EA Says Digital Will Offset New Console Investments for the First Time

Despite having to sink $80 million into new console game development this year, EA’s CEO John Riccitiello is upbeat, saying that “we are absolutely a different company in a different spot.”

Typically at this point in the hardware cycle, he said, the cost of developing new videogames would lead to a loss. But in a conference call with investors yesterday, Riccitiello said revenue from digital content will keep EA profitable.

“In the face of, unfortunately, somewhat of a headwind relative to console, we’re getting top line growth, robust digital growth, robust margin expansion, robust EPS growth, while affording the investment in the next-gen console. I don’t think, going back to our foundation in ’82, that’s ever happened before. So what we are guiding for is entirely unprecedented, and it’s a function of everything we’ve been saying on the call so far. … It’s our hope to be able to accelerate top line through a transition and accelerate bottom line growth through a transition because we won’t be facing sort of negative console compares.”

Nintendo expects to release the Wii U later this year, which will require new games that tap into both the TV and a touchscreen device. Neither Microsoft or Sony have unveiled plans for their respective next-generation hardware systems, the Xbox and PlayStation. Riccitiello did not mention the new consoles by name, and instead referred any direct questions about hardware to Sony, Microsoft and Nintendo.

“We intend to invest $80 million in Gen4 console development in fiscal ’13. We are strong believers that console will return to strong growth, and represent a great opportunity — one that is in lockstep with our digital plans.”

In fiscal 2012, EA generated $1.2 billion in digital revenues, representing a 47 percent increase year over year. In the past six months alone, FIFA 12 — one of the company’s traditional packaged good titles — was able to break $100 million in digital revenues for the first time. This year, it’s predicting digital revenues of $1.7 billion, representing 40 percent of the company’s overall business.

Even though Riccitiello painted a positive outlook, he failed to turn to the tide.

Along with a broader market meltdown, the company’s stock fell 65 cents, or 4.3 percent, at $14.48 a share. At that price, the company’s stock is off more than 40 percent from its 52-week high of $26.13 a share.

During the call, Riccitiello also tried to stress that while Star Wars: The Old Republic is an important title for the company, it is getting an unfair amount of attention by analysts. In the quarter, he said the number of subscribers fell to 1.3 million from 1.7 million when the game launched.

“So while I understand there’s an enormous amount of interest, I don’t know that it warrants as much as what we’re seeing right now,” he said, according to a SeekingAlpha transcript.

The final highlight from the call was when Riccitiello questioned how much Zynga paid for OMGPOP and its hit title Draw Something, which was No. 1 for a short period of time. He didn’t actually name the two companies, but it was implied.

“Right now, what I’m starting to see is valuation expectations that assume that these things are all hockey stick moving up and to the right with no end in sight, and I think those are bad assumptions,” he said. “Some of them will work, some of them won’t, but they can’t all be worth the multiple that I’m seeing in the market right now.”


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