Activision (ATVI)

Summary:
The game industry took a big hit in 2005 with two major console upgrades (Xbox 360 and PS3) coming out. Activision has posted a loss in the first half of FY 06, and unfortunately there doesn't seem to be any good news coming up. Analysts are expecting a year with zero income growth from FY 05, and initial sales of their top titles were lower than expected.

Buying the stock at this point is taking a big bet that ATVI will have a sleeper hit on the new consoles, which is a long stretch at best.

As of Q2 FY06 (Sep 30 2005) TTM:
- Revenue: $1.35B (up 13% YoY)
- Net income: $84M (down 30.6% YoY)
- Net margin: 6.2% (down from 10.2% 1 year ago)
- EPS: $0.30 (down 33% from 1 year ago)
- Current P/E: 48.71 (CY04 P/E range was 5.4 - 96.3)
- Current ratio: 6.1 (Q2 FY06)

FY06 projections:
- FY 06 Revenue growth of 7% (S&P)
- FY 06 EPS: $0.54 (Yahoo) (8% growth) - Note: Q3 (Dec 30) accounted for half the annual revenue in FY 05, and will account for virtually all the income in FY 06)

Danger signal:
Even if ATVI hits the $0.54 EPS projection, which represents a 54% increase over last year), their overall FY 06 EPS will still only be $0.49 (there were losses in the first half of FY 06). This is virtually flat from one year ago!

Valuation:
- Current P/E of 48.7 represents an expectation that ATVI can grow earnings by 2.4 times (over a nominal P/E of 20).
+ 2.4x growth means revenues of $3.4B and earnings of $337M (at a 9.8% margin)
- At a constant 13% annual growth, they will be able to do this in 7.3 years. Q2 FY 06 Revenue grew at 13% YoY.

SWOT:
- Strengths:
+ Good brand
+ Strong franchises: Tony Hawk’s Underground, Shrek, True Crime: Streets of L.A., and Spiderman

- Weaknesses:
+ Big losses in FY 06 so far.
+ Doom for Xbox 360 scored only 6.6 on Gamespot

- Opportunities:
+ New consoles this year (Xbox 360 in Nov 05 and PS3 in Mar 06)
+ Call of Duty 2 for Xbox 360 (Gamespot score: 8.8)

- Threats:
+ Hard to break $50 price point, even as development costs soar

Notes:
- Initial sales for Gun and True Crime were lower than expected - http://biz.yahoo.com/ap/051122/activision_mover.html?.v=1

Bottom line:
All indications point to a bad FY 06 for ATVI, with no growth from FY 05. Summer 06 may be a good time to re-evaluate ATVI's lineup for 2006.

Recommend: Stay Away

Jamdat Mobile revenue doubles, shares jump

article

Hey guys. I listened to 1/4 of the conference call and took notes:

1 out of 3 mobiles games in the US are from jamdat. this is 4 times the market share of nearest competitor.

this quarter was difficult for the industry: significant upgrades to mobile carriers' platforms hurt sales throughout the mobiles games industry. resulted in outages.

4 reasons business will grow q4+
- us carriers have completed platform transition. mobile games market back on upswing. new platforms (t-mobile) help distribution.
- us market share at unprecedented levels validating competive positioning. european share increasing. as well as korea and japan -- especially with tetris and upcoming launch of doom rpq
- new products helping: doom rpg and socom. jamdat can consistently deliver hits.
- create significant leverage from new r&d. multiplayer games

R&D
- created swight (propertary technology) which lets one code base target multiple platforms
- hardware management platform (maintains specs of 3500 devices worldwide)
- sku manager helps distribute to many different channels (carriers and off deck)
- multiplayer engine (social networking, buddylists, community features, messaging)

drivers for industry
- worldwide 800 million cell phone units sold in 2005
- 850 million new cell phone units sold in 2006
- na carriers will add 20 million new subscribers in 2006
- european carriers will add 50 million new subscribers in 2006