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Reportedly, Electronic Arts (EA - Analyst Report) is downsizing its Montreal game studio. The downsizing comes on the heels of the sudden resignation of its chief executive officer (“CEO”) John Riccitiello on Mar 30, 2013.

The Montreal studio, which comprises a mobile team, is well known for developing games such as Army of Two. Although EA has declined to provide any details about the number of employees or teams to be affected by the move, the company said that the studio will continue to operate going forward.

The downsizing follows EA’s restructuring of PopCap Games in 2012.  According to Reuters, approximately 50 out of 380 employees from the Seattle and Vancouver studios were laid off last year.

EA’s decision to restructure the Montreal studio comes at a time when it is witnessing declining demand for packaged games amid significant competition from free-to-play and social games from the likes of Zynga (ZNGA - Snapshot Report).

Although EA’s digital (social, mobile and free-to-play) revenues have grown significantly over the last 12 months, it has failed to offset the declining packaged game revenues, thereby pressurizing margins.

In such a scenario, we believe that EA’s decision to realign costs in order to gain operational efficiency is a positive move.

Additionally, we believe that EA’s strong digital portfolio will drive top-line growth going forward. Reportedly, both Microsoft (MSFT - Analyst Report) and Sony (SNE - Snapshot Report) are expected to launch their next generation consoles this year, which will be a significant growth catalyst going forward.

However, we believe that weakness in retail sales amid an aging console system lifecycle, the cannibalizing effect of free-to-play games and tough competition remain major concerns in the near term.

Currently, EA has a Zacks Rank #3 (Hold).

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