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Activision Sees Stagnation

By Troy Wolverton
TheStreet.com Staff Reporter
12/14/2005 5:49 PM EST

Activision (ATVI:Nasdaq) poured some coal in investors' stockings Wednesday afternoon, warning that earnings and revenue for the next two quarters will be "significantly lower" than previously forecast guidance.

The video game-software maker blamed the disappointing outlook for the holiday and first calendar quarters on worse-than-expected sales and reorders of the company's titles, price cuts and weak sales overall in U.S. and European markets.

In a statement, Michael Griffith, CEO of Activision's publishing division, acknowledged that the holiday period wasn't yet over and that there was still uncertainty about how the season would turn out.

However, the company had seen enough to feel like it needed to update its outlook, he said.

"We are disappointed that our earnings performance will come in substantially below our previous outlook," Griffith said.

For their part, investors seemed disenchanted. In recent after-hours trading, shares of Activision were off $2.04, or 14%, to $12.26. The company's stock closed regular trading on Wednesday -- prior to the announcement -- up 72 cents, or 5.3%, to $14.30.

The company did not provide new estimates for the coming periods. In November, Activision officials predicted that the company would earn 52 cents per share on $790 million in sales in the current, third fiscal quarter and 5 cents a share on $226 million in sales in the coming fourth quarter.

Analysts had forecast profits of 53 cents a share on $799.3 million in sales in the current period and 6 cents a share on sales of $230.1 million next quarter.

Activision's warning is somewhat unexpected. According to market data from NPD released Tuesday, the company saw strong sales in November.

The company's Call of Duty 2 title was the most popular game sold for Microsoft's (MSFT:Nasdaq) new Xbox 360, and retail sales of Activision's games in the U.S. grew 54% year over year to $97 million.

In contrast, game software sales as a whole fell 18% last month.

The company did not mention which specific titles were selling poorly or which were seeing lower-than-expected reorders. But Activision did say that it was having trouble with reorders on its "most profitable" titles.

Typically, the most profitable titles in a game-publisher's portfolio are those that are developed internally and do not involve outside licenses of content. For Activision, that would likely imply that the reorder problem was affecting games such as Gun and True Crime: New York City, both of which received poor or mediocre reviews.

According to NPD, retailers sold 224,593 copies of Gun last month and just 77,251 copies of True Crime: New York City.

Games in general aren't considered a hit unless they sell at least 1 million copies. Given that the bulk of game sales typically occur in the first several weeks after they are released and that both Gun and the latest True Crime were released last month, the company could have a difficult time turning either of the titles into hits.

Activision's warning is only the latest downcast news from the video game-software sector. Although it didn't issue a formal earnings warning, industry leader Electronic Arts (ERTS:Nasdaq) last week cautioned analysts that it too was seeing weak sales.

Late last month, GameStop (GME:Nasdaq), the leading video-game retailer, lowered its own sales guidance for the fourth quarter.

Meanwhile, November represented at least the third month in a row of disappointing sales results from NPD.

As with other consumer-oriented businesses, video game-software makers garner the bulk of their sales and earnings in the holiday quarter. The industry has been roiled in recent months by a technology transition as hardware makers such as Microsoft rolled out new consoles.

Such transitions typically lead to soft game sales in the short term amid heightened development costs.

Despite the short-term troubles, most analysts remain bullish on the industry's long-term prospects.