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Activision Posts Steep Earnings Drop

July 23, 2003|Alex Pham | Times Staff Writer

Activision Inc., the nation's second-largest video game publisher, posted lower quarterly sales and profit Tuesday but still beat expectations as the company pursued a new strategy of developing fewer but bigger titles.

Sales fell 17% to $158.7 million in its fiscal first quarter. Spring is typically the industry's slowest period. Net income dropped nearly 80% to $4.2 million, or 4 cents a share. Activision earned $20.7 million, or 21 cents, a year ago, driven largely by sales of its "Spider-Man" game.

The results, which follow a Securities and Exchange Commission investigation into the accounting practices of major video game publishers, spooked investors. Shares of the Santa Monica-based game maker, which rose 55 cents to $11.84 in regular Nasdaq trading, traded as low as $10.66 in after-hours sessions following the earnings release.

"It makes no sense," said Michael Pachter, an analyst with Wedbush Morgan Securities in Los Angeles. "It shows that we have a skittish and intolerant investment group right now."

Without a major release on the level of "Spider-Man," analysts surveyed by Thomson First Call had expected Activision to break even on sales of $142 million.

"Somewhat like the movie business, the games business is driven by the release schedule. You're just going to see [big revenue fluctuations] from time to time," said Stewart Halpern, an analyst for RBC Capital Markets in New York.

Like much of the rest of the industry, Activision pared its product lineup after a difficult holiday season last year, when retailers anticipated slack spending and ordered fewer titles.

The adjustment, analysts predicted, would translate to lower results this quarter for the industry as publishers retool during the quieter spring and summer months. Redwood City, Calif.-based Electronic Arts Inc., scheduled to report earnings today, is expected to post earnings of 2 cents a share in its first quarter, compared with 5 cents last year. THQ Inc. of Calabasas is projected to have a loss of 9 cents a share, versus a 5-cent gain a year earlier, when the company reports Thursday.

Activision will release about 40 titles this year, compared with more than 60 last year. It anticipates ramping the number of games back up to 60 next year.

"One of the things we can do to differentiate ourselves is to get our product development process to the point where we can consistently release high-quality products," Activision Chief Executive Robert A. Kotick said. "This year is really about investing in those processes. You'll begin to see the fruit of that late this year and in full force next year.

"We have a smaller number of overall titles, and hopefully you'll see a higher level of quality in those titles."

Activision is among several video game companies recently targeted by a sweeping, non-public federal investigation into the industry's accounting practices. Others included in the probe by the SEC are THQ, Midway Games Inc. in Chicago and Acclaim Entertainment Inc. in Glen Cove, N.Y., the companies disclosed last week.

Another company, New York-based Take-Two Interactive Software Inc., has been under SEC scrutiny since mid-2001. The company has restated seven quarters of financial results to adjust for improperly recorded sales.

The SEC is not commenting on its probe, but industry analysts have speculated that the issue is related to "revenue smoothing" tactics used to keep sales in line with expectations and historical patterns. One such method involves reserves kept by most game companies to account for products that have to be discounted or are returned.

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