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EA gambles on growth as full year projections dip below $3 billion

Leading publisher Electronic Arts has reported fourth quarter results ahead of expectations - but the news has been overshadowed by a significant drop in the company's projections for FY 2007.

Leading publisher Electronic Arts has reported fourth quarter results ahead of expectations - but the news has been overshadowed by a significant drop in the company's projections for FY 2007.

Revenue guidance of $2.7 to $2.95 billion was announced by the company for the coming financial year, which is down significantly on analyst estimates which averaged over $3.1 billion, and means that the firm faces a second year of negative growth.

Full-year figures for 2006 show the company's revenues declining by six per cent, while the firm's new estimates mean that 2007 could see a decline of up to 8.5 per cent if the lower end of those figures is reached.

The firm's 2007 figures have been cut back, no doubt, due to the tough trading conditions which the entire console games industry expects to see during the year - but according to Wedbush Morgan Securities analyst Michael Pachter, there's more to be read into the figures than just that.

In a research note issued today, Pachter points out that the firm's research and development costs are expected to jump to $900 million in 2007, up from $758 million the year before, despite the expected decline in growth.

Looking at EA's historical figures, it's interesting to note that from development costs of $411 million leading to revenues of $2.5 billion in 2003, EA has continually invested more and more heavily in development over the following four years, while revenues have remained largely unchanged in the $3 billion range.

Despite EA's stated intention of investing in next-generation development, Pachter describes the $900 million figure as leaving him "speechless".

"In our opinion, this level of expenditure is not sustainable," he commented. "At the midpoint of guidance, the planned R&D expense represents 31.5% of sales, compared to the company's historical average of around 17%. While management was not willing to discuss expectations for revenue growth, it is obvious that they are making a huge bet that dramatic revenue growth will materialise."

The question for Electronic Arts, then, is whether it can rebound in FY2008 and build revenues once more through the coming console cycle, as it did at the beginning of the last cycle. Many analysts seem to believe that the company is certainly in a position to do so - with Pachter stating that he believes the firm can grow by 20 per cent in 2008, and forecasting revenues of $3.46 billion.

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