The next two weeks are going to be important ones for investors following the Video Game Development and Publishing industry, with the following three major companies making earnings announcements:
- Electronic Arts (EA) - Q3 2013 - January 30, 2013
- Activision Blizzard (ATVI) - Q4 2012 - February 7, 2013
- Take Two Interactive (TTWO) - Q3 2013 - February 5, 2013
Development costs - Costs to produce console and PC games are increasing to match consumer tastes, while sales of other than top selling franchises are dwindling. The few top-selling franchises on the other hand are experiencing record-breaking sales. This has meant trouble for game developers, particularly the smaller studios and producers who are struggling to turn profits.
Game developers are responding by exploring non-traditional sales means such as free-to-play online games. which allow limited play without charge encouraging subscriptions, and the widespread use of Downloadable Content to entice players to spend marginally more on each title and to keep their games longer, reducing lost revenue from second-hand sales. Furthermore, digital revenue from game downloads and application games have become more important and will continue to play an important role in the near future.
Next Generation Consoles - All eyes are on Microsoft (MSFT) and Sony (SNE) patiently awaiting concrete news about the release of the next-generation consoles to replace the aging Xbox 360 and Playstation 3. Rumors for both of these consoles are projecting a release date for Christmas 2013, however this is largely speculation, and delays are not unheard of.
The last generation of consoles are largely behind in processing and graphics capabilities compared with the latest PCs. The release of the next generation of consoles will be very significant for producers as a means of increasing sales as console game sales account for a significant portion of the revenue of each company.
Note - EA's and TTWO's earnings calendars use a year ending March, therefore December 2012, is Q3 2013. Information taken from Yahoo Finance and earnings reports.
1) Electronic Arts
Since its last earnings release, EA's share price has been in the range of 11.91 and 15.42. Its current price at the time of writing of $14.77 results in a P/E ratio of 1,510 with no dividend yield. At this valuation, the company is worth $4.51 B.
$ 977 M
$ 491 M
$ 1,100 M
Analysts currently project EA's earnings for Q3 2013 at $0.56 per share, comparing this with the estimated $0.93 and actual 0.99 in Q3 2012, this much lower estimate reflects EA's poor line-up over the Christmas season. Electronic Arts was not well positioned during the break without any releases that stacked up to the mega franchises "Call of Duty" by Activision and "Halo 4" by Microsoft, which dominated the Christmas season.
The market will be looking at the upcoming earnings release to monitor the health of EA's line-up of steady console games, and to see if there are improvements in the online sales, particularly those of "Star Wars: The Old Republic."
Since its last earnings release, ATVI's share price has been in the range of 10.56 and 11.57. Its current price at the time of writing of $ 11.36 results in a P/E ratio of 14.57 and a dividend yield of 1.58%. At this valuation, the company is worth $12.67 B
Unlike its competitor EA, ATVI has had a very impressive year. The latest installment of its largest console franchise "Call of Duty: Black Ops 2" set the year's sales records even though its predecessor version "Modern Warfare 3" was released only a year before. Call of Duty delivered approximately 21 M units across the 360, PS3 and PC (approx 29.5 M for Modern Warfare 3). World of Warcraft, the massively multi-player online role-playing game, regained its market size, which had dipped below 10 M with the release of its expansion pack: "Mists of Pandaria." ATVI's unique Skylanders series sold with action figures required to play helped boost revenue, becoming the number 1 game in North America in terms of dollar sales.
Looking toward the earnings, investors will be anxiously awaiting news on the financial results of Call of Duty. Analyst estimates project EPS of $0.72 on $2,044 M in revenue. The World of Warcraft subscriber base will also be a closely followed metric, and without any updates on subscribers since the release of the expansion a shift in any direction could result in a significant distortion.
3) Take-Two Interactive Software Inc.
Since its last earnings release, TTWO's share price has been in the range of 10.71 and 13.10. Its current price at the time of writing of $ 12.82 results in a total valuation for the company of $1.16 B. TTWO's P/E is negative, and it does not pay a dividend.
Best known for its Rockstar games series including Grand Theft Auto, Red Dead and for its Borderlands and BioShock series, TTWO is a much smaller development studio compared with its peers in terms of revenue. It has suffered the same fate as many smaller studios where a major title drives most of the revenues resulting in inconsistent profitability. TTWO has distinguished itself by producing and selling exceptional series that have strong fan bases:
- "BioShock - 2" (2010) selling 3.54 M units, the original (2007) selling 3.9 M units
- "Borderlands - 2" (2012) selling 4.08 M units, the original (2009) selling 5 M units
- "Grand Theft Auto - IV" (2008) selling 20.4 M units, San Andreas (2004) selling 23.6 M units
- "Red Dead Redemption" - (2010) selling 12.48 M units
For the current quarter, analysts project EPS of $0.55 on $365 M in revenue. 2013 will be an important year for investors, as Take-Two will be releasing the next installment of its most successful franchise - "Grand Theft Auto IV" - scheduled for spring 2013 and the latest game in the Bioshock series, "BioShock Infinite" in February.
Other Notable Headlines
1) Majesco Entertainment (COOL) Q4 2012 results
COOL Reported Q4 2012 earnings on January 14, 2013 with EPS coming in at $-0.07 well below expectation of $0.02. The earnings report further issued a poor outlook on upcoming sales, as described in this article. COOL dropped from $1.02 to the current $0.70 on the news for a total market value of $29 M.
2) Bankruptcy filing of THQ (THQIQ)
THQ Inc. was struggling with losses in the past five years and an increasing debt burden, leading to a bankruptcy filing in December 2012. On January 22, 2013, THQ's franchises were sold title by title at an auction, with SEGA (TYO:6460), TTWO, Ubisoft Entertainment (UBI) for a total of approximately $100 M in proceeds.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TTWO over the next 72 hours.