EA’s tale of two earnings

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Titles such as The Sims 3 gave EA a boost in its June quarter. Or did it? Credit: Electronic Arts

For Electronic Arts, it was a tale of two earnings.

One report, based on generally accepted accounting principles, or GAAP, was grim. Sales plunged nearly 20% to $644 million in the first quarter ended June 30 from a year earlier. Losses yawned to $234 million from $95 million last year.

But the other earnings report was full of smiles and sunshine. Revenue grew 34% to $816 million from $609 million in 2008. And losses were a mere $6 million, down from $135 million a year ago.

Hard to believe they came from the same company. But because of the wacky way many game companies book their sales, both reports are considered valid. Here’s why. EA books its expenses upfront, which means development and marketing expenses are recorded in ‘real time.’ At the same time, the revenue it gets from many of its games are not booked right away, even though the money’s already hit the company’s bank account. It gets dragged out for six or more months. Why?

Conservative companies such as EA say the costs of supporting those games continue months after they are released and sold. Those costs include the online support that EA and other publishers must devote to their games, including server costs, maintenance and customer support. Here’s how Daniel Ernst, an analyst with Hudson Square Research, explained it:

You get $60 from selling your game. But you say you only got $6. The game costs you $30 to build, so you actually made $30 in profit. But by GAAP accounting standards, you have to say you lost $24. GAAP was intended to keep companies from doing funny math. But in this case, it’s the GAAP numbers that’s funny math.

As a result, most Wall Street analysts such as Ernst pay attention only to the non-GAAP figures, which include revenue as it is booked. That’s probably why EA’s shares, which gained 34 cents to close at $21.89, ticked up an additional 6 cents to $21.95 in after-hours trading following the earnings release.

-- Alex Pham

Follow my random thoughts on games, gear and technology on Twitter @AlexPham.