Zynga active users in decline

 Posted by on May 17, 2012 at 12:07 am
May 172012
 

Zynga’s active users for their games, as tracked by Appdata, have been in decline of late.  Facebook was having some reporting delays the past week so I was anxious to see where Zynga’s games would be after Appdata started updating again.  Well updates resumed yesterday and the active user declines continued for Zynga.  Simply go to the above link and check out Zynga’s games for yourself.  Draw Something is leading the decline, as has been widely reported, but the declines were broad based affecting almost all of Zynga’s major games.

There may be some mitigating factors such as paying users may not be declining as quickly as overall users, some users may be migrating to Zynga’s own platform, and growth in mobile for Zynga.  However I don’t think those are enough to counteract the entire declines in active users being seen, so the longer that trend continues the more attractive a short candidate Zynga becomes to me.

KongZhong earnings

 Posted by on May 16, 2012 at 9:02 pm
May 162012
 

Earnings season continues with KongZhong reporting Q1 results today.  I’ll just hit the highlights:

- The company reported record revenues and non-GAAP profits which exceeded both prior guidance and the estimate from the one analyst who appears to cover the stock.  Non-GAAP EPS was $0.21 vs the $0.12 estimate from that one analyst.

- Guidance for Q2 is $49-$50 million in revenue and $0.22 EPS vs the one analyst estimate of $44 million and $0.11 EPS.

- Announced strategic partnership with Wargaming.net extending World of Tanks license to a perpetual license and securing rights to World of Warplanes, World of Battleships, and right of first offer to all other Wargaming.net games, including mobile.

- Announced licensing of U4iA’s (company founded by Call of Duty co-founders) free to play browser based shooter game, Offensive Combat.

- WVAS was stable, mobile was weak as expected as feature phone sales decrease and smartphone sales have yet to ramp.

During the earnings call they said they believe that World of Tanks has yet to reach critical mass, so more momentum can be expected there.  World of Warplanes could potentially launch in 2013 and World of Battleships in 2014, although that depends of course on Wargaming.net’s development progress.

Regarding Kung Fu Hero they said they were not expecting it to be a break-out game, so I would not expect much contribution there.  I think that reflects rather poorly on management since they had previously described the game as their flagship MMO which was expected to drive growth throughout 2012.

The good news is that they also said all their internally developed as well as licensed games going forward would be focused on Western and e-sports type games rather than the crowded, competitive MMO RPG type games like Kung Fu Hero.  Having licensed World of Tanks and now Offensive Combat it is becoming evident to me they have someone who knows what they are doing in this regard.

KONG appears on pace to earn around $1/share this year.  That gives KONG a forward PE of around 6, using KONG’s closing price.  If you back out KONG’s $4.34 in cash/share then KONG is trading at a forward PE of around 1.6 (1.6!).  Even after the 12% gain in after-hours trade, KONG is trading at a forward PE of around 6.6, 2.3 ex-cash.  Not bad at all for a company which seems set for strong growth over the next few years just from their Wargaming.net partnership alone.

THQ earnings

 Posted by on May 15, 2012 at 10:22 pm
May 152012
 

THQ reported Q4 results today.  As usual the most interesting info was from the earnings call.

- SR3 has now shipped 4.25 million units

- WWE’12 has shipped 2.2 million units

- UFC3 has shipped 1.4 million units

- Guidance for the full year is $410-$430 million in revenue, -$0.40 to -$0.25 EPS.

- Operating break even level is around $450-$460 million revenue.

- Q1 guidance is $25-$30 million revenue, -$0.45 to -$0.40 EPS.

- 1st half is expected to account for roughly 30% of full year sales.

- Have 1.1 million units of uDraw left in inventory which they expect to sell by end of Q3 at current carrying value.

- Release schedule for fiscal ’13 is nothing in Q1, Darksiders II and Saints Row Enter the Dominatrix in Q2, WWE in Q3, and Company of Heroes 2, Metro Last Light and Southpark in Q4.  Highest unit assumption for any game is WWE at roughly flat vs prior year (so around 2.2 million units).

- Fiscal ’14 release schedule will include Turtle Rock’s game, Patrice Desilet’s game, the next Saints Row game, Homefront 2 and inSane.

Using the midpoint of THQ’s guidance for the year ($420 million), guidance that 1st half sales will be about 30% of full year sales (so around $126 million) and the midpoint of Q1 guidance (around $27 million) means THQ expects around $100 million sales in Q2.  Around 1.2 million units each for Darksiders II and Saint’s Row Enter the Dominatrix, along with modest catalog sales would be enough to reach that guidance.  That actually seems within reason to me.

So it actually looks to me like there is little risk of THQ missing either Q1 or Q2 estimates, and that they will live to fight for another year.  This might make THQ good for some shorter term trades.

Gameloft sees faster growth

 Posted by on May 15, 2012 at 10:00 pm
May 152012
 

There are a few new details in this interview with Gameloft’s CFO:

———————————————

“If we make 59 percent growth in the first quarter without any launches and then we launch 10 games in each of the second, third and fourth quarters, it makes us relatively optimistic on the future growth rate especially driven by the smartphone growth rate,” he said.

and about their switch to freemium/paymium models:

This new model – which already accounts for 70 percent of Gameloft’s sales, up from zero last year – allows Gameloft to double each game’s revenue over its lifespan and provide it with recurring revenue, De Rochefort said.

———————————————-

Gameloft has only released a couple smartphone games so far in Q2 – Ice Age Village, Shark Dash and NOVA 3.  If they plan on releasing 10 smartphone games in each of Q2, Q3 and Q4, the release schedule is really going to pick up.  As De Rochefort noted they did 59% smartphone growth in Q1 without any new releases.  How much more will it be with 10 new releases each quarter?  Combine the increased number of releases with the increased revenue from moving to freemium/paymium models and I think there is potential for Gameloft to exceed guidance.

The catch is how quickly feature phone revenues decline.  However if initiatives such as Gameloft’s recently announced partnership with MediaTek can halt the decline in feature phone sales that will allow smartphone sales to drive higher overall growth.

As De Rochefort mentioned, and this article points out, feature phone sales are still dominant in emerging markets.  So the advent of so -called ‘smart feature phones’  capable of playing higher end games on cheaper feature phones could be a boost to feature phone sales in emerging markets:

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With this partnership in place, feature phone users can expect high end games which are currently only available to smartphone users. Notably, Gameloft has some very renowned games under its belt like Modern Combat 3, Nova 3, Adventures of Tintin and Asphalt.

Mediatek and Gameloft will also release similar games for other MediaTek’s platforms in due course. Gaming is one of the fastest growing segments and since 95 per cent phones sold in India are feature phones mainly based on Mediatek platform, this new partnership will bring new levels of entertainment to India mobile users.
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Ubisoft earnings

 Posted by on May 15, 2012 at 9:20 pm
May 152012
 

Fairly busy day today, first up Ubisoft earnings and highlights from their earnings call.

There are a couple things I wanted to highlight from their earnings call:

- Built into their guidance for the upcoming fiscal year is a material decline (which they described as double digit) in the Just Dance franchise.  However, they believe they can outperform that.

- Ghost Recon Future Soldier needs to sell around 2.5 – 3 million units to break even.

- Their guidance assumes sales for Assassin’s Creed III greater than the 8.2 million units AC II sold.  (In an interview from a few months ago they said they were aiming for 10 million unit sales).

- There is an unannounced title planned for release in Q4 which will be revealed at E3 but is not included in guidance.

The call went a long way towards allaying the main fears I had about Ubisoft:

1)  Decline of dance games.  I am glad to see that Ubisoft assumed a material decline in Just Dance.  Just Dance 3 seems to still be selling well (it was #9 in April NPD), but with the slowdown in Wii hardware sales assuming a material decline is prudent.  If the Wii installed base can remain active enough combined with sales on Wii-U, then perhaps dance games could be an area of over-performance compared to Ubisoft’s guidance.

2)  Performance of Ghost Recon.  I think Ghost Recon will be well received critically, and the series was a favorite early in the 360′s life-cycle.  However I thought perhaps too much time had passed since Ghost Recon 2 and that crowd had moved on to Call of Duty and Battlefield, preventing Future Soldier from being a huge hit.  I think 2.5-3 million units is a good assumption for Future Soldier sales.

3)  Ubisoft’s ‘shotgun approach’ to releases diluting the effect of their hits.  My concern in this area is publishers releasing too much shovelware on consoles which are sure to flop.  However targeted digital releases, either on PC or console, driven by strong communities are a different matter.  The success of games like Minecraft and World of Tanks, the explosion in Kickstarter funded video games, and the fact that PAX Prime sold out in record time are indications that the core gamers are still active.  They have just moved on from mid-tier console releases to these other areas.  I think a lot of Ubisoft’s releases fall into this community-driven online category – Trials Evolution, HOWRSE, The Settlers Online, Silent Hunter Online, Trackmania, etc.  They seem to have eliminated most of the console shovel-ware, so I am not as worried about Ubisoft’s scatter-shot approach any more.

Ubisoft’s guidance for the June quarter appears fairly conservative at EUR $115 million ($150 million).  I think ship-in of a couple million units of Future Soldier, the 15 digital/online releases, and catalog sales should have no problem achieving that.  So I do not think there is much risk of Ubisoft missing Q1 guidance.  Q2 results will not be released until November, so that leaves things pretty clear for a run-up to AC III’s release on October 30th (the lone potential land-mine being if Far Cry 3, which releases in September, really flops).

So I still feel good about my strategy with the warrants of holding now and selling into hype for ACIII.

April NPD report

 Posted by on May 10, 2012 at 5:41 pm
May 102012
 

NPD reported April sales today and the results were dismal.  Software was down 42% year over year, and all three home consoles were down year over year as well.  EA, TTWO and others have been saying the last few quarters that the HD platforms are still growing, but I think the last several months of NPD data show that even 360 and PS3 are losing momentum now.

For Activision Blizzard, Prototype 2 was the top selling title in April but from the statement that last April’s top 7 titles all outsold the number one title this April we know that Prototype 2 sold less than 236,000 units.  Modern Warfare 3 continued to sell less year over year compared to Black Ops.

For EA Mass Effect 3 dropped all the way down to #8, which probably means it sold less than 200,000 units.  It appears that ME3 sales dropped off by 80-90% from March to April.  That is a very steep decline for AAA franchises.  Tiger Woods 13 sold less than Tiger Woods 12 year over year.

Just pretty bad all around.  Next month will not be so bad with Diablo III, Max Payne 3 and Ghost Recon Future Soldier releasing.  I am confident about Diablo III but not too sure about Max Payne 3 or Ghost Recon Future Soldier.  So I expect overall software sales will fare better than console software sales.  I am not sure that Max Payne 3 and Ghost Recon would be enough to overcome last May’s new releases of LA Noire, Brink,  Lego Pirates of the Caribbean, and second month sales of Portal 2 and Mortal Kombat.

April NPD predictions and ATVI earnings and Take Two delay

 Posted by on May 9, 2012 at 7:57 pm
May 092012
 

My prediction for April NPD software sales is down 31% year over year.  The only analyst predictions I found this time were:

  • Piper Jaffray – down 25%
  • Baird Research – down 25-30%

As for Activision Blizzard earnings, they appear to have done just enough to keep their stock range bound (perhaps with a slight upward bias) for awhile longer.

In other news, Take Two has announced the delay of Bioshock Infinite to February 2013.  This comes as no big surprise as I wrote earlier this year about how delays have become the norm for Take Two.  There is speculation that this was done to make room for GTA V to release this holiday, however I feel there is no need to buy TTWO now on such speculation.  I’d rather wait for confirmation and miss the exact bottom rather than speculate now and risk further downside.

EA Q4 Earnings

 Posted by on May 7, 2012 at 9:09 pm
May 072012
 

EA reported Q4 earnings today, and they weren’t bad.  Guidance for next fiscal year was decent too, with revenue projections lower than analyst expectations but EPS projected to grow over 30% based on the mid-point of guidance.  On the surface EA now looks pretty cheap, trading at roughly 16x ttm earnings with over 30% EPS growth projected next year for a PEG ratio of around .5.  If you back out EA’s cash the valuation is even better.  With EA’s leading brands, transition to digital, etc, there appears a pretty good story to be told.  However a couple things dampen my enthusiasm.

One, I think EA’s guidance for packaged goods to be down only 7% is too optimistic.  Looking at fiscal ’13 vs fiscal ’12 quarter by quarter:

Q1:  The Secret World vs. Alice Madness Returns, Portal 2, Shadows of the Damned, Darkspore.  Q1 should be down year over year, just  because of Portal 2.

Q2:  FIFA 13, NCAA 13, Madden 13, NHL 13 vs. FIFA 12, NCAA 12, Madden 12, NHL 12, Harry Potter and the Deathly Hollows Part 2.  Since I expect the annual sports franchises to be flat to down year over year, I expect Q2 will be down year over year.

Q3:  NBA Live 13, Need for Speed, Medal of Honor Warfighter, plus one more title (SWTOR expansion? Overstrike?) vs. Need for Speed The Run, Battlefield 3, Star Wars the Old Republic, Sims 3 Pets, Hasbro Family Game Night 4.  I expect MoH to be down big from Battlefield 3, Need for Speed to be flat to down, and do not expect NBA Live to gain much traction in its first year back so I think Q3 will be down quite a bit year over year.

Q4:  Crysis 3, Sim City, plus five more titles vs. Mass Effect 3, Kindoms of Amalur Reckoning, Syndicate, SSX, Grand Slam Tennis 2, FIFA Streets, Tiger Woods 13.  I can’t really say without knowing what the other 5 titles are but at this point it wont much matter if the previous three quarters were all down year over year.

So I think digital will have to make up for more than just a 7% decline in packaged goods sales.  That brings me to the other thing which dampens my enthusiasm.  And that is that a lot of EA’s digital revenue is what I consider ‘low quality’ instead of ‘high quality’.  What do I mean by that?  I consider console DLC to be low quality digital revenue because it is tied to the popularity of the initial console release.  When sales of those console releases slow down as I expect, then the associated DLC will decline also.  I consider SWTOR revenue to be low quality digital revenue because I think the monthly subscription model for MMOs is on its way out, even for the biggest franchises. So both of those categories of digital revenue I think are at risk.

So what do I consider ‘high quality’ digital revenue?  Mobile, social, free to play.  EA is doing well in mobile, but needs more consistent execution.  The Simpsons Tapped Out was released March 1st and immediately saw overwhelming demand causing connection and game save corruption issues.  EA pulled the game from the app store to work on a fix and the game still has not returned to the app store over two months later.  In social EA had one bona fide hit release last year in The Sims Social, but they have not followed that up with anything yet.  9-10 months is too long to go between hit releases if EA is to catch up to Zynga in social.  Overall it just feels like EA is moving at too glacial a pace in mobile/social.  Between Playfish, Popcap, and organically EA should be releasing more than one hit a year in those spaces.

So while EA appears pretty cheap, I am inclined to wait until seeing more solid execution in digital before considering going long again.

Gameloft vs Glu Mobile

 Posted by on May 3, 2012 at 8:16 pm
May 032012
 

Gameloft and Glu Mobile both reported Q1 results, and based on just smartphone revenue Glu closed the gap with Gameloft considerably. I still believe that Gameloft is better positioned for the long run however, so I wanted to do a little comparison between the two.

Gameloft’s share price is EUR 4.58, market cap is EUR 353 million, and cash balance is around EUR 40 million.  Glu Mobile’s share price is $4.62 USD, market cap is $296 million USD, and cash balance is around $20 million.

Gameloft reported $59.1 million USD revenue in Q1, Glu Mobile $21.6 million.  Looking at just smartphone revenue, Gameloft had about $23.6 million smartphone revenue in Q1, Glu had $17.4  million.  So Gameloft’s smartphone revenue was 40% of total revenue, Glu Mobile’s smartphone revenue was 80% of total revenue.  Gameloft’s yoy smartphone revenue growth in Q1 was 59%, Glu Mobile’s  yoy smartphone growth was 158%.

Gameloft had operating cash flow of around $20 million USD and EPS of EUR 0.24 in 2011 while Glu Mobile is projecting break-even cash flow from operations and sustainable profitability in Q4 2012.

Gameloft has over 4000 employees in development, Glu Mobile 600.

If you value growth above all else, Glu Mobile is sporting higher smartphone growth and higher overall growth and will likely continue to do so as they have de-emphasized their feature phone sales quicker than Gameloft has.  Glu Mobile’s shares are also more volatile making them better for more active traders.

Gameloft on the other hand is already profitable and cash flow positive.  For the longer run I think Gameloft is better positioned because of their scale and diversity.  I think Gameloft’s over 4000 developers allow them to support more smartphone models, more localization, which gives them an edge in the fragmented Android market and in fast growing international markets.  I believe Gameloft’s still large feature phone business, while it drags down overall growth rates, contributes to cash flow making Gameloft more self-supporting and giving them more to re-invest in the smartphone segment.

I believe that Gameloft’s scale and one-stop shop capability to support roll outs across numerous platforms and territories makes them an attractive partner for licensed properties.  While I believe in the viability and benefits of original, owned IP in the mobile space, I believe that licensed brands will also be important, especially as the mobile space becomes increasingly crowded.  Everyone is getting into the mobile space.  So aside from the traditional mobile publishers like Gameloft and Glu Mobile, the console publishers also want in on the space.  The PC/social game companies also want in on mobile.  And it seems like not a week goes by that some higher level employee from some developer or publisher leaves to start their own company focused on mobile games.  So while today there may be say, half a dozen quality generic fantasy simulation/strategy games, in a year that number may double.  Even with the growth in smartphone/tablet sales I am not sure it will be enough to support the increased number of games across all genres. How to stand out in such an environment?  Licensed brands is one way.  While there may be a dozen generic fantasy simulation games, there will be only one Simpsons sim game, one Smurfs sim game, and one Ice Age sim game.

Gameloft Q1 revenue

 Posted by on May 3, 2012 at 5:27 pm
May 032012
 

Gameloft reported Q1 sales today.  Gameloft reports only sales for Q1 and Q3, they report full earnings at mid-year and year-end.  Q1 sales were EUR 44.8 million up 14% year over year, smartphone sales were up 59% year over year, and smartphone sales accounted for 40% of total sales in Q1.

My investment thesis for Gameloft was smartphone sales reaching a tipping point, driving leverage to earnings.  Earnings won’t be reported until Q2 results, but I think everything remains on track.  Smartphone revenues were around $24 million USD in Q1, which combined with Gameloft’s $25 million in smartphone sales in Q4 2011, puts Gameloft on a $100 million smartphone revenue run rate.  Gameloft did not have any big new smartphone releases in Q1, so I think the fact that smartphone revenues were down only slightly from Q4 was a good performance.

Perhaps most important from Gameloft’s short release was the comment that Q2 sales growth was set to accelerate significantly due to the  success of Ice Age Village, Shark Dash, and an acceleration of product launches.  Indeed, Q2 is looking promising with the release of Ice Age Village and Shark Dash early in the quarter, and N.O.V.A. 3 and Men In Black 3 set for release in May.  Q3 looks promising as well with  The Dark Knight Rises and The Amazing Spider-Man likely due in July alongside the movies, and the Ice Age movie also in July likely providing a boost to the game.

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