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EA's Mad(den) Dash

Gearing up for another holiday season, Electronic Arts (Nasdaq: ERTS  ) turned in yet another great quarter. And once again, driving it all was the video game franchise most responsible for reducing the productivity of males aged 18-30 around the world.

Madden 2004's 3.6 million units sold in the second quarter is a new record for video games. Companion NCAA Football 2004 set its own franchise record at 1.3 million units. All told, EA's sales grew 17% to $530 million. Net income surged 52% to $77 million, as gross margins improved from 56% to 60%. EPS jumped 47% to $0.50, sacking the analyst estimate.

Just pick up any video game magazine or visit any video game website to find out why. Sega's ESPN Football franchise is roughly considered Madden's equal by diehard gamers in terms of gameplay -- some even prefer it. Yet Sega's game hasn't even outsold NCAA Football, much less Madden.

Madden and NCAA are one-two among football titles on Sony's (NYSE: SNE  ) leading Playstation 2 platform, Microsoft's (Nasdaq: MSFT  ) No. 2 Xbox, Nintendo's GameCube, and the PC, Nintendo GameBoy Advance, not to mention the original Playstation 1. In other words, EA owns the field.

None of this is lost on investors. Since David Gardner picked Electronic Arts in Motley Fool Stock Advisor back in May 2002, the stock has nearly doubled. For what it's worth, with the stock reaching all-time highs, the company announced a 2-for-1 split.

There are issues, however. Net income climbed significantly, but cash flow from operations fell 21% to $62.6 million from last year's quarter. Blame this on a nine-fold jump in accounts receivables from $19.2 million last year to $188.8 million.

Further, while Nintendo's price cut boosted GameCube sales four-fold, EA now expects Sony Playstation 2 full-year unit sales of between 8 million and 9 million, rather than 9 million to 10 million. As the leading platform, Sony's loss means a smaller potential revenue base for EA.

This goes a ways toward explaining why, even with the stellar quarter, the stock got hit an extra 4% to under $98 in after hours trading yesterday.

Still, optimism remains surrounding holiday season contributions from new The Lord of the Rings, Medal of Honor, Harry Potter, among other popular titles. What's more, the stock looks reasonably priced at 25 times $592 million in trailing free cash flow.

As the second half gets underway, Electronic Arts is heading only in one direction -- towards the end zone.

Jeff Hwang owns both a PS2 and an Xbox, and several versions of John Madden Football. He can be reached at

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