EA's Still in the Game

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Electronic Arts (Nasdaq: ERTS) easily beat third-quarter earnings estimates, but a weaker-than-expected outlook sent the shares tumbling in last night's after-hours trading. The stock recovered somewhat early today.

Need for Speed Underground -- a 2 Fast 2 Furious-inspired racer -- led the way as EA's holiday bestseller. In all, 11 of the company's titles sold over 1 million units in the quarter, including Medal of Honor Rising Sun, FIFA Soccer 2004, and Madden NFL 2004 -- the industry's best-selling game in 2003.

As a result, third-quarter sales jumped 20% year over year to $1.48 billion. Sales in Europe alone climbed 40% to $471 million, accounting for 38% of revenue. Meanwhile, net income soared 57% to $392 million, beating analyst estimates handily. Boosting that bottom line, gross margins gained an impressive 11 percentage points to 65.2%.

And EA continues to roll out blockbusters. The company claims 27 platinum titles (1 million units sold) over the past 12 months, and just recently added another. Less than two weeks ago, the company released the highly anticipated NFL Street on the Sony (NYSE: SNE) PlayStation 2, the Microsoft (Nasdaq: MSFT) Xbox, the Nintendo GameCube, and the PC. In an interview with Reuters, CFO Warren Jenson reported that sales had already passed the 1 million-unit mark on Monday.

On a sour note, the company pushed the release of The Sims 2.0 and Medal of Honor: Pacific Assault into fiscal 2005. As a result, while EA expects fourth-quarter revenue to climb a respectable 19%-23% year over year, the expected $0.17-$0.20 in earnings is well short of the average analyst expectations.

Long term, Electronic Arts is a groundbreaker and remains my favorite of David Gardner's Motley Fool Stock Advisor picks (Activision (Nasdaq: ATVI), another top video game publisher David has picked, is also starting to grow on me). I might consider picking some up on a deeper pullback.

Give us your take on the Electronic Arts and Video & PC Games discussion boards. Jeff Hwang can be reached at JHwang@fool.com.