Analyst: Entertainment Software Firms Show Mixed Results

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The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

In February, Activision Blizzard (NASDAQ:ATVI) and Take-Two (NASDAQ:TTWO) reported better-than-expected quarterly results, while Ubisoft reported sales at the midpoint of its guidance range.

The Wedbush Video Game Index, our market cap-weighted index of video game companies, was up 5 percent in February. The increase was due in large part to a strong month for Activision Blizzard, which was up 13 percent after announcing upside to quarterly estimates and providing full-year 2014 earnings per share guidance that exceeded our expectations. The Russell 2000 and S&P 500 were up 5 percent and 4 percent, respectively, reflecting generally positive U.S. economic data and easing concerns around emerging markets.

Ubisoft had the best month, up 14 percent as it reiterated a bullish full-year 2015 outlook and continued to rebound from its October guidance decrease. EA was up 8 percent, reflecting growing optimism around the March releases of Titanfall and the Titanfall Xbox One bundle. Nintendo and Take-Two were both up 3 percent, with the former slowed by weak console sales and the latter held back by an opaque release lineup, in our view. On a constant f/x basis, the Index was up 4 percent. Excluding Nintendo, it was up 10 percent.

January U.S. console/handheld software sales were $224 million, down 40 percent year-over-year, and below our estimate of $300 million. Sales were negatively impacted by many factors, including a retail month that was one week shorter than the previous January and far fewer next-generation consoles shipped than we expected. Current-gen console software sales continued to be weak, with the PS3 and Xbox 360 accounting for well over half of the shortfall between our estimate and the industry figure.

Nintendo’s newest systems also performed below our expectations, with the 3DS down significantly from last month (as expected) and the Wii U again failing to offset its predecessor’s year-over-year decline. Each of the covered publishers performed worse than we expected due in large part to the struggles of certain key franchises. Finally, next-gen console hardware spending and supply constraints appear to have hurt software sales. We expect industry sales to improve somewhat in the next few months due to easier comparisons and an improving release slate.

Earlier this month, we published Post Hoc Ergo Propter Hoc, our latest video game industry report. The report details our expectations for the future of the industry and our covered companies, discusses emerging trends, and provides a comprehensive history of the industry up to now. In addition, in January, we introduced our video game industry growth model through 2016. The industry report and industry model are both available to clients upon request.

Key February headlines:

  • February 3: Take-Two reported a third-quarter 2014 beat and raised full-year 2014 guidance. We lowered our rating on the shares to NEUTRAL.
  • February 4: Nintendo announced the completion of its previously announced share repurchase. It acquired 9.5 million shares of the 10 million shares authorized for roughly 114 billion Japanese yen of the 125 billion Japanese yen authorized.
  • February 6: Activision Blizzard reported a fourth-quarter 2013 beat and provided full-year 2014 guidance with EPS above our earlier expectations.
  • February 6: EA announced that the delay of the Xbox 360 launch dates for Titanfall by two weeks to allow for additional polish.
  • February 10: Ubisoft reported third-quarter 2014 sales at the midpoint of guidance and tightened full-year 2014 guidance.
  • February 2013: NPD announced worse-than-expected January U.S. console/handheld software and hardware sales.
  • February 2014: In a Form 13F, Greenlight Capital disclosed a stake of roughly 4.2 million shares in Take-Two as of year’s end.

Key February headlines (continued):

  • February 18: Sony (NYSE:SNE) announced worldwide PS4 sell-through of more than 5.3 million consoles as of February 8.
  • February 18: King Digital Entertainment filed a Form F-1 registration statement for an I.P.O. of up to $500 million.
  • February 18: Ken Levine announced the winding down of the studio that he co-founded, Take-Two’s Irrational Games.
  • February 24: Microsoft (NASDAQ:MSFT) announced the Xbox One Titanfall bundle for $499.99, essentially bundling the game for free.
  • February 25: Reuters reported that Zynga (NASDAQ:ZNGA) had won the dismissal of a lawsuit accusing the company of fraudulently misleading shareholders about its financial and business prospects before and after its initial public offering.

Key March events:

  • March 11 (estimated): Majesco to report first-quarter 2014 results. ⇓ COOL
  • March 11: EA (NASDAQ:EA) to release Respawn’s Titanfall for Xbox One and PC. The Xbox 360 version launches March 25. ⇑ EA
  • March 13: February NPD U.S. video games sales data release.
  • March 25: Activision Blizzard to release Blizzard Entertainment’s Diablo III: Reaper of Souls (PC). ⇑ ATVI
  • March 27 (estimated): GameStop (NYSE:GME) to report Q4:13 results. ⇑ GME

Michael Pachter is an analyst at Wedbush Securities. 

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