Atari (Infogrames) ATAR
April 22, 2003 - 1:11am EST by
2003 2004
Price: 3.30 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 154 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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I believe IFGM is undervalued at current levels and possesses the potential for significant near-term and medium-term capital appreciation (2-5x) based on the strength of the ENTER THE MATRIX (ETM) Game, improving fundamentals, internal restructuring and other titles within its gaming library.

On 5/15/03, ENTER THE MATRIX (ETM) Game is scheduled for simultaneous release on all major gaming platforms (PlayStation2, Xbox, Nintendo GameCube and PC), in conjunction with the sequel to Academy Award-winning thriller THE MATRIX – THE MATRIX RELOADED. ETM Game is the most hotly anticipated game since GRAND THEFT AUTO: VICE CITY (TTWO), which sold over 4mm units. Internal company estimates for ETM Game is btw 2-3mm units (IFGM investor relations) – anything short of a blockbuster is a BIG disappointment. This is the first time that Hollywood and the gaming world has followed a simultaneous release strategy. To give you a sense, the hit 007 Game came out over a year and a half after the movie.

What this allows IFGM to do is leverage the marketing budget of THE MATRIX RELOADED and have cross-promotional synergies/opportunities. Additionally, ETM Game is integral to the MATRIX storyline and contains over an hour of additional footage that is not in the movie. ETM Game and MATRIX RELOADED have a marketing budget of more than $40mm:

"There has been extensive creative crossover that has taken place in the development of the film and the game. Warner Bros., Joel Silver, the film's producer, and Larry and Andy Wachowski, the film's writers, creators, and directors, have clearly shown their appreciation for the connection between the interactive world and THE MATRIX audiences."

I will no go into how amazing this game is to play. Needless to say, it is phenomenal, but I am biased being a ‘gamer.’ A typical game has ~350-600 moves a player can execute. In ETM Game, a player can execute over 3,500 moves. The website above has a trailer you can will blow you away. Also, Wired Magazine has an article about ETM Game and MATRIX RELOADED this month.

Fiscal Year Change:
On 3/14/03, the Board of Directors of Infogrames decided to change IFGM's fiscal year end from June 30th to March 31st. As a result of this change, IFGM’s fiscal year 2003, which began on July 1, 2002, will end on March 31, 2003. IFGM's new fiscal year 2004 will commence on April 1, 2003 and end on March 31, 2004.

I believe IFGM has repositioned itself to take full advantage of the ETM Game franchise. Pre-orders for the ETM Game began picking up in early April and have already crossed 250k units. IFGM expects to sell 2-3mm units, making it one of the most successful games in history. Only 50 games in 2002, out of 3000 titles, sold over 500k units last year. Again, anything short of a blockbuster will be a HUGE disappointment.

Revenue Potential/Earning Impact:
Although IFGM had negative and/or negligible earnings over the past 2-3 fiscal years, I believe IFGM has turned the corner in the December quarter of 2002 with strong revenue growth (>25%), cash flow generation and earnings momentum ($30mm in Q4). I believe this will continue going forward (sans ETM Game franchise),

IFGM has no analyst coverage - this is both a benefit and a risk. As I mentioned, the Company expects to sell ~2mm units (1.1mm PS2, 500k Xbox, 250k each GameCube and PC). Below I have outlined the revenue potential and earnings impact of ETM Game. The numbers are from IFGM estimates, gaming industry veterans, industry norms for “hit” videogames, and my own assumptions.

Suggested Retail Price: $49.95
Wholesale Price: $35-39 (assume $37)

Gross Revenue:
Gross Units 2,000,000
Average Wholesale 37
Gross Revenue $74,000,000

Net Revenue
Return Reserve Units (8%) 160,000
Net Units 1,840,000
Net Revenue $68,080,000 100%

Distribution 1.00 3%
Production 2.00 6%
HW Maker Royalty 8.00 24%
Total/Unit 11.00
COGS $22,000,000 32%

Royalty/Dev Cost
Intellectual Property 4,084,800 6%
Developer 12,935,200 19%
Royalty $17,020,000 26%

Total COGs & Royalties $39,020,000 57%

Gross Profit $29,060,000 43%

Other Expenses
Fixed Overhead 6,127,200 9%
Variable Marketing 1,500,000 2%
Variable Dev 510,600 1%
Total Internal Expense $8,137,800 19%

Net Profit $20,922,200 31%

Development costs are probably on the high side, but ETM contains a number of special scenes and additional footage, so I am comfortable with the number. I believe they will likely set a new record. Also, IP costs are complete guesstimates, but again, probably on the high side.

Aside from the ETM Game franchise, if you assume the rest of IFGM earns $20mm for the rest of year (IFGM earned $30mm in December quarter of 2002 and has a stable of games from which to derive earnings from & producing the new T3 game). Applying a forward earnings multiple of 15x (comps are trading above 20x forward P/E) to $40mm in earnings, you get to a market capitalization of ~$600mm ($8.60/share), or greater than 3.5x capital appreciation from current levels.

Of course, in the hits-based business of video gaming, ETM Game could be a flop (I don’t believe this will be the case, as pre-orders are quite high). Pre-orders topped 250k units on April 19, 2003.

"The revenue potential for THE MATRIX on multiple platforms is tremendous, making THE MATRIX RELOADED a premier title in our line-up for Fiscal 2003," said Bruno Bonnell, CEO of Infogrames. "THE MATRIX is one of the most desirable franchises within this industry. Its popularity and cult status are undeniable, and its movie fan base encompasses the quintessential gaming audience."

Shiny Acquisition:
On 5/2/02, IFGM acquired Shiny Entertainment for approximately $47mm in a combination of cash and a promissory note. Included in the purchase of the Shiny development studio are the exclusive worldwide rights to develop and publish interactive games based on sequels to the highly acclaimed Academy Award-winning action thriller, "THE MATRIX." The games will be based on the upcoming sequels, "THE MATRIX RELOADED" and "THE MATRIX REVOLUTIONS" from Warner Bros. Pictures.

Additionally, David Perry, Founder/President of Shiny Entertainment, has signed a long-term employment agreement with Infogrames to remain as President of Shiny. Larry Wachowski and Andy Wachowksi, the creators, writers and directors of THE MATRIX franchise, have worked closely with Mr. Perry and the Shiny team on the development of the games.

Company Description:
New York-based Infogrames, Inc. (Nasdaq: IFGM) is one of the largest third-party publishers of interactive entertainment software in the U.S. The Company develops video games for all consoles (Sony Computer Entertainment of America, Nintendo and Microsoft), PCs, and Macintosh systems. Infogrames' catalogue of more than 1,000 titles includes award-winning franchises such as Civilization(R), Backyard Sports(TM), Deer Hunter(R), Driver(TM), RollerCoaster Tycoon(R), and Test Drive(R), and key licenses including Warner Bros. Looney Tunes(TM), Nickelodeon's Blue's Clues(R), Dragon Ball Z(R), Unreal(R), Mission Impossible(R), Terminator(R), Harley-Davidson(R), Major League Baseball(R), and the National Football League(R), among many others. The Company's Humongous Entertainment and MacSoft labels are leaders in children's and Macintosh entertainment software, respectively.

Infogrames, Inc. is a majority-owned subsidiary of France-based Infogrames Entertainment SA (IESA) (Euronext 5257), a global publisher and distributor of video games for all platforms. In 2001, IESA acquired Infogrames Interactive, Inc. (formerly Hasbro Interactive), including its line of software based on well-known licenses such as MONOPOLY, Jeopardy(R), TONKA, and Atari(R), which are published and distributed in the U.S. by Infogrames, Inc.

1) Movie flops – highly unlikely
2) Game flops – somewhat unilikely
3) Game is a hit, but not a mega-hit…returns bite back hard.
4) Limited Float
5) Suggested Retail Price of $49.95 may be too high in market.

- May 15, 2003 – movie and game release date
- ETM Game sales data…May/June.
- Q1 earnings in (new) FYE 2004 – June 30, 2003


- May 15, 2003 – movie and game release date
- ETM Game sales data - May/June.
- Q1 earnings in (new) FYE 2004 – June 30, 2003
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