Activision Announces Record Second Quarter 2005 Results

Oct 26, 2004

Net Revenues Hit Q2 All Time High, Increasing 164% Year Over Year
Q2 Diluted E.P.S. Grew to $0.17 From a Loss Per Share of $0.08 Last Year
Net Revenues for Six Month Period Rise 89%
Company Increases FY 2005 Outlook

SANTA MONICA, Calif., Oct. 26 /PRNewswire-FirstCall/ -- Activision, Inc. (Nasdaq: ATVI) today announced financial results for the second fiscal quarter ended September 30, 2004.

Net revenues were $310.6 million, an increase of $193.1 million or 164%, as compared to net revenues of $117.5 million reported for the second quarter last fiscal year. Net income for the second fiscal quarter was $25.5 million, as compared with a net loss for the second fiscal quarter last year of $10.1 million. Earnings per diluted share were $0.17, as compared with a loss per share of $0.08 reported for the same period last year.

Net revenues for the six-month period ended September 30, 2004, were $521.9 million, an increase of $245.7 million or 89%, as compared to net revenues of $276.2 million reported for the six-month period of last fiscal year. Net income for the six-month period was $37.5 million, or earnings per diluted share of $0.24, as compared with net loss of $5.9 million, or a loss per share of $0.04, reported for the same period last year.

Robert A. Kotick, Chairman and CEO of Activision, stated, "In addition to delivering record net revenues and earnings for the quarter, we also significantly increased our market position in North America and Europe. As of this date, five of our games have shipped more than one million units each and three of those titles have achieved multi-million -unit status. Our focus on big propositions is yielding tremendous results worldwide. As we look to the future, we will continue to leverage our increasing portfolio of franchises as we expand and strengthen our competitive position."

Kotick continued, "We are very excited about future growth opportunities that will result from the Nintendo® DS, PlayStation® Portable, wireless gaming, in-game advertising and the next-generation of console hardware. These emerging opportunities combined with the ever increasing installed base of console hardware and our strong portfolio of brands should enable us to continue growing our revenues, earnings and operating margin as we have over the past several years."

Business Highlights

Activision's second quarter results were driven by strong worldwide sales of Spider-Man 2, which was the company's best-selling title for the quarter, and newly released games across all platforms including Doom 3, Rome: Total War and Call of Duty: United Offensive for the PC, X-Men Legends and DreamWorks' Shark Tale for the PlayStation® 2 computer entertainment system, Xbox® video game system from Microsoft and Nintendo® Game Cube and DreamWorks' Shark Tale for the Nintendo Game Boy® Advance and PC. The company's catalogue titles Shrek 2, Tony Hawk's Underground and True Crime: Streets of L.A. also performed well.

The company strengthened its market position worldwide resulting in a number of unprecedented rankings. Activision was the #1 PC publisher in North America for the month of August, according to NPD Techworld; the #1 publisher overall in the U.K. for the months of July and August, according to Chart Track; and the #1 publisher overall in Germany and the #2 publisher overall in France for the month of August, according to Media Control and GfK respectively.

Other highlights include:

  • On October 21, Activision confirmed that based on strong consumer response to its action role playing game X-Men Legends, the company is developing a sequel based on the ever-popular Marvel franchise with Raven Software.
  • According to NPD, Doom 3 is the #1 best-selling PC game in North America year to date.
  • On October 18, Activision announced that the company is launching a groundbreaking test with Nielsen Entertainment using its newly released Tony Hawk's Underground 2 game to determine how long and how often players interact with brands. The Chrysler Group will be the first advertiser to take part in the test, which will measure consumer interaction with the Jeep® brand.
  • Additionally on October 18, Activision and Nielsen Entertainment announced the results of a new study that examined the ability of game players to recall brand name products that were integrated within the video game experience. Among the study's key findings were: brands with which gamers must actively interact substantially impact consumer awareness and recall; and that highly integrated ads tend to enhance a gamer's interest in purchasing the advertised products.
  • On October 13, Activision confirmed that the company is in development on new games based on Spider-Man 2 and Tony Hawk's Underground 2 which are expected to be launch titles for SCEA'S PlayStation® Portable Entertainment Platform.
  • On September 22, Activision announced that the company's first title for the Nintendo® DS video game platform will be a new video game based on Spider-Man 2, which is currently the #1 best-selling movie game of 2004 according to NPD Funworld.


Company Outlook

Activision also increased its outlook for fiscal 2005. For the full fiscal year, the company expects net revenues of $1.15 billion, an increase of $50 million, and earnings per diluted share of $0.75. The company's previous fiscal year outlook was $1.10 billion in net revenues and earnings per diluted share of $0.69.

For the third quarter, the company expects net revenues of $500 million and earnings per diluted share of $0.49 as compared to its previous outlook of $515 million in net revenues and earnings per diluted share of $0.52. The change in Activision's third quarter outlook was based on over performance of its titles in the second quarter, which the company expects will result in a lower likelihood of reorders during the third quarter, and the movement of Doom 3 for the Xbox into the fourth quarter. For the fourth quarter, Activision expects net revenues of $128 million and earnings per diluted share of $0.01, as compared with its previous outlook of net revenues of $120 million and earnings per diluted share of $0.01.

Kotick continued, "We are on track to deliver another record year of net revenues and operating margin. Our net revenues exceeded $1 billion for the trailing 12 month period. We ended the quarter with more than $600 million in cash and short term investments. For the trailing 12 months, free cash flow was $122 million and return on invested capital was 42%."

Looking ahead to the third quarter, Activision's slate will be driven by Tony Hawk's Underground 2 and Lemony Snicket's A Series of Unfortunate Events for the PlayStation 2 computer entertainment system, Xbox video game system, Nintendo GameCube, Nintendo Game Boy Advance and the PC; Call of Duty: Finest Hour for the PlayStation 2 computer entertainment system, Xbox video game system and Nintendo GameCube; Vampire: The Masquerade®-Bloodlines and Shrek 2: Team Action for the PC; Spider-Man 2 for the Nintendo DS and Shrek 2: Beg for Mercy! for the Nintendo Game Boy Advance.

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 second 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 http://www.activision.com to listen to the conference call via live Webcast or to listen to the call live by dialing into (913) 981-4903 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 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 http://www.activision.com.

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.
 ACTIVISION, INC. AND SUBSIDIARIES
    CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
    (In thousands, except earnings per share data)

                                          Quarter ended     Six months ended
                                          September 30,      September 30,
                                        2004       2003      2004      2003

    Net revenues                       $310,626  $117,523  $521,902  $276,248
    Costs and expenses:
       Cost of sales - product costs    123,177    72,391   212,265   149,001
       Cost of sales - software
        royalties and amortization       46,363    11,397    58,646    26,895
       Cost of sales - intellectual
        property licenses                17,551     7,401    35,199    17,544
       Product development               19,881    15,894    40,986    29,474
       Sales and marketing               53,234    17,237    94,968    43,522
       General and administrative        15,762    10,136    29,447    21,599
          Total operating expenses      275,968   134,456   471,511   288,035
    Operating income (loss)              34,658   (16,933)   50,391   (11,787)
    Investment income, net                2,645     1,404     4,757     2,661
    Income (loss) before provision
     for income taxes                    37,303   (15,529)   55,148    (9,126)
    Provision (benefit) for income
     taxes                               11,760    (5,436)   17,648    (3,196)
    Net income (loss)                   $25,543  $(10,093)  $37,500   $(5,930)

    Basic earnings per share              $0.18    $(0.08)    $0.27    $(0.04)
    Weighted average common shares
     outstanding                        138,505   132,243   138,137   132,158

    Diluted earnings per share            $0.17    $(0.08)    $0.24    $(0.04)
    Weighted average common shares
     outstanding assuming dilution      152,685   132,243   153,127   132,158


    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.


    ACTIVISION, INC. AND SUBSIDIARIES
    CONDENSED CONSOLIDATED BALANCE SHEETS
    (In thousands)

                                         September 30,       March 31,
                                            2004                2004
    ASSETS
       Current assets:
         Cash, cash equivalents and
          short-term investments          $606,087            $587,649
         Accounts receivable, net          138,586              62,577
         Inventories                        63,690              26,427
         Software development               79,432              58,320
         Intellectual property licenses     15,945              32,115
         Deferred income taxes              21,203              26,127
         Other current assets               29,930              18,660
            Total current assets           954,873             811,875
       Software development                 21,023              28,386
       Intellectual property licenses       19,885              16,380
       Property and equipment, net          24,712              25,539
       Deferred income taxes                 5,056               9,064
       Other assets                          1,018               1,080
       Goodwill                             77,602              76,493
            Total assets                $1,104,169            $968,817

    LIABILITIES AND SHAREHOLDERS' EQUITY
       Current liabilities:
         Accounts payable                 $103,001             $72,874
         Accrued expenses                  113,341              63,205
             Total current liabilities     216,342             136,079
       Shareholders' equity:
         Common stock                           --                  --
         Additional paid-in capital        777,337             758,626
         Retained earnings                 245,779             208,279
         Treasury stock                   (144,128)           (144,128)
         Accumulated other
          comprehensive income               8,839               9,961
             Total shareholders' equity    887,827             832,738
               Total liabilities and
                shareholders' equity    $1,104,169            $968,817


    ACTIVISION, INC. AND SUBSIDIARIES
    FINANCIAL INFORMATION
    For the Quarter and Six Months Ended September 30, 2004 and 2003
    (Amounts in thousands)
                                                                    Percent
                                                                    Increase
                                                                   (Decrease)
                                             Quarter Ended
                              September 30, 2004       September 30, 2003

                                          % of                % of
                               Amount     Total    Amount     Total
    Geographic Revenue Mix
      United States           $157,705     51%     $46,450     40%    240%
      International            152,921     49%      71,073     60%    115%
      Total net revenues      $310,626    100%    $117,523    100%    164%


    Activity/Platform Mix
    Publishing:
      Console                 $145,542     55%     $46,019     64%    216%
      Hand-held                 23,669      9%       4,187      6%    465%
      PC                        97,184     36%      21,590     30%    350%
      Total publishing        $266,395     86%     $71,796     61%    271%

    Distribution:
      Console                  $29,929     68%     $33,188     73%    -10%
      Hand-held                  3,556      8%       4,730     10%    -25%
      PC                        10,746     24%       7,809     17%     38%
      Total distribution       $44,231     14%     $45,727     39%     -3%
      Total net revenues      $310,626    100%    $117,523    100%    164%


                                                                     Percent
                                                                    Increase
                                        Six Months Ended           (Decrease)
                             September 30, 2004   September 30, 2003

                                Amount     % of                % of
                                           Total   Amount      Total
    Geographic Revenue Mix
      United States           $282,896      54%   $129,189      47%   119%
      International            239,006      46%    147,059      53%    63%
      Total net revenues      $521,902     100%   $276,248     100%    89%

    Activity/Platform Mix
    Publishing:
      Console                 $264,669      62%   $134,503      72%    97%
      Hand-held                 42,099      10%      8,783       5%   379%
      PC                       121,279      28%     42,915      23%   183%
      Total publishing        $428,047      82%   $186,201      67%   130%

    Distribution:
      Console                  $69,123      74%    $68,530      76%     1%
      Hand-held                  7,211       8%      7,642       9%    -6%
      PC                        17,521      19%     13,875      15%    26%
      Total distribution       $93,855      18%    $90,047      33%     4%
      Total net revenues      $521,902     100%   $276,248     100%    89%


    ACTIVISION, INC. AND SUBSIDIARIES
    FINANCIAL INFORMATION
    For the Quarter and Six Months Ended September 30, 2004 and 2003

                        Quarter       Quarter     Six Months     Six Months
                         Ended         Ended         Ended          Ended
                     September 30, September 30, September 30,  September 30,
                         2004          2003          2004           2003
    Publishing Net
     Revenues

     PC                   36%            30%           28%            23%

     Console              55%            64%           62%            72%
      PlayStation 2       33%            32%           37%            35%
      Microsoft Xbox      14%            18%           15%            26%
      Nintendo
       GameCube            8%             4%           10%             5%
      PlayStation          0%            10%            0%             6%

     Hand-held             9%             6%           10%             5%
      Game Boy Advance     9%             5%           10%             5%
      Game Boy Color       0%             1%            0%             0%

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


    ACTIVISION, INC. AND SUBSIDIARIES
    Non-GAAP Disclosures
    Free Cash Flow
    (In thousands)
                      Trailing     Three      Three      Three       Three
                       Twelve      Months     Months     Months      Months
                       Months      Ended      Ended      Ended       Ended
                     09/30/2004  09/30/2004 06/30/2004 03/31/2004 12/31/2003
    Net Cash
     Provided by
     Operating
     Activities      $130,202     $62,846   $(52,136)   $21,069    $98,423

    Less: Capital
     Expenditures    $(8,204)    $(2,562)    $(1,881)  $(2,521)    $(1,240)

    Free Cash
     Flow            $121,998     $60,284   $(54,017)   $18,548     $97,183


    ACTIVISION, INC. AND SUBSIDIARIES
    Non-GAAP Disclosures
    Return on Invested Capital
    (In thousands)

                     Trailing      Three      Three       Three      Three
                      Twelve      Months     Months      Months     Months
    NET OPERATING     Months       Ended      Ended       Ended      Ended
     PROFIT AFTER   09/30/2004  09/30/2004 06/30/2004  03/31/2004 12/31/2003
     TAXES
    Net income       $121,145     $25,543     $11,957    $6,664    $76,981
    Less:
    Investment
     income           (8,272)     (2,645)     (2,112)   (2,051)     (1,464)
    Tax effect on
     Investment
     income (B)         2,703         846         697       677        483
    Net Operating
     Profit After
     Taxes           $115,576     $23,744     $10,542    $5,290    $76,000


    INVESTED CAPITAL

    Total
     assets (A)    $1,040,030  $1,104,169    $985,841  $968,817 $1,101,291
    Less:
    Cash and
     short term
     investments
     (A)              571,140     606,087     539,146   587,649    551,677
    Current
     liabilities
     (A)              196,034     216,342     132,092   136,079    299,623
    Invested
     capital         $272,856    $281,740    $314,603  $245,089   $249,991

    Return on
     Invested
     Capital              42%          8%          3%        2%         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.