As the video game industry heads into what several analysts say will be the worst year of the transition to next-generation consoles, analysts are braced for another round of poor results.
UBS analyst Michael Wallace said earnings estimates for video-game publishers could be lowered in the coming weeks, when Electronic Arts Inc. and other companies announce results from the December quarter — which often accounts for about half of their annual sales.
He expects EA and Activision Inc. to report soft results for the December quarter and that March quarter expectations will be weak. Both companies have issued warnings for the December quarter and end their fiscal years in March 2006.
Analysts have noted that both EA and Activision, the two largest publishers, recently discounted games for current- generation consoles.
"We expect these moves to hurt near-term results," Wallace said. "We also expect both companies to be very conservative with (fiscal 2007) guidance, which could lead to more estimate cuts."
Wallace said Monday he expects U.S. video game sales could rise 3 percent this year to $6.26 billion after falling 3 percent in 2005, but said most of that revision was due last year's weak results rather than brighter expectations for this year.
"Despite our expectations for slight growth this year, we remain cautious on the industry heading into 2006 due to the transition," said Wallace, who had previously expected flat sales in 2006.
The video-game industry recently hit a rough patch after customers reeled in game and console spending amid a move to new console technology. For 2006, analysts are forecasting more of the same.
"Even though earnings preannouncements are behind us, we believe the stocks are set for a choppy environment in the next few months," Deutsche Bank analyst Jeetil Patel said in a recent note.
Microsoft Corp. was the first company to release a new console in the United States, but supplies of its new Xbox 360 fell short of expectations, exacerbating the slowdown in console and related video-game sales. (MSNBC.com is a Microsoft - NBC joint venture.)
Sony Corp. has said it will release its new console, the PlayStation 3, in the spring in Japan. Wallace said a summer Japan launch from the world's biggest console was more likely. He sees the PS3 launching in the fourth quarter in the United States and Europe.
Analysts expect Xbox 360 production to pick up in the coming months, but caution the market could get another shock around the PS3 launch. In particular, they noted that, in 2000, initial PS2 shipments also did not live up to forecasts.
Patel suggested investors remain cautious and reassess the stocks in March or April when there is more information about the availability of the new consoles and sales of next- generation games.
Wallace said there is opportunity in the uncertainty.
"Transitions are always tougher than expected and we still think the next few months could provide a better chance to buy the group at lower prices," he added.
