Electronic Arts (NASDAQ:EA) is expected to announce earnings for the December quarter on Wednesday, January 30. The video game publisher was affected by an industry-wide decline through most of the calendar year with a 19% year-on-year decline in packaged goods revenue in the last quarter. Video game sales fell by 28% in the first half of the year and by 19% in the third quarter as Microsoft’s (NASDAQ:MSFT) X-Box 360 and Sony’s Playstation 3 continued through their elongated product cycles. 
The holiday season, which traditionally sees higher game sales, also proved to be quite disappointing with video game sales dropping by 22% over the prior year.  We expect a drop in earnings through product sales, partially offset by growth in digital sales. The much anticipated release of the Playstation 4 and the X-Box 720 will boost sales in the coming years.
Our price estimate for Electronic Arts’ stock is $17, implying a premium of 10% to the current market price.
EA has stated its intention to shift operation entirely to the digital domain.  The last quarterly report saw the company heading in this direction with about 45% of the revenues generated through digital media. In 2011, the product mix was just 33% digital. Game downloads increased by 46% in the September quarter with a 60% growth in mobile business and a 120% increase in smartphone and tablet revenue. Digital sales usually have higher margins than physical sales as manufacturing costs are not involved. The December quarter report will show the impact increased digital sales might have on EA’s margins.
Electronic Arts seems to be waiting for the release of next-generation consoles for developing new games. The number of games released per year has decreased in the last few years, from 36 titles in fiscal 2011 to 22 in 2012. Electronic Arts plans to release just 14 titles in 2013. We expect an increase in the number of video games released by the publisher once Microsoft and Sony release their respective consoles, leading to a subsequent rise in video game sales.Notes:
- Video Games sales in U.S. October 2012, NPD Group, 9th November, 2012 [↩]
- Bleak Sales Greet PC Makers, Video Gamers in New Year, 11th January, 2013 [↩]
- EA exec: We’ll be ’100 percent digital’ eventually, CNET, 3rd July [↩]