Activision Rockin' With 'Guitar Hero III'

The video-game maker raises its outlook on strong sales of <I>Guitar Hero III: Legends of Rock</I> and <I>Call of Duty 4</I>.
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Giving an outlet to air guitarists everywhere has helped

Activision

(ATVI) - Get Report

raise its sales prospects.

Activision on Tuesday lifted its revenue and earnings outlook for the third quarter and fiscal year based on robust retail sales of its two big releases,

Guitar Hero III: Legends of Rock

and

Call of Duty 4

.

Industry observers say the company's strong performance should alleviate recent concerns that its best titles may be behind it and that growth could slow in the next fiscal year.

With the two games among the most anticipated titles this holiday season, Activision's updated guidance shouldn't be a surprise to company watchers.

More importantly, the announcement signals Activision has what it takes to stand out in one of the

most competitive seasons for game publishers.

The latest release is also not the end of the road for the

Guitar Hero

franchise. While Activision has stayed quiet on its future plans for the series, the games industry has been buzzing about the company's attempts to create more music-based peripherals to expand the franchise. A new game, based on drums, or a different kind of guitar play, could give the franchise a boost -- and diminish worries that it may fall out of consumer favor.

For the third quarter ending Dec. 31, Activision expects $1.23 billion in revenue and earnings of 70 cents a share, up from its prior revenue outlook of $1.05 billion and earnings of 55 cents a share, excluding charges.

It also forecast revenue of $2.3 billion and earnings of 85 cents a share for fiscal year 2008, compared with its previous forecast of $2.07 billion in revenue and earnings of 65 cents a share, excluding expenses. Analysts are expecting revenue of $2.18 billion and earnings of 77 cents a share.

Activision's performance is not fleeting, says John Derrick, co-manager of the Holmes Growth Fund. The fund holds Activision shares, which represent a little more than 1% of its overall holdings.

"This update from Activision should give investors confidence going forward that they can execute," he says.

Activision shares were up 92 cents, or 4.27%, to $22.46 in recent trading Wednesday. The stock is off about 9% from a month ago.

Activision's future beyond fiscal 2008 is still cloudy. In the last month, some analysts have questioned the company's ability to grow in fiscal 2009, which starts April 1. Since Oct. 26, the stock has been downgraded twice, once from Janco Partners, to market perform from accumulate, and Piper Jaffray, to neutral from buy.

The Santa Monica, Calif.-based Activision has a number of blockbuster franchises, including the

Tony Hawk

series, a skating game, but it is

Guitar Hero

that is the market darling.

With the launch of

Guitar Hero 3

and increased competition in the form larger rival

Electronic Arts

(ERTS)

and

Viacom's

(VIAB) - Get Report

MTV Networks' latest release,

Rock Band

, the upcoming year for Activision could be less bright, some analysts suggest.

"The strength of second half of fiscal 2008 has set the stage for very high expectations through fiscal 2009," wrote Anthony Gikas, an analyst with Piper Jaffray in a recent report. "Shares of Activision have reached near-term peak relative to expectations, sentiment, emotion, events and momentum -- things will cool down post holidays." Piper Jaffray makes a market in Activision shares.

Activision faces stiff competition. The company's upcoming games have to compete against

Spiderman 3

,

Guitar Hero 3

,

Call of Duty 4

and

Transformers

-- titles that have become the biggest blockbusters of the year.

Activision seems ready for the challenge. Next year, it plans to launch movie-licensed games based on the

James Bond

franchise and the sequel to the animated hit,

Madagascar

.

The company also has acquired

Bizarre Studios

in September, a U.K.-based game developer that specializes in racing games, an entirely new market for the company.

With its core games in place, Activision's new releases could help diversify the company's sources of revenue.

"Should Activision introduce new intellectual property such as

True Crime 3

,

Gun 2

, it has the potential to grow revenues beyond our forecast," Michael Pachter, an analyst with Wedbush Morgan wrote in a research note. Wedbush Morgan does not own shares or have an investment banking relationship with Activision.

For fiscal year 2009, analysts polled by Thomson Financial expect revenue of $2.29 billion and earnings of 86 cents a share.

"Anytime you have a business like Activision's where you have to roll out new products and new franchises it can be a challenge, says Derrick. "But Activision has shown they can do that. They are constantly innovating."