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Wedbush Cautious On Midway, Expects $8 Million In Q1 Sales

Wedbush Cautious On Midway, Expects $8 Million In Q1 Sales

April 30, 2007 | By Jason Dobson

April 30, 2007 | By Jason Dobson
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Ahead of Midway's first quarter conference call on Thursday, May 3, Wedbush Morgan's Michael Pachter has commented that the firm expects to maintain its cautious outlook on the Chicago-headquartered game publisher and developer, and that it will report "weak in-line results."

Wedbush anticipates that Midway will report $8 million in sales for the period, a figure slightly above the company's $7 million guidance. According to Wedbush, NPD data for the March quarter found that Midway’s U.S. retail sales were up 6 percent over the prior year quarter.

However, the firm adds that “given that there were no new releases during the quarter, sell-in was likely light, and significant upside to our estimates is unlikely.” Wedbush expects Midway to continue its cautious outlook and guidance for 2007. Earlier this year Midway officials noted that the company expects revenue growth of approximately 36 percent to $225 million for the entirety of 2007.

Adds Pachter, “The company is unlikely to be profitable until it can generate revenues at much higher levels. We expect continued focus on building its publishing capability through 2007.”

The analyst further comments that his firm is “cautiously optimistic” regarding Midway's future, specifically concerning the company's ability to “perform significantly better than it did during the previous console cycle.” Much of this optimism hinges on the belief that Midway can “generate sustainable profits” if its revenues manage to exceed $300 million annually.

Based on Midway's upcoming release schedule, Pachter believes that this turnaround could be achieved by 2008. Midway has a considerable catalog of high profile titles that are expected to launch for multiple plaforms in 2007, including the Wii version of Mortal Kombat Armageddon, as well as Stranglehold, BlackSite: Area 51, The Wheelman, The Lord of the Rings Online, and Unreal Tournament III.

The analyst also notes belief that Midway has “reached the low point in its turnaround story,” but that the firm cannot yet predict “when it will achieve profitability.” Because of this, Wedbush has maintained its 'hold' rating, with a price of $7.29. As of this writing, shares of Midway were down 1.53 percent from opening to $7.18.

“The company’s cost structure suggests that it can achieve profitability at revenue levels of $300 million annually,” states Pachter, “and we remain confident that Midway could be able to generate revenues at the $300 – 800 million level over the next several years.”

“However,” he concludes, “to achieve this level of revenues, the company must continue to expend resources on growing its development capability.”


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