Big games don't mean more profits for EA

May 13, 2008: 8:25 PM ET

By Yi-Wyn Yen

Electronic Arts is selling more video games than Wall Street expects, but that doesn't mean chief executive John Riccitiello is happy.

Nor are investors. EA's (ERTS) stock dropped more than 3% in after-hours trading Tuesday after the video game publisher reported a $94 million loss in its fiscal fourth quarter compared to a $25 loss in the same quarter last year. Revenue rose to $1.1 billion from $613 million, a 84 percent increase.

The company expects strong sales from upcoming titles like Spore and Sims 3, but EA continues to work on its turnaround strategy to boost its margins.

"We're pleased with our revenue growth, but not yet happy with our profit margins," Riccitiello said in a statement.

EA forecast revenue of between $4.9 billion and $5.15 billion for its 2009 fiscal year, which ends next March. The company aims to increase its operating margin from roughly 8% in fiscal 2008 to 12% to 14% for the following year. Wall Street expected at least a 15% boost.

The company promised to deliver more than 50 games for Sony's (SNE) PlayStation 3, Microsoft's (MSFT) Xbox 360 and Nintendo's Wii in the following year. "EA has got a tremendous amount of games coming to the market, but in the past years they haven't always produced in profitability," said Evan Wilson, a gaming analyst with Pacific Crest Securities. "This is when we see the rubber hit the road."

Electronic Arts is also trying to buy rival game publisher Take-Two (TTWO) to fuel long-term growth. Take-Two, the maker of the blockbuster hit Grand Theft Auto IV, rejected EA's $2 billion all-cash bid as too low.

EA retaliated by extending a tender offer to Take-Two's shareholders to accept the deal, worth $25.74 a share, by Thursday. Last week Take-Two announced that record first-week sales of six million GTA IV games broke the $500 million mark.

Riccitiello said the success of GTA IV would not prompt a higher share offer for Take-Two. "Our current offer is $25.74," Riccitiello said during an earnings call with analyst Tuesday. "Our valuation took fully into account of Grand Theft Auto." He twice referred to the game as "spectacular."

Analysts say that EA and Take-Two are likely in talks to work out an acquisition agreement. Said Lazard Capital analyst Colin Sebastian: "EA has given a fiscal 2011 outlook that shows how it'll do without Take-Two, but more likely than not, they will hammer out a deal with them."

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