earnings per share roughly flat year-over-year compared with the current-year target revised on Monday.
The 2006 revenue forecast roughly was in line with Wall Street expectations in dollar terms. The new profit outlook lagged analysts' consensus target--analysts before the Monday revision had expected earnings to grow about 5 percent to $2.02 per share in fiscal 2006.
EA shares fell to $57.88 in after-hours trade on Inet after closing on Monday at $66.35 on the Nasdaq.
Shares of the top video game publishers and retailers were down about 5 percent to 7 percent in after-hours trade on the news. McNealy also said the sector as a whole has been on a strong run since last October, which could be one reason the stocks are falling so sharply on the EA news.
Jenson said the warning did not affect EA's longer-term view, even as the industry transitions from the current generation of video game consoles to new hardware expected to be released over the next 24 months.
"Based on our discussions and view of the marketplace, while we certainly remain cautious, our outlook is largely unchanged," Jenson said. "Our view of the world going forward is largely unchanged."
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