Games-maker Electronic Arts Inc. (NASDAQ: ERTS) is getting a boost in share price today following a better-than-expected third fiscal quarter earnings report, and a buoyant outlook. That outlook depends on extending its reach as competition is getting fierce and  free. That may prove to be a challenge to EA’s plan for growth.

On a non-GAAP basis, EA reported EPS of $0.59 on revenue of $1.41 billion. Analysts were expecting EPS of $0.56 on revenue of $1.43 billion. For the current quarter, EA projected revenue of $850-$950 million, while analysts are expecting $939 million. EA expects EPS in its fourth quarter of $0.15-$0.25, while analysts expect EPS of $0.21.

EA increased its sales of digital games by 39% in the quarter. The company claims to be the number one games publisher on the iOS platform from Apple Inc. (NASDAQ: AAPL), on the Kindle from Amazon.com (NASDAQ: AMZN), on the Blackberry App World from Research in Motion Ltd. (NASDAQ: RIMM), and on the Windows Phone 7 platform from Microsoft Corp. (NASDAQ: MSFT). It also claims that it is a “top publisher” on the Android platform from Google Inc. (NYSE: GOOG), with two of the top five paid apps in the period between Christmas day and New Year’s Day.

A Netherlands-based research firm, Distimo, reported in January that the fastest growing app software platform was Android, which saw its total number of available apps grow more than six times to 130,000. [http://www.distimo.com/] Apple’s iPhone catalog includes nearly 300,000 apps, while the Ovi store from Nokia Corp. (NYSE: NOK) is third with about 25,000 apps and RIM’s App World trails with 18,000 apps.

EA’s GAAP revenue in its non-digital divisions fell by $252 million year-over- year, while GAAP revenue for EA’s digital division rose by just $62 million, for a net GAAP differential of -$190 million year-over-year. On a non-GAAP basis, overall revenue rose $64 million.

The Distimo report notes that in December, the top 300 free applications in the US generated an average of more than 3 million downloads a day compared with just 350,000 downloads a day for paid applications. The good news, at least for EA, is that paid US downloads are up by nearly 30% more than free downloads since June 2010.

Another bit of bad news for EA is that the average price of apps is falling. Worse is that prices are falling more than twice as fast for the top 100 iPhone apps as for top 100 Android apps. And for all apps, iPhone prices fell by -12% while Android prices for all apps rose by 1%.

For EA to meet its goals, it has to be able to replace lost revenue from sales of packaged goods with digital download sales for smartphones. If it isn’t able to do that, the road ahead could be a bit bumpier than the company expects.

Today, though, everything is looking good. Shares are up more than 14% at around noon, to $17.86, after hitting an intraday high of $18.20. The stock’s 52-week range is $14.06-$20.24. Volume is very heavy, at about six times the daily average.

Paul Ausick

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