Wall Street Analyst: Electronic Arts and Zynga Grab Attention in Video Game Sector

This newsletter lists the key events (including key game releases and financial news) in December, previews our expectations for January, and provides our views of the current state of the video game industry.

In December, none of our covered companies reported earnings, but THQ (NASDAQ:THQI) lowered its Q3:12 revenue guidance.

The Wedbush Video Game Index—our market cap-weighted index of video game companies—had a December decrease of 6.5% due primarily to a difficult month for Electronic Arts (NASDAQ:EA) and Nintendo, despite much better-thanexpected November U.S. console software sales according to NPD.  Nintendo shares (down 10.0%) suffered due to continued market share declines, while Electronic Arts shares (down 11.2%) were negatively impacted by weaker-thanexpected NPD results and a tepid response to the IPO of social games competitor Zynga (NASDAQ:ZNGA). In addition, THQ shares were down 55.0% due to the lowering of its Q3:12 revenue guidance. The Russell 2000 and S&P 500 both increased 0.9%, respectively, due to easing European debt concerns. GameStop (NYSE:GME) shares were up 4.4% due to robust Black Friday spending by US consumers and continued positive industry trends according to NPD. On a constant f/x basis, the Index decreased 5.5%.  Excluding Nintendo, the Index decreased 3.9% (3.8% on a constant f/x basis).

U.S. November console software sales were $1.67 billion, up 15% from last year’s $1.45 billion, and above our estimate of $1.50 billion (up 3%). Unit sales were up 18%, ASPs were down 2%, and PC software sales were down 7%.

The top December game releases were Electronic Arts’ Star Wars: The Old Republic — PC — and Nintendo’s Mario Kart 7 (3DS). We expect positive sales growth for a fourth consecutive month in December. In our view, the crowded release slate in November triggered competitive behavior with more marketing spending than we have seen in the past. This huge marketing push from publishers and the competitive retail climate should help sales growth in December. If December sales end up being positive, full year sales will likely come in down 2%, compared to our prior down 4% estimate.

Overall, we expect the publisher group to appreciate substantially in 2012.  Packaged product sales have likely bottomed, and we are encouraged by the rebound in sales growth that began in September.

Key December headlines:

o 12/1 – Electronic Arts (NASDAQ:EA) announced the acquisition of KlickNation, a developer of free-to-play social role-playing games on social platforms including Facebook. Terms of the acquisition were not disclosed.

o 12/7 – THQ (NASDAQ:THQI) lowered its Q3:12 revenue guidance by ≈ 25% to an implied $382.5 – 412.5 million from $510 – 550 million to reflect weak sales of the uDraw GameTablet on Xbox 360 (NASDAQ:MSFT) and PS3 (NYSE:SNE).

o 12/9 – November NPD U.S. video games sales data release.

o 12/12 – Activision Blizzard (NASDAQ:ATVI) announced that Call of Duty: Modern Warfare 3, which was released on November 8, generated over $1 billion of sales in sixteen days, one day faster than the previous record-holder, the film Avatar.

o 12/15 – Zynga, the world’s leading social game developer, announced the pricing of its initial public offering of 100,000,000 shares of Class A common stock at $10.00 per share.

o 12/16 – Zynga (NASDAQ:ZNGA) shares began trading on the NASDAQ Global Select Market, and closed at $9.50 per share.

o 12/16 – Quebec Court of Appeal for Montreal rendered a judgment in favor of THQ, striking down a provisional injunction obtained by Ubisoft that prohibited THQ from soliciting Ubisoft employees with a non-compete provision.

o 12/19 – Wedbush initiated coverage of Zynga with an OUTPERFORM rating and a 12-month price target of $12.50.

o 12/20 – Electronic Arts released Star Wars: The Old Republic MMO for the PC.

o 12/20 – The NASDAQ ticker symbol for Electronic Arts changed to EA from ERTS as of the opening of trading.

o 12/22 – Activision Blizzard announced that the L.A. Superior Court denied a motion brought by Electronic Arts for summary judgment, permitting Activision to proceed to trial on its $400 million contract-interference suit against EA.

• Key January events:

o 1/3-6 (est.) – GameStop to report holiday sales. ⇔ GME

o 1/3-6 (est.) – Best Buy (NYSE:BBY) to report holiday sales. ⇓ BBY

o 1/23-27 (est.) – Microsoft, Nintendo, and Sony to report quarterly results.

Michael Pachter is an analyst at Wedbush Morgan.

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To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com