The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
This newsletter lists the key events (including key game releases and financial news) in April, previews our expectations for May, and provides our views of the current state of the video game industry.
The Wedbush Video Game Index — our market cap-weighted index of video game companies — was up 4 percent in April, and outperformed the broader market averages due to a strong month for GameStop (NYSE:GME) and Nintendo, as well as growing anticipation for the next-gen consoles. The S&P 500 was up 2 percent, while the Russell 2000 was down slightly from a mixed earnings season, among other factors.
GameStop had the strongest month among the companies in our coverage universe, up 25 percent due to strong Q4:12 results reported at the end of March and the next-gen consoles. Microsoft is expected to unveil its next-gen console on May 21, and we should learn pricing and launch dates for the Microsoft and Sony (NYSE:SNE) consoles at E3. Take-Two (NASDAQ:TTWO) had the worst month, down 6 percent, as the strong buzz from the highly reviewed BioShock Infinite subsided. On a constant f/x basis, the index increased 6 percent. Excluding Nintendo, the index increased 4 percent (on a constant f/x basis as well).
March U.S. console software sales were $555 million, down 1 percent from last year’s $563 million, and below our estimate of $570 million (up 1 percent). Sales have now been down fifteen of the last sixteen months, with only January 2013 up slightly at 1 percent due to an extra week in the measurement period in 2013.
While we have not had a month of true growth since November 2011, the close-to-break even results for March should be viewed as a sign that gamers will buy if publishers release desirable content. A slew of high-profile releases did not offset continued catalog weakness as gamers look to the next-gen consoles. Software units were down 5 percent, with ASPs up 4 percent. PC software sales were up 62 percent due to two key releases. Hardware sales were $222 million, down 32 percent compared with last year’s $325 million, and below our estimate of $234 million due to currentgen console fatigue and the disappointing impact of Wii U. Combined hardware and software sales for were down 10 percent y-o-y.
We expect April console software sales to be led by new releases Deep Silver’s Dead Island: Riptide (360, PS3, PC) and Warner Bros.’ (NYSE:TWX) Injustice: Gods Among Us (360, PS3, Wii U), as well as a slew of March releases, including Microsoft’s Gears of War: Judgment (360), Nintendo’s Luigi’s Mansion: Dark Moon (3DS), Square Enix’s Tomb Raider (360, PS3, PC), and Take-Two’s BioShock Infinite (360, PS3, PC). We expect packaged goods weakness to persist for much of 2013, albeit with intermittent reversals. We next expect positive growth in September (the launch month of TakeTwo’s Grand Theft Auto V), and do not expect sustained growth until 2014 when both next-gen consoles have launched.
Key April headlines:
o 4/15 – EA announced it will be shutting down three Facebook (NASDAQ:FB) games, citing the decline of player numbers and activity.
o 4/18 – Microsoft reported Q3:13 results.
o 4/18 – NPD reported March U.S. console software and hardware sales that were below our expectations.
o 4/22 – THQ (NASDAQ:THQI) announced completion of the bidding and sale process on certain IP, with buyers spending $6.55 million.
o 4/24 – Nintendo reported a Q4:13 miss and provided bullish initial FY:14 guidance that we believe is too aggressive.
o 4/24 – Zynga reported better-than-expected Q1:13 results from FarmVille 2 but provided weak Q2:13 guidance.
o 4/25 – EA announced additional layoffs. According to Kotaku, EA is expected to lay off up to 10 percent of its workforce.
Key May events:
o 5/7 – Electronic Arts to report Q4:13 results. ⇑ EA
o 5/8 – Activision Blizzard (NASDAQ:ATVI) to report Q1:13 results. ⇔ ATVI
o 5/9 – Sony to report Q4:12 results.
o 5/13 – Take-Two to report Q4:13 results. ⇑ TTWO
o 5/15 – Ubisoft (EPA:UBI) to report Q4:13 results. ⇔ UBI
o 5/16 – April NPD U.S. video games sales data release.
o 5/16 (est.) – GameStop to report Q1:13 results. ⇔ GME
o 5/21 – Microsoft to host an Xbox event where it will unveil its next generation console. ⇑ EA, ⇑ GME
Michael Pachter is an analyst at Wedbush Securities.
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