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EA's Big Loss Due to Global Transition

Electronic Arts today released its preliminary financial results for the fourth quarter and fiscal year ended March 31, 2006. While net revenue was up 16 percent to $641 million for the fourth quarter, the leading video game publisher suffered a net loss of $16 million. During the same period last year EA posted net income of $8 million.

Top drivers of revenue during the quarter included Fight Night Round 3, The Godfather The Game, Black, Need for Speed Most Wanted, FIFA Street 2 and The Sims 2. In fact, six titles sold over one million copies in Q4 compared with four a year ago. The quarterly loss was attributable in part to the console transition, but also to the fact that EA completed its acquisition of Jamdat for $680 million. Tax adjustments and restructuring costs also came into play.

Looking at the full-year results yields a clearer picture, however, of the difficulties the console transition has given EA. Net revenue was down 6 percent to $2.95 billion, and profit was less than half of what it was the year prior—net income fell from $504 million to $236 million. The number of platinum titles (million sellers) in fiscal 2006 was down as well, from 31 to 27.

EA believes the current conditions of the market reflect more than a console transition, though. During EA's earnings conference call the company referred to it more as a "global transformation."

"This transition is more than a console upgrade," explained Larry Probst, Chairman and Chief Executive Officer. "In addition to creating games for the PlayStation 3, Xbox 360 and Nintendo Wii, EA is positioning for global leadership in online, handhelds and mobile phones."

The publisher also emphasized that they've been heavily investing in next-gen development so as to ensure a leadership position on the new platforms. "We continue to invest ahead of revenues for long-term leadership," said Warren Jenson, Chief Financial and Administrative Officer. "We are well into the console transition and now have more than 30 next generation games in development."

Looking ahead EA expects net revenue to be between $300 and $340 million for the first quarter ending June 30, 2006. For the fiscal year ending March 31, 2007 net revenue is expected to be between $2.7 and $2.95 billion.

It's also worth noting that during the earnings call EA confirmed that its Superman video game would not be ready to ship concurrent with the theatrical release. The game is now expected to ship alongside the release of the movie on DVD later this fall. In addition, EA said that Will Wright's highly anticipated Spore would not release during the current fiscal year, meaning it would ship in April 2007 at the earliest.

Furthermore, EA noted that they believe $60 pricing for next-gen titles will continue for some time since consumers seem willing to pay the extra $10 for next-gen experiences. As for the company's strategy, EA is looking not only to lead on next-gen but also as a creator of original IP. Currently about 40 percent of the publisher's revenue comes from wholly owned intellectual property, but EA is looking to increase that significantly. After all, most of the big hits in the industry are original IPs, not licensed titles.

Thanks in part to the less than stellar guidance shares in EA fell 6.8 percent to $50.78, after the closing bell on Wednesday.

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