Head over to The Motley Fool's CAPS community database and pull up Activision's (NASDAQ:ATVI) page. Among of the many comments from investors all over the world, you'll find one from the co-founder of the Fool himself, David Gardner (TMFBreakerDave). Activision is a "long-term winner" in a "guaranteed growth industry," declares David. It appears the CAPS community agrees, giving the video game developer four stars out of five.
Does that mean investors should overlook the company's second quarter and its 15.5% year-over-year sales decline? Yep. The video game industry is all about cycles, and a monstrous wave of opportunity is about to sweep in, buoying Activision and fellow developers such as Electronic Arts (NASDAQ:ERTS), THQ (NASDAQ:THQI), and Konami (NYSE:KNM).
In this edition of Fool on Call, using Activision's most recent quarterly earnings conference call, we'll examine what lies ahead for the game developer as the new wave of high-powered video game consoles hits the market. The discussion will focus on the following areas:
- Product pipeline
- Development costs
A new generation of interactive gaming
The entire industry has been anticipating this November, as the Sony PS3 and Nintendo Wii make their debut on store shelves. Management acknowledged in the call, however, that there is "still risk in the short term" regarding hardware shortages. Even so, CEO Bobby Kotick asserted in the question-and-answer portion of the call that things are looking better in this newest product cycle than they have previous ones. More differentiated devices, and greater consumer acceptance of high-definition video, are two encouraging characteristics for management.
Despite delays from console manufacturers, expect Activision to be plugged in and ready, since it already has solid momentum heading into this critical launch time. Call of Duty 2 for the Xbox 360 sold more than a million copies in the U.S., "making it the No. 1 best-selling game to date on the Xbox 360," according to the call. Additionally, the company's partnership with Marvel (NYSE:MVL) continues to pay dividends with the latest release Marvel Ultimate Alliance. It's the company's first big holiday launch, and it's garnered wide acclaim among gaming critics, becoming Activision's "highest-rated Marvel title ever."
Activision is also pleased that its upcoming release schedule should "align well" with the ramp-up of next-generation platforms. Call of Duty 3 should be a big hit, as gamers will go crazy over the opportunity to simultaneously engage in online combat with as many as 24 players -- "three times as many" as the previous version.
Tony Hawk's Project 8 has been completely overhauled to take advantage of the PS3 and Xbox 360, and Activision is seeing some encouraging preorder activity for this anticipated title. In light of the Wii's unique motion-sensitive controller, Activision has developed Rapala'sTournament Fishing, letting players cast the controller like a fishing rod.
Perhaps the most aggressive launch for Activision is Guitar Hero 2 and its accompanying wireless guitar controller. A major marketing campaign, including in-store demonstrations, should help attract new users to the guitar-simulator sequel. Remarkably, Activision has secured a total of more than 7,500 demonstration stations at "almost every major retailer."
Despite the strong titles, hardware shortages will cap revenue growth for FY 2007. The company expects full-year sales of $1.15 billion. But FY 2008 may prove the true blockbuster, with sales expected to top $1.6 billion. It makes sense, then, to use any kind of significant weakness over the next few quarters as a buying opportunity, in preparation for what should be a huge year for Activision shareholders beginning next fall.
Fun doesn't come without funds
"While the future is exciting, realizing our growth and financial goals is not without risk," admitted Kotick. For one thing, next-generation gaming comes with next-generation price tags, including higher development costs.
There are several ways Activision can reduce these expenses, including identifying "efficiencies" across various platforms that save time and money. One obvious step would be using the same artwork in various platforms' versions of the same title, but hardware-level efficiencies can also be found. Exploiting system similarities between the PS3 and Xbox 360, and between the PS2 and Wii, can help Activision cut development costs.
Outsourcing is another cost-cutting opportunity. Activision is able to transfer some of its labor-intensive functions, like artwork, to lower-cost locations. The exact cost savings from outsourcing wasn't released, but management characterized it as both significant and worthwhile.
Beyond reduction strategies, the company can also offset rising development costs by saving money elsewhere. Look for Activision to employ more online advertising to woo gamers. The company is finding this strategy more cost-efficient and effective than TV or print ads. For example, a new online marketing campaign for its Marvel Ultimate Alliance release led to a "doubling" in preorders. Selling more downloadable game content can also help cut cotsts; in the most quarter, Activision "more than doubled" revenues from online content.
Game on
David Gardner would like to see Activision "develop some more of their own original intellectual property" to offset its reliance on licensing. The pipeline of upcoming titles suggests that Activision will stick to a "balance" of the two. Kotick identified two of the company's core competitive advantages as its "long-term control of valuable IP (intellectual property) rights" and the creation of new franchises. Kotick also highlighted a third core advantage: the company's ability to leverage its "propriety development resources," as the aforementioned cost-savings strategies demonstrate.
Kotick summarized his remarks by stating, "Our competitive position continues to improve, and the barriers to entry in our industry continue to rise." It's game on in the video game industry, and Activision looks well positioned to come out as a winner.
More conference call analysis:
- Fool on Call: A Great Reason to Hold Whole Foods Market
- Fool on Call: Chipotle's Leadership Leads the Way
- Fool on Call: Hog Wild!
Activision and Electronic Arts are Motley Fool Stock Advisor recommendations. Discover other high-scoring stock selections from David and Tom Gardner with a free 30-day trial.
Fool contributor Jeremy MacNealy has a player rating of 93.58 and is ranked 812 out of 12,626 participants in Motley Fool CAPS. He has no financial interest in any company mentioned. The Motley Fool has a nifty disclosure policy.
