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EA shares tumble almost 6%

Analysts point to digital future - but it's not yet enough to offset "depressed" packaged margins

Shares in Electronic Arts fell by almost 6 per cent to $ 17.71 in trading yesterday, despite posting solid financial results on Tuesday.

One of the key elements of those results involved digital income, which jumped by a third to $570 million - but while analysts seem convinced of good long term value, investors were clearly hoping for more.

Lazard Capital's Colin Sebastian maintained his Hold recommendation, as well as revenue estimates for the next financial year of $3.8 billion, and looked ahead to a strong Summer for the publisher.

"Summer EA Sports titles the next product catalyst," he wrote in an investor note. "With FIFA World Cup off to a good start, we note that summer releases of annual golf and football titles will mark the next potential product catalysts. We expect modest growth for EA Sports in fiscal 2011 following two years of softer than expected sell-through."

Signal Hill's Todd Greenwald was similarly conservative, predicting revenues of £3.75 billion.

"We believe outperformance for shares of [the company] will have to come from EA delivering upside to its current outlook (exceeding $0.70 in earnings per share, which isn't likely, in our opinion), or more visibility on its fiscal year 2012 line-up, which is a long ways off at this point," he noted, adding: "Maintain Hold."

But Wedbush Morgan's Michael Pachter was a little more positive, holding steady on his Outperform rating and expecting full year revenues next year of $3.94 billion.

"EA appears well positioned to grow earnings in financial year 2011," he wrote. "In spite of a sharply lower SKU count, EA's release slate is solid this year, and we expect revenue growth from the digital business.

"EA's line-up compares quite favourably to [last year's] line-up, and we believe that it can generate at least the same $0.44 in earnings per share from its core business."

But the digital side of the business was where all three analysts saw the interesting elements of the pubisher's future - although they were mostly agreed it wasn't there just yet.

"Digital revenues for fiscal 2010 increased 33 per cent to $570 million, including online, subscriptions and advertising, and management affirmed guidance for $750 million from digital in fiscal 2011," said Sebastian. "We continue to expect digital to scale to 20 per cent operating margins over time; however, this segment does not yet offset the depressed margins on EA's packaged software titles."

And Greenwald added: Digital segment meets expectations. "While EA is innovating and leading the industry by experimenting with features like Project Ten Dollar and its $10 Online Pass for sports titles, we are still somewhat sceptical that it can achieve its 30 per cent growth expectations, as more than 50 per cent of its 'digital' revenue comes from relatively slower growing segments like mobile, advertising, and Pogo, not to mention Playfish, which we believe is running into numerous hurdles on Facebook (limited notifications driving monthly active users down significantly, while Facebook credits driving costs up significantly)."

Pachter was, again, more upbeat: "The company expects digital growth to offset modest declines packaged goods demand, and expects total US and European software growth of 8 per cent, with packaged goods down 3 per cent and digital revenue up 26 per cent.

"Although EA has missed expectations badly for two years, we think that its guidance is realistically conservative. We expect packaged products sales to grow in 2010, and note every 5 per cent of industry growth upside to EA's -3 per cent forecast is expected to generate an incremental $0.20 in earnings.

"Foreign exchange is likely to be a drag, but is largely hedged on the bottom line," he added.

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Phil Elliott

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