Activision Reports First Quarter Fiscal 2007 Results; Company Delivers Better-Than-Expected Q1 Results

Aug 3, 2006

SANTA MONICA, Calif., Aug 03, 2006 (BUSINESS WIRE) -- Activision, Inc. (Nasdaq: ATVI) today announced results for the first fiscal quarter ended June 30, 2006.

Net revenues were $188 million, as compared to $241 million reported for the first quarter last fiscal year. For the first quarter, the company reported a net loss of $18 million, or a loss per share of $0.06 including equity-based compensation, as compared to the company's previous outlook of a loss per share of $0.11. Excluding the impact of equity-based compensation, the company had a loss per share of $0.05, as compared to the company's previous outlook of a loss per share of $0.10. For the previous year's first quarter, the company reported a net loss of $3.6 million, or a loss per share of $0.01. A reconciliation of the company's non-GAAP financial measures to the most comparable GAAP financial measures appears at the end of this press release.

Robert Kotick, Chairman and CEO of Activision, Inc. commented, "Activision delivered better-than-expected results for the first quarter and our balance sheet remains one of the strongest in the industry. We are excited about our strong launch lineup for the PlayStation 3 and Nintendo Wii, as well as our solid slate for the Xbox 360. While there is still uncertainty with respect to the opportunities next-generation consoles will provide this fiscal year, we remain confident about the long-term industry prospects and our ability to realize superior returns for our shareholders."

Business Highlights

Activision's results for the quarter were driven by the release of Over the Hedge for the PlayStation(R) 2 computer entertainment system, Xbox(R) video game system, Nintendo(R) GameCube(TM), PC, Nintendo Game Boy(R) Advance(TM) and Nintendo DS and X-Men: The Official Game for the Xbox 360(TM) video game and entertainment system from Microsoft, PlayStation 2 computer entertainment system, Xbox video game system, Nintendo GameCube, PC, Nintendo Game Boy Advance and Nintendo DS.

-- According to The NPD Group, Call of Duty(R) 2 remains the #1 Xbox 360 game to date.

-- In April, Activision was awarded the rights to the James Bond license through 2014. Since the initial release of Dr. No in 1962, James Bond films have grossed more than $3.6 billion theatrically worldwide, and approximately 30 million units of video games based on the world of James Bond have been sold to date. Bond is one of the most successful franchises in film history and continues to have popular global appeal.

-- In May, the company announced an exclusive multi-year agreement with Mattel, Inc. to distribute video games based on the Barbie(R) brand. The video games are expected to be available at retail stores worldwide this fall.

-- In June, Activision acquired video game publisher RedOctane, Inc., the publisher of the popular Guitar Hero(TM) franchise. The acquisition provides Activision with an early leadership position in music-based gaming, which the company expects will be one of the fastest growing genres in the coming years. Guitar Hero ranked as the #4 best-selling title overall for the month of June and has remained a top-10 selling title for calendar 2006, according to The NPD Group.

-- In June, Activision opened a publishing office in Seoul, Korea, one of the fastest growing gaming markets in Asia, through the acquisition of CSR Entertainment's software distribution operations. The new office will enable Activision to fully leverage its product portfolio in the territory, particularly the upcoming online multiplayer action game Enemy Territory: Quake Wars, the prequel to id Software's legendary QUAKE II(R).

Company Outlook

For the second quarter of fiscal 2007, Activision expects net revenues of $130 million and a loss per share of $0.13, which excludes equity-based compensation of $0.01 per share.

For fiscal 2007, Activision is raising its net revenues outlook to $1.075 billion. The company expects earnings per diluted share of $0.15, which excludes equity-based compensation of $0.05.

Activision also reaffirmed its fiscal year 2008 outlook. The company expects net revenues to exceed $1.6 billion.

Non-GAAP Financial Measures

To supplement Activision's consolidated financial statements presented in accordance with GAAP, the company provides non-GAAP net income (loss) and non-GAAP net income (loss) per share data which is defined as net income (loss) excluding expenses related to stock options, employee stock purchase plan, and restricted stock under Statement of Financial Accounting Standards No. 123 (revised 2004), "Share Based Payment" and the associated tax benefit.

Management believes that the presentation of these non-GAAP financial measures provide investors with additional useful information to measure the company's financial performance. These non-GAAP financial measures are not determined in accordance with generally accepted accounting principles (GAAP) and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with GAAP. The limitations of non-GAAP net income (loss) are that, it does not include certain costs, and the term non-GAAP net income (loss) does not have a standardized meaning. Therefore, other companies may use the same or similarly named measure but exclude different items, which may not provide investors a comparable view of the company's performance in relation to other companies in the same industry.

Management compensates for this limitation by presenting the most comparable GAAP measure, net income, directly ahead of non-GAAP net income (loss) in this earnings release and by providing a reconciliation that shows and describes the adjustments made. Management does not believe these limitations are material, particularly when such measure is disclosed with its most comparable GAAP financial measure, net income (loss). A reconciliation of GAAP net income (loss) to non-GAAP net income (loss) is provided in the accompanying tables.

Conference Call

Today at 4:30 p.m. EDT, Activision's management will host a conference call and Webcast to discuss its first quarter fiscal results and outlook. The company welcomes all members of the financial and media communities to visit the "Investor Relations" area of www.activision.com to listen to the conference call via a live Webcast or to listen to the call live by dialing into (719) 457-2679 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 $1.47 billion for the fiscal year ended March 31, 2006.

Activision maintains operations in the U.S., Canada, the United Kingdom, France, Germany, Italy, Spain, Japan, Australia, Scandinavia, the Netherlands and South Korea. More information about Activision and its products can be found on the company's World Wide Web site, which is located at 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, sales of the company's titles during the remainder of fiscal 2007, consumer spending trends, the seasonal and cyclical nature of the interactive game market, the company's ability to predict consumer preferences among competing hardware platforms including next-generation hardware, software pricing, product returns and price protection, product delays, retail acceptance of our products, delays in hardware launches, industry competition, rapid changes in technology and industry standards, protection of proprietary rights, litigation and an informal SEC inquiry, 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. 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
                                                        June 30,
----------------------------------------------------------------------
                                                     2006      2005
----------------------------------------------------------------------

Net revenues                                       $188,069  $241,093
Costs and expenses:
  Cost of sales - product costs                     108,623   136,754
  Cost of sales - software royalties and
   amortization                                      19,250    14,576
  Cost of sales - intellectual property licenses      9,916    20,940
  Product development                                25,422    17,802
  Sales and marketing                                36,194    46,318
  General and administrative                         21,450    18,151
----------------------------------------------------------------------
       Total operating expenses                     220,855   254,541
----------------------------------------------------------------------
Operating loss                                      (32,786)  (13,448)
Investment income, net                                8,275     7,348
----------------------------------------------------------------------
Loss before income tax benefit                      (24,511)   (6,100)
Income tax benefit                                   (6,685)   (2,515)
----------------------------------------------------------------------
Net loss                                           $(17,826)  $(3,585)
======================================================================

----------------------------------------------------------------------
Basic loss per share                                 $(0.06)   $(0.01)
Weighted average common shares outstanding          278,335   269,141
----------------------------------------------------------------------
Diluted loss per share                               $(0.06)   $(0.01)
Weighted average common shares outstanding
 assuming dilution                                  278,335   269,141
----------------------------------------------------------------------

Share and earnings per share data have been restated to reflect
our four-for-three stock split for shareholders of record as of
October 10, 2005, paid October 24, 2005.



ACTIVISION, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP NET LOSS TO NON-GAAP NET LOSS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings per share data)

----------------------------------------------------------------------
                                       Quarter ended June 30, 2006
----------------------------------------------------------------------
                                               Equity-Based
                                               Compensation
                                       GAAP    Adjustment(a)  Non-GAAP
----------------------------------------------------------------------

Net revenues                         $188,069            $-  $188,069
Costs and expenses:
  Cost of sales - product costs       108,623             -   108,623
  Cost of sales - software royalties
   and amortization                    19,250            25    19,225
  Cost of sales - intellectual
   property licenses                    9,916             -     9,916
  Product development                  25,422         1,476    23,946
  Sales and marketing                  36,194         1,055    35,139
  General and administrative           21,450         2,647    18,803
---------------------------------------------------------------------
       Total operating expenses       220,855         5,203   215,652
----------------------------------------------------------------------
Operating loss                        (32,786)       (5,203)  (27,583)
Investment income, net                  8,275             -     8,275
----------------------------------------------------------------------
Loss before income tax benefit        (24,511)       (5,203)  (19,308)
Income tax benefit                     (6,685)       (1,977)   (4,708)
----------------------------------------------------------------------
Net loss                             $(17,826)      $(3,226) $(14,600)
======================================================================

----------------------------------------------------------------------
Basic loss per share                   $(0.06)       $(0.01)   $(0.05)
Weighted average common shares
 outstanding                          278,335       278,335   278,335
----------------------------------------------------------------------

----------------------------------------------------------------------
Diluted loss per share                 $(0.06)       $(0.01)   $(0.05)
Weighted average common shares
 outstanding assuming dilution        278,335       278,335   278,335
----------------------------------------------------------------------

(a) Includes expense related to stock options, employee stock purchase
    plan, and restricted stock under Statement of Financial Accounting
    Standards No. 123 (revised 2004), "Share Based Payment."
    See explanation above regarding the Company's practice on
    reporting non-GAAP financial measures.


ACTIVISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
----------------------------------------------------------------------
                                                June 30,    March 31,
                                                  2006        2006
----------------------------------------------------------------------
ASSETS
----------------------------------------------------------------------
  Current assets:
      Cash, cash equivalents and short-term
       investments                               $792,576    $944,960
      Accounts receivable, net                     65,361      28,782
      Inventories                                  64,095      61,483
      Software development                         65,631      40,260
      Intellectual property licenses               23,844       4,973
      Deferred income taxes                        12,245       9,664
      Other current assets                         40,229      25,933
----------------------------------------------------------------------
           Total current assets                 1,063,981   1,116,055
----------------------------------------------------------------------
  Software development                             13,072      20,359
  Intellectual property licenses                   73,100      82,073
  Property and equipment, net                      43,986      45,368
  Deferred income taxes                            58,504      53,813
  Other assets                                      4,113       1,409
  Goodwill                                        180,646     100,446
----------------------------------------------------------------------
                   Total assets                $1,437,402  $1,419,523
======================================================================

----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
----------------------------------------------------------------------
  Current liabilities:
      Accounts payable                            $73,344     $88,994
      Accrued expenses                             88,264     103,169
----------------------------------------------------------------------
            Total current liabilities             161,608     192,163
----------------------------------------------------------------------
      Other liabilities                            40,960       1,776
----------------------------------------------------------------------

                 Total liabilities                202,568     193,939
----------------------------------------------------------------------
  Shareholders' equity:
      Common stock                                      -           -
      Additional paid-in capital                  862,678     823,735
      Retained earnings                           370,687     388,513
      Accumulated other comprehensive income        1,469      16,369
      Unearned compensation                             -      (3,033)
----------------------------------------------------------------------
            Total shareholders' equity          1,234,834   1,225,584
----------------------------------------------------------------------
                Total liabilities and
                 shareholders' equity          $1,437,402  $1,419,523
======================================================================



ACTIVISION, INC. AND SUBSIDIARIES
FINANCIAL INFORMATION
For the Quarter Ended June 30, 2006 and 2005
(Amounts in thousands)

                                                             Percent
                                                             Increase
                                     Quarter Ended          (Decrease)
                          --------------------------------------------
                              June 30,2006      June 30,2005
                                      % of               % of
                             Amount   Total    Amount    Total
----------------------------------------------------------------------
Geographic Revenue Mix
  North America            $99,610     53%   $112,320     46%     -11%
  International             88,459     47%    128,773     54%     -31%
----------------------------------------------------------------------
  Total net revenues      $188,069    100%   $241,093    100%     -22%
----------------------------------------------------------------------

----------------------------------------------------------------------
Segment/Platform Mix
Publishing:
  Console                  $90,189     48%   $142,362     59%     -37%
  Hand-held                 26,584     14%     25,331     10%       5%
  PC                        17,989     10%     25,858     11%     -30%
----------------------------------------------------------------------
  Total publishing net
   revenues               $134,762     72%   $193,551     80%     -30%
------------------------- --------------------------------------------

Distribution:
  Console                  $28,788     15%    $38,088     16%     -24%
  Hand-held                 18,213     10%      3,908      2%     366%
  PC                         6,306      3%      5,546      2%      14%
----------------------------------------------------------------------
  Total distribution net
   revenues                $53,307     28%    $47,542     20%      12%
----------------------------------------------------------------------
  Total net revenues      $188,069    100%   $241,093    100%     -22%
----------------------------------------------------------------------


ACTIVISION, INC. AND SUBSIDIARIES
FINANCIAL INFORMATION
For the Quarter Ended June 30, 2006 and 2005

                                        ---------------  -------------
                                         Quarter Ended   Quarter Ended
                                         June 30, 2006   June 30, 2005
--------------------------------------  ---------------  -------------
Publishing Net Revenues

 PC                                             13%            14%
--------------------------------------  ---------------  -------------
 Console                                        67%            73%
--------------------------------------  ---------------  -------------
   Sony PlayStation 2                           38%            34%
   Nintendo GameCube                            10%             5%
   Microsoft Xbox                               10%            34%
   Microsoft Xbox 360                            9%             0%

 Hand-held                                      20%            13%
--------------------------------------  ---------------  -------------
   Nintendo Game Boy Advance                    10%             8%
   Nintendo Dual Screen                          8%             3%
   Sony PlayStation Portable                     2%             2%

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

SOURCE: Activision, Inc.

Activision, Inc.
Kristin Southey
Vice President, Investor Relations
310-255-2635
ksouthey@activision.com
or
Maryanne Lataif
Vice President, Corporate Communications
310-255-2704
mlataif@activision.com

Copyright Business Wire 2006

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