Analysts question Activision acceleration

Industry watchers laud publisher's record-setting Q2 performance but raise cautions on future growth potential.

Today, Activision reported that Guitar Hero III: Legends of Rock enjoyed $115 million in first-week sales in North America. The number was an upward revision from the $100 million seven-day figure Activision announced yesterday, which itself led to the company to revise its holiday quarter earning's forecast up to $1.05 billion and full-year guidance to $2.07 billion.

With the publisher already counting its chickens, industry watchers today weighed in on whether Activision can carry its stellar Q2 momentum through the last half of the fiscal year and into fiscal 2009. Believing Activision to be playing conservative, Wedbush Morgan's Michael Pachter sees growth of $1.06 million for the October-December months, and a full-year haul of $2.11 billion.

However, with the market more interested in growth than dollars-in-hand, Pachter believes Activision's current fortunes may spell ill tidings for next year. "We think that the company has the potential to grow publishing revenues above the level we expect in FY:08, but acknowledge that the success of its lineup this holiday creates a formidable hurdle to revenue growth," he surmised.

Likewise, Nollenberger Capital Partners' Todd Greenwald also revised estimates on Activision's fiscal year upward, but raises cautions on how the publisher will continue to grow. Greenwald believes Activision will be able to assuage less dramatic revenue growth with an influx in earnings growth. "We are modeling 12 percent revenue growth coupled with 29 percent earnings growth for next year, driven by a higher mix of next-gen, premium-priced publishing revenue; benefits from outsourcing development to China; and leverage on the G&A line, especially as high legal costs and RedOctane amortization expenses fade away."

Goldman Sachs' Mark Wienkes also believes Activision will build on earnings growth into next year in lieu of revenue expansion. In the short term, Wienkes believes this will be done primarily through administrative measures. He put it thusly: "Activision's management team is in the process of revisiting its TV marketing campaigns, has streamlined its supply chain, and has aligned its studio and developer compensation with margin-focused incentive plans," he said.

Wienkes also believes Activision is in prime position to capitalize on the upcoming holiday lineup. "Activision's steadily increasing market share have positioned the company to prosper in the current cycle as its recurring Guitar Hero, Call of Duty, and Tony Hawk franchises have the scale and brands to be top tier sellers this holiday season."

However, Lazard Capital Markets' Colin Sebastian believes the rhythm genre remains the ace up Activision's sleeve, and that the Neversoft-developed Guitar Hero franchise will continue to be the key differentiator in revenue growth. "While the new James Bond and Marvel titles will help to offset the gap caused by Spider-Man and Transformers, we believe the more important growth driver is Guitar Hero, given that the market for music simulation games continues to expand rapidly," he concluded.

Adopting a wait-and-see approach, Pacific Crest's Evan Wilson has doubts as to whether Activision's upcoming in-house properties will be able to outperform this year's lineup at all. Not completely ruling out growth, Wilson believes Activision may make additional acquisitions to bolster sales.

"We believe it will be more difficult for it to grow at or above the market rate than it was this year, and that growth may come in the form of acquisitions rather than organically," Wilson said in a morning brief. "However, we believe Activision would attempt to complete an acquisition this fiscal year, although that is increasingly unlikely. To that end, we are most concerned with its ability to meaningfully grow margins."

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Discussion

33 comments
IIBlackknightII
IIBlackknightII

Cool. I really liked Transformers The Game & Spiderman Games From Activision.Its Awesome!.

GR33DY83
GR33DY83

graphics look identical on gametrailer.com between ps3 and 360, but since the PS3 controller and online sucks 360 it is

dylnuge
dylnuge

My Xbox (360) scratched my CoD3 disk and Activision requested $20 for repair. $20!!!!!!!!! None of it going to Infinity Ward, which actually made the game, either. Way to rip off customers. Not shocked they are moving ahead, they can just keep charging $60 for games and then reaping the benefits when Microsoft screws up. And no, MS should not pay the fee, because there should not be a fee. Would anyone really expect a huge company to give another huge company $20 because of a lone gamer? Not that I am happy with MS's can't do anything take on the issue either. PS: I hate PC gaming. Why? Not because of the prices, or because I don't have an awesome computer, but because it is all tied into Microsoft. Want to promote a crappy API over the (former) industry standard? Go ahead. Want to integrate it with the horribly slow Windows kernel just to force an OS upgrade? Go ahead. Want to make it platform specific so that Linux and Mac users can't play games anymore? Go ahead. PS3 and Nintendo fans, beware: Microsoft might pull DX support for your beloved consoles, and then where would you be?

Bretwalda
Bretwalda

More great news for PC gaming. Hey kids, time to sell console and join the big boys of gaming.

sw_and_wet
sw_and_wet

I want them to make a sequel for COD4, the modern setting is really great, powerful gun fight and stuff. Just never get old.

mrwizardsrus
mrwizardsrus

I am an investor and a gamer and I do own shares of Activision, IMPO with CoD4 and GH3 Activion will have an extremely strong 4th quarter for 07 and with the obvious release of downloadable content for both of these games and there acquisition of Bizarre Creations Activision's is on route to becoming a very formattable force in gaming.

mrsnowy
mrsnowy

whoever invented guitar hero is not only a friken genius but probably one of the richest people in america

ratradler
ratradler

Thanks for COD4. It is awesome!!!!

Pete5506
Pete5506

[This message was deleted at the request of a moderator or administrator]

MasterChief725
MasterChief725

dont question anything! activision is doing awesome, and there is no denying them! COD 4 and then Soldier of Fortune will only raise thier shares! Long live activision! Bring down EA!

Generic_Dude
Generic_Dude

Well, yeah? The growth was entirely spawned by their biggest IP. Nowhere to go here but down. Hot tip: buy shares right before GH4 comes out, then sell like hell right after.

kongking948
kongking948

Cool article, and johnny boy i agree.

johnnyboy232
johnnyboy232

Well they better make a good GH4 next time around. And as for outsourcing development to China, well that's kind of good and bad. Bad because game developing costs would be down, but I'm sure that wouldn't transfer to lowering the retail price.

RaiKageRyu
RaiKageRyu

RE:Warlypwnage Hey, I had that same thought when I watched the review at GameTrailers. However, we probably won't see it until two years from now.

Lynk420
Lynk420

haesuse....you're wrong. movie games sell like crazy. sure they suck hardcore but parents see them and they recognize them and think hey i saw that movie with my kids and they loved it so they'll love the game. as long as parents keep buying them the game companies won't have to put much effort into making the game good. cause they know it'll sell anyways. activision is the king of that market.

Warlypwnage
Warlypwnage

i hope we dont see a COD5: Future War.

Bauerpower324
Bauerpower324

With all that money, im looking forward to Guitar Hero 4!!!!!!

Incognito
Incognito

Infinity Ward is gonna make Activision billlllllllions

bernieberry
bernieberry

Make good games and of course your profit will go sky high!

Zerosumgame
Zerosumgame

"Analysts earn their keep by writing reports even when there's no real reason for one to be written. Market commentrators are paid for have an opinion, even on days when thery have to invent one" Warren Buffett.

EXxile
EXxile

Good for Activision. As many have said, it would be great to see more original titles, however luckily COD4 is no longer set in WWII so thats is at least one move. And more of something that is already great isn't really a bad thing, is it?

haesuse
haesuse

i dont see them reaching some of the goals at all. Their running horses are COD and GH, which we all know will sell like hotcakes. However the rest of their line up is trash. THPG and multitude of sub par movie and comic licensed games never sell and in their case you add the crap factor in and i dont see many of those being moved off the shelves in spite of the holliday season.

Sonovius
Sonovius

I got my copy of COD4 today. they couldnt keep them on the shelves literally so they just sold em at the cust service desk.

sw_and_wet
sw_and_wet

lamprey263, I do agree with you, activation should start to make some new game title..... but IMO they are not the only one make so many sequel, square enix is the same, final fantasy series is now more than a decade....and it's still coming out, over and over again, konami MGS series, over and over again, capcom devil may cry series, over and over again...... I also don't like them making so many sequels, coz it's really boring, but I am glad that COD4 is finally not about WWII again, coz I think every fps fan could remember all the WWII story without reading a history book.

lamprey263
lamprey263

I don't see them really doing anything too different, they've released the first Call of Duty game in 2003, the expansion 2004, COD2 in 2005, COD3 in 2006, COD4 in 2007; it appears they plan on releasing a COD game every year for the last 5 COD games. The Guitar Hero games are just like the COD series in which it looks as if a new one is planned to come out every year. I don't know why anyone would be concerned. No other company to my knowledge makes sequels to series as timely and as awesome as Activision does.

Ket87
Ket87

Tony Hawk is beating a dead horse, they need just to end that franchise.

Neo_Kelyn
Neo_Kelyn

I never realised Activision was such a massive publisher. Obviously I knew they were big, but with FY:07 projections topping 2 billion, they're not far from EA standards. Let us hope and pray the two companies never merge.

kori911
kori911

Hopefully with all that money Activison will fix up the Tony Hawk games.