動視暴雪 (ATVI) 2004 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Activision first quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the conference please press star, then zero, on your touch tone telephone. As a reminder, this conference call is being recorded. I'd like to now turn the conference over to your host Ms. Kristen Southey. Please go ahead.

Good afternoon and thank you all for joining us today for our first quarter fiscal 2004 conference call. My name is Kristen Southey, vice president of investor relations. I will start by reviewing our safe harbor disclosure and reminding everyone that the statements made during this call that are not historical facts are forward-looking statements. Although the company believes that its plans, intentions and expectations reflected in such forward-looking statements are reasonable, a number of factors could cause our actual future results to differ materially from those expressed in any such forward-looking statements. These important factors and other factors that potentially could affect our financial results are described in our filings with the S.E.C. including form 10-K for the year ended March 31st, 2003. On July 18th, 2003, we announced that the S.E.C. has commenced a nonpublic formal investigation captioned in the matter of certain video game manufacturers and distributors. The investigation appears to be focused on certain accounting practices common to the interactive entertainment industry with specific emphasis on revenue recognition. In connection with this inquiry the S.E.C. submitted to Activision a request for information. The S.E.C. informed us that this should not be construed that any violation of the law has occurred nor should it reflect negatively on any person entity or security. We intend to cooperate fully with the S.E.C. in the conduct of this inquiry. Our comments regarding this matter are limited to the information provided in our form 8-K which we file with the S.E.C. on Friday. We thank you for your patience in this matter. Finally I'd like to highlight that our results have been adjusted to reflect the three for two stock split that we announced on May 5th paid on June 6th. Now I'd like to introduce Bobby Kotick our chairman and CEO.

Thank you Kristen and as you know she has been out for the last couple of months so we are very happy to have her back. Our results for fiscal 2004 first quarter were better than expected due to primarily strong market conditions and title over performance. Our balance sheet and financial position remain strong. We ended the quarter with $390 million in cash and short term investments. Very low DSOs and $631 million in shareholders he equity which is an increase of 34 million dollars. Later in the call Ron Doornink will review the factors that impacted our operating results and provide a more detailed outlook for the future. We remain focused on strengthening our intellectual property portfolio and development resources and during the quarter we made several important announcements in this regard. We terminated during the quarter our license agreement with Viacom consumer product for Star Trek and filed a breach of contract lawsuit against Viacom in connection with the termination. We believe that Viacom has breached its fundamental promise to continue to exploiting the Star Trek franchise consistent with its practice when we entered into this agreement in 1998. We don't take litigation lightly however we felt that Viacom left us no other alternative to protect our rights and interests and we're confident in our claims. We're not going to refer to any more comment about this litigation during our call and we'll refer you to our complaint if you'd like a more detailed explanation on our position. On a more positive licensing note we extended our successful partnership with the world renown outdoor outfitter Cabala’s, through an exclusive multiyear licensing agreement that expires in 2014. Our first Cabala’s game debuted in 1998 and the brand continues to be a top seller across retail chains nationwide. We were also successful this quarter in expanding our product development resources. We announced our relationship with Spark Unlimited a new studio comprised of 28 of the individuals that worked on the hit Medal of Honor for the console and our new Call of Duty brand. In May we confirmed that the highly anticipated Doom 3 for the PC would also be released on Xbox. In the past number of months we have seen traditional PC titles perform well on the Xbox, Return to Castle Wolfenstein and Soldier of Fortune, so we are enthusiastic about Doom for the Xbox. Additionally, Lucas Arts announced an agreement with Activision. The agreement will expand our current distribution role for Lucas's products in Europe. And this is really a furthering of what was already a very strong relationship between Activision and Lucas Arts. While we are well positioned for the future given the breadth of our intellectual property rights our strong development resources and our high quality balance sheet we do remain cautious for the balance of this fiscal year. The drivers of our fiscal '04 operate being plan like Tony Hawk's underground and true crime are new efforts and we are excited you but we do remind that you they do come with some risk. As we look at fiscal '05, which is our 25th anniversary, we already have our largest laid development including Spiderman 2, Shrek 2, Shark Slayer We have a long history of revenue growth and operational success and with further focus on quality proven development talent and high impact intellectual properties we remain very enthusiastic about our long term prospects. Ron will now share with you the highlights of our performance this quarter and provide a detailed outlook on the future of our business.

Thank you Bobby. For the quarter ending June 30, net revenues were 159 million dollars versus $191 million last year. We had earnings per share of 4 cents for the quarter versus earnings per share of 21 cents last year. Of course last year's quarterly results were driven by the massive worldwide success of our Spiderman franchise. This year our quarterly results were driven by solid sales of our major releases, X-2, Return to Castle Wolfenstein, Soldier of Fortune, as well as catalog sales, Spiderman and Tony Hawk.

During the June quarter our manufacturing distribution expense was 48% of net revenues somewhat lower than anticipated due to mainly revenue mix differences. Operating expenses excluding manufacturing and distribution expense were about 48% of revenues. During the quarter, the company repurchased 2.3 million shares under our share buy-back program at an average price of $9.21 per share. Also, during the quarter we entered into $36 million of new structured repurchase agreements while we had $65 million in structured repurchase agreements mature for cash. As you may recall, these transactions may be settled in cash or stock based on the market price of our common stock on the date of the settlement. For further information on this, please refer to our form 10-K for the fiscal year ending March 31st, 2003. Turning now to our balance sheet, on June 30, we had $390 million in cash and short-term investments versus $407 million last quarter. As of June 30, we had $450 million of working capital. The $33 million accounts receivable balance on June 30 was down significantly versus the same period last year, due to last year's huge success of the Spiderman games. The June 30 AR reserve of $57 million was up $2 million versus last year. The effect of lower receivables and higher reserves caused us several related measures to look a bit out of the ordinary. Specifically the AR reserve as a percentage of gross receivables equals 63% which is above the four-quarter average 51%. Similarly DSOs came in at 19 days, below the 28-day average for the past four quarters. Looking ahead, we expect both measures to move closer to their historical average. Inventories at the end of the quarter were $25 million, in line with last year. Of the $25 million, only $9 million relates to our publishing business and $16 million relates to our distribution business. Capitalized software development costs on June 30 were $71 million up 9 million versus March 31st, representing 91 projects. Importantly, less than 5% of our current capitalized software development balance relates to products that have already been released. On June 30, capitalized intellectual property licenses were $46 million, flat versus March 31st. Now I'd like to share our thoughts on the overall market, beginning with our hardware estimates. The bottom line, we have not made any changes versus our May call. As of June, 2003, the installed base in North America for next-generation systems including hand-held had grown to 42.5 million units. For calendar year end 2003, we're still expecting the installed base of hardware including hand-held to grow to about 55 million units. Looking at each system individually at the end of June following a modest price cut to $179, the Playstation 2 had an installed base of 18.2 million units in North America. We expect the Playstation 2 to sell well in 2003 and by the end of the year have an installed base of about 25 million units. As of June 30, the Game Cube had an installed base of about 4.3 million units. We believe that the Game Cube will grow to an installed base of about 6 million by year end. Microsoft headed the month of June with an installed base of about 5.5 million units, also following a modest price cut to $179 in May. We're projecting the installed base of the to grow to about 8 million units by calendar year end. At the end of June the Gameboy Advance had a U.S. installed base of 14.5 million units and we expect the installed base of this device to hit about 16 million units by calendar year end. The launch of the Gameboy advance SB has been very successful selling in excess of a million units already which should help Nintendo exceed our full-year estimate. In conclusion the hardware price cuts in May were less than expected and our installed base estimates for the full year in corporate hardware base reduction to $149 for the Playstation 2 and the Xbox or the equivalent in terms of promotional activity for the parties. In the event there's no price cut or no promotional equivalent by the holiday season then we will have to revisit our hardware projections.

Now, moving to software, we define our market to include all major platforms in North America and Europe but we exclude Japan. Since our last conference call we believe general economic fundamentals remain somewhat unstable and we're keeping our U.S. and European estimates unchanged versus those we gave out in May. And those were as follows. For calendar 2003, we're projecting growth of 12 to 14% for the total console market, including software for both the past and current platforms. The combined growth rate for the console and hand-held market is 11 to 13%, and adding a flat PC market, the expected combined growth rate both for the console, hand held and the PC video game software is about 10%. Again, these growth rates are for the North American and European markets combined. With respect to software pricing, we see it as a continuing risk factor. We expect AAA console product launch pricing to hold at 49.99 through the holidays. We're concerned about price declines for second-tier or underperforming titles. However, our operating plan is designed to provide for that scenario. In the current fiscal year, one of our key initiatives is to aggressively try to establish new brands based on wholly-owned intellectual property. Examples include true crime, Pitfall Harry and Call of Duty. Inherently, this is a risky proposition that comes with a lot of unpredictability especially in terms of the development schedules and product demand. However, if successful the benefits of this strategy are substantial. Our outlook for fiscal '04 remains at $750 million in revenues and EPS of 47 cents. On our last call, we gave quarterly guidance for modeling purposes and since then we have firms up our release schedule and quarterly outlook for the balance of the fiscal year which I will now review.

For fiscal '04, the total year, we expect manufacturing and distribution costs of 51% of net revenues with operating expenses including royalties of 40%. We project interest income of .3%. The fiscal '04 tax rate should be 35% which will hold for each of the quarters and our fully diluted share count will be 96 million. Looking to the second quarter of fiscal '04, we expect revenues of 100 million dollars and loss per share of 13 cents. That's lower than previously expected, due to a change in the release timing of true crime, Streets of LA and change in pricing assumptions for Disney extreme skate product. True crime was scheduled to ship at the very end of Q2 previously, we have now moved its release into Q3 in order for time to complete this very promising title. With respect to Disney Skate, the product was scheduled to ship that would probably result in a $49.99 every day price point. However given the console releases for children we will release the title at a wholesale price that will likely result in a $39.99 every day price point. Disney Skate is the only title in our Q2 and Q3 that we planned to launch at this price point. Drive titles for the second quarter include the title I just mentioned, Disney Extreme Skate Adventure on multiple platforms. It blends the world of skate boarding with a broad range of Disney characters. In addition we have Star Wars Jedi Knight, Jedi, academy for the PC, a successor to Jedi Knight II. Also launching in Q2 is Cabala’s Deerhunt for both the PS2 and Xbox. For the second quarter we expect manufacturing and distribution cost of 63% of net revenues, with operating expenses including royalties of 55.7%. We project interest income of less than .5% and a basic share count of 88.4 million. For the third quarter of fiscal 2004, we now expect revenues of $360 million and earnings per share of 58 cents. The quarter will be driven by Tony Hawk's underground, a totally redesigned exciting skate boarding game. We recently previewed the game for the first time at E-3 and it walked away with the best of E-3 award for sports games. Also driving the quarter will be two wholly owned properties, True Crimes, Streets of LA and Call of Duty. In true crime you can assume the role of Nick Kang, whose brutal reputation and lethal skills have landed him the task of taking down the Chinese Triad and Russian Mafia. In Call of Duty you can experience the dramatic intensity of World War II front lines through the eyes of common soldiers in a cinematic first person action game. True crime and Call of Duty are quickly gaining momentum with the retailing gaming community as must-have titles for the holiday season. We will support both properties with heavy TV advertising in front of the all-important holiday buying season. Also due out in the quarter is Empires Dawn of Modern World, a historical real time strategy game for the PC which lets players command legendary civilizations, as they battle to forge mighty empires from the days of charging Knights to the awesome land, air and sea battles of World War II. Net, we feel the December quarter has great potential. At the same time it is our most risky quarter given that two of our four major releases are still unproven properties. For the third quarter, we expect manufacturing and distribution costs of 48% of net revenues with operating expenses including royalties of 28.3%. We project interest income of less than .3% and fully diluted share count of 96.5 million. For the fourth quarter, we expect revenues of $131 million and a loss per share of 3 cents. For planning purposes we're assuming that Doom 3 will come out in the fourth quarter but as you know, its software decides when the title will ship, not Activision. Also, expected to be released in the fourth quarter of Pitfall Harry Ted Shoe for the Xbox and our Motor cross game MTX. Please note that the release of Trinity, our own futuristic first person action game, has been moved to fiscal 2005. For the fourth quarter we expect manufacturing and distribution cost of 53% of net revenues with operating expenses including royalties of 51%. We project interest income of less than .5% and a fully diluted share count of 90.2 million.

In conclusion, as we look at our fiscal 2004 operating plan, we have a compact focused slate which while being more risky offers significant potential for operating leverage. Looking ahead to fiscal 2005, the plan for next year is being built around a very promising and large slate which includes properties like Spiderman 2, Shrek 2, Shark Slayer, Quake 4, Liminy Snicket, Call of Duty for the console and Rome Total War. Fiscal '05 promises to be our biggest year ever. We look forward on updating you on our progress on our next conference call. Thank you for joining us, we will now open the call up to questions, but before we start let me remind you as Kris and Bobby mentioned earlier we will not be able to offer further commentary on either the S.E.C. matter or the Viacom matter. We hope that you understand, and we appreciate your patience with that. Now, operator, please open up the call for questions.

Ladies and gentlemen if you would like to ask a question at this time, please press the 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue please press the pound key. Again, if you'd like to ask a question, please press the 1 on your touch-tone telephone. One moment please for our first question. We have a question from Arvind Bhatia from Southwest Securities.

Good afternoon guys. Couple of questions. One, I wanted to understand how much did the shift in true crime, you know, what is the impact of that on the quarter versus the decrease in pricing that you expect for the Disney product. And then I think as you look at the sell-through numbers that have come out from MPD in the last few months, they would indicate you know bad versus what you reported for the quarter, seems to be a little bit of a disconnect there, i.e. your numbers look more positive. Can you comment on that? Does that indicate there's more inventory in the channel right now or just if you could help us reconcile that.

All right. First, let me ask the first question. True crime Impact was the majority of the change in the quarter, the vast majority, I should say. The X-2 sell-through, when we talked previously about having shipped out over a million units, that was clearly a worldwide number. And we're overall not in a -- like a problem situation at all as far as inventories are concerned. There are a few spots where we're heavy but we've certainly provided for that as we close out the quarter. So there's really no significant issue there.

Okay. So other than X-2 there isn't anything else in the channel that you would really be concerned about?

No.

Okay. And when you talked about the price cuts later in the year, are you assuming a price cut around Labor Day or are you assuming more in the fourth quarter?

Honestly I would say I think that will be in September. I think that would maximize the effect on the industry and the software sales in particular.

Got it, thanks.

You bet.

Our next question comes from Jeff Vilensky from Bear Stearns. Please go ahead.

On True Crimes, can you talk about the delay and if it's regarding a better launch platform or there's more work to do or sort of what's behind the delay of that game? And I have a follow-up.

Yeah, we -- on the January conference call, we talked about, you know, doing a number of things in the area of improving game quality, and we talked about increasing play test time, doing more extensive game quality evaluations and lengthening development schedules as needed to allow for additional work to be included based on those evaluations. And in the case of true crime we feel that the title even though it has a tremendous amount of potential and is coming together well, would benefit from additional polishing to become all that it can be, and we believe it can be a terrific product. So we're giving it a little bit more time. We understand that that means a change in numbers, but at the same time, at the end of the day we believe it's most important that the quality of the game is as good as it can be.

Can you give us a potential month of release? Is this in October, November?

Right now, we're not giving it out. It's still -- obviously the objective is to put it out before the holidays.

Another question, you talk about Tony Hawk as an unproven entity going into the holiday season. I realize it is a new format and new approach to the game. But why would you characterize Tony Hawk as unproven in that manner and risky?

It is a fairly significant change in the approach to the brand. But fair enough. It is not in the same league of unproven ness at all as you and I would characterize true crime and Call of Duty.

Okay. And just a maintenance question. Can you tell us what the catalog was for the current quarter and what you're anticipating for the next quarter?

Catalog, I'd say about 20% for the first quarter. It would go up to about 40% or so for the second quarter. Not unlike Q4 of last year where we didn't have a very big slate either. And what we saw then, too, was that the catalog popped. In terms of the catalog, we're now selling the Spiderman movie games at platinum pricing. That has really shown a nice effect on sell-through and we'll see that reflected during the quarter in additional sell-in. Also Tony Hawk 4 during the quarter will move to platinum pricing and that should have a nice effect on the catalog as well.

Okay, thank you very much.

Your next question comes from Mike Wallace from UBS. Please go ahead.

Hi, couple of questions. Welcome back Kristen by the way.

Thank you.

First regarding retail. I assume, you know, the reps are talking at IMA this week. Do you get any sense on how the channel is? Are they a little gun shy after last Christmas, or you think this year it's going to go a little smoother, they going to take less of the B and C product and focus on the bigger ones? What do you think will be different this year?

I think that the retailers are continuing to focus on inventory management. In a way that probably a year ago you didn't quite see. We saw that manifest itself during the Christmas season. That has continued. They're pretty conservative across the board in buying particularly to sort of the second-tier titles that are not heavily supported. And I suspect that that will continue to play us out during the Christmas season. Having said that I'd also feel that last year was a year where everybody kind of learned how to cope with a, you know, a significant increase in the number of titles out there. And right now we're at a pace that would suggest that we're not going to have quite as many titles out in the channel as we did last year. For the first half of this year, I'm talking now hand-held console and PC, we're counting about 670 titles going out. That's about 10% less than what we saw last year in the first half. So that should be a help.

Okay. But in no sense they're going to take less of the top-tier product and just try and reorder quicker. It's just the secondary stuff that they'll shy away from?

Exactly. I think their focus is on trying to figure out what the top titles are and really playing those for all they're worth.

Okay. As far as true crime is it still going to go out on all the platforms at the same time?

Yes, no change in that plan. . We're planning on all platforms domestic as well as international.

And then just a clarification on the games. Call of Duty that's going to be PC at Christmas and the console versions are in the next fiscal year is that correct?

That is correct.

Okay. And X-Men legends is that next year as well?

It is.

Okay. And Call of Duty, if it's going to go out around the same time of Medal of Honor is there anything you do differently to promote it?

I don't know anything about the release time of Medal of Honor. We're going to, you know, promote it like a unique brand and that of course is what it is. We're very excited about the title. It's coming along beautifully and I think it takes the whole World War II shooter genre to a new level. I think it's coming along very nicely.

Good, thanks Ron.

You bet.

Our next question comes from Edward Williams from Harris Essex. Please go ahead.

Couple of questions. What was cash from operations for the June quarter?

Cash flow from operations for the June quarter was a negative $24 million. Kind of two things noteworthy there. One, a big change in our receivable balance from the beginning to the end of the quarter. They were unusually low at the beginning of the quarter, about $16 million. We closed the quarter at about $33 million. That's still not a high balance but the change is really what's material as we calculate the cash flow. And then the second component is continued investment in software development, and IP as we build out our slate for the future. That was about a $9 million increase net of amortization.

Looking at the software development and IP, where do you expect those to be say at the end of the September quarter and at the end of the fiscal year?

We kind of have focused on the end of the year. We're expecting that from the current balance of about $70 million, $71 million, probably go up to around $100 million. And just to add some color commentary to that, of course a function of the fact that we're building out a slate for next year that is a lot bigger than the slate for this year, from somewhere around 40 products this year to over 60 products and counting for next year. Also, as we, over the last year and a half or two years, have made the transition from making both next gen and old gen games, we are only taking next gen games. Those games take much longer and cost a lot more to develop. Because of those two factors our balance has gone up. I want to remind you we have done this for a number of calls in the row that the balance is currently on the balance sheet, a significant portion of that or I should say less than 5% is associated with titles that have been released. So the vast majority of it is all for titles that are still to come out.

Okay. And then as you're looking out at this point, what's your thought as far as the timing of the next generation? And what are your plans as far as, you know, as you look out into calendar '04 or calendar '05 as far as allocating development resources towards those consoles?

We -- first let me say that you're strictly hearing me speculate now. I don't have any firsthand knowledge. First parties have not shared that with us nor do I believe they shared it with anyone else. We think that the earliest we'd see a new platform is late 2005, probably late 2006. When you factor in it, these parties have not gone global with new platforms. They've concentrated on one geography first. So I would say more likely 2006. We are in dialogue with the first parties about where they're at and what we can do to line up with that. They're certainly interested in our supports and in our brands and as things develop we'll obviously provide additional updates.

Okay. The last question I have for you is the -- what are your expectations for the hardware installed basis in Europe at the end of the current calendar year?

We -- let's see, we haven't really put those numbers out. But I can give you sort of a ballpark here. We think that across all consoles, flush to GBA, the European installed base reads a little over 30 million units.

With a little higher percentage in Europe for the Playstation 2 than in the U.S.

Okay. Thank you very much.

Your next question comes from John Taylor from Arcadia. Please go ahead.

Hi. I got two questions, I guess. One is, have your, in terms of the revenue guidance with the 750 million, have your assumptions changed as it relates to mix between distribution and publishing and between the individual platforms and PC very much?

No.

No, okay. All right. And then on your balance sheet you've got what looks like $10 million roughly moving from long-term IP licenses up to current. Can you give us a sense of what that is? Is it any one specific thing?

Yeah, we'll look it up. It's the timing. It's a weighted element when you have a 12-month period you got to reclassify it from non-current to current.

This looks like more IP licenses so this is something that is obviously going to ship in the next 12 months. I'm just wondering if that is any one thing? Mostly?

Multiple properties.

Okay. Just housekeeping stuff. Thank you.

We have a question from Ian Corydon.

With B Riley and company. I didn't catch the cash spend on software licenses during the quarter.

Cash in software, I said it was eight or $9 million net of the amortized amount.

Those are the add-backs.

Got it. On cash from operations, I can't recall if you've given any guidance for the year. Do you have any thoughts there?

No, we've discussed it in general, you know. We point to the fact that in the last three years we've been positive, operating cash flow positive. And that would be our goal for this year. But frankly, that's, you know, barring any unforeseen or any unanticipated developments. But that's our track record.

Okay. And were there any kind of additional Write offs of capitalized cost related to any Star Trek titles that you had planned for future release?

There was nothing out of the ordinary.

Okay, thank you.

And we have one more question from Gary Cooper from Bank of America. Please go ahead.

Hi, could you give us the currency impact on the top and bottom line for the quarter? Can you also tell us what is the name of the Motocross now, does it still have Pastrano's name on it? Ron could you spend a minute or two talking about what you thinks he think the customer base is between Spiderman 2 and Shrek 2, since they come out a month or two from each other?

There's about one to 2 million dollars in terms of currency exchange effect, 2.5 million in revenues and the impact of operating income was immaterial. The year-over-year effect was about $9 million on the revenue line and less than $1 million on the operating income line. Motocross game, we are still working on the final nomenclature. But subNomen that includes Travis's name. We think that's a good thing for that game.

It is called MTX.

It's called MTX, yeah. And then the differences in audiences between Spiderman and Shrek, I would say Spiderman is an unusual property in that it has a very broad demographic reach, a little broader than Shrek 2. I will say Shrek 2 really developed a following that is also pretty broad. So being a little bit of overlap, but I think Spiderman ends up appealing a little bit more to the action gamer and Shrek 2 will appeal a little bit to a slightly different audience in terms of game play, little bit more adventure and puzzle solving oriented.

Thank you.

That concludes the question-and-answer session. I'd like to turn the conference back over Kristen Southey.

Thank you for the call today. On behalf of everyone at Activision, we appreciate your time today. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference. You may disconnect at this time and have a good day.