Author: DomsPlaying

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Bottom Line: How Healthy is Nintendo’s Financial Position Ahead of Earnings & NX?

DomsPlaying16 Comments

Nintendo Logo

 

Ahead of Nintendo Co., Ltd (7974) earnings release and investor conference this week, let’s take a look at the gaming firm’s financials: how healthy is it really right now before the pending formal reveal of its latest hardware piece dubbed “NX” and its move into mobile?

If internet chatter and market sentiment are to be believed, Nintendo is struggling badly. Its stock is down 30% over the past 6 months, indicating investors are nervous. But is this warranted given its current situation and future prospects?

Perhaps, but I think it’s overblown. Compared to competitors Sony Corp (6758) and Microsoft Corporation (MSFT), Nintendo has smaller market capitalization and sales/income figures. But I’d argue it’s also a much more focused company that’s pure-play gaming, whereas the other two are broader corporations. When looking at strictly gaming-related figures, Nintendo’s sales are in fact lower than both though operating margin is comparable to Sony’s (Microsoft is better than both here) which indicates it doesn’t sell as well but it is actually more efficient from a profitability standpoint.

 

Comparison of Nintendo, Sony & Microsoft Gaming Segments 2

 

Edit: Caveats to above table is that Microsoft includes the following in its Computer & Gaming Hardware segment: Xbox gaming and entertainment consoles and accessories, second-party and third-party video game royalties, and Xbox Live subscriptions (“Xbox Platform”); Surface devices and accessories (“Surface”); and Microsoft PC accessories.

Additionally, it does not directly report Operating Income at its segment level but rather Gross Margin, so I have taken this figure out of the table for now. I would like to get a better estimation of Operating Income before updating again.

The main knock on Nintendo lately is that the Wii U console, released in late 2012, has been a failure. Below shows Wii U lifetime sales each fiscal year compared to both Wii and Nintendo 3DS, aligned for their launch timings. It’s true that sales of the console have been lackluster compared to recent consoles and Nintendo’s handhelds, but the success of the Nintendo 3DS in particular has supporting sales and earnings since its release in 2011.

 

Nintendo Hardware Unit Sales Launch Aligned

 

Still, you’ll notice below that from a monetary standpoint, Nintendo is actually not trending downward. In fact, it turned an operating profit in 2015 for the first time since 2011, just after peak success of the Wii (released in 2007). Its net income was also positive in 2015 compared to losses in 2014 and 2012. Sure overall sales have declined a bit over the past five years, but last year’s figure of ¥549 trillion (~$5 billion) is only around 15% lower than 2012. Additionally, taking into account its liabilities, the firm has around just under ¥100 trillion ($1 billion) of cash available which it can use to invest in future endeavors.

 

Nintendo Select Financials

Nintendo Select Financials 2

 

And Nintendo is also a software company, which is a key component of its overall business. Software sales have softened a bit over the past five years, but I expect a bump once NX is released in time for 2017 financials.

 

Nintendo Software Sales

 

Which brings me to the key going forward, as most gamers understand: Nintendo’s new NX hardware has to be a hit, its foray into mobile needs to be monetized and it needs great games in order to achieve a financial rebound. It has to differentiate NX from Wii U, similar to how Wii separated itself from its predecessor in GameCube. The way Wii had motion controls, NX needs to stand out.

Common speculation has it that the NX is a cross-over between a console and handheld, and that it will bridge the gap between home and mobile gaming plus offer an online infrastructure that is superior to the Wii U and Nintendo 3DS. But Nintendo has yet to commit to any sort of messaging on the new console yet. The firm did release its first mobile game, Miitomo, this month however has yet to show any sort of monetization. It’s more of a foundation upon which to build future mobile games.

All in all, Nintendo’s current financial situation is somewhat concerning compared to recent years and its big competitors, but it’s not as dire as its stock performance or internet message boards will have you believe based on profit rebounding and cash on hand to invest in its future. Do you agree?

Sources: Nintendo Co., Ltd, Sony Corp, Microsoft Corporation, Google Finance.

Note that all figures above are based on today’s exchange rate between JPY and USD.

-Dom

Bottom Line: How Will King Digital Acquisition Impact Activision Blizzard’s Business Mix?

DomsPlaying

Activision-Blizzard-logoKing Logo (PRNewsFoto/King Digital Entertainment plc)

 

Bottom Line: Activision Blizzard, Inc. (ATVI) derived most of its overall sales and income from its Activition publishing arm prior to its recent acquisition of King Digital Entertainment PLC (KING) in February 2016, while its dominant distribution segment was digital channels and its operations were mainly in North America. Now that the deal is complete, what will be the impact on the business mix of ATVI from both an operational and geographical perspective?

Before the deal, ATVI had two main operating businesses, both well-known as industry leaders in their specific areas, and an additional catch-all category:

Activision Publishing, Inc.: Publishing interactive entertainment software products and downloadable content. Major brands include Call of Duty, Guitar Hero, Destiny and Skylanders.

Blizzard Entertainment, Inc.: Publishing real-time strategy games, role-playing games and online subscription-based games in the MMORPG category. Major brands include World of Warcraft, Diablo, Starcraft and Hearthstone.

Other: Activision Blizzard Media Networks, Activision Blizzard Studios, Activision Blizzard Distribution & Corporate Items.

ATVI Segmented Revenue

 

You’ll see the Activision Publishing arm has been responsible for the most revenue and income for the past three years. This past year it comprised 58% of revenue ($2.7 billion) and 59% of income ($868 million), while Blizzard Entertainment constitutes 34% ($1.57 billion) and 38% ($561 million) respectively. A decline in revenue and income for Blizzard Entertainment was mostly due to bigger releases in 2014 and lower subscriber base for World of Warcraft this past year.

Taking into account KING’s latest statements, my forward-looking estimates for revenue and income including an additional business unit named “King Digital”:

King Digital Entertainment PLC: Developing and publishing mobile games and interactive entertainment, including free-to-play titles and social applications. Major brands include Candy Crush, Farm Heroes, Pet Rescue and Bubble Witch.

KING Revenue

Estimated Revenue Income Post Acquisition 2

 

Using KING’s latest annual figures and aligning them with the other segments within ATVI overall, you’ll see KING could contribute around 33% of sales ($2.26 billion) and 34% of income ($768 million). This indicates that it would move into the second position in terms of contribution, right after Activision Publishing, meaning that ATVI’s mobile business will eclipse its publishing of Blizzard titles and game types. I expect this to fully continue in the future with the increase in popularity of mobile and casual gaming plus the decline in World of Warcraft subscriptions, unless Blizzard releases a new game within one or more of its established franchises.

Digging further, let’s see revenue by distribution channel which is a breakdown of how consumers are purchasing ATVI’s content. The channels before the deal are:

Retail Channels: Physical distribution of games via brick-and-morter and online retail outlets.

Digital Online Channels: Digitally-distributed games and subscriptions, licensing royalties, value-added services, downloadable content (DLC) and related microtransactions.

Other: Same items as above.

 ATVI Distribution Channels

And again, my estimates for after using recent KING reports using a grouping called “Mobile Channels.”

Mobile Channels: Games, services and subscriptions distributed via mobile phones, tablets and other devices.

Estimated Distribution Channels Post Acquisition

 

The trend here first is that last year, Digital Online Channels overtook Retail Channels as the leading distribution type, indicating a more widespread trend toward consumers opting to buy their software digitally. Digital Online Channels contributed 57% of revenue ($2.63 billion). If we insert KING’s revenue under the new Mobile Channels classification, then I estimate it will be the second overall distribution source at 33% of revenue ($2.26 billion). This would be a large shift away from Retail for ATVI, a bet that consumers want to consume their games digitally whether it’s on console, computers or mobile devices.

Lastly, I’ll show a quick glance at which regions are driving ATVI’s business. This is trickier to display as the companies report their geographical breakdowns differently. Before the deal, ATVI reported broad regions:

ATVI Geographic Revenue

While KING classifies according to individual countries:

KING Geographic Revenue

Which leads to a rough estimate, and definitely not a perfect one, because I have to follow KING’s reporting that lumps all countries outside of these three into Rest of World:

Estimated Geographic Revenue Post Acquisition 2

 

Still, it does the job to show that North America will continue to be the driving force behind business operations as half the firm’s sales over the past few years are from this locale.

The highlight overall is that ATVI’s $5.9 billion bet in acquiring KING is a significant shift in the company’s business mix, as its mobile business will overtake Blizzard Entertainment from a games revenue perspective and also will contribute more to revenue than the firm’s retail offerings. Geographic mix for now looks to be unchanged, but that also depends on expansion into new markets and what constitutes the Rest of World classification. By these estimates, it will take around 3 years for ATVI to recoup the almost $6 billion sales price in revenue and even sooner if mobile grows at a faster rate than the firm’s more traditional businesses.

Sources: Activision Blizzard, Inc., King Digital Entertainment PLC, United States Securities & Exchange Commission (SEC)

-Dom

Prediction: Which Console Exclusive Will Sell More: Uncharted 4 or Quantum Break?

DomsPlaying

2876987-uncharted4amazon2916116-quantum-break-box-shot-jpg

Prediction: Which gaming console exclusive will sell more copies across its lifetime: Uncharted 4: A Thief’s End, releasing May 10th on Sony Corp’s (6758) PlayStation 4 or Quantum Break which is out tomorrow Apr 5th on Microsoft Corporation’s Xbox One? Note that the latter will also be available on PC.

*FAIR WARNING* This will be a lengthy post, and more analytical than my usual ones. This is to dive deep into what is driving my predictions, rather than simply stating them blindly.

My personal guesstimates are below. In my opinion, Uncharted 4 has the better upside since it is the latest and likely last installment in a long-standing series. Additionally, PS4 user base is larger at around 36 million currently and I expect it to be as much as 50 million by end of 2016 based on growth since launch (and even more by the end of the generation, as we’ll see below). Moreover, Quantum Break is a brand new intellectual property (IP) for the lagging Xbox One this generation so its sales potential is lower despite its overall favorable critical reception now that review embargo has lifted as of last week.

When it comes to these two exclusives, quick predictions for sales this year and then rationale to follow:

Uncharted 4: A Thief’s End (Naughty Dog, Sony Computer Entertainment)

Predicted Lifetime Sales: 8 million

Quantum Break (Remedy Entertainment, Microsoft Studios)

Predicted Lifetime Sales: 5.9 million

The basis for these predictions comes down to a handful of factors: Current and predicted install base of each current generation console, historical attach rates of similar titles (comparison of software units sold per units of its console), actual company estimates and finally pre-order figures.

uncharted-4-a-thiefs-end_2015_01-29-15_017

For Uncharted 4, the historical sales of each installment in the series is as follows over each game’s lifetime compared with the install base of PlayStation 3 on which all were originally released. Note these are lifetime sales:

Uncharted Series Lifetime Sales

Subsequently, current lifetime sales of select PS4 exclusives to date and corresponding attach rates based on 36 million units sold of the console itself. Caveats, obviously, these are newer than the older Uncharted games and some are available on PC. But these represent only console sales.

PS4 Exclusive Lifetime Sales

Pushing this one step further, let’s assume based on early sales trends that the PS4 will outsell the PS3 to upwards of 100 million (almost what the PS2 sold). Using this assumption, these are “potential” lifetime figures of the same select PS4 exclusives we just plotted at current attach rates:

Potential PS4 Exclusive Lifetime Sales

Which ultimately leads to my estimate of 8 million lifetime sales for Uncharted 4, assuming it achieves an attach rate of 7.50% which is comparable to earlier titles in the Uncharted series and a bit more than select titles currently available for the PS4 console. This is my built-in upside, as the title has already achieved gold status which is pre-order sales of 250,000 before it has even released.

Estimated Uncharted 4 Lifetime Sales

 

3004866-quantum_break_takedown

As for new Xbox One title Quantum Break, we’ll first look at historical sales of new exclusive titles available on “Original” Xbox and Xbox 360 platforms over the past few years again compared with corresponding console sales:

Xbox Exclusive Lifetime Sales

Now sales of Xbox One exclusives to date and attach rates based on 20 million consoles in the wild:

X1 Exclusives Lifetime Sales

Similar to what we had above, the following is “potential” lifetime figures assuming that the Xbox One sells exactly the same as its predecessor which is around 84 million. I am estimating less lifetime sales here than PS4 based on the Xbox One lagging for the foreseeable future.

Potential X1 Exclusives Lifetime Sales

Almost done. While Quantum Break isn’t a part of an existing series, I’ve charted how earlier games by Remedy Entertainment have sold on their individual consoles. Note these are not console exclusives except for Alan Wake.

Remedy Entertainment Lifetime Sales Final

And finally, this brings me to my Quantum Break estimate of 5.9 million lifetime unit sales. I have to assume the game has an attach rate similar to existing Xbox One exclusives like Halo 5 or earlier Remedy title Alan Wake rather than classic titles such as Halo: Combat Evolved or original Fable. And also, this assumes Xbox One again sells as much as the Xbox 360 which I think is realistic depending on how this generation plays out.

Estimated Quantum Break Lifetime Sales

 

Two MAJOR edits at this juncture: The Alan Wake sales figures above initially were high, as this is the figure was for the series overall. I have edited this to reflect Xbox 360 sales only which are around 1.5 million. Also, the big caveat that I didn’t properly convey is that at present Quantum Break is a console exclusive and it is available on PC but only via the Windows Store. Limiting distribution to one platform on PC rather than opening it up to others, namely Steam, will have huge negative implications for sales of the title overall. If MSFT doesn’t offer Quantum Break on the most popular PC distribution platforms at some point in its lifetime, and Xbox One doesn’t sell as well as Xbox 360, then my estimates would need to be revised downward.

Keep in mind, there are a ton of assumptions and estimates here. The bottom line is that I think Uncharted 4 has the greater potential when all is said and done, in that it’s the final installment in an established series going up against a brand new game in Quantum Break. This is despite higher historical attach rates for Xbox exclusives, as I think the Xbox One console could sell less than its competitor PS4 plus Quantum Break is an unproven brand. How do you feel about these assumptions and estimates? Do you think Quantum Break will actually sell more?

Sources: Sony Corp, Microsoft Corporation, Remedy Entertainment, NPD Group, Forbes, GameSpot, Amazon

-Dom

Quick Thoughts: What Do New Gaming Console “Iterations” Need to be Successful?

DomsPlaying

Xbox One PS4

 

Quick Thoughts: Now that major gaming hardware manufacturers have hinted at iterating on their existing consoles rather than using the “traditional” model of 6-8 year generations, what do you think a new version would need in order to be successful? What features should be required in order to cater to both existing and new owners? Should console makers even take this route at all?

With a recent report from The Wall Street Journal, in addition to earlier articles by gaming-focused media including Kotaku and Polygon, rumors are solidifying that both Sony Corp (6758) and Microsoft Corporation (MSFT) will be iterating on their existing gaming consoles, the PlayStation 4 and Xbox One respectively, to release more “powerful” versions rather than waiting out the traditional console cycle period which can be anywhere from 6 to 8 years approximately. I’m not going to speculate on what the specs will be or when they will be released, but rather I want to ask how can these be successful when gamers are used to the traditional longer-term cycle?

Consumer sentiment around these rumors has been mixed leaning mostly towards the negative, especially existing owners that are worried they might be “left behind” if the newer console iteration offers much better graphics or software that isn’t playable on the older machines. To put these concerns in perspective, estimates for current user base for the three major gaming consoles are below which indicates the risk of alienating these bases if manufacturers don’t approach these iterations properly.

 

Estimated Console Install Base

 

So, what’s the right approach? I think it comes down to three factors, in no particular order:

Transparency: Of course this is quite general, but it’s still essential. Console makers need to be explicit in their communication on what these iterations are, how they will be done and honestly they need to do it soon. Are the iterations going to now support 4K output or VR capabilities let’s say, or will they involve more significant upgrades to hardware that will noticeably impact how games and videos perform and look? Will there be software that’s only available on the newer version a la Nintendo’s New 3DS handheld? Which leads me into my next two points..

Forwards Compatibility: There’s been a lot of talk about backwards compatibility this generation, but if these companies start iterating on existing consoles then they need to assure existing players that they can still play their favorite games on the latest version. I think this is less of a concern with the first iteration, and more with the second or third down the line. Similar to how mobile phones are constantly updated on an annual basis these days, if consoles are upgraded every couple of years, at what point does newer software outpace the specs of the original machine?

Upgrade Path for Existing Owners: This goes hand-in-hand with the previous point. To alleviate worries of current users, there needs to be a specific path by which these users can upgrade to the newest boxes and carry-over content and apps that they have paid for using hard-earned dollars. If this means charging them the difference in price between the original version and new iteration, that might suffice. However as a show of goodwill, I think manufacturers should go further and offer some sort of bonus or free content to those loyal customers that bought their earlier product version.

Sony LogoMicrosoft Logo

 

 

 

 

 

 

 

 

 

 

It will be interesting to see how and when both Sony and Microsoft communicate the future of their console businesses. Microsoft has been moving towards unifying its platform under the Windows brand, and executives including Phil Spencer have hinted that hardware upgrades are likely incoming for the Xbox One in the article I linked above, so it’s imperative that they form a more concrete message for the marketplace to digest. Sony has less of a structure in place at present. All in all, gamers like us will have to play the waiting game until we hear what the future of this console generation will be.

Sources: Sony Corp, Microsoft Corporation, Nintendo Co., Ltd., The Wall Street Journal, Kotaku, Polygon

-Dom

Quick Thoughts: How Much Did The Division Actually Sell Day One?

DomsPlaying

The Division Concept Art

 

Quick Thoughts: Ubisoft Entertainment SA (UBI) announced via its UbiBlog that Tom Clancy’s The Division has broken sales records internally as being the best-selling game in the firm’s history. Based on this, how much in dollars did the game actually sell to consumers? My estimate is below. Would you agree?

After Tom Clancy’s The Division’s release this week on Tues, 3/8, publisher UBI has coyly proclaimed that the third-person online RPG had sold more on its first day than any other game in the publisher’s 30-year history. We saw a similar type of announcement with its last fast-selling title, the open-world hacking game Watch Dogs, in 2014.

Frustratingly, in both cases UBI didn’t initially reveal any sort of sales figures in copies or dollars. I will note it ended up that Watch Dogs sold 4 million copies in its first week, but no dollar amount was ever publicized. First I’ll try to put some perspective around this situation and then I’ll make my best estimate (which, full disclaimer, is completely a personal guess).

As for day-one sales, below are closest estimates in dollars of notable launches based on publisher announcements and industry data.

 

Video Game Day-One Sales Chart

 

Couple important items to note: Call of Duty: Ghosts (2013) sold $1 billion to retailers (sold-in) as opposed to consumers (sold-through). Also, Call of Duty: Black Ops III (2015) figures are for the first 72-hour period. Like everything in life, there’s caveats and exceptions and it’s difficult to get a perfect comparison. Ultimately I’ve charted these both for illustration purposes rather than trying to prove that Call of Duty: Ghosts was the best-selling game ever upon launch.

In addition to the titles above, I mentioned Watch Dogs before. If we try to wrap a dollar amount on its first-week sales, let’s take its 4 million worldwide copies multiplied by the standard $60 price tag which would come to $240 million. Note that this is across the span of a full week, so assuming it was front-loaded on launch day, around $150 million or 2.5 million copies that one day. Again, for comparison purposes.

 

Watch Dogs Art

 

So if The Division has sold more than Watch Dogs on launch day, how much did it actually sell? I don’t think that it has eclipsed any of the other names on the chart above, otherwise UBI would have come out and projected that accordingly. Which means to me, it falls somewhere between $150 million and $310 million of both Call of Duty: Modern Warfare 2 (2009) and Grand Theft Auto IV (2008). I’ll bet it ends up being somewhere near the lower band of that range, so my estimate is that The Division may have sold $210 million upon its launch implying around 3.5 million copies, give or take.

Am I overestimating the success of this new franchise? Are my assumptions above completely crazy or perfectly genius? Do you think that The Division sold more than some of the titles in the chart above? Feel free to let me know either way, but until we hear concrete figures from UBI itself, we get to have fun and make bold predictions on our own!

Sources: Ubisoft Entertainment SA, Activision Blizzard, Inc., Take-Two Interactive Software, Inc., Bethesda Softworks, NPD

-Dom

Bottom Line: Gaming Journalists & Crowd-Funding: Cool or Conflict?

DomsPlaying

Bottom Line: It’s a simple question, more about ethics than about statistics. Is it acceptable for journalists that cover the games industry to contribute to crowd-funding campaigns for video games? Or does it create the appearance of a conflict of interest that their outlet will then provide favorable coverage to said game? My thoughts below.

Crowd-funding is still a big deal in the world of video game development, and overall it’s a good way to both gauge public interest in a title and a way to raise funds to aid in producing it especially for smaller teams or experimental projects. But with the popularity comes responsibility on behalf of the media, and in my opinion I think gaming journalists should abstain themselves from participating in crowd-funding games.

Sites like Kickstarter, Indiegogo and recently Fig (which offers an equity ownership option as opposed to strictly donations) are popular platforms for developers to use for these crowd-funding efforts. For perspective, the following shows video game projects last year that raised over $20K. Note that Kickstarter is obviously still the most popular of these platforms based on stats from ICO Partners:

 

GamesIndustryBiz

 

And from a games perspective overall, the following are the most contributed games ever based on stats from both providers:

 

Top Crowd-Funded Games

 

Knowing that many smaller or “indie” games wouldn’t be made otherwise if it wasn’t for donations from supporters, it’s tempting for journalists covering the medium to turn into a fan and donate. But that presents a conflict of interest in my opinion, where it gives the appearance that their outlet *could* provide critical coverage that is more favorable than usual. I understand gaming journalism is inherently flawed; it walks a fine line between unbiased coverage and being occupied by downright fans of the industry its covering, but either way it needs to recognize potential conflicts in this age of moneyhatting and pay-for-play YouTubing.

I think that all such cases of journalists donating need to be explicitly stated to the market and fully transparent. And it’s the responsibility of the outlet to acknowledge this and separate the individual from any and all coverage of the title in question. It’s similar to an employee donating to a presidential campaign, which companies require them to report and distinguish the individual’s opinions from that of the firm.

I’ve heard various cases of members of the gaming media donating to fund-raising campaigns, but not much discussion on the conflict that this presents. I believe the journalist should not donate overall, and if they do, their outlet needs to be transparent and remove them from any coverage of the particular title. Do you think I’m overreacting, as games are normally covered by fans that are a part of the media? Or should journalists in general not financially support the companies, items or services that they are covering?

Sources: CrowdFunding.com, GoFundMe.com. Kickstarter, Fig, ICO Partners, GamesIndustryBiz

-Dom

Quick Thoughts: Can The Division Replicate Destiny’s Success as a Shared-World Shooter?

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Quick Thoughts: Simply put, can Tom Clancy’s The Division become as successful as its competitor Destiny, which made a record $500 million during its initial launch and was reported by Activision Blizzard Inc (ATVI) to be the top-selling new IP in North America and Europe in 2014?

 

Tom_Clancy's_The_Division

 

As noted in my previous article, publisher Ubisoft Entertainment SA (UBI) is releasing its biggest title of the year, Tom Clancy’s The Division, soon on March 8th. The shared-world, online shooter with RPG elements set in a frigid Manhattan is the firm’s biggest bet this year as it’s a brand new IP for which the firm expects it to “be one of the largest launches of a new brand in the history of the video game industry,” per CEO Yves Guillemot. And without an Assasin’s Creed title this year, and Watch Dogs 2 yet to be confirmed, The Division is the premier part of UBI’s calendar year portfolio.

Which leads me to my comparison to Activision Blizzard Inc (ATVI)’s hugely-popular online shooter Destiny. Stats from the firm’s reporting show the aforementioned record launch and even over a year later, the game has over 25 million registered users which have around 3 billion hours. It has yet to be seen if this success can be sustained through the decade-long plan that ATVI is rumored to have for the franchise, but with net revenues increasing last year to $4.6 billion (compared with $4.4 prior year), Destiny is a main contributing factor to the firm’s continued success as one of the world’s largest publishers.

 

ATVI 2015 Revenues

 

Going back to The Division, UBI hasn’t divulged their internal sales forecasts for the title in particular however they have released guidance of increased sales during final quarter of 2015-16 and relatively healthy full-year sales in 2016-17. From a consumer perspective, the game will scratch the same itch as Destiny from an RPG loot and leveling perspective however the key is its mechanics and narrative content, the latter of which was the main knock on Destiny when it first came out.

Based on this, it’s a fresh new IP that’s quite ambitious, so my personal take is if it delivers enough content between its story missions, side quests and “Dark Zone” PvP concept (which is an area many have compared to survival games where players can decide to either work together or fight against one another to collect the game’s best gear), I think that The Division can certainly compete with Destiny and even steal a portion of the games user base as ATVI hasn’t released new content since September 2015’s Taken King expansion. And ATVI announced that a sequel to Destiny won’t be out this year, which leaves the door open even further.

Whether it will generate $500 million in day-one sales or achieve 25 million users in its first year, that has yet to be seen, but the game is one of the year’s most intriguing releases.

 

Destiny Cover

Sources: Activision Blizzard Inc 4th Quarter & Full Year Financial Results 2015, Ubisoft 3rd Quarter 2015-16 Earnings, Xbox One UK.com

-Dom

Quick Thoughts: Far Cry Primal & The Division Releasing Together Impact Ubisoft Sales?

DomsPlaying

I understand why Ubisoft Entertainment SA (UBI) is releasing two huge titles within two weeks of one another: first-person open world game Far Cry Primal and shared-world shooter RPG Tom Clancy’s The Division. The French publisher wants to have both out the door with enough time to account for early sales before its fiscal year ends in March 2016. Still, I am skeptical: Does releasing big titles this close together hurt overall revenue potential, as one cannibalizes sales of the other? Or are the titles different enough that there is minimal overlap between audiences? See below for my personal take, and let me know your thoughts!

During its 3rd quarter 2015 earnings last week, Ubisoft Entertainment SA (UBI) reiterated the high expectations for its upcoming release schedule especially for two anticipated titles: Far Cry Primal on Tuesday, February 23rd and The Division on Tuesday, March 8th. For context, the publisher estimates that sales for last quarter of 2015 will bump to €591 mil ($662 mil) which would be more than three times the same quarter of 2014 and a 5% increase over this past quarter. This is a key quarter for UBI, as sluggish sales for Assassin’s Creed: Syndicate have caused the firm to lower its full-year expectations.

 

Ubisoft 2015Q4 Sales Forecast

 

I have a couple thoughts though with the titles overall and their release schedule in particular. First, Far Cry Primal is coming out a little over a year after Far Cry 4 which leads me to view it almost as an expansion than a full release. It seems to be recycling significant assets from the previous title, including similar animals and character models, and I’m skeptical that it can innovate enough to capture those outside of Far Cry’s base audience.

On the other hand, I’m quite high on The Division though worry that it may end up being too ambitious. Pre-order figures are encouraging (some estimates are as much as 1 million copies), but UBI was careful to not release statistics on how many players were involved in their January closed beta. An open beta is upcoming this month, so we may learn then the true potential of the game’s audience size.

the-division-infographic
Click to enlarge

And the other, arguably more important thought, is that I don’t know if there’s enough differentiation across the titles with both being open-world action-shooters. If target audiences overlap too much, consumers are forced to choose which full-price retail release to buy or maybe even rent one instead of purchasing it. This will at best defer sales to a later quarter, and at worst could eliminate them entirely. It will be interesting to see results come mid-April, when NPD Group reports industry-wide software sales, and then UBI’s year-end financials.

Personally, I will be purchasing both titles upon release. But am I the exception? UBI is banking on that not being the case.

Sources: Ubisoft Entertainment SA Third-Quarter 2015-16 Earnings Press Release, Ubisoft Massive The Division Close Beta Statistics, VGChartz (take this as you will).

-Dom

Bottom Line: Can Twitter Break Through Its Plateau & Grow?

DomsPlaying

Twitter Inc (TWTR)

Bottom Line: Between sluggishness in its user base and advertising dollars not able to outpace overall costs, what can TWTR do to jump-start growth and alleviate investor concern that it has hit a wall? How would you improve TWTR? Can the firm afford to change its service without alienating its dedicated users? See my opinion at the end of this post!

Twitter Inc (TWTR) is quite an interesting company in this day and age, as a rare “mature” social media company. Three years after its IPO, it has released its 2015 results and the news is mixed despite best efforts to jump-start growth. Which begs the question, has TWTR reached its plateau for users and revenue potential? Or will users respond positively to it adapting its strategies as it matures?

Quick snapshot, revenue is up more than 50% to $2.2 billion however the company is still losing money as it has for years (according to Generally Accepted Accounting Principles, or GAAP, the standard used in the States). Though, it is losing less money this past year per below. I will note that the company reports “adjusted EBITDA” which is their non-GAAP measure of profit, as it excludes certain expenses.

 

TWTR Financial Summary 2015

 

Main concern is that for the first time ever, the company’s monthly average users were flat for the last quarter of 2015. Though annual users were up 9% to 320 million, this is the first time that TWTR’s user base has stagnated on a quarterly basis. Note that the vast majority of these users are outside of the United States, and in fact its users in the States declined during this time frame.

 

TWTR Monthly Users 2015

 

The firm reassures that users have since come up for the month of January, but we won’t know for sure until next quarter’s earnings. This is an essential detail, because users have been slowing down across 2015 compared with earlier years culminating in a flat quarter indicating that the firm may be hitting the dreaded plateau that maturing tech companies sometimes see. Investors have responded with skepticism, with the firm’s stock declining around 60% since beginning of 2015.

Still, like all companies, it’s about monetization. Its business is split across two areas: Advertising and Data Licensing & Other. The former segment is the main revenue driver, and grew to $2 billion last year primarily due to an increase in advertisers. Still, the company has substantial sales and marketing costs plus research and development which combine to $1.6 billion per year. It’s an example of a firm growing sales, but costs aren’t being held in-check at the same rate. It’s also interesting to me that a company like TWTR, which seems ubiquitous in today’s society, spends so much on marketing itself but perhaps this is akin to Pepsi Inc running TV ads to maintain its brand identity.

Another couple of items I’d like to mention are its young CEO Jack Dorsey returned to the firm last year and has started to reshape the look and feel of its core services, plus expand in areas like video streaming (via Periscope) and “Moments” which displays current news items and topics but is only available in three markets so far. The firm has the lofty goal to reach across the entire globe, but for some perspective, it is still small compared to a peer like Facebook which has 5 times the amount of users.

Personally, to answer my initial questions, I think the user experience is key and making it as easy as possible to on-board new users should be a cornerstone. Additionally, continuing to present itself as the go-to source for “live” interaction across a broad sweep of people with expanding “Moments” into more markets and supporting its existing video offerings is also a key strategy. I think the firm is doing a good job at integrating non-intrusive ads into its user experience and offering self-service for advertisers, it’s just that costs of doing business in particular marketing costs are still high and without further user growth, profitability and investor confidence seems a ways off.

Sources: Twitter Inc 2015Q4 Earnings, NY Times

-Dom

Bottom Line: Disney Record Results But Market Outlook Negative?

DomsPlaying

Walt Disney Co. (DIS)

Bottom Line: Star Wars brand drove a quarter with record income for DIS, but contraction in Media Networks is a concern for analysts and investors going forward. It should be an interesting year for DIS as pipeline includes Finding Dory, Captain America: Civil War, more Disney Infinity but the main areas to watch are Star Wars merchandise and the future of ESPN.

Questions: What other areas or products can drive growth for DIS this year? Are you positive overall on ESPN? Can Star Wars alone, between licensing and merchandise, abate concern with Media Networks at least this year?

Dissecting a huge media conglomerate’s financials is a monumental task, so I won’t necessarily be posting every single stat or figure but want to address the above question while overviewing the company’s current business.

DIS reported 2016Q1 earnings this week, with record net income however the market sentiment is still negative as indicated by the firm’s stock movements after earnings release. So what’s behind this divergence? The firm’s main profit drivers are Media Networks (cable channels, ABC & ESPN etc) and Studio Entertainment (movies, including Star Wars and Marvel titles) with the latter almost doubling income since last year due to Star Wars: The Force Awakens release.

DIS Segments 2016Q1

The key here is that Media Networks income contracted since last year despite sales being up, as costs are also increasing on a relative basis. Driving this is partly timing, as the College Football Playoffs occurred during this quarter, but also rate increases for sports programming and production costs going up. A general concern is the sentiment around ESPN in particular, where programming costs are up and cable subscribers are “cutting the cord” adversely impacting advertising potential. To combat this, DIS is trying to expand ESPN mobile offerings, as WatchESPN now displays all live shows and events in order to have more eyeballs on advertising. I’ve even heard rumblings that DIS should consider an approach similar to HBO Now, offering ESPN content separate from a cable contract for a subscription fee. I’d say this is a last resort, at present.

DIS Media Networks 2016Q1

DIS Studio Entertainment 2016Q1

As for gaming, the Consumer Products & Interactive Media is actually quite healthy but this of course seasonal and this quarter included holiday 2015. Revenue and income were boosted by licensing from Star Wars i.e. Star Wars: Battlefront while Disney Infinity results were lower (sales volume down, inventory up). Even compared to last year, when Frozen merch was all the rave especially with kids accumulating annual sales of $3 billion, Star Wars gear has just begun to reap benefits and Nielsen expects it to account for $5 billion in revenue across this year.

Last note is that DIS results are being propped up by the steady Parks and Resorts segment, up more than 20% since last year driven by Americas region. I see this as continuing to be a key component of the firm’s diversified approach, especially as the cable landscape changes and products/interactive media remains seasonal and dependent on the strength of content and titles.

Sources: Walt Disney Co. Form 1oQ February 9, 2016; Walt Disney Co. Q1 FY2016 Earnings; Nielsen

-Dom