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EA's PopCap Unit Reduces Workforce

Zacks Equity Research

Video game bellwether Electronic Arts Inc.’s (EA) unit PopCap Games has downsized its workforce by roughly 12% in the North American region. EA had acquired the latter in July 2011.

According to Reuters, approximately 50 out of 380 employees from the Seattle and Vancouver studios have been laid off. Further, PopCap is looking into the feasibility of running its Dublin studio, which has a workforce of 90 employees.

EA had acquired PopCap Games to compete with Zynga Inc (ZNGA) and expand in the rapidly evolving social and mobile gaming segments. The deal was valued at $1.3 billion, of which $650 million was paid in cash and $100 million in new shares. The remaining $550 million was subject to certain performance milestones.

EA’s decision to restructure PopCap Games comes at a time when the company is witnessing a decline in its revenues and reporting losses on a year-over-year basis. In the last concluded quarter, EA’s loss widened from the year-ago quarter due to higher operating costs.  This is particularly painful in the video games market where retail sales have declined for eight straight months.

Moreover, management believes that the social gaming space remains challenging because of limited visibility in monetization opportunities. Since most of the digital and online games are free-to-play, gaming companies remain overly dependent on advertising revenues and online sales of in-game virtual items.

Therefore, in the current situation, the company’s decision to realign costs in order to gain operational efficiency is a positive.

However, EA’s strong digital portfolio and continuing growth in the free-to-play and online segments are expected to drive top-line growth over the long term. Moreover, we are encouraged by EA’s financial outlook for the second quarter, which is supported by  games from some of the most popular franchises lined up for  release in the second half of this fiscal year.

However, tough competition from Activision Blizzard Inc. (ATVI), Zynga Inc. and Take-Two Interactive Software Inc. (TTWO) is a headwind going forward. Moreover, we believe that EA is challenged by the limited number of new games. We believe that this is going to negatively impact EA’s measures to boost its online subscriber base, which will impact its revenue growth.

We remain Neutral over the long term (6-12 months). Currently, EA has a Zacks #3 Rank, which implies a Hold rating over the short term (1-3 months).

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