By Kris Graft
With key core gamer titles failing to achieve "siginficant hit economics" at Electronic Arts, one analyst reckons that the publisher may have missed its chance for meaningful margin expansion for this console cycle.
Doug Creutz with Cowen and Company stated in a Monday research note that he would be "slashing" fiscal 2009 non-GAAP earnings per share estimates to 51 cents from $1.16. His fiscal 2009 revenue estimates dropped to $4.5 billion from $5.1 billion.
He wrote, "[EA] continues to struggle to deliver quality improvements where they are most urgently needed."
Creutz noted that overall, average game review scores have improved, but key titles Mirror's Edge, Army of Two, Mercenaries 2 and Need for Speed: Undercover scored less than 80 percent on Metacritic.
Earlier this month, EA announced that it lowered fiscal 2009 guidance due to lower-than-expected sales of holiday releases. Later, it announced that it would be cutting 10 percent of its global workforce, or 1,000 people, and closing or consolidating nine studios by March 31, 2009.
"We believe the recent cost reductions are unlikely to meaningfully improve earnings if they are not accompanied by better R&D efficiency," Creutz said.
The analyst also pointed to prior management, led by former CEO Larry Probst, which "failed to incubate new hit franchises heading into this cycle and let aging franchises decline. Instead, dollars were spent on what were largely low-return projects."
But current CEO John Riccitiello also shared some of the blame for some of EA's problems, with Creutz saying management was slow to allocate more resources to the leading console, the Nintendo Wii.
"...An attempt to chase market share [on Wii] has run up against the reality that third-party economics on that platform are simply not that attractive due to Nintendo's dominance of the software market."
"EA Is In Danger of Missing the Cycle"
For this console cycle, Creutz said the "last, best hope for meaningful margin expansion" for this hardware cycle is BioWare's upcoming MMO, Star Wars: The Old Republic.
"If EA's Star Wars MMO is able to capture several million subscribers, it could dramatically change EA.s operating profit picture," the analyst wrote.
However, he questions whether or not The Old Republic, even with the Star Wars license and the well-respected BioWare leading development, could match World of Warcraft-like success. And with the launch date presumably still a ways off, Creutz said it will likely be more than a year before we see any impact from The Old Republic on EA's financials
