UbiSoftologist
Member
Michael Pachter of Wedbush Morgan Securities offers his preview of video game sales in Dec 2004:
1) General comment on software and hardware sales
2) Comment on Activision
3) Comment on Electronic Arts
4) Comment on Take-Two Interactive
5) Comment on THQ
6) Market share forecast
Market Share By Company (US Retail Sales)
Dec 2004E Dec 2003A
ERTS 21.4% 24.4%
THQI 7.2% 7.3%
ATVI 6.9% 7.7%
TTWO 6.1% 5.2%
ATAR 3.6% 5.3%
MWY 1.4% 1.2%
1) General comment on software and hardware sales
We expect NPD Funworld TRSTS U.S. retail video game console software sales data for the month of December (five-week period ending January 1, 2005) to be released on Thursday, January 13, after the market close...
...December is typically the strongest month of the year, with significant sales of games released in October and November for the holiday selling period. We expect December sales of $1.800 billion (up 5% vs. December 2003s $1.707 billion), somewhat lower than the growth trend of the last few months. We believe that sales were dominated once again by sell-through of the blockbusters Halo 2 (released November) and GTA: San Andreas (released October), which we believe generated $125 - 150 million in combined sales. Year-to-date sales are up 11% over last year, and we believe that relatively modest holiday sales will result in overall sales growth of 10% for the U.S. console software market (up from 5% in 2003). We note that through November, year-to-date unit sales are up 11%, while ASPs have increased 1% (compared to our full-year forecast of a 6% decline). We expect ASPs to stay relatively flat in December, given the likelihood for strong sales of full-priced blockbuster titles.
The U.S. hardware installed base is currently at 69 million current generation consoles (including handhelds) as of the end of November 2004 (up from 56 million at year end 2003). Our prior forecast called for growth to 77 million total consoles by the end of 2004, but we expect a potential shortfall of 1 2 million units given Sonys PS2 supply problems. Console prices have remained stable through year-end (current U.S. prices are Nintendo GameCube $99, Microsoft Xbox $149, and Sony PS2 $149), with the next round of cuts likely early next year. We believe it likely that the next generation Xbox (Xbox Next?) will not be backward compatible, and expect a reduction in price for the current generation Xbox as soon as the Xbox Next is formally announced. We expect an announcement at the Game Developers Conference in March, so Microsoft may choose to discount its Xbox to $129 or lower at that time.
Notwithstanding shortfalls of hardware supply, we have noted an increase in promotional activities (bundling of freegames) with the Xbox and GC. Bundling for the PS2 has been less prevalent, likely due to hardware supply shortages. Until Sony is able to satisfy pent up demand for the PS2, we think it is unlikely to lower PS2 pricing. We expect momentum in handhelds to continue as consumer response to the Nintendos DS has been very strong to date.
Our December quarter earnings forecasts for the six companies we cover were predicated on our belief that the quarter would see monthly sales growth average approximately 25 30% compared to last year. While sales growth was a robust 35% for October, the figure for November was a disappointing 11% (compared to our forecast of up 28%), and we now expect December to come in around 5% (compared to our original expectation of up 25%).
Additionally, hardware supply problems contributed to lower than usual software sales during the holiday period, and caused retailers GameStop (GMEBuy) and Electronics Boutique (ELBOBuy) to report lower than expected holiday same store sales. Accordingly, we think it likely that some of the companies we cover will deliver revenues and earnings at the low end of investor expectations. In particular, we believe that those companies with greater exposure to the U.S. market may deliver disappointing results, while those companies with greater international exposure are likely to offset disappointing U.S. sales with foreign currency translation gains. We include our comments about each companys prospects for the December quarter in the company sections below. In December, we expect sales to be dominated by continued strong sales of Microsofts Halo 2 (Xbox) and Take- Twos GTA San Andreas (PS2), along with top releases during the month of LucasArts Knights of the Old Republic 2 (Xbox) and Electronic Arts NFL Street 2 (PS2, Xbox, GC). We also expect to see continued strong sales of THQs WWE Smackdown vs. Raw (PS2) and The Incredibles (PS2, Xbox, GC, GBA, PC), Nintendos Metroid Prime 2: Echoes (GC) and Pokemon Fire Red and Leaf Green (GBA), Electronic Arts NFS Underground 2 (PS2, Xbox, GC, GBA, DS) and Madden NFL 2005 (PS2, Xbox, GC, PSX, GBA, PC), and Konamis Metal Gear Solid 3 (PS2). We note that there were 33 games that sold over 100,000 units in November, and we expect 115 in December (compared to 114 last year).
2) Comment on Activision
Activision (ATVIBuy)
Releases during December: 12/2 Cabela's Big Game Hunter 2 (GC).
We estimate that Activision generated approximately $125 million in sales for the month (compared with $63 million last month and $132 million last December). We expect sales were led by Tony Hawk's Underground 2, which we believe sold 900,000 units combined (on top of the 754,000 units sold in its first two months). We expect continued strong sales of Call of Duty, which we estimate sold 400,000 units combined (on top of the 228,000 units sold last month). We expect that catalog titles Spider-Man 2, Shrek 2, X-Men: Legends, and Shark Tale also sold well. Activision preannounced positive results for the December quarter last month, with strong contributions from international publishing and from its distribution business (primarily international, as well). We think that there is little risk of an earnings shortfall, and continue to recommend that investors accumulate shares of Activision.
3) Comment on Electronic Arts
Electronic Arts (ERTSHold)
Releases during December: 12/6 Lord of the Rings: Battle For Middle Earth (PC), 12/14 Tiger Woods PGA Golf (DS), 12/26 NFL Street 2 (PS2, Xbox, GC).
We estimate that EA generated $385 million in sales for the month (compared with $133 million last month and $417 million last December). We expect sales to be led by NFS Underground 2, which we estimate sold 1.2 million units combined (on top of the 735,000 units sold last month). Due to recent price reductions, we expect Madden NFL 2005 and NBA Live to have sold well during the month, although we believe year-over-year unit sales for both games were similar to last year in the face of competition from the ESPN branded games. We expect NFL Street 2 to have sold a modest 50,000 units combined during the month, given the late launch date. We expect to see continued strong sales of James Bond, Harry Potter, Need For Speed Underground, Lord of the Rings and Medal of Honor as well as from its catalog of sports games. EA is likely to deliver December quarter results at the low end to midpoint of its $1.4 1.475 billion revenue guidance, and we believe that the company will have no trouble delivering earnings solidly within its guidance range of $1.16 1.26/share. We believe that the company will suffer a decline in U.S. revenues of approximately $75 million year-over-year, and will make up a large part of the decline through favorable foreign exchange translation from its international sales. We do not expect a material reaction to the NPD data for Electronic Arts.
4) Comment on Take-Two Interactive
Take-Two Interactive (TTWOBuy - Focus List)
Releases during December: None.
We estimate that Take-Two generated $110 million in sales for the month (compared with $100 million last month and $99 million last December). We believe that sales of GTA San Andreas were again quite strong, with an estimated 1.8 million units sold in its third month of release (on top of the 3.6 million units sold so far). We expect continued strong sales of ESPN sports games: NFL 2K5, NBA 2K5 and NHL 2K5, and believe that each of these games sold a competitive number of units vis-à-vis its Electronic Arts counterparts. We believe that Red Dead Revolver, Grand Theft Auto, Max Payne, Midnight Club, and Conflict: Desert Storm led catalog sales. We do not see any risk to Take- Twos January quarter, given that we expect sales of GTA San Andreas to be quite strong both domestically and internationally. We continue to recommend that investors accumulate shares of Take-Two.
5) Comment on THQ
THQ (THQIHold)
Releases during December: 12/7 Ping Pals (DS).
We estimate that THQ generated $130 million in retail sales for the month (compared with $71 million last month and $124 million last December). We believe that sales were led by WWE Smackdown vs. Raw which we believe sold 500,000 units in its second month (on top of the 362,000 units sold last month). We believe that The Incredibles sold a combined 900,000 units, and that The SpongeBob SquarePants Movie game sold 600,000 units. We expect continued strong sales of WWE, Nickelodeon, and Finding Nemo titles. We expect THQ to continue to benefit from strong Nintendo GBA SP sales through the first quarter. We estimate that THQ had 70 titles sell over 10,000 units during the month, compared to 48 titles last month and 70 titles last December. We do not foresee any difficulties for THQ during the December quarter, as we believe that the company effectively marketed its games and sold-in sufficient quantities to meet or exceed investor expectations. However, we expect overall industry malaise for the November-December period to impact reorders of THQ games in the March quarter, and anticipate that the company may experience a shortfall from its revenue guidance of $165 million for the March quarter. We continue to view THQ shares as fairly valued, and maintain our Hold rating on the stock.
6) Market share forecast
Market Share By Company (US Retail Sales)
Dec 2004E Dec 2003A
ERTS 21.4% 24.4%
THQI 7.2% 7.3%
ATVI 6.9% 7.7%
TTWO 6.1% 5.2%
ATAR 3.6% 5.3%
MWY 1.4% 1.2%