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Wednesday, February 4, 2009

Electronic Arts, Netlogic, Nokia

Electronic Arts (ERTS) reported and it wasn’t pretty.  The company had indicated during the quarter that they were tracking below plan and they sure were right about that.  Sales of 1.74 bil were well below analyst consensus of 1.9 bil.  EPS of 56 cents missed consensus of 89 cents.  In response to the macroeconomic weakness, the company will be scaling back costs, cancelling some titles and playing with the release calendar to better focus and promote games such as Sims 3 and Godfather 2.  They offered guidance of 4.2 bil and $1.00 for 2010.

The Skew:  Miss was expected.  Cost cutting is good but its not growth.  The company has been slow to embrace the Wii, likely because the platform is like going backwards developmentally for them – they’re all about high end graphics and the Wii is all about fun.  The company seems creatively frustrated – Spore failed and they had really promoted that to be a new and exciting franchise.  Many of their other franchises are long in the tooth.  As Electronic Arts paid way up for multi-year licenses for the NFL, NBA, FIFA, and Harry Potter, its difficult for them to break some of their largest overall costs.  There is nothing strategically encouraging about cost cuts – they’re a response to an adverse environment.  They need to be creative and that’s a much trickier line item to address.  It’s bouncing – maybe people stop selling it for a day or two.  I doubt there’s much follow through to a rally.


Netlogic (NETL) reported in-line revenues and gross margins 300 bps better than estimates.  Guidance was essentially in-line with the street.  Cisco is 32% of sales and has been reducing inventories – Netlogic believes these inventory reductions are largely behind them and that Cisco will begin to increase again in Q1.

The Skew:  Short interest in the name is high at over 25% of the float so its particularly sensitive to good news – frankly even news that isn’t bad makes stocks with very high short interest rise.  Its not cheap.  Dependence on any one company is rarely a good feature for a company – it means they don’t control a big chunk of their destiny.  It’s likely to be strong today but that’s just going to make it more expensive.  It’s held in very well prior to the report, having rallied some 50% since its $14 low in December.


Nokia (NOK) will be ramping smartphone orders in 2Q, according to Digitimes.  Jeff Kvaal of Barclays had the company on the road yesterday and says demand hasnt deteriorated meaningfully since their last snapshot.  Channel inventories are being worked down to 4-5 weeks, which will be the desired level, down from previous 5-6 weeks.  Orders could begin to rise again in 2Q.

The Skew:  Wow, demand hasnt dropped again?  What’s it been, 2 weeks since their last update?  Two whole weeks of consistently poor demand!  Hooray!!!  What a company says about the current quarter two weeks after blowing up isn’t particularly meaningful.

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