Electronic Arts cuts 4Q expectations

3 min read

Electronic Arts (Nasdaq: ERTS) sees a soft market ahead as it waits for Sony to increase the number of Playstation 2 consoles in North America and Europe.

During a Tuesday conference call with analysts, the largest independent maker of game software reduced its financial targets for the company's fiscal fourth quarter, which ends March. Electronic Arts now expects revenue to be comparable to the $294.3 million recorded in the year-ago period.

Analyst consensus had been predicting a 17 percent year-over-year improvement in fourth quarter sales, according to earnings tracking firm First Call.

Expect a slight loss for the quarter, CFO E. Stanton McKee Jr. told analysts. First Call consensus previously called for a breakeven fourth quarter.

Many Wall Street observers weren't surprised by a lower fourth quarter forecast. "This one came off largely as expected," said Miguel Iribarren, analyst with Wedbush Morgan Securities. "EA has always put out a pretty honest market forecast. They haven't been overly optimistic and they haven't sandbagged, they haven't been overly pessimistic."

Shares of Electronics Arts traded slightly higher in afterhours activity on the Island ECN, following the conference call. Electronic Arts stock rose $1.31 to $40 in Tuesday's regular trading ahead of the earnings report.

"The next few quarters we expect to be uncertain, particuarly in the U.S. and Europe with the Playstation 2 situation," McKee said during the analyst call.

Game software vendors hoped for a boost from the North American and European launches of Playstation 2 by Sony, which originally hoped to ship 2 million units of the new platform into the United States in the last three months of calendar 2000. But Sony (NYSE: SNE) shipped just slightly more than 1 million, with much of that coming near the end of the quarter.

Electronic Arts reported fiscal third quarter net income of $91.5 million, or 66 cents per share, excluding special charges. That was in line with First Call's earnings consensus.

However, third quarter revenue of $640.3 million was 10 percent less than First Call's estimate of $710.45 million.

Revenue in Japan, where PlayStation 2 has been available since March, increased 112 percent year-over-year. North American revenue rose 14 percent, and Asia Pacific outside of Japan gained 17 percent. European revenue, which was also hurt by the weak Euro, fell 10 percent from the comparable period a year earlier.

"EA is kind of at the mercy of Sony to ship their hardware," said Paul Kaump, analyst with Dougherty & Co. "With the exception of Sony's problems, I'd say it was an excellent quarter for EA."

Excluding EA.com, Electronic Arts earned $124.6 million on revenue of $629.9 million. That core revenue represented a 5.6 percent increase from $596.3 million in the year-ago period.

EA.com in the third quarter lost $1.6 million, before special charges, as revenue increased 127 percent year-over-year to $11.2 million.

Including goodwill writedowns and non-cash costs, Electronic Arts posted overall net income of $88 million, or 63 cents per share in the third quarter.

Although Electronic Arts predicts slowness for the next few months, the picture should improve markedly in the second half of the year, Iribarren said. "These guys are so well-positioned," he said. "Starting this summer, you should see some pretty tremendous growth."

Iribarren and Kaump praised Electronic Arts' ability to quickly establish itself as the largest maker of software for Playstation 2. Electronic Arts on Tuesday cited market research data indicating the company commands 44 percent of the North American market for Playstation 2 games.

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