Activision Reports Record Third Quarter and Nine Month Fiscal 2005 Results

Feb 7, 2005

- Q3 Net Revenues Increase 34% Year Over Year -
- Net Revenues for Nine Months Grow 53% -
- Company Increases Net Revenue and E.P.S. Outlook for FY 2005 -
- Company Expects Net Revenue, E.P.S. and Operating Margin Growth for FY 2006 -

SANTA MONICA, Calif., Feb 07, 2005 /PRNewswire-FirstCall via COMTEX/ -- Activision, Inc. (Nasdaq: ATVI) today announced record financial results for the third quarter and nine months ended December 31, 2004.

Net revenues for the third quarter were $680.1 million or 34% higher, as compared to $508.5 million for the third quarter of fiscal year 2004. Net income for the third quarter rose to $97.3 million, a 26% increase, compared with net income of $77.0 million for the previous fiscal third quarter. Diluted earnings per share grew 19% to $0.63 per diluted share, compared to $0.53 per diluted share reported for the prior fiscal third quarter.

For the nine-month period ended December 31, 2004, the company announced record net revenues of $1.2 billion, an increase of 53%, as compared to net revenues of $784.8 million reported for the nine-month period last fiscal year. The company also announced record earnings per diluted share for the nine-month period of $0.87, an increase of 78%, as compared to earnings per diluted share of $0.49 for the same period last fiscal year.

Activision increased its net revenues and earnings per diluted share outlook for fiscal year 2005 to $1.352 billion in net revenues and earnings per diluted share of $0.87 from the company's prior outlook of $1.265 billion in net revenues and diluted earnings per share of $0.81. The company's revised outlook represents a 43% increase in net revenues and a 61% increase in earnings per diluted share year over year.

The company also increased its outlook for the fourth quarter of fiscal year 2005 to $150 million in net revenues from $128 million, despite moving id Software's DOOM 3 for the Xbox and the DOOM 3 PC expansion pack to fiscal 2006. For the fourth quarter, the company expects earnings per diluted share of $0.01. During the quarter, Activision plans to release Spider-Man 2(TM) and Tony Hawk's Underground 2 Remix for the PSP simultaneously with the North American release of the new handheld platform, as well as, three titles from LucasArts that will be released in Europe -- Star Wars(R) Knights of the Old Republic(R) II: The Sith Lords(TM), Mercenaries(TM) and Star Wars Republic Commando(TM). In addition, Shrek 2(TM) will be first of the company's fiscal 2005 games to enter Sony Computer Entertainment America's "Greatest Hits," Microsoft's "Platinum Family Hits" and Nintendo of America's "Player's Choice" programs.

Robert Kotick, Chairman and CEO of Activision, Inc., commented, "For the first nine months of fiscal year 2005, net revenues have already exceeded net revenues in fiscal 2004, resulting in 13 consecutive years of revenue growth for Activision. We ended the quarter with more than $713 million in cash and short term investments and for the trailing 12 months, our free cash flow was $107 million and return on invested capital was 46%. Our results to date were driven by the release of over 10 one million-unit selling games. Four of these titles sold in excess of two million units. These proven franchises should allow us to continue improving our market position domestically and internationally."

Kotick continued, "As we look toward the future, we are very excited about the opportunities ahead. The combination of our product slate, the emerging opportunities created by new hardware technologies and the ever increasing installed base of current console hardware should enable us to continue expanding our net revenues, earnings and operating margin. In fiscal 2006, we will release the strongest game slate in our history which includes new versions of our top-selling fiscal 2005 franchises -- Tony Hawk, Spider-Man, Shrek, Call of Duty, DOOM, and X-Men, as well as games based on True Crime, Fantastic Four, Madagascar, Quake, The Movies, and an original new property from Neversoft, the development team behind the Tony Hawk series."

Business Highlights

Activision's third quarter results were driven by solid performance of its titles across all platforms worldwide. During the quarter, the company had five top 10-best selling games in the U.S., according to NPD -- Call of Duty: Finest Hour(TM), which has established itself as a new console franchise for the company, Tony Hawk's Underground 2, DOOM 3(TM), Rome: Total War(TM) and Spider-Man 2 for the Nintendo DS.

Between October and December, Activision released five new games: Tony Hawk's Underground 2, an all-new Tony Hawk experience for PlayStation(R) 2 computer entertainment system, Xbox(R) video game system from Microsoft, Nintendo(R) Game Cube, Nintendo Game Boy(R) Advance and PC; Call of Duty: Finest Hour, a World War II first-person action game for the PlayStation 2 computer entertainment system, Xbox video game system from Microsoft and Nintendo Game Cube; Lemony Snicket's: A Series of Unfortunate Events(TM) for the PlayStation 2 computer entertainment system, Xbox video game system from Microsoft, Nintendo Game Cube, Nintendo Game Boy Advance and PC; Vampire(R): The Masquerade Bloodlines(TM) for the PC and Spider-Man 2 for the Nintendo DS.

Other business highlights include:

     *  On January 20, 2005, Activision announced that the company further
        strengthened its next-generation development capabilities through the
        acquisition of game developer Vicarious Visions, the creative studio
        behind the #1 best-selling third-party Nintendo(R) DS title,
        Spider-Man 2.  Vicarious Visions' proven proprietary Alchemy(TM)
        middleware technology and tools will be combined with Activision's
        next-generation tools and libraries to further enhance the company's
        overall development efforts.

     *  For calendar 2004, Activision had a number of top-selling titles:

         *  Spider-Man 2 was the #1 movie-based game in the U.S., according to
            NPD Funworld.  For the calendar year, the Spider-Man franchise
            sold more than seven million units worldwide.  Spider-Man 2 for
            the Nintendo DS was the #1 best-selling third-party title for the
            platform in the U.S. for the calendar year, according to NPD

         *  Tony Hawk's Underground 2 was the #9 best-selling title in the
            U.S., according to NPD Funworld.  The Tony Hawk brand sold more
            than six million units worldwide in the calendar year.

         *  The Call of Duty franchise sold more than four and a half million
            units worldwide in the calendar year and was the best-selling game
            franchise based on a new intellectual property.

         *  Shrek 2 was the #1 best-selling children's video game in the U.S.,
            according to NPD Funworld.  The Shrek 2 franchise sold more than
            four million units worldwide in the calendar year.

         *  According to NPD Techworld, Activision was the fastest growing
            top-10 U.S. PC publisher for calendar 2004.  The company had a 10%
            PC market share, the highest in its history, and was the only
            publisher to have three top-10 games for the year -- DOOM 3, Call
            of Duty(TM) and Rome: Total War.

    Company Outlook

Activision also provided its outlook for fiscal year 2006, which begins in April 2005, of $1.43 billion in net revenues and earnings per diluted share of $0.91. For the first quarter of fiscal year 2006, the company expects net revenues of $215 million and earnings per diluted share of $0.02. Diluted earnings per share does not include the impact of adopting FASB 123(R), which relates to the expensing of stock options and other share-based payments.

Non-GAAP Financial Measures

The company's press release includes the non-GAAP financial measures of "free cash flow" and "return on invested capital." A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measure appears at the end of this press release.

Conference Call

Today at 4:30 p.m. EDT, Activision's management will host a conference call and Webcast to discuss its third quarter fiscal year 2005 results and outlook. The company welcomes all members of the financial and media communities to visit the "Investor Relations" area of to listen to the conference call via live Webcast or to listen to the call live by dialing into (913) 981-4910 in the U.S.

About Activision

Headquartered in Santa Monica, California, Activision, Inc. is a leading worldwide developer, publisher and distributor of interactive entertainment and leisure products. Founded in 1979, Activision posted net revenues of $948 million for the fiscal year ended March 31, 2004.

Activision maintains operations in the U.S., Canada, the United Kingdom, France, Germany, Italy, Japan, Australia, Scandinavia, Spain and the Netherlands. More information about Activision and its products can be found on the company's World Wide Web site, which is located at

Note: The statements made in this press release that are not historical facts are "forward-looking" statements. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties. The company cautions readers of this press release that a number of important factors could cause Activision's actual future results to differ materially from those expressed in any such forward-looking statements.

Such factors include, without limitation, product delays, retail acceptance of our products, industry competition, rapid changes in technology and industry standards, protection of proprietary rights, maintenance of relationships with key personnel, vendors and third-party developers, international economic and political conditions, integration of recently acquired subsidiaries and identification of suitable future acquisition opportunities.

These important factors and other factors that potentially could affect the company's financial results are described in our filings with the Securities and Exchange Commission, including the company's most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Readers of this press release are referred to such filings. The company may change its intention, belief or expectation, at any time and without notice, based upon any changes in such factors, in the company's assumptions or otherwise. The company undertakes no obligation to release publicly any revisions to its forward- looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

(Tables to Follow)

     (In thousands, except earnings per share data)

                                         Quarter ended      Nine months ended
                                          December 31,         December 31,
                                        2004      2003       2004       2003

     Net revenues                     $680,094  $508,511  $1,201,996  $784,759
     Costs and expenses:
        Cost of sales - product costs  316,494   235,301     528,759   384,302
        Cost of sales - software
         royalties and amortization     58,200    23,680     116,846    50,575
        Cost of sales - intellectual
         property licenses              22,598     9,464      57,797    27,008
        Product development             25,068    50,354      66,054    79,828
        Sales and marketing            105,248    58,503     200,216   102,025
        General and administrative      15,407    14,248      44,854    35,847

             Total operating expenses  543,015   391,550   1,014,526   679,585
     Operating income                  137,079   116,961     187,470   105,174
     Investment income, net              3,197     1,464       7,954     4,125
     Income before provision for
      income taxes                     140,276   118,425     195,424   109,299
     Provision for income taxes         43,014    41,444      60,662    38,248

     Net income                        $97,262   $76,981    $134,762   $71,051

     Basic earnings per share            $0.70     $0.58       $0.97     $0.54
     Weighted average common shares
      outstanding                      139,820   133,145     138,700   132,488

     Diluted earnings per share          $0.63     $0.53       $0.87     $0.49
     Weighted average common shares
      outstanding assuming dilution    155,592   146,027     154,418   143,679

     Share and earnings per share data have been restated to reflect our
     three-for-two stock split for shareholders of record as of February 23,
     2004, paid March 15, 2004.

     (In thousands)
                                                  December 31,      March 31,
                                                     2004             2004
        Current assets:
           Cash, cash equivalents and
            short-term investments                 $713,180         $587,649
           Accounts receivable, net                 344,894           62,577
           Inventories                               41,656           26,427
           Software development                      61,550           58,320
           Intellectual property licenses            19,908           32,115
           Deferred income taxes                     13,689           26,127
           Other current assets                      17,424           18,660

                Total current assets              1,212,301          811,875
        Software development                         13,384           28,386
        Intellectual property licenses               11,624           16,380
        Property and equipment, net                  26,798           25,539
        Deferred income taxes                            --            9,064
        Other assets                                  2,530            1,080
        Goodwill                                     77,992           76,493

                         Total assets            $1,344,629         $968,817

        Current liabilities:
           Accounts payable                        $156,376          $72,874
           Accrued expenses                         155,057           63,205
                 Total current
                  liabilities                       311,433          136,079
        Deferred income taxes                        12,712               --

                       Total liabilities            324,145          136,079
        Shareholders' equity:
           Common stock                                  --               --
           Additional paid-in capital               803,753          758,626
           Retained earnings                        343,041          208,279
           Treasury stock                          (144,128)        (144,128)
           Accumulated other
            comprehensive income                     17,818            9,961

                 Total shareholders'
                  equity                          1,020,484          832,738

                     Total liabilities
                      and shareholders'
                      equity                     $1,344,629         $968,817

     For the Quarter and Nine Months Ended December 31, 2004 and 2003
     (Amounts in thousands)

                                               Quarter Ended
                                    December 31,        December 31,  Percent
                                       2004                2003      Increase
                                            % of              % of  (Decrease)
                                   Amount   Total     Amount  Total
    Geographic Revenue Mix
      United States              $344,342    51%     $252,114   50%     37%
      International               335,752    49%      256,397   50%     31%
      Total net revenues         $680,094   100%     $508,511  100%     34%

    Activity/Platform Mix
      Console                    $382,400    75%     $304,996   80%     25%
      Hand-held                    63,243    12%       13,367    3%    373%
      PC                           68,410    13%       64,558   17%      6%
      Total publishing           $514,053    76%     $382,921   75%     34%

      Console                    $134,503    81%     $102,979   82%     31%
      Hand-held                     7,923     5%        6,917    6%     15%
      PC                           23,615    14%       15,694   12%     50%
      Total distribution         $166,041    24%     $125,590   25%     32%
      Total net revenues         $680,094   100%     $508,511  100%     34%

                                            Nine Months Ended
                                    December 31,        December 31,  Percent
                                       2004                2003      Increase
                                            % of              % of  (Decrease)
                                   Amount   Total     Amount  Total
    Geographic Revenue Mix
      United States              $627,238    52%     $381,303   49%     64%
      International               574,758    48%      403,456   51%     42%
      Total net revenues       $1,201,996   100%     $784,759  100%     53%

    Activity/Platform Mix
      Console                    $647,069    69%     $439,499   77%     47%
      Hand-held                   105,342    11%       22,150    4%    376%
      PC                          189,689    20%      107,473   19%     76%
      Total publishing           $942,100    78%     $569,122   73%     66%

      Console                    $203,626    78%     $171,509   79%     19%
      Hand-held                    15,134     6%       14,559    7%      4%
      PC                           41,136    16%       29,569   14%     39%
      Total distribution         $259,896    22%     $215,637   27%     21%
      Total net revenues       $1,201,996   100%     $784,759  100%     53%

     For the Quarter and Nine Months Ended December 31, 2004 and 2003

                                                             Nine      Nine
                                        Quarter   Quarter   Months    Months
                                         Ended     Ended    Ended     Ended
                                         Dec. 31,  Dec. 31, Dec. 31,  Dec. 31,
                                          2004      2003     2004      2003

    Publishing Net Revenues

       PC                                 13%       17%       20%       19%

       Console                            75%       80%       69%       77%
           PlayStation  2                 44%       48%       41%       44%
           Microsoft Xbox                 21%       20%       18%       22%
           Nintendo GameCube              10%       10%       10%        8%
           PlayStation                     0%        2%        0%        3%

       Hand-held                          12%        3%       11%        4%
           Game Boy Advance               10%        3%       10%        4%
           Nintendo Dual Screen            2%        0%        1%        0%

       Total publishing net revenues     100%      100%      100%      100%

     Non-GAAP Disclosures
     Free Cash Flow
     (In thousands)
                                       Three      Three     Three     Three
                                       Months     Months    Months    Months
                                       Ended      Ended     Ended     Ended
                                      12/31/04   9/30/04   6/30/04   3/31/04

     Net Cash Provided by (Used In)
      Operating Activities            $85,668     $62,846  $(52,136)  $21,069

     Less: Capital Expenditures       $(3,587)    $(2,562)  $(1,881)  $(2,521)

     Free Cash Flow                   $82,081     $60,284  $(54,017)  $18,548
     Trailing Twelve Month Free
      Cash Flow                      $106,896    $121,998   $30,779   $55,427

     Non-GAAP Disclosures
     Return on Invested Capital
     (In thousands)

                                       Three      Three     Three     Three
                                       Months     Months    Months    Months
                                       Ended      Ended     Ended     Ended
                                      12/31/04   9/30/04   6/30/04   3/31/04

     Net income                       $97,262     $25,543   $11,957    $6,664
     Investment income                 (3,197)     (2,645)   (2,112)   (2,051)
     Tax effect on Investment
      income (B)                          991         846       697       677
     Net Operating Profit After
      Taxes                           $95,056     $23,744   $10,542    $5,290
     Trailing Twelve Month Net
      Operating Profit After Taxes   $134,632    $115,576   $80,826   $73,630


     Total assets (A)              $1,344,629  $1,104,169  $985,841  $968,817
     Cash and short term
      investments (A)                 713,180     606,087   539,146   587,649
     Current liabilities (A)          311,433     216,342   132,092   136,079
     Invested capital                $320,016    $281,740  $314,603  $245,089
     Trailing Twelve Month Invested
      capital (A)                     290,362     272,856   265,585   247,330
     Return on Invested Capital           30%          8%        3%        2%
     Trailing Twelve Month Return
      on Invested Capital                 46%         42%       30%       30%

     (A)  Amounts for the trailing twelve months represent averages of the
          previous four fiscal quarters
     (B)  Tax effect represents investment income multiplied by our effective
          tax rate.

SOURCE Activision, Inc.

Bill Chardavoyne, Chief Financial Officer, +1-310-255-2229,, or Kristin Mulvihill Southey, Vice President, Investor
Relations, +1-310-255-2635,, or Maryanne Lataif, Vice
President, Corporate Communications, +1-310-255-2704,, all of
Activision, Inc.

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