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To: Slumdog who wrote (14545)	10/25/2002 2:09:50 PM
From: Bill Harmond	Read Replies (1) \| Respond to of 57684

From Briefing: Live Headline 25-Oct-02 Electronic Arts (ERTS) 65.98 +0.13: In the entertainment software business, Electronic Arts is the undisputed industry leader. As such, the market always takes an added interest in its earnings guidance and commentary on industry trends. To its credit, ERTS has been a beacon of optimism on both fronts for some time now. Having reported its fiscal Q2 results last night, it was clear little changed in that regard. What isn't so clear is if the market really believes things can remain so good for ERTS when others in the space are tempering expectations. Earlier this week, in fact, THQ, Inc. (THQI) checked in with some disappointing guidance that was punctuated with a reduction to next year's industry growth prospects. Citing a number of factors, including economic uncertainty, THQ said it was expecting growth in the neighborhood of 10-15% versus most analysts' estimates, which ranged from 20-25%. That was enough to send the entertainment software group reeling as investors fretted over the possibility the sector's growth cycle had peaked. As to be expected, the impending earnings report from ERTS took on added importance following THQ's pronouncements. By most accounts, ERTS had a blowout report that should have assuaged those concerns. Not only did ERTS easily exceed the fiscal Q2 consensus EPS estimate, it also raised its guidance for fiscal Q3 (Dec.), reaffirmed estimates for fiscal Q4 (Mar), and boosted its full-year outlook. ERTS indicated, too, that the upcoming holiday quarter will be the biggest in its history and that a peak in the software cycle could be as far off as 2005. Not surprisingly, then, ERTS sounded an upbeat note on the industry growth prospects. To wit, it expects the PS2 business to grow 25-30% in North America in calendar 2003, the Xbox and GameCube businesses to grow 20-25%, and the PC business to grow 5-8%. ERTS added that those projections should be higher in Europe and that, overall, they were on the conservative end of the range. That good news, however, hasn't done much to jumpstart the sector as the likes of ATVI, TTWO, MWY, and THQI are struggling to make much headway. To see THQI trade noticeably lower isn't much of a surprise. If anything, the report from ERTS suggests THQ's cautious outlook may be more of a company-specific thing. What is surprising, though, is to see ERTS trade with little vigor as its report also suggests it is clearly a cut above the rest. The market's seeming lack of appreciation for that understanding is a bit perplexing, but we suspect it stems from concerns about ERTS's ability to maintain its momentum in what should prove to be an increasingly competitive environment as smaller companies try to bolster sales and defend their market position. Valuation concerns may also be factoring into the mix, but in its defense, ERTS is putting up the type of numbers to warrant a premium multiple. Of course, that doesn't mean much if the industry's growth curve is starting to flatten. ERTS's industry outlook flies in the face of such assumptions, and hence, we expect it to outperform its peer group. Nevertheless, the inability of the sector to capitalize on the industry leader's good news suggests the market, at least, has its doubts. So long as it does, the sector's progress should be held in check.-- Patrick J. O'Hare, Briefing.com

To: Slumdog who wrote (14545)	10/30/2002 1:44:18 PM
From: Bill Harmond	Read Replies (2) \| Respond to of 57684

30-Oct-02 Activision (ATVI) 19.98 +1.77: Few groups have received as much attention lately as the entertainment software group. For the most part, the undue attention has been a by-product of some disappointing comments on industry trends that were made last week by THQ, Inc. (THQI). Last night, however, Activision (ATVI) provided its own perspective on the industry that quelled some burgeoning concerns about the industry's prospects. After reporting better than expected fiscal Q2 (Sep) results and raising its sales and EPS guidance for FY03, Activision began its conference call with an acknowledgment that FY04 (beginning in March) is likely to be the company's best year ever. Its optimism was rooted in a number of factors, not the least of which is the company's expectation that the North American hardware installed base will increase from 35 mln units at the end of calendar '02 to at least 55 mln units at the end of calendar '03. Additionally, Activision has 75 products planned for release next year. Careful to stress that companies have different ways of arriving at industry forecasts, Activision noted it was projecting a combined growth rate of 13-17% in calendar '03 for console, handheld, and PC video game software in North America and Europe, with an assumption that Europe won't grow quite as strong as the U.S. Separately, Activision forecast 17-20% growth for the total console market, including software for both new and old platforms. Hoping to dispel some concerns raised by THQ about the upcoming holiday season, Activision indicated that, barring any major macroeconmic issues, it expects a strong holiday season. The company did note, however, that retailers are being pretty selective right now, particularly with respect to the GameCube and GameBoy Advance platforms where they appear to be over-inventoried. Activision held off on updating its FY04 guidance, saying it would do so when it finalizes its operating plan in January. On its last call, it provided preliminary guidance for EPS of $1.35 and revenues of $1.025 bln. In listening to last night's call, one got the sense that those numbers are likely to increase as Activision is known for its conservative planning. That understanding is reflected in the fact that current Multex consensus estimates for FY04 are $1.41 and $1.074 bln, respectively. Should Activision boost its guidance to match the current consensus EPS estimate, that would translate into yr/yr EPS growth of approximately 9.0%. While that is nothing to sneeze at, it does seem somewhat modest for a company that is in the midst of a great growth period. Be that as it may, Activision is winning accolades today for an outlook that suggests, at the very least, that it should be in a good position to capitalize on the growth prospects that still exist for the entertainment software industry. Whether the market really believes in those prospects is another matter.-- Patrick J. O'Hare, Briefing.com