Electronic Arts posts $454m FY loss

[Sullla]

Bodhesatva said:

Sullla! Paging Sullla! I need your EA yearly profits thread again. Can you find it for me one last time? Pretty please? :( 

Always happy to help.  Here's the thread you want: http://www.vgchartz.com/forum/thread.php?id=4029 The info is in the sixth post. I'll summarize here for those who don't want to read the old thread:

Over the past four years, EA's net revenue has remained fairly constant at around 3 billion dollars annually, while their gross profit has remained at about the same figure, $1.9 billion. But look at what happens to their operating expenses: the balloon upwards with each year of the "next-gen" consoles! Total operating expenses: 1.08 billion (FY04), 1.26 billion (FY05), 1.45 billion (FY06), 1.84 billion (FY07). Nearly all of those expenses are coming from increases in research and development (ie, the cost of making these "HD" games); R&D costs more than double from $511 million in FY04 to $1,041 million in FY07. As a result, EA's profitability drops steadily every year over this period, from $577 million in FY04, to a paltry $76 million last year in FY07. If you read further, EA tries to explain away their falling profits with a bunch of words about "generational change" and "transition costs", but the writing is on the wall. Developing for the 360 and PS3 is not paying off.

When Legend called my reasoning into question, I responded with this post (with more relevant financial info):

Legend11 - dude, you need to calm down a bit. Did I say that no one has created profitable games for the 360? No, not at all, and you could certainly come up with examples to the contrary. What I said was that EA's costs have been rising at a very noticeable rate over the past few years, and almost all of that increase has gone into rising development costs. I don't doubt that some titles have proved to be very profitable; I'm merely point out that the general trend has been rising development costs, decreasing profits:

FY04: $511 million R&D costs, $577 million total profitFY05: $633m R&D, $504m profitFY06: $758m R&D, $236m profitFY07: $1041m R&D, $76m profit

Now there's no guarantee that those are two are related, but it does seem likely, doesn't it? EA specifically states that their marketing expenses (p.114) remained constant at 15% of overall costs, and ditto for administrative costs (slight increase from 7% to 9% of costs). But R&D costs jump from 26% to 34% of net revenue! (p.115) It's difficult to escape the conclusion that higher development costs are significantly driving up expenses - and hurting the overall bottom line.

So what does this mean in terms of the lastest financial info? Well, EA's "revenue" is up by about $600m, the statistic that every large corporation likes to tout. However, the company took a large loss overall: $454m in FY08. This is the first time in a decade that EA has not turned a profit - this *IS* a very big deal. EA is clearly losing its position as the premier third-party publisher, which it has held for the past decade.

Where's the money going? The exact same place I said it was going ten months ago: into more research and development costs:

It [EA]also spent $104 million more on research and development compared with the previous year.

In addition, the company took a $138 million charge for "acquired in-process technology" during the most recent quarter and year.

So, to update the chart I posted month and months ago:

FY04: $511 million R&D costs, $577 million total profitFY05: $633m R&D, $504m profitFY06: $758m R&D, $236m profitFY07: $1041m R&D, $76m profit
FY08: $1238m R&D, $487m lossEA wasn't helped either by vastly increased marketing expenses ($466m last year, $588m this year). This is clearly a company in disarray. The investment signs are NOT positive here. I don't want to toot my own horn either, but I did predict a full ten months ago that EA would not turn a profit in fiscal year 08. And I wasn't just correct, I was emphatically correct.