Analysts question Activision acceleration

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."