Ahead of Electronic Arts, Activision, THQ and Midway's quarterly reports, Lazard's Colin Sebastian and Wedbush Morgan's Michael Pachter have forecasted strong results, with Pachter "more bullish than ever about Activision," but cautious on Midway's return to profitability.
Looking at the industry as a whole, Sebastian says "overall video game industry growth remains healthy through mid-2007 (+24% software sales year-to-date), and our channel checks indicate that sales trends remain strong into late July," but warns that "with strength most evident on Nintendo platforms (DS and Wii), we note that not all publishers are benefiting equally."
Both analysts predict Activision to report above estimates for its first quarter, with Pachter calling for sales of $450 million, and Sebastian estimating even higher at $475 million on strong sales of Guitar Hero, Spider-Man 3, Shrek the Third
"We expect the company to raise its FY:08 guidance by the upside in Q1, and to remain optimistic about its near-term outlook," said Pachter, adding that the company's "recent strong performance reinforces our positive long-term thesis, and we are more bullish than ever about Activision as an investment."
He also added that "shares have recently come under pressure due to concerns about competition from the upcoming MTV title Rock Band
, and expect management to address the competitive threat during the conference call."
Turning to Electronic Arts, Pachter has called for first quarter sales of $350 – 400 million, and Sebastian has said he expects earnings of $375 million on a "limited spring release schedule, while seasonally EA’s release schedule improves meaningfully over the summer with sports titles NCAA Football, Madden NFL, Tiger Woods PGA
, and FIFA
"Although EA is tracking behind the quarter according to data from the NPD group," added Pachter, "we believe that its sales are stronger than implied. The company’s U.S. retail sales are 30% lower than in the same period last year compared with guidance for –3% to -15%. We believe that the company results were better than implied as they controlled sell-in of Harry Potter and the Order of the Phoenix
late in the quarter, and we believe it generated better sales of that game in Europe. In addition, contribution from JAMDAT should be up $15 million year-over-year, and foreign currency translation should contribute at least $15 million."
THQ will also be reporting their first quarter earnings this week, with Sebastian expecting in line sales of $115 million on its Pixar-licensed Ratatouille
, and "an otherwise slow release lineup," though, he added, "we believe THQ has a solid lineup of [second half of 2007] new releases including WWE Smackdown vs. Raw, SpongeBob
and Cars Mater National
, which are all well differentiated from expected industry blockbusters Halo 3
and Grand Theft Auto IV
Pachter called for sales of $110 million, adding that he remains confident of the company's fiscal 2008 prospects. "THQ has a strong slate of releases for the Nintendo Wii and DS platforms," he said, "and the company’s release schedule reflects its commitment to migrate from a majority of licensed products to a majority of owned intellectual property.
"We think that the industry will grow at least by 18%, implying that even if it loses market share, THQ can deliver revenues at the high end of its guidance" he added, and said that he believes "the company will continue to maintain a dominant position on Nintendo platforms, and believe that its lineup of owned I/P positions it to grow share on the PS3 and Xbox 360 platforms next year."
Finally, Pachter says he is "cautiously optimistic" about Midway ahead of its second quarter results also coming this week, with expected sales slightly below estimates of $30 million, adding that "given the company’s relatively light lineup for the quarter, we do not see much potential for upside."
He added that if the publisher can achieve sales above the $300 million annual level, it could achieve a turnaround by 2008. "Although we believe that Midway has reached the low point in its turnaround story," he said, "we have no clear visibility as to when it will achieve profitability."
"The company’s cost structure suggests that it can achieve profitability at revenue levels of $300 million annually, and we remain confident that Midway could be able to generate revenues at the $300 – 800 million level over the next several years," he concluded. "However, to achieve this level of revenues, the company must continue to expend resources on growing its development capability."