Ahead of Activision's financial results next week, Janco Partners analyst Mike Hickey has commended short-term revenue prospects, but commented that "emerging competition for some of [Activision's] core franchises, including Guitar Hero
and Tony Hawk
", may prove damaging for the company's long-term growth.
Hickey stated for the short-term company prospects, "We expect key fiscal Q208 and 2H08 game sales will come from Spiderman 3, Shrek 3, Transformers, Guitar Hero, Tony Hawk, Call of Duty 4 and Enemy Territory: Quake Wars
. The Company’s fiscal ’08 game pipeline is exceedingly strong, and will likely generate record fiscal ’08 operating performance."
He continued, "We expect significant sales from the release of COD 4
during the holiday period. The game has achieved significant buzz, and quality is anticipated to be very high. Holiday ship delays from competitors (GTA IV, Army of Two
, etc.) further cement our belief COD 4
will be a top seller."
Looking to 2009, Hickey expressed that Activision's fiscal 2009 growth prospects "will likely benefit from the financial resources to roll up growth through IP acquisitions, general video game market software growth and a larger next-gen console installed base."
However, Hickey noted some threats to those growth prospects: "Emerging competition for some of their core franchises, including Guitar Hero
and Tony Hawk
will likely prove damaging for growth prospects." The analyst is likely referring to Harmonix's Rock Band
and EA's Skate
in relation to those two franchises. He added: "In addition, their mass market licensed sales in fiscal ’08, which included Spiderman
should be near impossible to replicate in fiscal ’09."
In particular, Hickey highlighted the emergence of Electronic Arts' Rock Band
as a "compelling option" in the previously Guitar Hero
-dominated music category beginning with the 2007 holiday season. He estimates that Guitar Hero II
sold 3.9 million units through September 30th, setting a high bar for Guitar Hero III
, "although prior iterations should continue to have legs at retail."
He continued, "That said, we expect Guitar Hero to follow a natural product evolution by adding additional music peripherals in CY08. Importantly, the Guitar Hero
franchise that is developed internally and owned, offers a meaningful operating margin expansion potential versus Rock Band
, which is purely a distribution deal for [Electronic Arts]."