Electronic Arts loses the earnings game in Q2


Electronic Arts (NASDAQ: ERTS) did not have a good second quarter. According to preliminary results, the publisher is looking at an adjusted loss of 6 cents per diluted share; this compares unfavorably to a profit of 27 cents per diluted share in the year-ago period. Wait, did I just say unfavorably? I meant very unfavorably. EA merely met Wall Street's expectations.

Non-GAAP revenues, however, increased 20%, and cash flow from operations for the trailing twelve months rose over 50% (cash was used, however, for operations during the quarter). But shares were down in the after-hours session over 15% at one point. The market was reacting to the cautious outlook from management and comments about a slowing retail environment. Furthermore, EA needs to reduce its costs. The company is eliminating about 6% of its workforce. While Wall Street traditionally looks upon job cuts as a sign that management is taking steps to improve its operations, I think, in this case, shareholders will look upon the cuts as a sign that EA is floundering.

Can you imagine this? Shouldn't EA be doing an incredible job of maximizing shareholder value by taking its incredible pipeline of intellectual properties and monetizing it via the next-generation platforms provided by Sony (NYSE: SNE), Microsoft (NASDAQ: MSFT) and Nintendo (OTC: NTDOY)? It should, but it's not. The publisher has sold millions of copies of high-profile titles such as Madden NFL 09 and Spore, but again, those costs and expenses are getting out of hand.

And then there is one issue that screwed up the outlook for EA that was beyond its control. Originally, Time Warner's (NYSE: TWX) fantasy flick Harry Potter and the Half-Blood Prince was supposed to be released during the fourth quarter. It ended up being rescheduled to a summer 2009 release date (check out Zac Bissonnette's opinion about that change). EA obviously moved the release date for its video game based on that film to 2009 as well.

However, not everything can be blamed on that move, in my opinion at least. EA simply must step up its game and put some marketing muscle behind its software. In particular, it has to ensure that it gives a proper push for its Rock Band title. That should be a key driver during the holiday season. Of course, it won't be easy, since Activision Blizzard (NASDAQ: ATVI) will be out there in full force supporting Guitar Hero.

I currently prefer Activision Blizzard as an investment idea over EA (I own shares in that company). Granted, Activision Blizzard's stock has been weak lately as well, but I'm more attracted to its pipeline compared to EA's. No, I don't think EA is going away. Longer term, EA's brands should benefit from the expanding installed user base of the current console technologies. I do, however, believe that the publisher may have a tough holiday season ahead of it.

Disclosure: I own Activision Blizzard; positions can change at any time.

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