From: Reuters
Published November 27, 2007 06:35 PM

Activision ups outlook as "Guitar Hero" rocks on

By Scott Hillis

NEW YORK (Reuters) - Activision Inc <ATVI.O>, the second-biggest U.S. video game publisher, raised its quarterly outlook on Tuesday, citing strong sales of its "Guitar Hero" and "Call of Duty" games, sending its shares sharply higher.

The improved outlook comes just after the U.S. holiday shopping season kicked off over the Thanksgiving Day 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.

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Shares of the company closed up 13.8 percent to $21.54 on Nasdaq and climbed higher to $21.85 in extended trading, following Chief Executive Robert Kotick's comments on profit margins to the Reuters Media Summit.

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, Kotick said in a statement.

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 margin improvement could come from doing more art, animation and programming in low-cost regions such as China, and by focusing marketing on more effective online campaigns than through traditional print media, Kotick later told the Reuters Media Summit in New York.

Emerging areas of gaming, such as massively multiplayer online titles, additional content that can be downloaded over the Internet, and casual games that are easy to learn and play, all boasted margins of more than 40 percent, Kotick said.

"A lot of the (company) bonus programs are based on margin expansion, so we'll continue to make improvements on this over the next couple years," he told the Summit.

Activision expects profit for the third quarter ending December 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, California-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 25 in the year to date, outpacing rival Electronic Arts Inc <ERTS.O>, the world's biggest games publisher, whose shares have gained 9 percent.

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.

(Additional reporting by Euan Rocha and Peter Henderson in New York, John Tilak in Bangalore, editing by Derek Caney and Tim Dobbyn)

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