Activision Shows Revenues Down, Rosier Outlook

Activision announced its revenue for the quarter ended September 30th, 2006, revealing net revenues were $188.2 million, down from around $222.5 in the same period in 2005. However, the company ended the quarter with $747 million in cash and short-term investments, but the ongoing review of the company's historical stock option grant practices meant that the full information for the quarter was lacking. As for highlights, during the quarter, Activision's Call of Duty 2 for the Xbox 360 video game and entertainment system crossed the 1 million unit sales mark in the U.S., making the title the #1 best-selling game to date on the Xbox 360 video game and entertainment system, according to The NPD Group. In addition, Guitar Hero was a top 10 best-selling title in the U.S. 10 months following the game's initial release, according to The NPD Group. Going forward, the company will release three launch titles for the PlayStation 3 (Tony Hawk's Project 8, Call of Duty 3 and Marvel: Ultimate Alliance) and five titles for the Wii (Tony Hawk's Downhill Jam, Call of Duty 3, Marvel: Ultimate Alliance, Rapala Tournament Fishing and World Series of Poker: Tournament of Champions). Robert Kotick, Chairman and CEO of Activision Inc., stated, "Our second quarter net revenues exceeded our expectation and were driven by improving market conditions and the success of our franchises... We are optimistic about our exciting holiday lineup, although we remain cautious of the many variables that can affect the holiday selling season, including software pricing and the introductions of the PlayStation 3 and Wii." Looking forward, for the third quarter of fiscal 2007, Activision expects net revenues of $600 million. For the fourth quarter, the company expects net revenues of $175 million. The company's fiscal year net revenue outlook is $1.150 billion, and Activision also reaffirmed its fiscal year 2008 net revenue outlook, which is expected to exceed $1.6 billion. [UPDATE: In the conference call following the results, the first question involved the formerly overarching Marvel license that Activision holds, given that other publishers such as Sega are now licensing Iron Man (a property formerly held by Activision). Activision execs explained of this: "We made a choice to narrow our focus to what we consider the crown jewels of the portfolio - Spider-Man and X-Men", noting that they had made a decision to return Iron Man and Fantastic Four licenses to Marvel some months earlier. Elsewhere, the company revealed that they had around $2 million in downloadable content for the quarter (largely consisting of Call of Duty 2 Xbox Live downloadable maps), double that of the $1 million in the previous quarter. But the offering, which now also includes Doom for Xbox Live Arcade, is still a very small percentage of the company's overall revenues. Talking about digital downloads on consoles (as has been successful with Call Of Duty 2), it was noted: "The one thing that's been missing generally in the console market... is what you would look at in the PC market as expansion packs" - digital map downloads on Xbox 360 accomplish this goal. Thus: "Higher quality products will provide for a greater attach rate" for this type of content. Activision execs also claimed that it helps with the problem of used game reselling when new digital content is available for an existing game, suggesting: "The [pre-played] supply of Call Of Duty 2 has dried up" now new map packs have arrived. On next-gen console download expectations, Activision execs commented: "We expect very similar programs across both [PS3 and Xbox 360]", noting that Sony "are very committed" to making sure that digital downloads are easily available - though did not give any timetable to have paid PS3 downloads of Activision game add-ons. Discussing hardware shortages, Activision execs suggested that the complicated nature of the consoles have made initial roll-out tricky: "I think the challenge, as we've seen, is that it's higher technology than we've seen in the past, particularly in 360 and PlayStation 3... the yields are going to be lower up front, and it's going to take them a while to get those yields to the point where they will be able to satisfy all the demand." The discussion of porting Xbox 360 to PlayStation 3 titles also came up, with execs commenting of the two consoles: "We're encouraged by our abilities to find efficiencies across the systems" - both between Xbox 360 and PS3 and particularly between PlayStation 2 and Wii. Specifically singled out: "One of the key areas of efficiency is the development of artwork". When asked about the availability of Guitar Hero, specifically because a questioner was concerned that the volume of guitars may be tricky to source given the popularity of the game, execs simply commented: "We feel very comfortable with our supply." In addition, when asked on the future of the Guitar Hero franchise, it was explained: "Our strategy is to publish titles across multiple platforms" - though no specifics were revealed.]