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Analyst: 'Looking Ahead: 3Q06, 4Q06, and Beyond'
by Simon Carless [PC, Console/PC]
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October 31, 2006
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In a report titled “Looking Ahead: 3Q06, 4Q06, and Beyond” released today by the Susquehanna Financial Group, analysts Jason Kraft and Chris Kwak look at the holiday prospects for major publishers, following strong NPD data for the past three months, and give their predictions for the top selling titles leading into the next quarter.
The report starts as follows (thanks to Kraft and Kwak for permission to reprint here):
"Looking Ahead: 3Q06, 4Q06, and Beyond
On the back of strong NPD sell-through data for the past three months, September earnings for ERTS and THQI should be healthy. (ATVI already pre-released better-than-expected revenue for its Sept. 2006 quarter.) Much of the strength has been driven by a handful of titles – chiefly, Madden and Saints Row. We believe upside to September quarter numbers is already embedded in stocks. The more interesting question involves December quarter numbers – where managements take estimates and how realistically companies can exceed them.
In our Video Game Journal dated October 10, 2006 (“Will the PS2 Hold Up? – Looking at Estimates this Holiday”), we outlined why we are not concerned about December quarter revenue estimates (excluding Take-Two, who will no doubt file SEC documents in the future). Looking just at fundamentals, next-gen consoles (and the shortage of PS3 units) should not hurt the publishers much. Will the shortage of PS3 units freeze PS2 game purchases? We do not believe so.
Looking at sentiment, however, the group could be choppy before and after the PS3 launch, as first-party titles (Gears of War – Microsoft, The Legend of Zelda: Twilight Princess – Nintendo, and Resistance: Fall of Man – Sony) take prominence this holiday and as third-party publishers face headline risk, especially from PS3 supply constraints.
An upward bias to estimates is already embedded in these stocks and the easy money has been made for now. With valuations extended, these stocks should take a breather for the next few months until we get a better sense for a PS3 hardware ramp.
Longer term, investors remain focused on peak earnings per share potential. This cycle is unlike past cycles insofar as several high-margin revenue opportunities (in-game advertising, digital transactions, and third-party friendly portables) have emerged to offset higher development costs. In the face of catastrophically bad news and euphoria-inducing good news, we remind readers that everything has a fair value. In this spirit, we revisit our Peak EPS analysis. This time, we supplement our Peak EPS analysis with our historical P/E analysis.
2QFY07 Previews: Great Expectations
Electronic Arts. Management guided to 2QFY07 (Sept.-06) total revenue and pro forma EPS of $635 mln to $685 mln and $0.00. For 2QFY07, our total revenue and pro forma EPS estimates are $677.2 mln and $(0.01). Consensus estimates for 2QFY07 stand at $672.2 mln and $0.02. We believe ERTS had a strong quarter on the back of Madden NFL 07, NCAA Football 07, and NBA Live 07. We expect the company to beat expectations. We also believe this sentiment is captured in the stock price.
THQ. Management guided to 2QFY07 (Sept.-06) total revenue and pro forma EPS of $195 mln and $0.01. For 2QFY07, our total revenue and pro forma EPS estimates are $192.5 mln and $0.01. Consensus estimates for 2QFY07 stand at $200.7 mln and $0.03. This quarter was all about Saints Row. This GTA-clone has filled a void in the violent, free-roaming Action genre.
Activision. Activision already pre-released better-than-expected revenue of $188 mln for 2QFY07 (Sept.-06). On the back of Call of Duty 2, Guitar Hero, and a strong distribution business, Activision exceeded expectations by roughly $60 mln.
Take-Two. Take-Two’s 4QFY06 (Oct.-06) will be reported fully when the investigation into the company’s stock options grants wraps up. We believe Bully and NBA 2K7 will be the big drivers of the quarter.
Looking Ahead to 3QFY07
Electronic Arts. For 3QFY07 (Dec.-06), our total revenue and pro forma EPS estimates are $1.20 bln and $0.54. Consensus estimates for 3QFY07 stand at $1.20 bln and $0.59. In our Video Game Journal dated October 10, 2006 (“Will the PS2 Hold Up? – Looking at Estimates this Holiday”), we showed that ERTS could post ~10% upside to published revenue estimates. Our analysis points to a revenue number in excess of $1.3 bln in 3QFY07. The driver of 3QFY07 revenue? [Need For Speed: Carbon, Superman Returns, Madden NFL 07, FIFA Soccer 07]
Activision. For 3QFY07 (Dec.-06), our total revenue and pro forma EPS estimates are $573.5 mln and $0.29. Consensus estimates for 3QFY07 stand at $588.1 mln and $0.28. In our Video Game Journal dated October 10, 2006 (“Will the PS2 Hold Up? – Looking at Estimates this Holiday”), we showed that ATVI could post some upside to published revenue estimates. Our analysis points to a $600 mln revenue number. The driver of 3QFY07 revenue? [Call of Duty 3, Guitar Hero 2, Tony Hawk's Project 8, Marvel Ultimate Alliance]
THQ. For 3QFY07 (Dec.-06), our total revenue and pro forma EPS estimates are $436.2 mln and $0.98. Consensus estimates for 3QFY07 stand at $429.2 mln and $0.97. In our Video Game Journal dated October 10, 2006 (“Will the PS2 Hold Up? – Looking at Estimates this Holiday”), we showed that THQI could also post ~10% upside to published revenue estimates. Our analysis points to a revenue number closer to $500 mln. The driver of 3QFY07 revenue? [Smackdown Vs. Raw 2007, Cars, Saints Row, Destroy All Humans! 2]"
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