Activision reports scorching Q3 sales

Activision announced impressive earnings today, reporting third-quarter sales of $680.1 million on the strength of games like Spider-Man 2 and Tony Hawk's Underground 2. That number is up 34 percent from third-quarter sales of $508.5 million for the same quarter a year ago. The quarter ended December 31, 2004, for the publisher.

The company also reported that for the first nine months of the current fiscal year, it generated $1.2 billion at retail. "For the first nine months of fiscal year 2005, net revenues have already exceeded net revenues in fiscal 2004, resulting in 13 consecutive years of revenue growth for Activision," Bobby Kotick, chairman and CEO of Activision said in a statement today. In the first nine months of fiscal year 2004, Activision generated $784.8 million in sales.

Profit for the October-December quarter rose to $97.3 million, a 26 percent increase over net income of $77 million for the same quarter a year ago. In today's earnings call, Kotick said, "Activision has never been in a better position to capitalize on our strong industry fundamentals."

Activision's Ron Doornink, CEO of Activision Publishing, then detailed the extent of growth he expects by the time the current fiscal year concludes, at the end of March 2005: "We are raising our fiscal year revenue outlook by $87 million and expect revenues of $1.352 billion, up a strong 43 percent versus last year."

Kotick noted that 10 Activision games sold in excess of 1 million units apiece in 2004. He reminded listeners that Activision was the only publisher to have three games among the top 10 best-sellers of 2004. Doornink said the company was setting even higher goals in 2005, projecting that 12 games would sell more than 1 million each, and five to six would move more than 2 million apiece.

Numerous franchises will see new releases in fiscal year 2006, which begins April 1, 2005, including Tony Hawk, Spider-Man, Shrek, Call of Duty, Doom, and X-Men, all for a variety of platforms. In addition, the company is planning releases of True Crime 2 and Quake IV and games based on films like The Fantastic Four and DreamWorks' Madagascar in the coming fiscal year.

Both Kotick and Doornink anticipated that much of the company's--and the industry's--growth in the coming year would come on the strength of handhelds like the PSP and the Nintendo DS, while sales for consoles and PCs would be flat until the next-gen consoles begin launching in late 2005 or early 2006. Once that happens, "Fiscal '07 is likely to offer the greatest opportunities for overall industry growth we have ever experienced," Kotick said.

Activision forecasts net revenues of $215 million for the first quarter of fiscal year 2006, in part on anticipated sales of Doom 3 for the Xbox and the Doom 3 expansion pack for PCs, both games having been pushed into that quarter.

Doornink drilled down on the upcoming slate of games, saying, "In fiscal '06 we plan to launch 12 big propositions across more gaming platforms than ever before."

Doornink specified Tony Hawk, Spider-Man, Shrek, Call of Duty, Doom, and X-Men, saying that "all of these titles will be released on consoles, including Call of Duty, which I mentioned earlier will have a console and a PC sequel in fiscal 2006."

"Additionally," he said, "we will have two more proven properties slated for release. The multiplatform sequel to one of our all-time best-sellers, True Crime, and on the PC, id Software's Quake 4." Doornick also said the SKU count from the publisher would rise in FY2006, to 52, up from 42 in FY05, "as we add the two new handhelds to our multiplatform strategy."

Additional gems that came out of the call include:

Activision is ready for a late-'05 Xbox 2 launch if Microsoft deems it so. "If there is a new Xbox later this fall, how many titles will we have? [Well,] we're going to refrain from giving any specific numbers, but we will tell you that it will be our goal to put out enough titles so we have a significant, meaningful presence at launch," Doornink said.

European expansion for the company will see new regions conquered. Operations will be launched in Denmark, Switzerland, Austria, Portugal, and Norway sometime during the coming fiscal year, but the company doesn’t expect any meaningful impact on the bottom line for some time.

The Alchemy engine from Vicarious Visions will be used, and used, and used. "About the middleware technology that came with the Vicarious Visions acquisition," Doornink said, "that's a really positive part of the acquisition. It is middleware that facilitates quick and efficient development of next-generation games. We've already worked with it. X-Men Legends, for example, was built on the Alchemy engine, and some of our handheld games are built with that technology. As I said, it's a strong part of the acquisition. We will use that technology within the company in other places. It won't necessarily be a mandatory technology, but it will be encouraged on other projects."

Activision will price its PSP launch library on the high end. "On the PSP…we're going out at $49.99." Likewise with the DS, the publisher went to retail with DS games at a similar premium to first-party games, pricing its DS line $10 above Nintendo's. With PSP, it similarly adds a cushion of $10 to its software library price point.

Overall, Activision execs Bobby Kotick and Ron Doornink talked up a bright future for the publisher, lavishing praise on the potential they see in the Call of Duty franchise, the increasingly active role the company expects to play in the growing mobile space, its willingness to spend big on marketing and advertising to promote games it feels have blockbuster potential, and the reliance it is placing on the Alchemy game engine that comes with the acquisition of game developer Vicarious Visions.

Ron Doornink summed up the company's overall positive outlook by way of his closing remarks in today's earnings call: "Fiscal '06 represents another year of great opportunity for Activision driven by our own slate with more proven properties, more SKUs, less competition with fewer high-profile titles, the introduction of two to three new platforms, a direct sales force in five additional countries, our marketing excellence, our very strong balance sheet, and our incredible people and their ability to consistently deliver. We look forward to the coming year as we're building for the future and the long-term value creation that comes from increasing the breadth and depth of our proven product portfolio, expanding our high-quality product development resources, and improving our international penetration. We thank you for the opportunity to share our continued success and growth initiatives for the future."

As far as how today's call affected share price after hours: At the close of regular trading today, shares were up 27 cents to $24.06. At press time, after-hours trading had pushed the price back to $23.39.