Sector Preview: Video Games

Barbara Ortutay - Associated Press

Microsoft's "Halo 3" may have stolen the thunder from independent video game publishers in the latest quarter, but that doesn't mean analysts are expecting weak results for Electronic Arts Inc. and Activision Inc.

However, because the sector makes most of its money during the holiday season, eyes will already be on those forecasts when the companies begin reporting financial results later this week.

In September, "Halo 3," the final installment in the popular first-person shooter series from Microsoft Corp., sold 3.3 million units in the U.S., according to market researcher NPD Group. This was roughly twice as much as all the next nine top-selling games, which included EA's "Madden NFL 08" for the PlayStation 2 and four games from Nintendo. "Halo 3" also re-energized sales of the Xbox 360 and helped push Microsoft's fiscal first-quarter earnings above Wall Street's expectations.

Of the three independent video game publishers which report in the next few days, EA and THQ Inc. post their results on Thursday and Activision next Monday. Take-Two Interactive Software Inc., whose fiscal year ends Oct. 31, won't report until later.

Strong international sales and benefits from the weak dollar will likely drive upside to Activision's and EA's results, wrote Banc of America Securities analyst Michael L. Savner in a note to investors.

EA said earlier this month it expects to beat its guidance for the fiscal second quarter, which had called for adjusted earnings between 10 cents and 20 cents per share. Analysts polled by Thomson Financial are predicting a profit of 20 cents per share for the quarter, which ended in September.

The upside, wrote Kaufman Bros. analyst Todd Mitchell, is coming from strong sales of software for next-generation consoles such as the PlayStation 3, Nintendo Wii and the Xbox 360.

"Because of the diversity of its lineup, EA is a beneficiary of strong X360 sales," Mitchell wrote. He expects EA's Xbox 360 revenue to total $229 million for the quarter.

The market's focus, however, will be on guidance for the fiscal third quarter, Mitchell noted. Wall Street's consensus is for sales of $1.61 billion.

"We believe this is the number EA will have to guide to for the stock to go higher in the near term," the analyst said, adding that the company is poised to regain market share during the holidays.

EA's smaller rival, Activision, which publishes the "Guitar Hero" franchise, is projected to post a loss of a penny per share for the quarter. Wedbush Morgan analyst Michael Pachter expects the company to raise its outlook for fiscal 2008, after posting better-than-expected results in the second quarter, and to "remain optimistic for the balance of the year."

Meanwhile, THQ recently lowered guidance for the remainder of the fiscal year, citing delays and disappointing sales of several games. Savner said the company "has positioned fiscal 2009 as its peak growth year." He'll be listening for details on Nintendo platform releases and games for the coming fiscal year during THQ's conference call.

Savner said video game software pricing will likely remain under pressure in the winter quarter. To capitalize on the strength of the Wii, he expects the third-party publishers to attempt to increase their current 47 percent share of software sales for the platform.

"As a result, we will be listening to publishers' comments regarding sales of next-gen software and holiday releases for Nintendo's Wii and DS platforms," he wrote.

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Copyright 2012 by Associated Press