Brean Capital Previews Video Game Publishers: Electronic Arts, Take-Two Interactive And Activision Blizzard

Todd Mitchell of Brean Capital previewed the major video game publishers, including Activision Blizzard, Inc. ATVI, Electronic Arts Inc. EA and Take-Two Interactive Software, Inc. TTWO ahead of third quarter results.

Industry Wide View Positive

Mitchell believes that all three major firms provided "overly-conservative" guidance for their fiscal years following an uncertain outlook over the pace of adoption for next-generation consoles. However, the analyst notes that sales of Xbox One and PS4 continue to sell better than expected while attach rates for new games have been "surprisingly robust."

As a result, Mitchell speculates that the major publishers sold more units than expected as consumers are "clamoring" for next-generation games such as Activision's "Destiny."

Additionally, digital revenue continues to play a larger role within the industry that typically yields a higher margin.

Activision To Benefit From Destiny Sales

Activsion is expected to report its third quarter results on November 3 after market close. Mitchell expects the company to earn a non-GAAP earnings per share of $0.12 on $1.0 billion in revenue. The estimates are based on the 8.5 million units of "Destiny" sold in the quarter along with just over two million versions of "Diablo III: Reaper of Souls."

Gross margin is expected to be flat at 74 percent, but operating margin is expected to fall to 16 percent from 19.5 percent a year ago, as higher operating expenses will more than offset higher revenues.

Shares are Buy rated with a price target raised to $26 from a previous $25.

Electronic Arts: Most Top-Selling Titles Out Of Entire Group

Electronic Arts will report its second quarter results on October 28 after market close. Mitchell expects the company to earn a non-GAAP earnings per share of $0.53 on $1.15 billion in revenue.

Electronic Arts will prove to have the most top-selling titles out of any publisher in the quarter, according to Mitchell. The analyst expects Electronic Arts to report sales of six million units of "FIFA 15" and 3.2 million units of "Madden 15" in the quarter.

Mitchell expects Electronic Arts will benefit from a higher percentage of digital revenue leading to a company-wide gross margin of 66 percent. Additionally, the analyst is projecting the company to report more than $100 million in mobile revenue.

Shares are Buy rated with an unchanged $40 price target.

Take-Two: No New Releases In The Quarter

Take-Two will report its second quarter results on October 29 after market close. Mitchell expects the company to report a non-GAAP earnings per share loss of $0.57 (non-GAAP EBITDA loss of $47 million) on $112 million in revenue.

Take-Two had no new releases in the quarter and faces a tough comparison against last year's quarter which included sales of newly released "Grand Theft Auto." The analyst expects at least two-thirds of the company's revenue deriving from recurring digital revenue, which will help boost company-wide gross margins to 43 percent from 39 percent a year ago.

The analyst notes that there is "greater level" of risk associated with owning shares of Take-Two than there is for Activision or Electronic Arts. As such, investors should be "cautiously optimistic."

Shares are Hold rated with no assigned price target.