Activision Says It's Got Game -- By Raising Guidance

Activision(ATVI Quote) shares ended up slightly Tuesday, after the video-game maker announced that it will meet or beat revenue and earnings guidance for its 2001 fiscal year, and fourth quarter ending March. 31.

The Santa Monica, Calif.-based software company that publishes interactive video-game software for PCs, home consoles, handheld devices, and the Internet, also said that it will buy back $15 million in debt.

Activision expects to earn 1 or 2 cents a share on revenue of $105 million to $110 million in the March quarter. Consensus estimates project a penny per share on $100 million, according to Multex.com. Those figures represent a decline from the same quarter last year, in which the company earned 9 cents a share on revenue of $103.8 million.

For the 2001 fiscal year, Activision expects to earn 74 cents to 75 cents a share on revenue between $598 million and $603 million. Analysts polled by Multex.com project 73 cents on revenue of $593 million. In the same period last year, the company earned 79 cents a share on revenue of $593 million.

Analysts say that the company's numbers are lower because 2001 is a "transition year," one in which old game consoles are being phased out and new ones haven't been released yet.

Robert Kotick, Activision chief executive, said in a written statement, "Our multiplatform strategy and leadership position on the existing console systems is enabling us to deliver better than expected results."

The company's redemption of $15 million in notes also reflects the company's improving finances. "This redemption represents the next step toward our goal of improving our capital structure by lowering our debt-to-equity ratio, thereby reducing interest expense and increasing our financial flexibility," said Kotick. "Activision has never been in a stronger financial position," he added.

The confident CEO also made much of future growth prospects based on the recent Sony PlayStation2 release and the upcoming "next generation" console launches of the Nintendo Game Boy Advance on June 11, 2001 and the holiday releases of the Xbox video-game system from Microsoft >(MSFT Quote) and the Nintendo Gamecube.

"Activision is one of the few legitimate growth stories in the market right now," according to Wedbush Morgan analyst Miguel Iribarren, who rates the stock a strong buy (his firm hasn't done any underwriting for the company). The analyst projects 20% to 30% revenue growth in 2002, in line with industry growth spurred by the new game boxes. He also said the company's operating margins, which were at about 3% in the last few years due to heavy research and development expenses, should "creep up" to around 6%.

The company also has a reasonable price-to-earnings ratio going for it, asserts Iribarren. In the popular interactive-software sector, 30 times projected 2002 earnings looks reasonable. "First, there is still upside in the numbers. The quarter isn't over yet, and they have titles like Tony Hawk's Pro Skater that are selling well on the "current generation" consoles, (like the original PlayStation.)"

"The stock's valuation is between Electronic Arts(ERTS Quote) and THQ (THQI Quote)," he continued, "And its value certainly reflects the widespread belief that these companies will be the clear U.S. winners in the next console cycle."

The company also announced that it has plenty of cash on hand. As of March 31, 2001, it will have between $95 million and $100 million in cash and cash equivalents (and bank loans of between $13 million and $15 million.) This compares with cash and cash equivalents of $50 million and bank loans of $30 million as of the same date last year.

There are a few concerns however, admits Iribarren. Activision is "pretty dependent on its Tony Hawk brand," he said. About a quarter of the company's overall 2000 revenue came from Tony Hawk games. If gamers lose their love for the title, revenue could get walloped.

And extreme sports games, the company's specialty, are an untested area. In May, the company is releasing another new extreme game, Mat Hoffman, BMX. "Extreme sports is risky. They don't have the well-documented fan base that traditional sports do and there are many new players rushing into the space," said Iribarren.