Electronic Arts Isn’t Winning the Game That Counts

Electronic Arts is struggling to parlay the popularity of its sports-themed gaming franchises and the SimCity games into higher earnings, but the company’s own acknowledgment of a disappointing quarter may prove to be just the tip of the iceberg: analysts have downgraded not only the outlook for the just-ended fourth quarter but for the new fiscal year.

For any company, the news that its CEO is departing on only two weeks’ notice, leaving its board to find a replacement, is never good news. So it is surprising to find that in the case of Electronic Arts (EA.O), the market didn’t seem too worried by the mid-March announcement by John Riccitiello, the company’s CEO that his resignation would become effective on March 30. More surprisingly still, the stock price has remained virtually unchanged in the three weeks since the announcement, made on the same day as that of Riccitiello’s pending departure, that the company’s results for its fiscal fourth quarter (ended March 31) would be at the low end of its earlier estimates. Even without the prospect of an earnings misstep, the need to identify and install a new CEO adds uncertainty to the company’s outlook at a critical point in its history. That is particularly true since the company won’t just be without a CEO: Electronic Arts already has witnessed the departure of its CFO and chief operating officer, as well as the former heads of two significant acquisitions.

Meanwhile, Electronic Arts is running into headwinds on the operating front. Its SimCity game remains popular, but the latest iteration — released last month — proved controversial, both because of server problems and the requirement that players be online when gaming. To address the controversy, Electronic Arts has promised the early buyers of the new SimCity a free copy of one of its other games, but while that might diminish the criticism it isn’t going to do much for the company’s profit margins down the road. Meanwhile the company is on track to report an earnings disappointment for its fiscal fourth quarter, ended March 31, 2012.

Only 90 days ago, the I/B/E/S estimate for the company’s fourth quarter reflected analysts’ views that Electronic Arts would earn 72 cents a share for the period; today, that consensus estimate is only 58 cents a share. The company’s own earnings warning, delivered at the same time as the news of Riccitiello’s imminent departure, cautioned that per-share earnings will be at the low end of, or slightly below, its January forecast of between 57 cents and 72 cents a share.The SmartEstimate, which places a greater weight on the most recent forecasts and those by the analysts with the best track records for accuracy, suggests that it will be below that range and below the consensus forecast, coming in closer to 56 cents a share. That would give the company a large negative Predicted Surprise of 4.4%, in turn reflecting the fact that all four of the analysts who have earned a five-star rating from StarMine (which acknowledges their track record of accurate forecasts) have estimates that are significantly lower than the consensus. Indeed, three of those four forecasts are Bold Estimates: earnings projections that vary significantly from the consensus, calling for Electronic Arts to earn only between 53 and 55 cents a share for the quarter. All of this strongly suggests that the company is likely to report earnings that fall short of that I/B/E/S consensus figure when it announces its results in early May.

Source: Datastream Professional / StarMine

Electronic Arts is struggling to deal with the transition to online gaming. The company earned its reputation on the sale of game software sold on CDs, including popular franchises like the Madden Football franchise and NBA LIVE basketball . But while its FIFA soccer game may get a boost from the approach of another World Cup season, boosting sales and earnings, overall the company has been battling to avoid losing market share to online gaming companies like Zynga (ZNGA.O). But as Zynga itself has demonstrated, turning online games into moneyspinners is a tricky proposition, and Electronic Arts so far has found no easy way to solve that riddle.

Riccitiello’s departure makes it easier to view him as the reason for the difficulties at Electronic Arts that have resulted in the company being seen as a laggard: while the S&P 500 Index is ahead more than 11.5% over the last 12 months, the gaming company has gained only 10.6% in the same period. And indeed, Riccitiello took all the blame for the company’s problems. However, it remains to be seen how his exit and a new management team will fare in fixing the issues that have led to the company’s poor performance and appear likely to produce another set of disappointing earnings.

Clearly, analysts aren’t feeling optimistic that that will happen. Even as they have responded to the events of the last few weeks by cutting their fourth-quarter earnings projections, they also have been trimming their estimates for the coming fiscal year (ending March 2014) as a whole over the last 90 days. Their forecasts for the company’s revenue have fallen 6%, and they now expect earnings per share and EBITDA to come in about 9% below their previous estimates.

There is still a chance that excitement about the 2014 World Cup competition — to be held in Brazil — will help galvanize sales at Electronic Arts’ when a new edition of the game to commemorate the 2014 World Cup in Brazil is released sometime next year. .But for now, the outlook doesn’t appear very rosy, and the negative sentiment of the top-ranked analysts covering the stock suggests that when the company reports its fiscal fourth quarter earnings on May 7, 2013, these are likely to prove disappointing.

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