A leading publisher of interactive games (video game software and content), Electronic Arts Inc. (ERTS) cut its revenue and earnings outlook for fiscal 2010; the second time since the last earnings call. As a result of its gloomy outlook, shares fell 8.37% after hours following the announcement.

The company slashed its outlook due to weakness in its EA business, dismal holiday sales for the overall packaged goods sector in Europe and product mix shifts to lower-margin distribution business in North America in the third quarter of 2010. Moreover, EA is facing intense competition from Activision Blizzard, Inc.‘s (ATVI) Modern Warfare 2, which led to overall lower games sold in stores such as GameStop Corp. (GME) and Best Buy Co. Inc. (BBY).

Management said that packaged software sales fell 15%, which was much lower than expected. EA expects industry packaged game sales to be flat to down mid-single digits in fiscal 2010. Although EA generated $75 million higher-than-expected revenues from titles such as Left 4 Dead 2 and The Beatles: Rock Band, these titles have thinner margins, which did not increase profitability.

For the third quarter, management expects GAAP net revenue of $1.227 billion to $1.247 billion and GAAP diluted loss per share in the range of 24 cents to $32 cents. Non-GAAP net revenue is expected to be $1.33 – $1.35 billion and non-GAAP earnings per share are expected to be in the range of 29 cents to 33 cents.

For the full-year 2010, non-GAAP net revenue (adjusted for deferrals) is expected to be $4.13 – $4.20 billion, a decline from the prior outlook of $4.20 – $4.40 billion. While, GAAP net revenue is expected to be $3.60 – $3.68 billion, down from the previous outlook of $3.60 – $3.90 billion.

Management expects EPS, excluding one-time items, to be in the range of $40 cents – 55 cents, much below the company’s previous outlook of 70 cents – $1.00. GAAP diluted loss per share is expected to be in the range of $1.94 to $2.24 for fiscal year 2010, higher from the prior outlook of a loss of $1.20 to $2.05. GAAP guidance does not include the impact related to the Playfish integration.

Electronic Arts reported better-than-expected second-quarter of 2010 results, with a steep rise in net earnings and growth in revenue. Earnings also surpassed the Zacks Consensus Estimate.

Effective cost management and a lower tax rate enabled the company to generate the second quarter earnings surprise. Earnings surprises have fluctuated substantially over the last four quarters with two extreme positive and two extreme negative surprises. However, the average remained positive at 3.29%. This implies that EA has beaten the Zacks Consensus Estimate by 3.29% over the last four quarters.

However, for the upcoming quarter, the Zacks Consensus Estimate is 48 cents, with a potential negative surprise of 4.17%. Thus, we expect some downward price movement in the near-term.

Further, in the near-term we expect significant hurdles on EA’s outlook due to weakness in the video gaming industry, a cautious retail sector, pricing issues and increased product development costs. Moreover, the margins are currently under pressure and cash flow is weak.

Longer-term, we remain positive on EA’s growth prospects and expect a turnaround in fiscal 2011 as a result of increased focus on cost reduction, a strong balance sheet, a growing presence in digital distribution and most importantly – the Playfish acquisition.

Our outlook is reflected by the stock’s Zacks #3 Rank. This implies a ‘Neutral’ rating on the stock.

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