Electronic Arts (Nasdaq: ERTS) seems to be making progress in fixing its sinking ship.
The video game giant reported $850 million of non-GAAP revenue in the fourth quarter of fiscal 2010; up 4% from the year-ago period. Last year's $0.13 of GAAP losses per share turned around to a $0.09-per-share profit. These improvements came riding on white horses named Digital Distribution and Fewer but Bigger.
Those are two of management's four strategic goals (the others being cost savings and plain old better games), and that model seems to be working. EA recently cut hundreds of jobs, pared down the release schedule somewhat, and promised to push the remaining games harder. The all-important EA Sports brand is central to this effort, including a freshly minted plan in conjunction with game retailer GameStop (NYSE: GME) to milk more money from gamers who buy used copies of Madden, FIFA, and other popular EA Sports titles.
But above all, what's fueling EA's engines now is digital distribution. Direct-download games cut out expensive manufacturing and shipping costs and give customers instant gratification. It's a higher-margin business model than shipping physical discs in lavish packaging, and this model is very much on the rise. Only 13.7% of EA's sales came from downloads and digital service subscriptions in 2010, but that segment is set to grow sales by 30% next year. That target would outpace the general gaming market's 8% expected growth, and also take market share from rivals Activision Blizzard (Nasdaq: ATVI) and Microsoft (Nasdaq: MSFT) in the digital space.
If there is any hope for Electronic Arts to complete a long-suffering turnaround, it would be as a digital gaming expert. Microsoft's Xbox 360 and the Sony (NYSE: SNE) PlayStation 3 were always meant to be highly connected entertainment hubs, and EA's download-centric strategy plays right into that phenomenon. Moreover, EA is a leading game provider for newfangled platforms such as Facebook and any Apple (Nasdaq: AAPL) gadget you'd care to mention.
I still think Activision has a better fundamental business and the stronger pipeline of upcoming games between the two market leaders, but there may be hope for this turnaround story yet. Can EA stay focused enough to execute this audacious transformation? Discuss in the comments below.
