Activision revs up 14 percent

Fantastic 4, Doom 3, and Madagascar each ship 1 million units; company adjusts guidance up for full-year tally. Bottom line still dips by $3.6 million.


Today Activision announced earnings for the first quarter of its 2006 fiscal year, which ended on June 30, 2005. In a conference call with analysts after the announcement, Activision executives said the company recorded revenues of $241.1 million for the quarter--14 percent more than the same quarter last year. Among the drivers: strong sales of Fantastic 4, Doom 3, and Madagascar--each which sold over a million copies.

The company's bottom line wasn't so rosy, however. Activision saw a loss of $3.6 million--attributed to costs associated with the European release of Star Wars Episode III: Revenge of the Sith (the deal is part of Activision's affiliate program; Activision is the LucasArts-created game's distributor in Europe), reduced catalog pricing, and a $10 price differential between the price of last year's Shrek 2 and this year's Madagascar.

Activision increased its forecast for full fiscal year earnings in 2006. It now sees $1.47 billion in net revenues coming in over the full year. CEO Ron Doornink mentioned in today's call that if that revenue figure is achieved, it would mark the fourteenth consecutive year of revenue growth for Activision.

Some none-too-surprising announcements accompanied the telephone conference:

The company is banking heavily on Gun, the upcoming free range-Western from Tony Hawk-developer Neversoft--and plans to "invest heavily against this title to maximize its potential to become a top-selling franchise."

Doornik and his colleagues see a PS2 price reduction this fall, but mentioned a decidedly "safe" price the console might drop to. "In our model, we assumed a modest price reduction to $129, which could either happen through a list price reduction or promotional activity and that looks like a reasonable assumption to us," Doornink said. The company is not counting on a price reduction for the PSP.

Along with the higher revenue figure mentioned in the company's guidance is a dose of reality. "For fiscal '06," the execs said, "we expect manufacturing and distribution costs of 45 percent of net revenues with operating expenses, including royalties, of 41.3 percent. Operating expenses are expected to be higher than in fiscal '05, primarily due to increased selling and marketing expenses."

As far as how the company plans on addressing the higher costs associated with next-gen game development, the execs said they have already "been deploying strategies" to offset the rising costs--which include "focusing more on big brands in our portfolio, developing more brands internally, aggressively exploiting brands across all platforms, and expanding our international sales and marketing capabilities."

One potentially interesting exchange took place after an analyst asked about studio head count. Doornink said that this year, the company had already increased staff on the development side by about 100. He added he expected to add another 200-300 studio staffers. While he downplayed where those professionals might come from, he did not rule out additional acquisitions. The company has shown itself prone to buy talent having acquired Madagascar-developers Toys For Bob in May of this year, and then later in the same month acquiring Canadian dev studio Beenox.

"As we see it," Doornink said, "there are a number of risks in the marketplace, but from an Activision perspective, we have never been better prepared to execute."

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