Activision Shares Surge on Raised Outlook

Activision, the second-biggest US video game publisher, raised its quarterly outlook, citing

Guitar Hero III video game set by Activision Inc.
Guitar Hero III video game set by Activision Inc.

strong sales of its "Guitar Hero" and "Call of Duty" games, sending its shares up as much as 19 percent.

The improved outlook comes just after the holiday shopping season kicked off over the Thanksgiving weekend, and three weeks after Activision posted a 70 percent jump in quarterly sales.

"They are certainly at the right place at the right time. It's very apparent that video games are one of the few strong categories this holiday season and it's also become apparent that it's winner-take-all in that the strong titles are dominant," said Kaufman Brothers analyst Todd Mitchell.

Activision previously said its "Guitar Hero 3" video game that came out in late October racked up more than $115 million in sales in its first week on the market -- equivalent to more than a third of the company's fiscal second quarter revenue.

Analysts also expected strong sales for military shooting game "Call of Duty 4" after it received critical acclaim from game reviewers.

Activision's growth spurt means it will hit its operating margin target two to three years ahead of schedule, Chief Executive Robert Kotick said in a statement.

The statement did not elaborate, but Kotick said three weeks ago the goal for operating margins was 15 percent to 18 percent this fiscal year, and for 20 percent in a couple years.

Activision expects profit for the third quarter ending Dec. 31 of 66 cents a share, compared with a prior forecast of 51 cents a share. It also raised its revenue outlook to $1.23 billion, compared with an earlier forecast of $1.05 billion.

Analysts, on average, had forecast earnings of 57 cents a share, on revenue of $1.06 billion, according to Reuters Estimates.

The Santa Monica, Calif.-based company expects fiscal 2008 earnings of 75 cents a share on net revenue of $2.30 billion, compared with a prior view of 55 cents a share on net revenue of $2.07 billion.

Excluding an equity-based compensation expense, the company expects fiscal 2008 earnings of 85 cents a share, compared with a prior forecast of 65 cents a share.

Activision stock has risen 11 percent over the past year, compared to a fall of 8 percent for rival Electronic Arts, the world's biggest games publisher.

Much of Activision's gain came during the three months to October in anticipation of the holiday lineup, but game publisher shares have come off sharply in the past month, with Activision's slide of 20 percent making it among the hardest hit.

"The question is that they've hit it out of the park with every game they've produced this year, so how do they outgrow the market next year?" said Mitchell, who has a "hold" rating and a price target of $26 on Activision stock.