Electronic Arts Pauses Before the Holidays

Electronic Arts (Nasdaq: ERTS  ) is in a lull, but a good kind of lull. The video game maker posted financials last night that aren't as bleak as they seem as it gears up for a future that is brighter than it may seem. (Before you press play, you can pause on the previous quarter's earnings here.)

EA posted a second-quarter loss of $0.62 per share on a 45% drop in gross profits. Revenue fell by 18% to $640 million.

It's ugly on first glance, but let's whip out the Crayola box and color this appropriately. The top-line slide isn't that dreadful. It's actually offset by bloated deferred revenues, as the company made a revenue recognition tweak, changing the way it books the sale of items tied to digital delivery.

And the bottom line isn't unattractive at all after you back out the charges related to things like recent acquisitions and stock-based compensation. It's a long list of items, but adjusted profits of $0.27 a share are well ahead of the $0.21 a share it earned last year, and far better than the $0.20 per share that the pros were banking on.

And that bright future? I wasn't kidding. A year ago, EA was slow to cash in on the popularity of Nintendo's Wii. It wasn't the only publisher caught off guard. Sony (NYSE: SNE  ) and Microsoft (Nasdaq: MSFT  ) were outselling Nintendo's GameCube in the previous generation of consoles. You'd be lying if you said you weren't making Wii jokes at this point last year.

Well, now EA is the top-selling game developer of Wii titles after Nintendo itself. The $59 million in Wii-related revenues that it recorded in the latest  quarter is more than double the previous quarter's revenue.

The company is also well-positioned for the holidays, with 10 titles hitting stores. Sure, the company had a few second-quarter winners. Madden NFL 08 moved 4.5 million copies. FIFA 08 was good for 2.9 million games sold internationally. Things will get better now that the holiday shoppers are coming, with the installed gamer bases for the new platforms growing substantially.

This won't bode well for just EA, of course. Other publishers with hot titles are sitting pretty. Between Activision (Nasdaq: ATVI  ) with Guitar Hero III and Call of Duty 4, Take-Two Interactive (Nasdaq: TTWO  ) with Manhunt 2, and THQ (Nasdaq: THQI  ) with its slate of kid-friendly licensed games, this should be a redeeming quarter for the software players that fell short a year ago.

So enjoy the pause button, EA investors. With holiday tidings, a thick pipeline, and the rich margins of digital delivery to look forward to, the game will only get better from here.   

Play on, Fool:


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