EA shares drop after job cuts, outlook

AP News
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Posted: Nov 10, 2009 2:43 PM

Shares of Electronic Arts Inc. took a hit Tuesday, the day after the video game publisher said it is cutting 1,500 jobs and announced it bought Playfish Inc., a maker of online social games.

Electronic Arts said the job cuts, representing about 17 percent of its work force, are expected to save about $100 million a year.

The company acquired Playfish for $275 million in cash. It will also pay up to $100 million if Playfish hits certain financial targets by the end of 2011, plus $25 million in stock-based retention agreements with Playfish employees.

"The reality is that EA remains a company in transition," wrote Broadpoint AmTech analyst Benjamin Schachter in a note to investors. "As it tries to figure out how to right-size itself and execute, the timing and the form of the transition to digital are still unclear."

EA posted adjusted results for its fiscal second quarter that were roughly in line with analysts expectations. But, noted Schachter, "all eyes were on guidance and expectations of cost cuts."

"With operating expenses still at about $2 billion annually, it will likely take more time than many would like for the margins to recover significantly," wrote the analyst, who rates EA "Neutral."

Digitally distributed games and components of packaged games are a relatively small but rapidly growing business for EA and the broader industry. EA, Schachter said, is clearly focused on digital as an important growth driver for the future.

"It is still too early to give this management team the benefit of the doubt around execution, but for the first time in quite a while we think they may be at least heading in the right direction," he said. He added that he expects EA to be smaller but more profitable in the coming year.

Needham analyst Sean McGowan said the Playfish deal will strengthen EA's presence outside of traditional game distribution avenues and platforms. The acquisition, coupled with EA's decision to narrow its resources to fewer, more profitable titles, "represents further commitment to the company's growing digital business and presence."

McGowan kept a "Hold" rating on EA's shares.

Shares of the Redwood City, Calif.-based company fell $1.27, or 6.5 percent, to $18.26 in afternoon trading Tuesday. In the past 52 weeks, the stock has traded between $14.24 and $23.95.