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Arts Optical : Electronics Arts cuts outlook on weak holiday sales

12/09/2008 | 07:07pm US/Eastern
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Electronic Arts Inc warned its fiscal 2009 profit and revenue will fall short of already-low forecasts due to disappointing holiday sales of its video games in North America and Europe.

By Yinka Adegoke

The surprise announcement drove shares of the video game publisher down 10 percent in after-hours trading, on top of an 11.5 percent decline during the Nasdaq session on Tuesday.

EA had already slashed its fiscal 2009 estimates, blaming slowing demand at retail stores and a delay in the release of its latest "Harry Potter" video game.

On October 30, EA forecast earnings per share, excluding special items for the year ending March 31, 2009 would range between $1.00 and $1.40, down from a previous forecast of $1.30 to $1.70. Analysts on average are forecasting $1.17 per share.

In contrast, smaller rival Take Two Interactive Software Inc <TTWO.O> and Xbox game console maker Microsoft Corp <MSFT.O> told the Reuters Media Summit last week that holiday game sales were better than expected, despite the recession.

"I think they're basically floundering in terms of what to do this quarter and this year in general," Todd Mitchell, analyst at Kaufman Bros, said of EA.

He said tighter inventory management at retailers who do not want to overstock during uncertain economic times was one factor unsettling EA's outlook.

On a conference call with analysts, EA executives said key catalog titles continued to underperform and said one significant retailer had cut its year-end inventories in the last five days.

"By itself one retailer can be as much as $60 million in revenue ... it's a large swing factor for Q3," said John Riccitiello, chief executive of EA.

He said the impact of such decisions by retailers could have more of an impact on sell-in to the retailers than on sell-through to consumers.

Last month, major electronics retailer Circuit City Stores Inc <CCTYQ.PK> filed for bankruptcy, while Best Buy Co Inc <BBY.N>, the No. 1 U.S. electronics chain slashed its profit forecast.

EA, which makes games like "Madden NFL" and "FIFA Soccer," said it is continuing to pursue cost saving measures such as reducing its product portfolio for fiscal 2010 with associated job cuts and facility consolidations.

"We are disappointed that our holiday slate is not meeting our sales expectations," EA Chief Executive John Riccitiello said in a statement. "Given this performance and the uncertain economic environment, we are taking steps to reduce our cost structure and improve the profitability of our business."

He said EA will cut additional costs on top of the 6 percent reduction in its workforce announced in October.

Executives also said there would be "material double digit reduction" in the unit sales of video games sold into retailers next year.

The company said it does not expect to provide specific financial guidance for fiscal 2009 before it reports third-quarter results in early February.

EA would have been expecting leading sales from the popular "Rock Band", but early reports from analysts have shown the video game music genre to be weaker than expected, according to Mitchell.

EA said it felt the impact of the growing market share gains by Nintendo Co Ltd's <7974.OS> Wii, which publishes most of its own top selling games.

"There's no question that having the lead platform with two-thirds of the unit sales occurring to the first party owner is a really unusual thing," said Riccitiello. "It's a challenge."

But he said the Wii was not a new factor in warning of the outlook.

EA unveiled its first personal training game on the Wii in November, tapping into the growing appeal of the "Wii Fit" title earlier this year.

EA shares, which fell 11.52 percent to close at $19.35 on Nasdaq, lost another 10.4 percent to $17.34 in after-hours trading.

(Reporting by Yinka Adegoke; editing by Richard Chang)

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