Pachter: NPD March Data Shows Industry Resisting Recession

Following yesterday's release of March NPD data for U.S. video game hardware and software retail sales figures, analyst firm Wedbush Morgan Securities noted that March's figures reflect a dramatic growth in unit volumes year-over-year, suggesting a resistance against a possible recession by the industry. Wedbush Morgan analyst began his review of the data with a favorable comparison against previous months: "Except for Decembers, the sales figure for March was the second highest level ever achieved. This is important enough to say again: March 2008 sales exceeded every month’s level in U.S. history except for the last 10 Decembers and except for November 2007." March's overall sales were above the firm's $850 million forecast by 47% as a result of generous next generation software sales. Wedbush Morgan noted that first quarter sales in the past seven years have represented about 20% of full year sales, implying that full year sales could equal $11 billion (or up around 25%) if historical patterns hold. According to its report, March software sales were largely driven by new releases, including Nintendo's Super Smash Bros. Brawl and Ubisoft’s Rainbow Six: Vegas 2 for the Xbox 360 and PlayStation 3, as well as Electronic Arts’ Army of Two (360, PS3), Take-Two’s Major League Baseball 2K8 (PS2, PS3, PSP, 360, Wii). Continued strength of sales for Nintendo’s Wii Play, Activision’s Guitar Hero III, and Electronic Arts’ Rock Band also contributed to higher-than-expected software sales figures. With no new releases in March, Activision's retail sales suffered a decrease of -5% sequentially from last month and were +60% over last March, compared to the firm's +105+ year-over-year estimate. Guitar Hero III and Call of Duty 4 led March's sales, along with the rest of Activision's catalog of recent releases. Atari also saw no new releases in March, and its retail sales were down -16% sequentially from last month and were -18% over last March, compared to Wedbush Morgan's estimate of –23% year-over-year. Dragon Ball Z: Budokai Tenkaichi 3 led catalog sales. Electronic Arts released Army of Two in March and sold almost triple of Wedbush Morgan's estimate of 300,000 units. That, Rock Band, and other titles in EA's catalog put the company's retail sales at +22 sequentially from last month, +105% from last March, compared to a+102% year-over-year estimate. Nintendo's Super Smash Bros. Brawl brought Nintendo's retail sales up +182% sequentially from last month, +161% over last March, compared to our estimate of +116% year-over-year. Brawl sold 30% over the firm's 2.0 million estimate, achieving an attach rate of 30%. Other companies included in the report were Majesco Entertainment, which saw an +19% jump over last month, and a -7% drop in sales from the same period in 2007; Midway Games, which experienced decreased sales of -7% from the previous month, and was at +6% compared to last March; Take-Two Interactive, which benefited from a +116% increase sequentially from last month, +41% from last March; and THQ, which saw a slight 3% raise sequentially from February and was 37% from last March. Ubisoft Entertainment retail sales also saw a leap, and were at +152% sequentially from last month and+56% over last March, compared to Wedbush Morgan's estimate of +19% year-over-year. Rainbow Six: Vegas 2 led sales with Assassin’s Creed and other titles in Ubisoft's catalog contributing. Pachter stated: "March overall sales were much higher than our expectations. Continuing the strong growth trend of the past four months, March saw very strong demand across the board, despite continued supply constraints for the Wii, DS and Xbox 360. We believe that underlying software sales strength along with increased hardware supply will position the industry for continued strong sales through 2008." He continued: "We expect industry sales to be strong for the next several months, with a strong release schedule early in the year allowing sustainable double-digit sales growth. We currently forecast full year growth of 19%, but think our estimate may be conservative, particularly if software ASPs and PS2 sales remain strong throughout the year. Our estimate presumes that ASPs will increase slightly for the year, but YTD ASP was up 18% (units sales are up 19%), implying that our estimate may be too low." Concerning the favorable performance for major publishers' share prices, Pachter commented: "Concerns about consumer sentiment and the macroeconomic environment seem to be subsiding. Shares of Activision have been supported by its impending merger with Vivendi Games, while shares of Take-Two appreciated dramatically due to the all cash acquisition proposal by Electronic Arts. In addition, Atari has an offer to be acquired by parent Infogrames for $1.68 per share for the approximately 48% of Atari it doesn’t own. We believe that the strong video game software sales trends will continue at least through May, and expect share prices to remain strong as investor concerns continue to abate. " Pachter concluded: "Next generation console unit sales are running well ahead of the level in the analogous period of 2003 (when console prices averaged under $200), implying room for significant sales growth once more price cuts are implemented. It appears that supply constraints with the Wii and DS this month greatly improved in anticipation of highly anticipated new releases for Nintendo scheduled over the next month (including Mario Kart Wii, Pokemon Mystery Dungeon, and Wii Fit). We continue to believe that hardware unit sales will accelerate in 2008, but do not expect dollar sales growth."