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 July, previews our expectations for August, and provides our views of the current state of the video game industry.
In the last month, Activision Blizzard (NASDAQ:ATVI), EA (NASDAQ:EA), Take-Two (NASDAQ:TTWO), and Zynga (NASDAQ:ZNGA) reported better-than-expected results, Ubisoft (EPA:UBI) reported in-line sales, and Nintendo (TYO:7974) reported worse-than-expected results. Sony (NYSE:SNE) reported quarterly results.
The Wedbush Video Game Index, our market cap-weighted index of video game companies, was up 17 percent in June, and outperformed the broader market averages due to the announcement of a transformative share repurchase by Activision Blizzard, better-than-expected June quarter results for many of the covered companies, and growing anticipation for the next-gen console launches. The Russell 2000 and S&P 500 were up 7 percent and 5 percent, respectively, driven by continued global economic growth.
Activision Blizzard had the strongest month, up 26 percent, with Take-Two up 17 percent due to quarterly guidance that implied strong Grand Theft Auto V sell-in, and GameStop (NYSE:GME) up another 17 percent as anticipation builds for the next-gen consoles. Excluding Nintendo, the index increased 21 percent.
June U.S. console/handheld software sales were $296 million, down 10 percent from last year’s $329 million, but above our estimate of $270 million (down 18 percent). Sales were down for the fifth consecutive month, but above May’s record-breaking low levels, driven by the positive impact of an extra week and two major releases, Sony’s The Last of Us and Nintendo’s Animal Crossing: New Leaf. SW units were down 11 percent, with ASPs up 1 percent. PC software sales were down 48 percent. Hardware sales were $142 million, down 30 percent from last year’s $201 million, but above our estimate of $115 million due primarily to better-than-expected sales for the 3DS. Combined hardware and software (including PC) sales for June were down 19 percent y-o-y.
We expect July console/handheld software sales to be led by new release EA’s NCAA Football 14 (360, PS3), and June releases Nintendo’s Animal Crossing: New Leaf and Sony’s The Last of Us. We expect packaged goods weakness driven by deteriorating demand for current-gen content (both new and catalog games) to continue in July and for most of the remainder of the year ahead of the next-gen console launches. We expect positive growth to return in September (the launch month of Take-Two’s Grand Theft Auto V), but do not expect sustained growth until 2014, as new consoles from Sony and Microsoft are expected to launch late this year.
Key July headlines:
o 7/1 – Zynga announced Don Mattrick would join Zynga as CEO and a member of the Board, effective July 8th.
o 7/10 – The South China Morning Post reported that China may soon end a 13-year ban on video game console sales
for consoles manufactured in Shanghai’s new free-trade zone.
o 7/17 – The NCAA announced it would not enter into a new contract with EA for the license of its name and logo for the
EA Sports NCAA Football video game. The current agreement expires in June 2014.
o 7/18 – Ubisoft reported Q1:14 sales that exceeded its guidance, and maintained full year guidance.
o 7/18 – NPD announced better-than-expected June U.S. console/handheld software and hardware sales.
o 7/19 – Joystiq reported that EA had signed an extension with the Collegiate Licensing Company for three years starting
on July 1, 2014 for a non-exclusive college football game.
o 7/23 – EA reported a Q1:14 EPS beat driven by digital revenue and cost phasing, and maintained FY guidance.
o 7/24 – The Wedbush Investment Committee removed Electronic Arts from the Best Ideas List.
o 7/25 – Zynga reported a slight Q2:13 beat and lowered the high end of its FY target adjusted EBITDA margin.
o 7/25 – Activision Blizzard announced a highly accretive share buyback from Vivendi and a new capital structure.
o 7/30 – Take-Two reported a slight Q1:14 EPS beat and increased full year guidance.
o 7/31 – Nintendo reported worse-than-expected Q1:14 results, but maintained full-year guidance.
Key August events:
o 8/1 – Sony reported Q1:13 results.
o 8/1 – Activision reported Q2:13 results that were in line with strong preannounced levels and maintained FY guidance.
o 8/15 – July NPD U.S. video games sales data release. ⇓
o 8/22 – GameStop to report Q2:13 results. ⇑
Michael Pachter is an analyst at Wedbush Securities.