Electronic Arts Tumbles After CEO Ouster, Lower Forecast

Electronic Arts Inc., the No. 2 U.S. video-game maker, sank the most in 19 months after ousting its chief executive officer and cutting an already-lowered forecast for this quarter.

Electronic Arts slid 8.3 percent to $17.15 at the close in New York, the biggest drop since August 2011. CEO John Riccitiello leaves at the end of this month, a casualty of shrinking sales as the industry gears up for new consoles that no one is sure shoppers want.

“We believe the move and the sales warning could be a sign of tougher challenges ahead,” Sean McGowan, a Needham & Co. analyst, said in a research note, lowering his rating on the stock to hold. “Mr. Riccitiello’s departure comes after a series of setbacks, and underscores the industry’s difficult transition to new platforms, business models and genres.”

Chairman Larry Probst, 63, who ran the Redwood City, California-based company until 2007, becomes executive chairman and will lead management as the board seeks a new CEO, according to a statement yesterday.

Riccitiello, a former Sara Lee Corp. executive, produced a mixed record at Electronic Arts, nurturing winning franchises like “FIFA” soccer, while commissioning expensive releases such as the multiplayer “Star Wars” and “Medal of Honor” that failed to meet expectations.

The company flubbed the latest version of its popular “SimCity,” which some users couldn’t play because its computers were overwhelmed, said Edward Woo, an analyst at Ascendiant Capital Markets in Irvine, California, who rates the stock neutral. Sales have declined in three of the past four quarters, according to data compiled by Bloomberg.

‘My Accountability’

“My decision to leave EA is really all about my accountability for the shortcomings in our financial results this year,” Riccitiello said in a blog posting.

A new CEO will have to guide Electronic Arts’ transition from packaged games that produced 81 percent of sales in fiscal 2010 to an online world where titles are bought and played on tablets, mobile phones and a new generation of home consoles. While Electronic Arts will probably top $1 billion in digital revenue this year, No. 1 Activision Blizzard Inc. enjoys more success with conventional titles like “Call of Duty.”

“Maybe a new CEO will do better, but, frankly, the uncertainty coming at a time when results are falling short does not, in our view, create a compelling buying opportunity. Quite the contrary,” McGowan wrote.

‘Worst Company’

With today’s drop, EA remains up 18 percent for 2013. In the statement, Probst said Riccitiello was stepping down by mutual agreement. His tenure was marred by strategic stumbles and the departure of key executives, according to Woo. They include former Chief Operating Officer John Schappert, who went to Zynga Inc. in 2011. Electronic Arts was voted “Worst Company of 2012” in balloting on Consumerist.com.

The company posted net losses before extraordinary items in four of the past five fiscal years, according to data compiled by Bloomberg.

Expectations crumbled for the fiscal year ending this month. In May, the company projected 2013 sales excluding changes in deferred revenue of $4.3 billion; now it expects $3.78 billion or less. The adjusted annual-profit projection has shrunk to 86 cents a share or less from as much as $1.20.

Quarterly Outlook

Fourth-quarter results may fall short of a Jan. 30 forecast, the company said yesterday. Electronic Arts had projected profit of 57 cents to 72 cents a share, excluding items, on adjusted revenue of as much as $1.13 billion.

Riccitiello’s exit comes amid the introduction of new game consoles to uncertain demand. Nintendo Co. came out with the Wii U in November, and by January had cut its unit-sales forecast for the March-ending fiscal year by 27 percent.

Sony Corp. plans a new PlayStation before year-end. Microsoft Corp. hasn’t said when a new Xbox will be available. Those products will compete for consumers’ attention with tablets, smartphones and new mobile consoles like Nvidia Corp.’s Project Shield.

Electronic Arts suffered in the last transition after betting heavily on Sony’s PlayStation 3. It initially developed few games for Nintendo’s Wii, which became a runaway hit.

Social Acquisitions

Riccitiello spent $750 million to buy PopCap Games, which makes titles played on Facebook Inc., just as consumers shifted from the website to mobile and free-to-play games. To create more online products quickly, he agreed in November 2009 to pay $300 million for London’s Playfish Inc., a company that creates free games such as “Restaurant City” for social networks.

Riccitiello has also closed game-design studios, reduced the number of titles produced each year to about a dozen from more than 60 and fired several thousand workers.

Those moves should help the new CEO, said Michael Pachter, an analyst with Wedbush Securities in Los Angeles.

“It’s disappointing he didn’t get the ball past the goal line,” Pachter said. “The last three years, he’s been doing the right thing to position the company, short of the PopCap acquisition, and he’s actually got them turned around.”

The new CEO probably will spend less on packaged titles and focus on profitability to soothe investors, said Pachter, who recommends the stock.

Moore, Gibeau

Top internal candidates include Peter Moore, 58, chief operating officer, and Frank Gibeau, 42, president of EA Labels, overseeing product development, Pachter said.

Riccitiello took over as CEO from Probst in 2007. He had been with Electronic Arts from 1997 to 2004, before leaving to co-found Elevation Partners. Probst served as CEO from 1991.

Soon after becoming CEO, Riccitiello warned top executives at the company that the industry would be damaged by clinging to selling shrink-wrapped games for $60 each while users were turning to cheaper online titles.

While spending more than $1 billion acquiring online-game makers and slashing the number of packaged titles, he poured development dollars into “Medal of Honor” and “Star Wars” -- games that failed to unseat Activision Blizzard’s blockbusters, “Call of Duty” and the multiplayer online “World of Warcraft.”

“He lasted a pretty long time given that the company hasn’t really performed that well,” said Woo, who rates the stock neutral. “There were times when you wondered why he was still there.”

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