Activision Report Stronger Than Expected, But Options Issue Pressures Stock

Activision (ATVI) last night announced that revenue for the fiscal second quarter ended September 30 totaled $188.2 million, far higher than previous guidance of $130 million, and ahead of Street expectations of $134.7 million, due to “strong performance of the company’s product portfolio, improving market conditions and the strength of the company’s distribution and affiliate businesses.”

The company also increased its revenue outlook for the March 2007 fiscal year to $1.15 billion, from $1.075 billion; it continues to see fiscal 2008 revenue exceeding $1.6 billion. (Street estimates average $1.09 billion for fiscal 2007 and $1.64 billion for fiscal 2008.)

Activision said it won’t be able to issue final results for the second quarter until the company completes its internal stock options review.

The stock is up on the news, but not as much as you might imagine given the dramatic performance in the quarter. And for that, you can blame the options issue. A sample of this morning’s research on the company:

• Mary Meeker, Morgan Stanley: As the fundamentals for ATVI begin to improve heading into the upswing of the new cycle, legal issues surrounding past option grants may provide risk and overhang. Maintain Overweight based on fundamentals but stock likely governed until there is clarity on the options issue.
• Heath Terry, Credit Suisse: We continue to believe we are close to a major inflection point in Activision’s business with three major titles shipping in November. With Activision’s leverage to the Wii, easy comparisons, and strong product line-up in the year ahead we believe it is likely to be one of the best performing names in the space, despite the unknown of the options issue. We reiterate out Outperform rating and $18 target.
• Michael Wallace, UBS: The only longer-term concern we have would be if CEO Bobby Kotick had to leave due to options issues.
• Elizabeth Osur, Citigroup: Activision’s business is strong and games are selling more quickly than previously expected, even better than our recently raised revenue forecasts. This positive trend improves our view of the company’s prospects for the remainder of the year and into [fiscal 2008]…Activision’s more cautious tone regarding slower sales of PS3 versus prior expectations related to the delay of Sony’s European launch seems overdone to us; Activision has good exposure to other platforms in the holiday season and has five games on the Nintendo Wii platform, for which production levels (and therefore expected shipments) appear to be ahead of previously expected levels.
• Lowell Singer, Cowen: ATVI is our only Outperform rated stock among the video game publishers, due to its strong franchises and strong upcoming release slate.

Activision shares are up 82 cents at $15.09