Wedbush Morgan Details Further May NPD Highlights

Following recent predictions by Wedbush Morgan analyst Michael Pachter regarding NPD's May U.S. retail console software sales data, and an initial top titles listing released by the NPD itself, Webush Morgan has added much detail to initial NPD reports. The company noted that May video game sales were down 10 percent from the previous year to $286 million, according to the NPD, and that the analyst foresees the slide to continue into the months ahead. He noted that May sales were driven by recent releases Square Enix’s Kingdom Hearts II and Ubisoft’s Tom Clancy’s Ghost Recon: Advanced Warfighter, along with the recently released and overall top-selling New Super Mario Bros from Nintendo. Take-Two's Major League Baseball 2K6 was the top selling Xbox title for the month, while Activision's movie adaptation Over the Hedge carried the bulk of GameCube software sales. Interestingly, Microsoft and Bungie's Halo 2 remained a strong seller for the month, and ranked as the third top selling Xbox title in May, according to The NPD Group. Wedbush Morgan indicated that it anticipates the top selling games for June to be Take-Two’s Grand theft Auto Liberty City Stories (PS2) and THQ’s Cars (PS2, Xbox, GC, DS, GBA, PSP, PC). The company announced that console game sales in the U.S. amounted to $286 million, much lower than the previously estimated $320 million. Wedbush attributed this decline to weaker than expected Xbox 360 game sales, which were down 37 percent. Sales of games for current generation systems dropped $96 million (33 percent), primarily due to significant declines of Xbox and GBA games. In addition, sales of next-generation software totaled only $98 million, an increase of $65 million over last year, but far below the previous estimate of $135 million. Regarding Xbox 360 software sales in the coming months, Pachter notes that: “Xbox 360 tie ratio was a strong 3.9, but over the next few months, we think that it is possible that software attach rates will decline to around 3.5 units per Xbox 360 hardware unit sold, particularly as the release dates for many key sequels appear on the horizon. This means that Xbox 360 software sales will only contribute $50 – 60 million per month, in line with the May figure. As current generation software sales reverted in May to the prior trend of a -30% rate, we expect overall software sales to be down around $20 – 30 million per month for each of the next several months.” Indicating that the firm believes that the decline will continue throughout the months ahead, Pachter comments that “...we think that this trend foreshadows continuing weak sales until the holidays, as we expect continued monthly yearover-year declines of 30 – 40% for current generation software sales, with next generation software sales growth failing to offset these declines. We do not expect next generation software sales to offset the decline in current generation software sales until the fall, when a strong lineup of Xbox 360 games is anticipated and launches of the PS3 and Wii are scheduled.” Pachter added: “Through May, NPD data shows that cumulative Xbox 360 hardware sales in the U.S. were 1.7 million units, and we expect Microsoft to sell approximately 200,000 – 300,000 hardware units monthly through October, with consumers poised to purchase compelling software like Ghost Recon and Elder Scrolls with their consoles.” Continuing to look forward, the report suggested: “We think that the transition is only partially complete, and believe that several bumps in the road lie ahead. Should software sales continue to decline over the following several months, we think that many investors may remain skeptical, and continue to question whether these stocks make sound investments." "This uncertainty is likely to be exacerbated should Sony or Nintendo delay the launch of their respective next generation consoles, expected in November and October, respectively. In addition, if Xbox 360 sales continue to be relatively weak now that the supply imbalance has been corrected, which could bode for a more difficult and longer transition.” The report concludes: “We believe that the publishers are, indeed, very sound investment vehicles, but believe that the risks of the transition are showing up in lack of investor confidence. Once Sony and Nintendo launch next generation consoles, we expect to see sales of software for the three major consoles and two handhelds more than offset sales declines of current generation software, and we expect to see industry sales growth rebound dramatically.”