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 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.
The Wedbush Video Game Index—our market cap-weighted index of video game companies—was down 9% for the month of December, below the broader market averages, as investors appear concerned about potential legislation relating to video game violence following the Sandy Hook Elementary School shooting. The Russell 2000 and the S&P 500 were up 3% and 1%, respectively, from a year-end rally and easing concerns around the fiscal cliff. Majesco (NASDAQ:COOL) was up 15%, likely due to better-than-expected sales of Zumba Fitness Core in November, while Ubisoft (EPA:UBI) was up 2% from a strong debut for Far Cry 3. Our other covered companies were down for the month, with THQ (PINK:THQIQ) down 80% from the news that it had entered into an asset purchase agreement and filed for bankruptcy. Nintendo was down 9% from the Wii U’s disappointing debut. On a constant f/x basis, the index decreased 9%. Excluding Nintendo (TYO:7974), the index decreased 6% (on a constant f/x basis as well).
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November U.S. console software sales were $1.43 billion, down 11% from last year’s $1.60 billion, and below our estimate of $1.57 billion. Overall sales were down ≈ $170 million; software sales for Nintendo consoles and handhelds declined $114 million and software sales for the PS3 declined $87 million. Call of Duty sales dropped off by a greater amount than we had anticipated. Software units were down 14%, with ASPs up 5%. PC sales were down 43% with a tough comp from Elder Scrolls V: Skyrim last year. Hardware sales were $839 million, down 13% compared with last year’s $962 million, and below our estimate of $871 million—so combined hardware and software (including PC) sales for November were down 11%.
November was a rough month for Nintendo, which accounted for the bulk of the software decline. Software sales on Nintendo hardware devices declined over 30% despite the debut of Wii U, and accounted for about two-thirds of the total decline for the month. Wii U software sales were only $26 million, reflecting an attach rate much closer to one title per hardware unit, and well below our estimate of three. Overall software sales were down for a twelfth consecutive month.
We expect December console software sales to be led by new release Ubisoft’s Far Cry 3 (360, PS3, PC) and a slew of high-profile recent releases, including Activision Blizzard’s Call of Duty: Black Ops II, Microsoft’s Halo 4, and Ubisoft’s Assassin’s Creed III. We expect the industry’s software sales declines to continue in December and January due to the aforementioned Nintendo weakness and increasing gamer fatigue.
Key December headlines…
o 12/5 – Activision Blizzard (NASDAQ:ATVI) announced Call of Duty: Black Ops II achieved worldwide retail sales of $1 billion in its first 15 days, one day faster than its predecessor. However, sales for November according to NPD were down y-o-y.
o 12/6 – NPD announced November console software and hardware sales down y-o-y and below our expectations.
o 12/7 – Take-Two’s (NASDAQ:TTWO) Irrational Games announced the delay of BioShock Infinite’s release by a month to March 26, 2013.
o 12/12 – Ubisoft announced that Assassin’s Creed III, released on October 30, had become the fastest-selling game in the company’s history, with sell-through of over 7 million units worldwide a month after its release.
o 12/16 – Two days after the Sandy Hook shooting, Sen. Lieberman stated violence in entertainment culture (including video games) causes vulnerable young men to be more violent. He called for a national commission on mass violence.
o 12/19 – THQ announced that it had entered into an asset purchase agreement with affiliates of Clearlake Capital Group, L.P. to acquire substantially all of THQ’s assets, and that it had filed for bankruptcy.
o 12/30 – According to TechCrunch, Zynga shut down or curtailed activity for 11 of its games.
Key January events:
o 1/10 (est.) – GameStop (NYSE:GME) to report holiday sales results. ⇔ GME
o 1/10 – December NPD U.S. video games sales data release.
o 1/11 – Best Buy (NYSE:BBY) to report holiday sales results. ⇓ BBY
o 1/14-18 (est.) – Majesco to report Q4:12 results.
o 1/21-25 (est.) – Nintendo to report Q3:13 results. ⇓ 7974.JP
o 1/24 – Microsoft (NASDAQ:MSFT) to report Q2:13 results.
Michael Pachter is an analyst at Wedbush Securities.
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