Ahead of Earnings: Can Electronic Arts Escape the Drag of Zynga’s Losses?

As the Olympics play out this week in London, there’s another pretty big games competition worth watching right at home.

Electronic Arts and Zynga are duking it out for top honors among the best game companies in the world. However, at the moment neither of them is close to winning the gold.

At last count, Zynga wildly missed analyst expectations for its second quarter, leading to a drop of more than 40 percent in its stock, sending it to an all-time low. The next day, EA’s shares came tumbling after, posting a new low for the year.

Tomorrow, EA has a chance to regain investor confidence as it reports results for its fiscal first quarter. And while it may be easy to assume that if one company has a hard quarter the other will too, that’s not what all the analysts are saying.

Michael Pachter of Wedbush Securities said he isn’t revising his expectations based on Zynga’s poor performance. “Zynga’s losses are other people’s gains,” he said.

Pachter reasoned that since Facebook’s revenues from payments, which are used to make purchases inside social games, were up slightly in the second quarter vs. the previous period, it’s likely Zynga’s quarter had more to do with Zynga itself than any broad trend. Specifically, Zynga said it suffered after Facebook made changes to its network, which consequently led to a drop in bookings for the company’s older games.

Wall Street analysts will be looking for EA to report a loss of 42 cents a share on revenues of $501 million, excluding some expenses. Based on the company’s internal guidance using the same non-GAAP metrics, it is expecting to lose between 40 cents and 45 cents a share on revenues of $500 million.

A successful social games quarter, however, does not mean the company is entirely out of the woods. Social gaming makes up one of EA’s smallest contributors to revenue — or so we’d guess since it doesn’t yet have to break it out. About half of its revenues still are coming from the ailing packaged goods sector, which includes blockbuster hits such as Battlefield 3, Madden and Mass Effect 3.

According to NPD, which publishes monthly data on the industry, EA’s first-quarter software sales were down 50 percent year over year.

But those losses are likely going to be offset by gains in digital revenue as EA is forecasting another 40 percent increase in digital revenue in the 2013 fiscal year. Besides social gaming, other forms of digital content includes downloadable content for its console and PC games, like Star Wars: The Old Republic. There’s mobile gaming, too. Last quarter, the company said Bejeweled Blitz, which it obtained through the acquisition of PopCap a year ago, was its top grossing app on Apple’s App Store.

By the end of last week, EA’s stock regained some ground after hitting that low. Today, however, it slipped 18 cents a share, or 1.6 percent, to close at $11.23.

If it’s any consolation, EA still has something to brag about: Its market cap is now higher than Zynga’s, which hasn’t always been the case since Zynga went public eight months ago. At the end of trading today, EA was worth $3.6 billion and Zynga was worth a mere $2.2 billion (or about equal to the cash it has on hand).


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Just as the atom bomb was the weapon that was supposed to render war obsolete, the Internet seems like capitalism’s ultimate feat of self-destructive genius, an economic doomsday device rendering it impossible for anyone to ever make a profit off anything again. It’s especially hopeless for those whose work is easily digitized and accessed free of charge.

— Author Tim Kreider on not getting paid for one’s work