The Wedbush Video Game Index, our market cap-weighted index of video game companies, was down 6 percent for the month of January, weighed down mainly by difficult months for GameStop and Nintendo. The Russell 2000 and S&P 500 were down 3 percent and 4 percent, respectively, due to concerns about the strength of emerging markets and the impact of the Federal Reserve tapering its bond buying program. GameStop was down 29 percent for the month after lowering FY:13 EPS guidance as better-than-expected new hardware sales and worse-than-expected new software sales over the holidays negatively impacted gross margin. Nintendo was down 14 percent for the month after slashing its FY:14 guidance due to weaker-than-expected hardware and software sales. EA had the strongest month, up 15 percent after reporting a Q3:14 EPS beat and raising full-year EPS guidance. On a constant f/x basis, the Index was down 10 percent. Excluding Nintendo, it was down 3 percent.
December U.S. console/handheld software sales were $1.28 billion, down 17 percent compared to last year, and below our estimate of $1.53 billion. Just two days after we published our December estimate of down 1 percent year-over-year, GameStop reported much weaker-than-expected new software sales over the holidays (down 22.5 percent year-over-year), attributing the decline to the PS3 and Xbox 360.
As GameStop’s holiday period encompasses the retail months of November and December, our December estimate was clearly too bullish given that November was down 24 percent. Based upon the December NPD data, lower-than-expected software sales on the Xbox 360 and the PS4 (PS3’s successor) accounted for the bulk of the difference between our estimates and actual industry performance. The Xbox 360 surprise was due in large part to Activision’s (NASDAQ:ATVI) Call of Duty: Ghosts, which sold below our estimate. The PS4 surprise was due primarily to lower-than-expected hardware sales. Software sales for the Nintendo consoles also were below our expectations, with the Wii U lagging behind the PS4 and Xbox One.
Last month, Wedbush Securities introduced its video game industry growth model through 2016, and made the model available to clients. The model has our hardware and software sales forecast for 2014 – 2016, as well as historical data from 1994 – 2013. We expect Sony’s and Microsoft’s new consoles to thrive over the next three years.
Key January Headlines
o 1/6 — Pasta Padre reported that Take-Two’s 2K Sports had erased any mentions of its MLB franchise on its websites.
o 1/6 – Microsoft (NASDAQ:MSFT) announced Xbox One sell-through of over 3 million units before the end of 2013.
o 1/7 — Sony announced cumulative PS4 sell-through of over 4.2 million units as of December 28.
o 1/14 — GameStop reported holiday sales results and lowered EPS guidance from mix shift.
o 1/14 — Majesco reported a Q4:13 EPS miss driven by margin weakness due in part to Zumba timing.
o 1/16 — NPD announced worse-than-expected December U.S. console/handheld software and hardware sales.
o 1/17 — Nintendo significantly lowered FY:14 guidance primarily to reflect weaker-than-expected year-end sales.
o 1/27 — Microsoft announced it had bought the rights to the Gears of War franchise from Epic. Terms were not disclosed.
o 1/28 — EA reported a Q3:14 EPS beat driven by cost control and digital revenue, and raised FY:14 EPS guidance.
o 1/29 — Nintendo reported Q3:14 results that reflected guidance cuts from earlier in the month.
o 1/29 — An article posted on The Verge website included a number of claims by a NeoGAF poster relating to Microsoft’s Xbox One plans, including the possibility of a version of the console without a Blu-ray drive.
o 1/30 — Zynga preannounced better-than-expected Q4:13 results in conjunction with its announcement of an agreement to acquire NaturalMotion for $527 million in cash and stock. In addition, it provided bullish FY:14 guidance.
Key February Events
o 2/3 — Take-Two to report Q3:14 results. ⇔ TTWO
o 2/4-7 — D.I.C.E. Summit 2014 at the Hard Rock Hotel and Casino in Las Vegas.
o 2/6 — Activision Blizzard to report Q4:13 results. ⇑ ATVI
o 2/10 — Ubisoft to report Q3:14 sales. ⇔ UBI.FP
o 2/13 — January NPD U.S. video games sales data release.
o 2/27 – Best Buy (NYSE:BBY) to report Q4:14 results. ⇓ BBY
Michael Pachter is an analyst at Wedbush Securities.