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Analyst: Activision, EA, THQ Perform “Stronger Than Expected”

Wedbush Morgan Securities analyst Michael Pachter has raised the firm's estimates for Activision, Electronic Arts, and THQ,
October 16, 2006
Wedbush Morgan Securities analyst Michael Pachter has raised the firm's estimates for Activision, Electronic Arts, and THQ, following a 38 percent growth in September video game sales as reported by research firm NPD Group. According to Pachter, major publisher and developer Activision had a “stronger than expected” quarter, despite generating sales of just $73 million, a 13 percent decline from the same period last year. The analyst has raised its revenue estimate for the company from $135 million to $145 million, noting that it believes that “the company’s U.S. performance is representative of its worldwide performance.” In addition, Wedbush also has maintained the company's Strong Buy rating and $18 target price. The stock is currently trading at $15.46. The company noted that in 2005, Activision released Spider-Man and X-men titles during this same period, and that no similarly anticipated games were released during this most recent quarter. “While those titles represented approximately $90 million of revenue for the September 2005 quarter,” explained Pachter, “we believe that strong sell-through of Activision’s Over the Hedge and X-men games (both released in the June quarter) during the quarter indicates better than expected reorders, and think that contribution from the newly acquired Guitar Hero game provided upside to guidance and the consensus estimate.” Looking to major video game company Electronic Arts, the analyst also noted “stronger than expected” performance for the quarter ended September 30, with U.S. retail sales of $421 million. This represented a 12 percent climb over the $377 million reported over the same period in 2005. EA's revenue guidance is between $635 – 685 million. The firm is also maintaining EA's stock as a Strong Buy with a $60 target price. Shares of EA are currently trading at $56.86. For the second quarter, Wedbush is increasing its expected revenue for EA from $670 million to $700 million. “We believe that the company’s U.S. performance is representative of its worldwide performance, and believe that its sell-through figures are consistent with its sell-in performance during the quarter,” commented Pachter in a research note. “Our revenue estimate reflects year-over-year growth of less than 5%, as we believe that late quarter shipments of Tiger Woods and FIFA were likely lower than in the prior year’s quarter. Our EPS estimate reflects a substantial increase in marketing spending, as we believe that the company is focused on maintaining market share for its NBA game.” In addition, the Pachter noted that the firm believes EA's guidance of revenues between $2.8 and $3 billion for fiscal 2007 is “conservative”, and is “well positioned to consistently deliver upside to expectations.” Because of this, the firm has upped its expectations from the company's performance in fiscal 2007 from $2.935 billion to $3 billion. Noted Pachter: “Full-year guidance was based upon the company’s estimate for flat to negative 5% industry growth. It now appears that the industry will grow between 5 – 8% in 2006, with approximately 8 – 10% growth in the December quarter. Accordingly, we believe that EA is likely to deliver substantial upside to revenue estimates in its December quarter. Our earnings estimates again reflect significantly higher year-over-year marketing expenses, as we believe EA will continue to support its sports franchises during the holiday quarter. Notwithstanding our increased Q2 and Q3 estimates, we note that EA has several games planned for Q4 release, and the delay of any of these could result in revenues and EPS at the high end of guidance for the full year.” Finally, Wedbush noted that publisher THQ's September quarter sales were likewise “stronger than expected” at $120 million, up a substantial 63 percent from last year's $74 million. While THQ's guidance for the second quarter is $195 million, Wedbush has raised its expectations for the period from $195 million to $205 million. The firm has maintained its Buy rating for THQ, with a 12-month target price of $31. THQ stock is currently trading at a slightly higher price of $31.80. “We believe that the company’s U.S. performance is representative of its worldwide performance, and believe that its sell-through figures are consistent with its sell-in performance during the quarter,” wrote Pachter. “Our revenue estimate reflects year-over-year growth of less than 45%, as we believe that late quarter shipments of Bratz, Danny Phantom and Unfabulous may have been slightly lower than typical initial shipments. Our EPS estimate reflects a substantial increase in marketing spending, as we believe that the company is focused on creating brand awareness for its Saints Row game.” Looking ahead to THQ's fiscal 2007 performance, Wedbush expects revenue from the company to fall between $950 million and $955 million. “Although we are confident that full-year industry growth will be substantially higher than the assumptions used in arriving at both guidance and the consensus estimates,” added Pachter, “we note that THQ has two high-profile PC games (S.T.A.L.K.E.R. and Supreme Commander) scheduled for release in the March quarter, and we believe that one or both may slip into the following quarter.”

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