EA has missed the current hardware cycle

"Electronic Arts has missed the current hardware cycle" - analyst

EA has "missed the current hardware cycle" and is unlikely to return to historical operating income margin levels "anytime soon", according to a new report by analysts at Cowen Research.

In an occasionally damning critique of EA's plans and guidance the report states that: "We believe that following serial earnings disappointments, Electronic Arts now deserves a lower valuation premium than the company has historically enjoyed."

"Since management first laid out its initial full year 2010 guidance and full year 2011 long-term guidance in February 2008, the company has failed to deliver on its earnings targets and has been forced to repeatedly revise down its guidance. Given this historical record, we do not think investors should place too much faith in management's current guidance."

The report suggests that EA's guidance for the next financial year is "fairly aggressive" but that its targets could still be met. EA's revenue targets currently stand at USD 4.3 billion, but the report suggests this can only be achieved via further cost cutting - which is likely to be damaging in the long term.

The report points out that publishing revenue growth will need to outperform overall industry figures by a considerable margin, despite a "pared back" release schedule and currently difficult global economic conditions.

Growth in digital distribution is seen as a key factor, with EA aiming for a 100 per cent increase over the course of the year - which the report again characterises as achievable but with considerable downside risk.

Despite considerable scepticism over EA's business model and guidance the report is not entirely critical, maintaining a share rating advice level of "neutral".

Indeed, the report suggests that EA's own expectations for its first quarter may be unnecessary low, with a strong line-up including EA Sports Active and Bloom Blox: Bash Party on the Wii. First year sales in the US are estimated at 1.4 million and 350,000, respectively.

Although this would make EA Sports Active one of the most successful third party titles on the Wii, the report is general sceptical about the ability of any third party publisher to thrive on the format.

The report is particularly despondent about third party sales when revenues for Guitar Hero and Rock Band are ignored, where the top 5 per cent of third party titles for the Wii sold an average of 860,000 units, compared to 2.5 million on the Xbox 360 and 1.2 million on the PlayStation 3.

These top 5 per cent of titles accounted for only 31.8 per cent of total market share on the Wii, compared to 41.2 per cent on the 360 and 34.2 per cent on the PS3. The figures also suggest that quality and critical reaction are far less import on the Wii, making successful titles even harder to predict.

The report is also sceptical over the impact EA's increase in unlicensed new intellectual properties will have, with only 36.5 per cent of sales expected to come from unlicensed titles in the next financial year. Estimated first year US sales for selected EA-owned titles stand at 1.5 million for The Sims 3, 0.4 million for Brutal Legend, 0.63 million for The Saboteur, 1.3 million for Army of Two: The 40th Day, 2.1 million for Dragon Age: Origins, 1.1 million for Battlefield: Bad Company 2, 1.1 million for Mass Effect 2 and 0.8 million for Dante's Inferno.

In a final comment on the company's future for the next 12 months, a potential buyout is mentioned - especially given EA's current share price is currently significantly below its historical valuation. The report hints that Disney and Time Warner may be the most likely suitors - although the latter suggestion seems to have been made before the recent move for Midway.

Although Cowen Research's expectations for 2010 are only a little below that of EA's it is significantly lowering its 2011 estimates, from a year-on-year earnings per share increase of 48.7 per cent to just 24.0 per cent. The firm's analysts suggest that "further margin gains will be difficult without significant new hit games". However, little is currently known about EA's publishing schedule for that period.

http://www.gamesindustry.biz/articles/e ... le-analyst

What a pity. They should stop fannying about and release a new Desert Strike game.

Estimated first year US sales for selected EA-owned titles stand at 1.5 million for The Sims 3, 0.4 million for Brutal Legend, 0.63 million for The Saboteur, 1.3 million for Army of Two: The 40th Day, 2.1 million for Dragon Age: Origins, 1.1 million for Battlefield: Bad Company 2, 1.1 million for Mass Effect 2 and 0.8 million for Dante's Inferno.

Really?

I think the Sims estimate is a little low too, everyone I know wants it. It's very much the same market as Nintendo targets these days.

rinks wrote:What a pity. They should stop fannying about and release a new Desert Strike game.

Estimated first year US sales for selected EA-owned titles stand at 1.5 million for The Sims 3, 0.4 million for Brutal Legend, 0.63 million for The Saboteur, 1.3 million for Army of Two: The 40th Day, 2.1 million for Dragon Age: Origins, 1.1 million for Battlefield: Bad Company 2, 1.1 million for Mass Effect 2 and 0.8 million for Dante's Inferno.

Really?

Army of Two sold 831K in the US in its first month, so that's definitely possible!

Estimated first year US sales for selected EA-owned titles stand at 1.5 million for The Sims 3, 0.4 million for Brutal Legend, 0.63 million for The Saboteur, 1.3 million for Army of Two: The 40th Day, 2.1 million for Dragon Age: Origins, 1.1 million for Battlefield: Bad Company 2, 1.1 million for Mass Effect 2 and 0.8 million for Dante's Inferno.

Really?

I would have thought a little more for Battlefield and, well, quite a bit more for Mass Effect 2.

Garth wrote:
rinks wrote:What a pity. They should stop fannying about and release a new Desert Strike game.

Estimated first year US sales for selected EA-owned titles stand at 1.5 million for The Sims 3, 0.4 million for Brutal Legend, 0.63 million for The Saboteur, 1.3 million for Army of Two: The 40th Day, 2.1 million for Dragon Age: Origins, 1.1 million for Battlefield: Bad Company 2, 1.1 million for Mass Effect 2 and 0.8 million for Dante's Inferno.

Really?

Army of Two sold 831K in the US in its first month, so that's definitely possible!

Yeah, despite all the hype, Army of Two > Killzone Two.

Garth wrote:The report is particularly despondent about third party sales when revenues for Guitar Hero and Rock Band are ignored, where the top 5 per cent of third party titles for the Wii sold an average of 860,000 units, compared to 2.5 million on the Xbox 360 and 1.2 million on the PlayStation 3.

That's a particularly interesting part of this article, which warrants further examination.

Don't Wii titles have to sell much fewer copies to turn a reasonable profit? And it's interesting to note that it's not actually that far behind the PS3 (and also fascinating to see how much the 360 streaks ahead of the pair of them).

BUT the one problem with that is that most HD titles sell across both formats, which makes a game likely to sell four times more copies on PS3 and 360 over Wii.

We really need to find out the comparative cost (including production and marketing) of these games and work out whether third-party games ARE really such poor value on Wii, or whether the profit margin isn't actually all that different. Wii games would have to cost four times less, and I'm not sure that's the case, particularly once marketing is factored in - but then again, many third parties have been unwilling to really put big bucks behind marketing their Wii titles.

And then there's the issue of Wii not really having an extensive portfolio of quality third-party titles. And the fact that the economic downturn isn't going to help the console turn those figures around any. It's a vicious circle for the Wii really - and one which Nintendo needs to start to address lest these accusations continue to hurt its third-party business (it does seem like a slightly one-sided article in this respect - for a piece which purports to be about EA, there's a lot of Wii-related doom and gloom).

I've got a feeling that the company that wrote that report don't have a clue what they are talking about.

Think about it, have EA ever, ever had as many good games on its books before? Think about what they actually publish this generation, Boom Blox, Burnout, Battlefield, Dead Space, Fifa, Rock Band, The Sims.

They might not have had the complete new smash hits they need yet, but how anyone can think they are badly placed to have a few in the next couple of years...I don't get.

Garth wrote:
[b]The report is particularly despondent about third party sales when revenues for Guitar Hero and Rock Band are ignored, where the top 5 per cent of third party titles for the Wii sold an average of 860,000 units, compared to 2.5 million on the Xbox 360 and 1.2 million on the PlayStation 3.

if 360 sells so much more than PS3, how come PS3 fangirls are often saying that EA make more money from PS3?

Winckle wrote:I think the Sims estimate is a little low too, everyone I know wants it. It's very much the same market as Nintendo targets these days.

The Sims has always been a massive seller, and the fact that it runs quite happily on my laptop shows that even people with stock computers that are a few years old can run it, so the potential market there is huge.

Also, it's fantastic.

"Electronic Arts has missed the current hardware cycle" - analyst

The report suggests that EA's guidance for the next financial year is "fairly aggressive" but that its targets could still be met. EA's revenue targets currently stand at USD 4.3 billion, but the report suggests this can only be achieved via further cost cutting - which is likely to be damaging in the long term.

Revenue wouldn't be increased by cost cutting. Amateurs.

EA has missed the current hardware cycle

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