Activision losses less than expected

Number-two publisher's $18 million shortfall beats own guidance--but next-generation development costs cut into bottom line.

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On Monday, the second-largest third-party publisher in the US, Electronic Arts, reported its earnings for the quarter ending June 30. The Redwood City, California-based company beat Wall Street expectations but still lost $81 million during the three-month period, due to expensing of stock options and next-generation development costs.

Today, the nation's number-two third-party publisher, Activision, reported its earnings for the April-June quarter. Like its archrival, it also beat expectations. The company suffered a net loss of $18 million, or $0.06 per share, less than its own projections of an $0.11 loss per share. And, just as EA partially blamed its losses on "the expensing of stock-based compensation," Activision also called out "equity-based compensation" to its employees as a reason for its expanded losses. Without that, the company would have suffered only a $0.05 per-share loss.

That said, the publisher's overall income was down precipitously from the year before. Activision's net revenue for the quarter was $188 million, $53 million below the $241 million it took in during the same period in 2005. The shortcoming was partially due to the lackluster performance of X-Men: The Official Game (PC, PlayStation 2, Xbox, Xbox 360, GameCube, DS, Game Boy Advance), which went on sale mid-May in the face of almost universally negative reviews. The publisher's other major release for the quarter, the film tie-in Over the Hedge (PC, PS2, Xbox, GameCube, DS, GBA), received similarly poor marks from critics.

Several other factors contributed to Activision's mixed financial picture. One was the publisher's spring spending spree. In April, the company acquired the rights to make games based on the James Bond film series after EA let its license lapse. In May, it announced the purchase of indie shop Red Octane, maker of the award-winning PS2 headbanger-sim Guitar Hero. Shortly after that purchase was completed in June, Activision opened an office in South Korea, which has one of the highest numbers of gamers per capita in the world.

However, like every other major publisher, Activision is developing a number of games for the PlayStation 3 and Nintendo Wii, both of which will go on sale this fall. That means the company is spending a lot of money on two untested platforms without recouping any of its losses--a fact that chairman and CEO Robert Kotick freely acknowledged.

"While there is still uncertainty with respect to the opportunities next-generation consoles will provide this fiscal year, we remain confident about the long-term industry prospects and our ability to realize superior returns for our shareholders," said Kotick in a statement.

Indeed, Activision told shareholders to gird themselves for even bigger losses during the current quarter, which ends September 30. During that three months, the company now expects a loss of $0.13 per share on revenues of $130 million.

For its full 2007 fiscal year, which ends on April 30, 2007, Activision raised its outlook to $1.08 billion in net revenues. For its 2008 fiscal year, the company "expects net revenues to exceed $1.6 billion."

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