Atari revenues up as losses narrow
Flashback preorders strong, but fewer SKUs, reduced R&D allocations, and convoluted relationship with parent company raises concerns.
As is the custom, Atari second-quarter earnings call was chaired today by company CEO, chairman, and chief creative officer Bruno Bonnell. And, as usual, a posse of inquisitive analysts bore down on the executive, questioning the long-term prospects for the financially challenged game publisher.
However, despite the fact Atari's second fiscal quarter earnings came in at $71.4 million, which represents an 18 percent year-on-year increase, analysts critical of the company's dealings hammered away at Bonnell, demanding he explain the company's strategy for the coming two quarters. Some even wondered aloud if the time had come for Bonnell to consider selling Atari to salvage the well-being of its parent, Infogrames.
This, despite Atari's tally sheet, being impressive--or, rather, this being not as unimpressive as previously thought. The bottom line for the July-to-September quarter saw a loss of $16.89 million, or 14 cents a share, which is less than the 16 cents analysts polled previously by Thomson First Call had predicted.
However, for the second quarter in a row, Atari execs reduced their projected revenue figures. For the upcoming third quarter, the company expects to earn $15-$20 million on revenues of between $160 and $175 million. That guidance fell short of figures Wall Street analysts were working with earlier. Reportedly, Wall Street had predicted profits of 24 cents a share on $189.11 million for the quarter.
Bonnell singled out Test Drive: Eve of Destruction for the PlayStation 2 and Xbox, Dragon Ball Z: Buu's Fury for the Game Boy Advance, Terminator 3: The Redemption for all consoles, Demon Stone for the PS2, and Yu Yu Hakusho: Dark Tournament for the PS2 as the past quarter's biggest revenue drivers. He also said sales of the critically lashed Driver 3 for the PS2 and Xbox continued to be strong.
Bonnell emphasized that, save for the single announced DS title Atari Classics, he preferred to take a "second row" seat for all upcoming hardware launches. He expressed confidence in the Atari Flashback plug-and-play gaming console, despite calling it "a piece of plastic with a chip."
Crass reference aside, the company stands to pocket about $8 million in revenue from the Atari Flashback console this calendar year. Due to parts shortages, Atari could produce only 500,000 units in time for the holiday season, all of which have already been shipped to stores. Allocation went to just four chains, Bonnel said. These include Wal-Mart, Best Buy, Target, and GameStop. "We anticipate significant reorders in the fourth quarter," Bonnell told listeners to the call.
For the full fiscal year ending March 31, 2005, Atari issued guidance that sees sales of $450-$470 million and a profit of $25-$30 million.
In a statement, Atari clarified the relationship between itself and its parent, Infogrames: "On November 3, 2004, a subsidiary of IESA issued to Atari a secured note relating to royalty and other payments that were due to Atari by IESA or its subsidiaries during the period ended September 30, 2004. The secured note has a principal amount of $23.1 million, bears interest at market rate and will mature on March 31, 2005. Atari will reduce the sums due under the note by applying royalties and other amounts that become due by Atari to IESA or its subsidiaries, which will result in the prepayment of most if not all of the note prior to maturity."
Bonnell said a possible sale of Atari to service Infogrames' debt was unlikely. "There is a long list of options that Infogrames can activate before deciding to sell its main asset," was just one way he addressed analysts' numerous questions.
In the area of funds allocated for future games, the company reported that it reduced its R&D expenditures by more than $6 million during the quarter. During its second 2005 fiscal quarter, it spent $18.9 million, compared to $23.6 million the same quarter a year ago. That reduction was in keeping with the company's plan to release 50 SKUs during FY05, compared to the 75 SKUs released the previous year.
Though at times intense, Bonnell's grilling by analysts did not have an effect on Atari's stock. In after-hours trading, Atari shares were up $0.16 to $1.96. Reacting to today's earnings call, Wedbush Morgan analyst Michael Pachter sent a memo to investors on Thursday night. In it, he said, "Despite our lower estimates, we are increasingly confident that the company's Dragon Ball Z games will perform well, and believe that Atari stock will rebound over the next few quarters as the company continues to execute as expected."
Pachter's long-term outlook was also favorable. "Our price target of $3.50 reflects a P/E multiple of 14x multiple our FY:06 EPS estimate (about in line with the company's two year estimated normalized growth rate). We are maintaining our Buy rating on Atari."
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