Published on October 31st, 2009 | by Gameuber Staff0
Video Game Publishers Face Pressure To Recover In 4th Quarter
Video game publishers are gearing up to report financial results for the September quarter starting next week, but the industry is facing even more pressure in the year-end period, which will have to produce a lot of sales to make up for a long slump earlier in the year.
Results for the quarter ended Sept. 30 are largely expected to be solid, given the release of strong titles such as “The Beatles: Rock Band,” “Guitar Hero 5″ and “Madden NFL.” The quarter also benefitted from price reductions on game consoles.
However, sales in the industry are still down from last year, and analysts are growing more skeptical that a strong holiday season can help publishers fully recover.
“The downward software sales trend barely reversed in September, and we think it is likely to revert to mildly negative in October,” Michael Pachter of Wedbush Morgan wrote in a note to clients on Wednesday.
In that report, Pachter lowered his full-year sales estimates for the industry, citing the sharp weakness through the spring and summer periods. He now expects sales of game software for the U.S. and Europe to be down 4% in 2009 from the previous year. He had previously predicted a 4% gain in sales for the period.
The industry will still need a strong holiday sales turnout to even get to that number. According to data from the NPD Group, game software sales in the U.S. were down 12% by the end of September compared to the same period last year.
Video game makers have faced not only a sharp economic downturn, but also difficult comparisons with last year, when many of the biggest releases came out early in the period. By comparison, 2009 is a back-end loaded year, with the biggest titles such as “Call of Duty: Modern Warfare 2,” “Assassin’s Creed 2″ and a new “Super Mario Bros.” coming out in the last two months of the year.
Pachter said that while October sales may show mild weakness compared to the previous year, the industry should still see a strong close to the year.
“We expect our covered companies to be cautious regarding industry growth when earnings are reported next week, but believe that most companies have factored in a modest rebound,” he wrote.
Activision Outlook Still Strong
Activision Blizzard (ATVI) will report third-quarter results on Thursday. The publisher is expected to report earnings of 4 cents a share, according to consensus forecasts from Thomson Reuters. Net revenue is expected to come in at $726.1 million, up from $711 million for the same period last year.
The company had a couple of strong releases for the quarter, including the shooter title “Wolfenstein” and “Marvel Ultimate Alliance 2,” the latter of which ranked in the top-10 selling game titles for the month of September, according to NPD data.
But Activision’s biggest release for the quarter also faces heavy competition. The company launched “Guitar Hero 5,” the latest of its popular franchise, right up against “The Beatles: Rock Band,” which outsold “Guitar Hero” during the month of September.
Weakness in the music genre caused Doug Creutz of Cowen & Co. to trim his earnings estimates for Activision for this year and next.
“The largest factor in our estimate reduction is the recognition that the declines in the music genre earlier in the year were not temporary, and are likely to persist going forward,” he wrote in a report Monday.
Still, analysts agree that Activision has the strongest slate this year. Next month will see the release of “Modern Warfare 2″–widely expected to be one of the industry’s top-selling games of all time. The company also has “Tony Hawk: Ride” and its newly released “DJ Hero” for the holiday season.
That will be reflected in the company’s fourth-quarter results. Wall Street currently expects Activision to bring in $2.3 billion in revenue for the quarter, with earnings of 44 cents a share.
THQ Inc. (THQI) will also report results for its second fiscal quarter on Wednesday, Nov. 4. The company had no major game releases during the quarter.
Electronic Arts May Trim Forecasts
Electronic Arts (ERTS) reports results for its second fiscal quarter on Nov. 9.
For the period, EA is expected to earn 7 cents a share on revenue of $1.14 billion. Revenue for the same period last year on a non-GAAP basis was $1.13 billion, with a loss of 6 cents a share.
The company’s biggest release of the quarter was the latest installment of its popular “Madden NFL” franchise. But several analysts believe the company saw weaker-than-expected sales of the game, some of which may have been offset by strong European sales of its latest “FIFA” soccer series.
EA will also benefit from “The Beatles: Rock Band,” but only in a limited fashion, as the game was produced by Viacom’s (VIA) MTV Games division, which splits a portion of the sales with EA as the distributor.
Todd Mitchell of Kaufman Bros. believes EA may trim its full-year guidance, but said the company is likely hoping that strong sales of games for the Nintendo Wii will help offset revenue weakness elsewhere.
“We believe the Street is broadly expecting EA to lower its fiscal 2010 non-GAAP EPS guidance, and the stock may actually respond well if the magnitude of this reduction is not too great,” Mitchell wrote in a report Monday.
Fourth Quarter Sees Benefits
Along with a stronger release slate, game publishers are expected to benefit from a round of price cuts on the major gaming consoles.
Both the Xbox 360 from Microsoft Corp. (MSFT) and the Wii from Nintendo (NTDOY) can now be had for less than $200. Sony’s (SNE) PlayStation 3 was also reduced to $299, which gave the console a sharp bump in sales during the month of September.
Also, several publishers have moved titles out of the holiday season, which may help the ones that remain have more room to generate interest.
“It is not a crowded holiday season and the overall line-up is well segmented,” said Mitchell of Kaufman Bros. “All the major third-party publishers have top contending titles for each of the specific genres, and with fair spacing in release windows between each one.”
The outlook for early 2010, however, has gotten much stronger, with titles such as “Bioshock 2″ from Take-Two Interactive (TTWO) and “God of War 3″ from Sony expected to hit the market.
Pachter of Wedbush Morgan says he expects that 16 of the games in the pipeline for the first half of 2010 can generate unit sales of more than 1 million each.
“The combination of a solid release schedule and easy comparisons (March through August software sales averaged down 21%), leave us quite optimistic that the industry will record double digit sales growth each of the first eight months in 2010,” he wrote.