Activision's holiday earnings up, profits down

Despite raking in record revenues, the number-two third-party publisher's Q4 2005 profit was down 30 percent.

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The final quarter of 2005 was both the best of times and the worst of times at Activision. The Los Angeles-based third-party publisher, which ranks only behind Electronic Arts in size, reported a 20 percent rise in earnings for the three months ending on December 31, 2005. Net revenues for the quarter were $816.2 million, versus $680.1 million during the same period in 2004. For the nine months ending December 31, 2005, net income was $1.28 billion, up from $1.2 billion during the same period in 2004.

However, the 2005 holiday quarter also saw Activision's profit suffer a 30 percent year-on-year decline. Net income for the quarter was $67.9 million, versus net income of $97.3 million during the same period. Diluted earnings were $0.23 per share for the quarter, compared to $0.35 per share in calendar Q4 2004.

Though other publishers saw similar shortfalls, today's news was especially disconcerting, given Activision's robust holiday lineup. While Take-Two Interactive could blame its shortcomings on a lack of a new Grand Theft Auto console game in Q4 2005, almost all of Activision's flagship franchises got new installments during the period. The quarter saw the release of Call of Duty 2 (PC, Xbox 360), Call of Duty 2: Big Red One (PlayStation 2, Xbox, GameCube), True Crime: New York City (PC, PS2, Xbox, GameCube), and Tony Hawk's American Wasteland (PS2, Xbox, GameCube, Xbox 360). It also saw the debut of Gun (PC, PS2, GameCube, Xbox, and Xbox 360), an all-new Western-action game from Tony Hawk developer NeverSoft, and Quake 4, the latest installment in the popular shooter franchise, for the PC and Xbox 360.

According to the NPD group, Activsion scored some solid hits in Q4 2005. Call of Duty 2 was the number one Xbox 360 and number two PC game of the quarter. Tony Hawk's American Wasteland was the fourth overall game from October to December, with sales of the long-popular franchise topping $1 billion in revenue.

However, Activision conceded that not all of its holiday games sold as well as expected. "Two major releases performed below our expectations, Gun and True Crime [New York City]," Michael Griffith, president and CEO of Activision's publishing group, told analysts in a post-earnings conference call. "However, Gun ranked as the number one [new] intellectual property in North America. By market standards, this title will be considered a success." Griffith also appeared to quash rumors that a sequel to Gun had been canceled. "Even they though we missed our internal expectations, make no mistake, we're very excited about the future of this property and we'll update you in the future on our plans," he said.

Griffith also went on to explain the overall reasons for Activision's decline in profits. "The market environment this quarter turned out tougher than we expected," he told analysts. "We underestimated the deadline in current generation software sales, as the transition came on sooner and harder than expected, and the supply of Xbox 360s in the market was lower than anticipated. As a result of the softness, we saw more pricing pressure than we expected. We also aggressively supported our franchises although we didn't see the incremental revenues needed to provide an adequate return. In fact, the additional investment in brands had a compounded effect on the reduction in operating margins."

Because of the low holiday profits, Activision revised its guidance for its 2006 fiscal year. For the year ending March 31, 2006, the company now expects net revenues between $1.405 billion and $1.415 billion. For the fourth quarter of that year, the company predicts $125 million to $135 million in net revenues and a loss of $0.07 to $0.09 per share. The market's reaction was swift and harsh, as Activision stock was clobbered in after-hours trading, falling $1.04, or 7.24 percent.

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