As expected, Nintendo (NTDOY.PK) reported very strong F4Q07 results after raising guidance four times throughout the year. We think Nintendo's success portends poorly for the major video game publishers.

• Higher SG&A affects EBITDA. Sify reported fiscal 4Q07 revenue of $33 million versus our estimate of $32.2 million. Gross margins came in at 46.7%, above our estimate of 46.5%; adjusted EBITDA was $2.4 million (7% margin) versus our expectation of $4 million. The $2.4 million in EBITDA nets out about $1.8 million in incremental bad debt expense (out of a total of $2.39 million) and forex losses of about $400,000. Net of these extraordinary expenses, the variance versus our estimate was primarily due to an increase in SG&A caused by additional hiring and incremental marketing.
• Corporate services drives growth. The Corporate services business exhibited strong growth, up 20% Y/Y and 4% Q/Q to $19.5 million (versus our estimate of $19.3 million). Management has seen efficiencies from the realignment of the sales force to sell multiple products and expects the benefits to gain momentum over the next few quarters.
• Access Media declined. The Access Media business declined 5% Y/Y and was flat Q/Q to $10.6 million (versus our estimate of $10.2 million). Most of the decline is at the cyber cafe business as the management team is focused on turning around the underperforming cafes and has slowed down the pace of new cafe openings. These cafes are being positioned as e-stores providing travel bookings, bill payments and money transfer services. The roll out of these services should be completed in the next 2-3 quarters. The ISP business continues to grow adding 7,000 new subs to end the quarter with 215,000 subscribers. Management indicated that they are already seeing a benefit to gross margins and EBITDA margins due to the restructuring.
• Growth at interactive services declined. This business grew 23% Y/Y and declined 11% Q/Q to $1.6 million (versus our estimate of $1.8 million). The slowdown was caused by the departure of some ad sales personnel and tough comps created by a large corporate order in FY3Q07. The company has announced that it will be outsourcing its ad sales to Big Bang Media, which should give it access to agencies who handle most of the marketing dollars.
• Changes to our estimates. We are increasing our 2008 revenues from $145 million to $148.4 million, primarily at the Corporate business, offset by reductions at the Access Media business. Our Adjusted EBITDA estimate declines from $20.5 million to $18.7 million to account for higher SG&A costs.
• Our price target remains $8. This utilizes a 10-year forecast of the company’s estimated unlevered free cash flow discounted at the cost of equity of 13.4%, down from 13.6% due to a lower risk free rate (10-year note) in our CAPM model.
Bottom line. As expected, the bad debt write offs continue at SIFY and smaller amounts should be expected for the next 2 quarters. While the turnaround seems to show some traction, it is still in its early stages. Maintain HOLD.

Shares were up yesterday on the news Electronic Arts (ERTS) is expanding its line up of Wii titles, which prompted price target increases for a stock that is already expensive.

Comcast announced that on July 1, it will shut down its analog tier in Chicago and offer all basic subs its all-digital expanded-basic tier.

Google (GOOG) is reportedly negotiating an advertising deal with DirecTV (DTV). This follows news last week of an agreement between Google and EchoStar (DISH). Deal with DirecTV is reportedly taking longer to consummate due to change of control at DirecTV.

Sony (SNE) dropped the price of the PSP to $170. This represents a $30 price reduction from the previous price of $200. The high-end PSP offering will be dropped to $200 from $250.

EchoStar (DISH) and Google (GOOG) announced last night that they have partnered to create an automated system for buying, selling, delivering and measuring the impact of TV ads running on EchoStar's Dish Network.

Microsoft (MSFT) officially announced a new Xbox 360 with HD tuner capability and more memory called the Xbox 360 Elite. It will be launched on April 29 for $479.99.

• Fiscal 4Q07 results fail to measure up. It was a flat panel holiday season with millions of new HDTVs sold, but TiVo added just 10,000 new subs. This is not a product that is "changing how America watches TV." How many new video game consoles were sold during this time? How many "undifferentiated" DVRs found their way into people's homes? Slice it and dice it any way you want: TiVo's performance in fiscal 4Q07 does not measure up to management's optimism on yesterday's conference call.

• Sub growth was accompanied by strong revenue gains. A 9% increase in total subs was accompanied by an 11% increase in ARPU to $65.38 from $58.79 for an 18% increase in total revenue to $2.6 billion. ARPU gains in 4Q06 were from sell through of advanced services as EchoStar took minimal price increases. The 18% increase in 4Q06 revenue drove a 16% increase for 2006 to $9.8 billion. EchoStar reported a 26% increase in 4Q06 EBITDA to $608 million, in line with expectations, for an 18% increase for the full year to $2.3 billion.

Activision (ATVI) says it will double its Nintendo (NTDOY.PK) SKU count in fiscal 2008. Activision said it will have 60 SKU in fiscal 2008, up from 48 in fiscal 2007, and that it will double its SKU count for Nintendo Wii and DS. Guitar Hero will be released for the Wii and DS in fiscal 2008. There will also be Wii and DS versions of Spider-Man 3, Shrek and Transformers. Activision confirmed new iterations of Call of Duty, Tony Hawk and Guitar Hero. A PS2 version of Downhill Jam, Guitar Hero II on X360, and Quake Wars: Enemy Territory on PC are expected to be released in fiscal 1Q08. Spider-Man 3, Shrek the Third and Transformers will also be released in fiscal 1Q08.

Take-Two (TTWO) will release another GTA for the PS2 before next-gen launch. Take-Two announced that Grand Theft Auto: Vice City Stories will be released on PS2 in North America on March 6 and in Europe on March 9. No price was given, but it is expected to be $19.99. This is the second GTA PSP port. Manhunt 2 will be Rockstar's first Wii title. Take-Two said the game will be released on PS2, PSP, and Wii this summer. Being developed in several Rockstar studios, the stealth action game will be Rockstar's first title on the Wii.

Ubisoft (UBI) is expanding in Canada with new CGI production center. The new center will focus on creating digital cinema content and short films based on Ubisoft brands and create around 1,000 new video game jobs. One of the first films would be an eight-minute CGI short based on Assassin's Creed. Ubisoft looks to have 500 specialists in the studio by 2013. Ubisoft could invest an additional $383.9 million over the next six years and build up a team of 3,000 total employees by 2013.

Epic reveals $150 million Gears of War (X360) cost $9 million to $10 million. As of January 19, the game had sold three million copies worldwide for revenues approaching the $150 million range. Epic Games did not reveal the game's marketing costs. Costs were kept low, due to Epic Games' game engine, Unreal Engine 3. While using Unreal Engine 3 is possible for the Wii, it was designed for next-gen HD platforms.

EA's (ERTS) Half-Life 2: Episode Two games pushed back to fall 2007. The Orange Box includes the original Half-Life 2, Episodes One and Two, Team Fortress 2, and Portal for PC, X360, and PS3 and will be the only Half-Life 2 game offered for the two consoles at retail. The Black Box includes Half-Life 2: Episode Two, Team Fortress 2, and Portal for PC.

Sony's (SNE) PS3 firmware updated to 1.51. The update adds a few minor fixes such as more support for PS2 software titles and the ability to use your photos as a user icon. Sony confirmed Wipeout is in development for the PS3. More details regarding the game are expected in the near future.

Wii outsells the PS3 almost 3:1 in Japan. Enterbrain reported 405,000 Wiis and 148,000 PS3s were sold in January, brining total sales for the Wii and PS3 at 1.4 million and 614,000, respectively.

Higher spending will negatively impact 2007 FCF. DirecTV's 4Q06 results were impressive. Sub metrics were better than expected across the board, and the message was reinforced by 2007 guidance. However, higher activity means higher spending, pushing out DirecTV's FCF ramp. We estimate consolidated FCF will be flat in 2007 at $1.2 billion. We do not think multiple expansion is warranted, despite the sharp turnaround in operating results in 4Q07.

Strong sub growth reversed a long deceleration. DirecTV saw its first positive gross add comp in a year and churn dropped to less than 1.6% after four quarters at 1.7% to 1.8%. As a result, 275,000 net adds were up 38% from 200,000 a year ago. Higher growth came from a strong consumer offering and growth in the direct channel. Management attributed lower churn to a number of factors, but a swing of this magnitude can only reflect a change in policy.

Growth was garnered at a relatively high ROI. Total SAC per gross add of $626 was about $30 less than expected. DirecTV saw a tremendous amount of upgrade activity and said it deployed more than 500,000 HD DVR. ARPU rose nearly 7% to $80.70 on growth in HD and DVR service and a strong comp for Sunday Ticket. With a 5% increase in total subs, this translated into a 12% increase in revenue to $3.8 billion.

Increased activity is driving higher capital spending. DirecTV reported 4Q06 EBITDA of $876 million, up from $442 million in 4Q05, with growth due entirely to the capitalization of CPE costs. Without this, EBITDA would have been $468 million, up just 6%. In 2006, DirecTV capitalized $1.1 billion in CPE expense, for total capital expenditures of $1.8 billion. As a result, 2006 FCF for DirecTV U.S. was $545 million versus $535 million in 4Q05. Consolidated FCF was $1.2 billion, up from $283 million due to a favorable tax situation.

DirecTV expects similar trend to continue in 2007. Guidance is for flat gross and net adds in 2007, with churn down to 1.5% from 1.7%. APRU is expected to grow 6% and revenue 12%e. Higher programming costs will be offset for no change in premarketing cash flow margins. SAC is expected to be stable at the low end of $650 to $700, and EBITDA and operating income are expected to grow 20%. Capital expenditures are expected to be $2 billion in 2007, up from $1.8 billion in 2006.

We think Consolidated FCF could be flat in 2007. We now forecast gross and net adds to be flat in 2007 at 3.8 million and 820,000. We look for DirecTV revenue to grow 12% to $15.6 billion, EBITDA to be up 23% to $3.97 billion. We expect capital expenditures of $2.0 billion, and a 70% increase in FCF to $928 million. We expect consolidated revenue to grow 15% to $17.0 billion, with DLA contributing $1.6 billion. We project consolidated EBITDA of $4.05 billion, a 21% increase from 2006, but think consolidated FCF could be flat at $1.2 billion if DirecTV pays any cash taxes in 2007.

Stock has had a good run, and further upside is speculative. Shares of DTV have more than doubled in the past 12 months and are no longer cheap. Our price target of $26 is based on 17.5x 2010E UFCF discounted to PV at 10.7% Alternatively, at $26 DTV is trading at 28.0x 2007E FCF, and 19.0x 2007 EPS, while we estimate the 2006 to 2010 CAGR for FCF is 25%, and 18% for EPS, in line with current multiples. There maybe some further upside from a recapitalization of the balance sheet, but that is a different issue.

Gemstar (GMST)
($4.13-BUY-$4.25 Price Target)

DirecTV (DTV) will report today before the open. Management will host a conference call at 11:00 a.m. EST. The dial-in is 973-582-2751, and the pass code it 8331424.

We expect objectively strong consolidated financial results – Consolidated revenue is expected to be up 14% in 4Q06 and 11% in 2006. EBITDA is expected to grow 106% in 4Q06 to $907 million, and 128% for the year to $3.4 billion. Even after factoring in capitalized CPE costs, EBITDA gains are in the 30% to 35% range. Importantly, FCF has reached $1 billion on an annualized basis, and should grow 30% to 35% over the next year. We look for EPS of $0.28 in 4Q06, and $1.16 for 2006, up from $0.09 and $0.24 a year ago.

Operating metrics will benefit from a easy comparison – We are dropping our net adds forecast to 230,000 from 275,000, but still expect a modest increase in gross adds, due to a very easy comparison. DirecTV revenue should be up 12% for the quarter to $3.8 billion, and EBITDA is expected to double to $880 million. Sub metrics should also be solid; ARPU growth is expected to exceed the SAC increase for a higher ROIC, and total CPE costs are expected to fall as a percentage of revenue driving a ramp in FCF.

Operations likely impacted by high upgrade activity – There has been a lot of chatter about higher installer activity associated with DirecTV's HD rollout. MasTec hired 800 DirecTV installers in the quarter alone. However, at least initially, it appears a lot of this capacity is dedicated to upgrades for DirecTV's relatively affluent existing sub base. This may have crowded out some new customer acquisitions, and will cause retention marketing to spike up in 4Q06 and 1Q07, as HD upgrades need a new dish as well as a new STB.

DirecTV must execute better to keep its competitive position – We estimate DirecTV lost about 5% of market share of new DBS subs to EchoStar (DISH) in 2006. From a series of dramatic announcements at the 2006 CES, momentum seemed to fizzle. Over the course of the year, gross adds have been lower than expected and churn has remained persistently high. New product launches are behind schedule, and the launch of its HD DVR has been problematic, to the point were it has negatively impacted DirecTV's business.

Outlook for 2007 is solid, but we have concerns about momentum. We think that DirecTV can deliver 10% top-line growth and EBITDA gains of 25% to 20% in 2007, and with a step down in satellite capital spending, FCF is expected to double to $1.6 billion. However, carrying current trends forward, net adds drop to 660,000 in 2007 from 775,000 this year, and 1.2 million last year. While DirecTV is scaling into its cost structure for dramatic FCF gains this year and next, decelerating sub growth does not support multiple expansion.

Bull case is predicated on speculation of recapitalization or acquisition – At current levels DTV is trading at close to 25.0x 2007E FCF and 15.0x 2008E FCF, which we believe pretty much fully values the stock given its current capital structure. Our price target for DTV of $26 is based on 17.5x of 2010E FCF of $2.5 billion discounted back at 10.7%, with a separate DCF analysis for DLA, which values it at about $3 per share. Upside to our target may come from a strategic change in the company's status or level of leverage, but we consider both thesis speculative.

Microsoft (MSFT) next-gen Windows Vista launched worldwide. The new OS features DirectX 10, a built-in game explorer start menu and cross-platform functionality. Players will be able to use their X360 controllers with their PCs to play Vista games and play online games on both PC and X360 platforms. Players using Vista will be able to connect to Xbox Live.

Sony (SNE) refers to eventual PS3 price cuts on conference call. Sony noted that costs for the PS3's launch were higher than expected, due to advertising promotions and production delays that led to air shipping. Sony thinks that it will recover and have its game division break even by March 2008. Sony said price cuts to some extent were factored in, but did not provide specifics

EA (ERTS) discusses its plans for Mythic MMOG. Dark Age of Camelot: Labyrinth of the Minotaur will be released in Europe in February. EA Mythic also plans free upgrades for the game every six months in place of expansion packs. EA Mythic also presented the human Empire and Chaos factions, two of six playable factions, in its upcoming Warhammer Online: Age of Reckoning.

Two Take-Two (TTWO) directors refuse to be re-elected. Todd Emmel, a member of the audit committee, stated that he will not be seeking re-election, due to time constraints and his relocation to Boston. Michael J. Malone indicated he will not be seeking re-election, due to personal reasons.

EARNINGS RESULTS

THQ reported preannounced fiscal 3Q07 results – Fiscal 3Q07 revenue grew 33% to $476 million, and GAAP EPS rose to $0.91 from $0.71 a year ago. Results were better than guidance at the beginning of the quarter for revenue of $425 million to $450 million and GAAP EPS of $0.50 to $0.60. Upside versus our forecast was due primarily to higher-than-expected WWE sales, and higher volumes for Nickelodeon and other young-oriented titles.

Initial guidance calls for 12% to 15% growth in fiscal 2008 – THQ expects revenue of $1.12 billion to $1.15 billion and GAAP EPS of $1.11 to $1.21 in fiscal 2008. THQ expects about 50% of revenue to come from next-gen content, 20%-25% to come from handhelds, and 15%-20% to come from PS2. Title count will be flat with fiscal 2007, but THQ expects 80 SKUs versus 66 SKUs in fiscal 2007. Top-line growth is slower than most expectations for industry growth, and likely conservative.

Core Pixar and WWE franchises are expected to be flat – We think Cars will do about $250 million in fiscal 2007 and WWE will do about $200 million. We believe THQ will have a tough Pixar comp in fiscal 2008 with Rataouille and Cars 2. WWE performed better than our expectations this holiday as well. We just don't see how this franchise gets any bigger. With Pixar and WWE expected to trend flat to down, growth will need to come for new IP.

Growth in fiscal 2008 will come from new properties – THQ has added the Stuntman franchise to its line up for fiscal 2008, which we believe has the potential to be a successful 1.5 million to 2 million copy franchise. Otherwise new properties for fiscal 2008 are either unproven, or updated next-gen versions of titles, that where certainly successful, but in most cases were hardly blockbuster hits in their previous iteration.

Fiscal 2008 guidance is conservative if THQ can execute on game quality – We are projecting a 15% increase in fiscal 2008 revenue to $1.16 billion. We are projecting GAAP EPS of $1.26, also slightly ahead of guidance. The success of THQ's fiscal 2008 line-up will be borne out in execution. There are about six of seven titles, that if THQI executes well on, would result in upside. At the same time, if any two or three are unsuccessful, then there is likely some downside risk to guidance.

We would not be chasing THQI at these levels at this time – We think that shares of THQI offer potential upside from current levels, but we would not be buyers at this time. We feel that shares of THQ have had a nice run on strong fiscal 2007 execution and a recovery of cyclical demand. THQ is planning a much broader line-up for fiscal 2008, which points to upside, but before this can happen we expect to see tough comps versus Cars.

We reiterate our HOLD rating and $34 price target – Our price target is based on 25.0x calendar 2009 FCF of $98 million discounted to present at 11%. There are many risk inherent in our forecast for THQ as we are projecting revenues based on the success of video games, which are not completed. We consider shares of THQI moderately risky.

EA's fiscal 3Q07 results were slightly stronger than we expected. Fiscal 3Q07 revenue was $1.28 billion, flat with a year ago and in line with guidance of $1.2 billion to $1.3 billion, while GAAP EPS of $0.50 compared to guidance of $0.33 to $0.40 and our estimate of $0.38. After a bearish spell in December, we think most investors were back on board for results at the high end of guidance, which is exactly what they got.

Publishing sales of $1.15 billion were flat from fiscal 3Q06. A solid number, since we had expected a 10% drop. Upside versus our forecast here came from stronger than expected sales of Need for Speed, and surprisingly strong Sims 2: Pets results on the DS and PC, particularly overseas. Relative to our forecast; the PC, PS2, and DS platforms generated the greatest upside in that order, while X360 and PS3 sales were somewhat lower than expected.

Comcast pulled back on higher capital expenditures guidance. Comcast reported stronger-than-expected 4Q06 results and called for even stronger momentum in 2007. However, shares pulled back on a $1 billion-plus increase in expected capital expenditures, which is now expected to result in flat FCF in 2007. CMCSA had a nice run and we see the rationale for taking profits, but shares are not expensive, and we think Thursday's sell-off is an over reaction.

Results in 4Q06 showed evidence of accelerating fundamentals. On a pro forma basis, 4Q06 revenue was up 14% to $6.89 billion and EBITDA rose 17% to $2.75 billion. Results were driven by a 77% increase in RGU net adds to 1.6 million from 920,000 a year ago. For the full year, revenue grew 12% to $26.3 billion, EBITDA grew 15% to $10.5 billion, and RGU net adds rose 69% to 5 million. In the past two quarters Comcast's core revenue growth rate has accelerated 200-300 basis points as a result of the rollout of voice and shift to a bundled sales model.

Accelerated momentum resulted in positive comps for every product category. Comcast added 110,000 basic subs in 4Q06, up from 28,000 a year ago, for a total of 78,000 for the year. DTV net adds were 613,000, up from 365,000 a year ago. DTV penetration is now over 50% and 1.5 million subs take DVR/HDTV. Comcast added 488,000 HSD, versus 436.000 a year ago, and CDV gross adds were 508,000, for a total of 1.5 million in 2006. Total RGU net adds in 4Q06 were 1.6 million, up 77% from 920,000 a year ago. Strong RGU growth drove a 12% increase in ARPU to $93.34.

Comcast's RGU growth will be faster in 2007 than 2006. Cable revenue should grow at least 12%, cable EBITDA at least 14%, and 30% growth in RGU net adds to about 6.5 million. Capital expenditures are expected to be $5.7 billion for 2007, about $1.1 billion higher than 2006, which should result in FCF of about $3.0 billion, flat with 2006. Of this incremental $1.1 billion in capital expenditures, about two-thirds is one-time in nature; $500 million for upgrades for acquired systems, $250 million for the small-mid business market, and $150 million for switched digital video.

We believe Comcast is managing CDV rollout for a maximum ROI. Some say target of 2.1 million CDV net adds in 2006 is light, but this fails to take in to account that the shift to a bundled offering is usually part of a full upgrade for subs to basic or advanced DTV, which entails deploying a new set-top box, or extra capital expenditure. We also believe Comcast is literally capacity constrained, due to a shortage of installers across the country. We think Comcast is managing the business to a steady state of 500,000 net adds per quarter reflecting a sweet spot that maximizes growth and ROIC.

We reiterate our BUY rating and $49 target for CMCSA. Despite a reduced outlook for FCF we believe that shares of CMCSA are still attractively valued. Comcast's fundamentals have accelerated over the past two quarters and are on track for four to six quarters of continued accelerated growth. We think Comcast's strong improving fundamentals and high liquidity make it an attractive defensive play for next year. We value CMCSA at $49 based upon 18.8x 2010 unlevered free cash flow [UFCF] discounted to present at 9.3%. We also consider EBITDA, P/E and FCF multiples, as well as per sub and per RGU values. We view shares of CMCSA as modestly risky.

NDS Group delivered a positive development message. NDS reported solid fiscal 2Q07 results and held an investor meeting that focused on R&D efforts aimed at broadening its markets. The company's presentation is compelling, its technology is strong and its strategy appears sound, but shares fail to respond. We think the issue is uncertainty with the time frame for the deployment, and eventual depth of penetration, of some of these services.

Fiscal 2Q07 results were solid, if modestly below our expectations. Revenue rose 8% to $165 million. Operating income was up 9% to $37 million, and EPS rose 17% to $0.52. Conditional access (CA) and new DVR deployments were the clear growth drivers. CA revenues rose 12% to $98 million, ahead of expectations for 10%. NDS added 1.1 million new DVR in the quarter, lower than our forecast for 1.3 million, but enough to drive a 25% increase in New Technology revenues. Management adjusted guidance only modestly for the Jungo acquisition.

It looks like NDS' business is getting broader faster than deeper. We believe fiscal 2Q07 results foreshadow two trends: 1) the core growth rate of NDS' CA business is accelerating as LCD customers come on line, and 2) the low-end offering these customers take is causing some degradation in NDS' ASP. We believe this was particularly the case for middleware where net adds were higher than expected while Licensing Fees were lower than expected.

Investor meeting used to explain and justify heavy R&D investments. NDS gave an overview of its product development road map for expanding its technology into new vertical markets by developing an integrated solution of CA and digital rights management [DRM] for a converged offering. The recent Jungo acquisition reflects this strategy as NDS believes that the Telcos will provision a multitude of services via a residential gateway including secured digital content services.

NDS gave investors a preview of its Fusion next-gen middleware. Fusion is a completely new middleware built by NDS to replace Media Highway. Fusion is differentiated from previous generation middleware by its ability to work on multiple programming standards (Java, HTML, etc.) and modular construction, which increases its capabilities and flexibility in deployment. NDS was frank about its goal of displacing OpenTV from NDS' CA customers now that OpenTV is aligned with Kudelski.

NDS is a leading technology supplier in a niche in a cyclical upswing. Given our projected outlook for NDS we think its shares are attractively priced at current levels, but do not see a firm catalyst. Qualitatively, we believe the issue is that the growth of the part of the business where the R&D is being spent is slower than expected, while the low end business has accelerated, putting downward pressure on ASPs. If the rate of advanced service penetration is slowed through the model it changes the ROIC equation pulling in NDS' valuation.

We reiterate our BUY rating and $57 price target for NNDS. We value NNDS at $57 based on a DCF analysis. Our analysis employs a terminal multiple of 22.5x 2009 FCF discounted to present at 12.5%. At our price target of $57, shares of NNDS would trade at just 12.8x 2007E EBITDA and a P/E of 23.3x. We consider NNDS moderately risky

• Electronic Arts, Inc. (ERTS) will report fiscal 3Q07 results today after the close. Management will host a conference call at 5:00 p.m. EST.
• We expect EA's fiscal 3Q07 results will be within guidance. We look for revenue of $1.2 billion and GAAP EPS of $0.38, versus guidance of $1.2 billion-$1.3 billion and $0.33-$0.43. Our estimate assumes a 5% drop in total sales, with a 13% decline in video game sales offset by about $70 million in revenue from cellular, online and Fx gains. We project revenue of $3.05 billion for fiscal 2007 and GAAP EPS of $0.11.
• We sense expectations are now set somewhat higher. We remain more cautious on EA. EA's broad line-up was not well received this holiday season, due to narrow market demand for PS2 titles and a crowding out on the X360 from Gears of War. Among its mass market titles, EA has a tough Superman versus Harry Potter comp and its sales of DS or Wii titles were not all that impressive.
• We estimate EA's revenues could grow 20% in fiscal 2008. We project fiscal 2008 revenues of $3.65 billion and GAAP EPS of $0.61. In this report is a preliminary bottom-up forecast on a title-by-title, platform-by-platform basis. EA will have a tough soccer comp in fiscal 2008, but otherwise EA Sports should track pretty close to hardware growth, and the rest of EA's line-up will be stronger than fiscal 2007.
• We estimate the video game market will grow 16% in fiscal 2008. We project worldwide software sales growing 16% during EA's fiscal 2008 to over $23 billion. Our estimates foresee a 70% increase in next-gen software sales to $10.9 billion from $6.4 billion during fiscal 2007, with handheld sales growing 11% to $6.5 billion from $5.9 billion, and current-gen sales contracting by 24% to $5.9 billion from $7.7 billion.
• We believe shares of ERTS become compelling below $48. At current prices, there is about 18% upside implied in our price target of $58. We think investors can get constructive at these levels, but we are going to keep our HOLD rating because we have no evidence that EA will report significantly stronger-than-expected results, and unless that happens the stock is likely range-bound in the near term.
• We reiterate our HOLD rating and $58 price target. Our price target is based on 25.0x calendar 2009 FCF of $763 million discounted to present at 11%. Shares of ERTS have recently traded off, due to disappointing indications about this quarter's performance. We acknowledge weakness on multiple fronts, but expect EA to make the quarter. We consider investment in ERTS to be moderately risky.
• Technical Analysis: Key technical ranges that investors should note are: $68.25 to $69.00, $54.30 to $54.50, $51.90 to $52.00, $50.25 to $50.75, $49.50 to $49.80, $47.00 to $47.50, and $42.75 to $43.00.