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Electronic Arts looks Up

Sometimes bad news is actually good news in disguise. That the case at game publisher Electronic Arts (Nasdaq: ERTS). Thursday, EA released their earnings report for the 2nd quarter 2007. Relative to the same quarter last year revenue was down and earnings went from the black to the red but the bad news was good, really.

EA posted a net loss of 62cents a share ($195m) on revenue of $640m but a significant part of the loss was due to changes in accounting practices regarding revenue recognition. Adjusted earnings (non-GAAP), less the revenue changes and other items, were a positive $87m which amounts to a gain of 27cents per share. Thats up relative to the same period last year when revenue was in at $65m (21cents a share). The earnings on an adjusted basis also easily beat consensus expectations of 20cents a share for the 3rd quarter.

Looking deeper into the numbers, EA Sports was a major driver of 3rd quarter returns. The Madden NFL 2008 franchise sold 4.5m games and FIFA Soccer (Football) sold 2.9m. Games for the Nintendo platform were also moving well. MySims, a game EA owns all IP for, moved more than a million units for the DS and Wii.

Geographically, the company saw positive growth in Asia (up 19%) but a decline in domestic North American returns. Europe was neutral.

Future growth markets like in-game advertising and mobile are moving ahead slowly. Progress is faster with the company’s reorganization process which is expected to cost 350 jobs and about $100m in charges but should shave upwards of $25m in annual costs.

The brighter spot for EA is the future quarter, and complete fiscal year. Heading into the December quarter, they are expecting demand for their newest game Rock Band (a joint venture with MTV Networks aimed at catching Activision’s Guitar Hero franchise) to exceed supply. A new Simpson’s game, NBA Live 2008 and the latest in their Need for Speed franchise are also scheduled. For the quarter, EA expects revenue in the range of $1.625 and $1.8b – a range ahead of analyst prior expectations of $1.61b.

For the fiscal year, which ends is March, EA expects net revenue in the range of $3.35 and $3.65b, up $150m from previous guidance. Earnings will come in at a loss due to accounting charges but on a Non GAAP basis will be between 85cents and $1.15 a share. On a GAAP basis, near $1 a share in losses is attributed to changes in accounting (deferring revenue) and and 50 to 60cents per share charge will be to account for the recent purchase Bioware and Pandemic Studios.

Even with the gaming industry changing, and new revenue models likely needed over the coming decade, things are looking good in Redwood City. There’s work still to be done but the turnaround is moving in the right direction.

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More detailed press coverage of EA’s finances can be found at:

Yahoo Finance
Google Finance




[Editors Note: this post was edited following its original publishing to correct an inadvertent editorial error.]

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