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EA Earnings Call: Ten Percent Workforce Reduction, Battlefield 4 Critical To Fiscal Year 2014

by Mike Futter on May 07, 2013 at 12:31 PM

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EA has released financial statements covering the entirety of fiscal year 2013. In addition to better than analyst predicted performance, officers committed to level operating expenses through the console transition during the coming year.

EA met the revised forecast it provided at the end of third quarter, which also saw the departure of CEO John Riccitiello. Net revenue was reported at 3.78 billion against an estimate of $3.7 billion to $3.8 billion.

The raw numbers don't tell the entire story, though. This quarter, EA touted over 1.4 million sales of SimCity (50%) from downloads, and $120 million from revenues related to purchases of Battlefield 3 Premium. Most R&D previous quarters. This allowed EA to realize a significant influx of revenue that had previously been deferred in a quarter that was extremely tumultuous.

Additionally, on the earnings call, it was confirmed for the first time that 10 percent of workforce had been laid off in the past month, amounting to approximately $27 million in severance costs, including those related to the departure of former CEO John Riccitiello. While there were no candidates announced to replace him, Larry Probst, who is serving as interim Executive Chairman, indicated that both internal and external candidates are being considered.

Chief financial officer Blake Jorgensen indicated that in addition to severance expenses, headcount and facility restructuring (including significant reductions in online support) have been reclassified in the financial reporting.

The justification for this appears in the SEC filing.

Although Electronic Arts has engaged in various restructuring activities in the past, each has been a discrete, extraordinary event based on a unique set of business objectives. Each of these restructurings has been unlike its predecessors in terms of its operational implementation, business impact and scope. As such, the Company believes it is appropriate to exclude restructuring charges from its non-GAAP financial measures.

In other words, because staff reductions are not identical, EA feels justified in keeping them out of the numbers used more often by analysts to evaluate growth. That said, forward looking statements include another $8 million in restructuring which could be a warning that future layoffs and studio closures are coming.

On the games side, EA declined to commit to a Premium program for Battlefield 4, despite the significant revenue the initiative brought in fiscal year 2013. SimCity has performed better than projections and president of EA Labels Frank Gibeau stated the company has "learned our lesson and it won't happen again." He placed the blame for the title's terrible launch on "consumers overwhelming the game servers."

The two titles bolstered digital revenues amounting to a 45 percent improvement year over year. At the same time, EA will be changing how they provide investor guidance. It will also be adjusting how revenue is realized, because of "developing deeper relationships with customers" that sees gamers playing longer and requiring more support. The cost of those games will be recognized as usual, however. All this amounts to increased challenge in comparing performance from one year to the next. 

EA is placing a great deal of faith in Battlefield 4, especially when compared with last year's Medal of Honor Warfighter. DICE's next title will be drawing increased marketing and promotional support and is also expected to drive significant revenues in comparison to last year's military shooter title. When asked why operating expenses do not reflect the 10 percent reduction in staffing, investment in next generation development (with an emphasis on Battlefield 4) was identified as a significant resource draw. 

Gibeau reported that Crysis 3 and Dead Space 3 fell below forecasts during fourth quarter 2013. On the sports side, NBA Live 14 is one of 11 games slated for fiscal 2014. It appears on the schedule and was mentioned multiple times. EA stated that 15 titles are planned for iOS and Android.

With regard to the recently announced Star Wars titles, it was reaffirmed that Visceral Games and DICE would be working on the franchise. It was not clear, however, if BioWare would be creating new games. Frostbite 3 was the center point of the core games discussion, with EA citing economies of scale realized by using the engine, which is powering games we'll see at E3.