動視暴雪 (ATVI) 2003 Q4 法說會逐字稿

Please stand by for the realtime transcript. The Activision conference call will begin shortly. Please stand by. We are about to begin. Good day, everyone and welcome to the Activision Fiscal 2004 fourth quarter earnings conference call. Today's call is being recorded. At this time, for opening remarks and introductions I would like to turn today's conference over to the Vice President of Investor Relations Kristen Southey. Please go ahead, ma'am.

Good afternoon, and thank you all for joining us today for the fourth quarter and 2004 year-end conference call. My name is Kristen Southey, Vice President of Investor Relations. I will start today's call with a review of our Safe Harbor disclosure, followed by comments by Bobby Kotick, Chairman and CEO, and Ron Doornink, President of Activision. After which we'll take your questions. With regard to our Safe Harbor disclosure, I would like to remind everyone that the statements made during this call that are not historical facts are forward-looking statements. They are based on current expectations and assumptions subject to risks and uncertainties. The company cautions that a number of important factors could cause Activision's actual future results to differ materially from those expressed in any such forward-looking statements. Such factors include without limitation, product delays, retail acceptance of our products, industry competition, rapid changes in technology and industry standards, protection of proprietary rights, maintenance of relationships with key personnel, vendors and third-party developers, international, economic and political conditions, integration after recently acquired subsidiaries and identification of suitable future acquisition opportunities. These important factors and other factors that potentially could affect the company's financial results are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q. The company may change its intentions, belief or expectation at any time or without notice based on any such factors in the company's assumptions or otherwise. The company undertakes no obligation to release publicly any revision to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Now, I would like to introduce Bobby Kotick, our Chairman and CEO.

Thank you, Kristen and thank you all for joining us today.

In late March we raised our quarterly outlook based on better than expect performance across all of our businesses. Our business momentum remains strong through the end of March and we are consequently reporting even better results.

For the fiscal year ended March 31, 2004, we have the highest net revenues and earnings in the company's history. And the year marked our 12th consecutive year of revenue growth. Our results for the fiscal year represent the five-year compound annual revenue growth rate of 17%, a rate of growth more than twice the rate of growth of the U.S. software market. And our compound annual earnings growth rate over the past five years of 39%, is significantly above the 9% for the S&P 500 during the same period. The results we achieved in fiscal '04, further enhance our balance sheet, and we continue to exhibit strength on all important balance sheet metrics. We ended the fiscal year with approximately $590 million in cash and short-term investments, low DSOs, a solid inventory position and $833 million in shareholders equity.

Over the past year, we were successful in developing and acquiring new high-profiled intellectual property, and strengthening our internal development resources. These investments and the resulting new franchises should translate into even better operating results predictability in the future.

Perhaps our most significant achievement in fiscal '04, was enhancing our processes that resulted in the successful identification, development and introduction of two new wholly owned intellectual properties; True Crime and Call of Duty. Both of these products have the key attributes of successful video game franchises. They are easily sequeled, expandable and have broad demographic and geographic appeal. The wholly owned studios and the marketing teams that created these power franchises are hard at work on sequels and we expect these franchises to provide predictable income streams for many years to come.

In fiscal '04 our management team took the steps necessary to improve our institutionalized product development processes and strengthen our product portfolio. Our record results for the fiscal year are a testament to the dedication and the commitment we have as a company to maintaining our leadership position in this market for the very long term.

As we look to fiscal '05, we believe our business will continue to expand globally, driven by our strongest lineup ever and solid worldwide industry fundamentals. Our fiscal '05 slate is based on many of the industry's most popular properties, and some of the year's most anticipated properties, including Spider-Man 2, Shrek 2, Doom 3, Shark Tale, Call of Duty and Tony Hawk's Underground. Our powerful lineup is focused on big propositions backed by strong brands and high-quality development, which will be supported by the largest marketing investment in our company's history.

Today, with more visibility and confidence in our release schedule, we are increasing our fiscal '05 outlook. Given the strength of our slate, we expect revenues now to exceed $1 billion which we believe will result in another year of margin expansion and record earnings. The achievement of our fiscal '05 operating plan would result in our fifth consecutive year of operating margin expansion, which is a companywide focus.

We begin fiscal '05 with the launch this week of Shrek 2. We've developed a unique partnership with DreamWorks and you will see the benefits of that collaboration with Shrek 2, as well as the holiday release of Shark Tale and next year's Madagascar.

Also in this quarter, we'll launch Spider-Man 2. I can tell you having seen the movie recently, we're very confident that our success with Spider-Man, as a franchise, will continue.

Looking to fiscal '06, we have much greater product visibility than we've ever had before, with sequels to many of our all-time best selling franchises including True Crime, Call of Duty, Tony Hawk, Spider-Man, Quake and Cabela's. We continue to focus on our operating margin expansion initiatives. These begin with a religious focus on franchise exploitation and franchise building. In addition, we are expanding our international publishing reach to ensure a greater realization against our product development advancements. We are also exploring new avenues of revenues, including our advertising and sponsorship initiatives.

We recently announced a partnership with Nielsen Entertainment to develop a new system that will allow video game companies to supply advertisers with audience measurement metrics to help them assess the impact of ingame advertising and sponsorship exposure. This new initiative will provide tools for advertisers to effectively measure everything from ad exposure to demographics, to audience recalls, as it relates to video game usage.

Last year Nielsen estimated that 8 to 34-year-old males in the United States watched over 30 billion hours of television. Remarkably, that same demographic played approximately 30 billion hours of video games. dvertisers spent more than $8 billion on television, trying to reach these consumers and negligible amounts of money advertising and sponsoring video games. We think this could be a potentially new source of revenues for our industry, but we must first ensure there's a high quality measurement system that traditional advertisers are comfortable with, and our project with Nielsen will create such a system.

As we begin fiscal '05, with a strong first half product slate, more proven franchises, and an incredibly stable balance sheet, we believe the achievement of scale should result in an even better competitive position than we have today. Ron will now share with you the highlights of our performance for the year and provide an updated outlook for the future.

Thanks, Bobby. For the quarter ending March 31, net revenues increased 30% year-over-year, to $163 million. We had earnings per share of four cents for the quarter compared to a loss per share of 6 cents last year. Our results for the quarter were driven by over-performance on both the publishing and distribution sides of business. Especially note worthy was the strong performance of Tony Hawk's Underground, True Crime and Call of Duty.

After very successful launches in the December quarter we continue to drive these titles into the March quarter which resulted in all three being among the quarter's most heavily supported brands in terms of trade advertising this. Aggressive launch and sustained strategy is representative of how we plan to go to market with our fiscal '05 titles. Our Q4 releases Pitfall, MTX and Tenchu did not get this level of support, the kind we had moved away from over the past year. Overall, the end market results for True Crime, and Call of Duty clearly confirm that as we enter a new year, our single-minded focus on big propositions is dead on.

Turning to the financial results in the March quarter, our manufacturing and distribution expense was 56% of net revenues; down slightly versus last year due to improved revenue mix. Operating expenses for the quarter, excluding manufacturing and distribution expense, were 41% of net revenues, significantly lower than last year's 54%.

Product creation costs which includes software and IP governments and product development expense were significantly lower than last year, when we wrote off a number of projects in development. Sales and marketing expense in the quarter was higher than the prior year, as we continued to aggressively promote our successful holiday lineup into the new year, while also launching some new titles.

For the quarter we had a favorable income tax rate adjustment of about $2 million, or one cents per share related to foreign income and the effect of our tax planning strategies. For the fiscal year ending March 31, net revenues increased to $948 million, up 10% compared to $864 million last year. For the fiscal year earnings per share increased 26% to 54 cents compared to 43 cents last year.

Our record results for the year were driven by the worldwide sales of Tony Hawk's Underground, True Crime: Streets of L.A., Call of Duty, Cabela's, X2, Wolverines Revenge and Return to Castle Wolfenstein. And we had strong catalog sales from a number of our franchises including Spider-Man.

In fiscal '04, we were successful in growing our business and improving our profitability; however, fiscal '04 can also be characterized as a year of improving our processes and realigning our project portfolio and resources with the key factors necessary for success in our business.

A year ago, I outlined the strategic changes that were necessary to strengthen our operational positions this coming fiscal year and beyond. With respect to our studio function, we said we would add resources, reduce the size of our slate, and extend the development schedules for the majority of our projects in order to improve product quality. We did exactly that. And the impact of these changes on product quality were apparent as we saw an increase in our average game ratings and the number of titles receiving an 80 rating or better.

With respect to specific titles we released Call of Duty for the PC, which became one of the highest rated PC game in recent memory. Also note worthy is that Tony Hawk's Underground, in the fifth year of the franchise, met with broad critical acclaim, and extended Tony Hawk's record as one of the highest rated franchises of all time.

Another key objective was to put more marketing muscle behind our big propositions. It was our goal to drive incremental sales of our big propositions by utilizing the large-scale focused retail and consumer approach, which we did. Specifically, we spent more on TV advertising, and in-store merchandising than ever before, and it paid off.

Another strategic initiative for fiscal '04 was to be more aggressive in trying to establish new brands based on wholly-owned intellectual property. In fiscal '04, we were successful in establishing two new brands and taking the company's flagship brand in a wholly new direction. Success we had in the creation of new brands should pay dividends for years to come and help us successfully identify new potential properties in the future.

Finally, we said we would continue improving our balance sheet, and financial position and our fiscal year-end results announced today showed the benefit of that focus. In fiscal '04, we were successful as an organization in significantly improving our global competitive position, but I can assure you, we are not satisfied and are poised to take the company to the next level in fiscal '05.

Now, turning back to the financial results in fiscal '04, our manufacturing and distribution expense was 50% of net revenues, slightly below last year due to revenue mix. Operating expenses, excluding manufacturing and distribution expense, were 38% of net revenues and in line with last year. Product creation costs for the year which includes software and IP costs and product development were 20%, versus 21% last year. Sales and markting expense for the year was 13.5%, versus 12% last year, as we stepped up the promotional activity on our big propositions. Operating margin, a long-time management focus, hit 11.6%, representing our fourth consecutive year of improvement. Margin improvement was driven by the successful launch of two new highly profitable franchises, True Crime and Call of Duty and more importantly are the continued success of our growing base of established franchises, Tony Hawk, Cabela's, Wolfenstein and Spider-Man.

Looking at the balance sheet on March 31, we had $588 million in cash and short-term investments. An increase of $181 million or a 44% versus last year. As of March 31st, we had $676 million of working capital, an increase of $253 million, versus last year. The accounts receivable balance on March 31, was $63 million, up versus last year due to more releases in the quarter. The accounts receivable reserve, $47 million was down $10 million versus last year and field inventories fell, based upon strong sell through. The a/r reserve as a percent of gross receivables equaled 43%. DSO's were 35 days. Inventories on March 1 were $26 million, down $9 million, versus December 31st. Of the $26 million, only $8 million relates to our publishing business which is flat versus last year. The remaining $18 million of inventory relates to our distribution business which means that it is at virtually no risk to us.

Going into a new fiscal year we feel very good about our inventory position, both in the warehouse and at retail.

Capitalized software development costs on March 31st, were $87 million, versus $62 million last year, as we've added more big propositions in development: Importantly, less than 5% of our current capitalized software development balance relates to products that have already been released. On March 31, capitalized intellectual property licenses were $49 million. That's down $3 million versus last year.

Now I would like to share our thoughts on the overall market, beginning with our hardware estimates. At the end of March, the installed base in North America for current generation systems, including hand held, was 60 million units. For calendar year end 2004, we still believe the install base of hardware, including hand held will grow to 73 million units driven in part by price cuts for the PlayStation 2 and the Xbox.

Looking at each system individually, at the end of March, the PlayStation 2 had an install base of 23.3 million units. We believe there will be a price cut on the PlayStation 2 hardware in mid to late 2004 to $149, and this device will end the calendar year with an install base of about 28 million units.

Following the recent price cut to $149, Microsoft's Xbox, ended the month of March with an install base of 8.4 million units and we're projecting the install base of this console to grow to 10.5 million units by calendar year-end 2004.

We believe the GameCube will grow from 7.3 million units, at the end of March, to $9.5 million units by year-end 2004. At the end of March, the GameCube Advance had a U.S. install base of 20.9 million units and we expect the install base of the hand held market which includes the Game Boy Advance and Nintendo dual-screen to hit 25 million units by end of calendar year of 2004.

The excitement in the hand held market is starting to build as they get ready for the launch of two new hand held devices. We are currently in development for the Nintendo dual-screen and the Sony PSP platform which arel expected to launch in late 2004 and early 2005 respectively.

As of now we have pretty modest expectations in our calendar 2004 estimates for the Nintendo DS. In conclusion the install base of current generation hardware is significant and growing. Today the install base is more than 100% larger than at the same point in the last console cycle despite the much higher average price point for the systems. To date, Microsoft has already announced the price reduction on its hardware and we are still expecting a hardware price cut by Sony sometime before October 1. Should Sony not announce a price reduction this year, it could impact our forecast and install base numbers. Moving to software, we define our market to include all major platforms in North America and Europe and we exclude Japan.

For calendar year 2004 we still expect the combined North American and the European software marketed for current gen softwares and hand held to be up about 8%.

Looking at the market segments we're projecting growth of 10% for the current generation console market which is defined as the PlayStation 2, the Xbox, plus the GameCube. The combined software growth rate for the current gen console market and hand held markets, which we define as GBA and Nintendo DS is expected to be about 8 to 9%. Add a PC market that will grow at an estimated 5%, and the expected combined growth rate for current gen console, hand held and PC video game software is about 8%.

With respect to software pricing, premium pricing for AAA launch titles held throughout calendar 2003. In terms of our pricing assumptions for fiscal '05, we are planning that our slate of console products will have launch pricing of $49.99 through the holiday season. Our plan provides for reserves against a certain amount of continued price erosion, but if launch pricing for AAA titles dropped abruptly before before the holidays, we will likely be negatively affects.

Turning now to our annual operating plan and strategic initiatives. In fiscal '05 we have our strongest slate ever in development with outstanding potential. Our slate this fiscal year is backed by strong brands with high-profile motion picture releases and high-quality development.

Our fiscal '05 operating plan centers around one key theme, awesome execution! Our performance this year will be driven by focusing our time, energy and capital, on the global execution of our big propositions including Shrek 2, Spider-Man 2, Doom 3, Call of Duty, Shark Tale and Tony Hawk's Underground 2. Our goal is to end the year with more than 10 titles having sold at least 1 million units with at least four of these reaching multi million unit selling status. In comparison in fiscal 2004, we had seven titles that sold over 1 million units, two of which were multi million unit sellers. Our goal for fiscal '05 is to take the company to an entire new level as far as the end market performance of our titles are concerned.

As we deplay our fiscal 2005 initiatives, our focus will be on the thing matter; product quality and timeliness, package, advertising, PR, in-store product visibility, and post-launch momentum marketing. To achieve this, we plan to support our big propositions with, by far, the largest sales and marketing investment in our company's history.

In fiscal '05, we will also continue to develop and implement our next gen hardware strategy. We already have initiated a number of projects by having one or more titles at launch for Nintendo DS and Sony PSP. The same target is in place for the next gen consoles. We have a number of projects upway for them. While there are still plenty of unknowns, our intent is very clear. We aim to have a significant presence at the launch of each new platform, while being very careful not to move away too quickly from the existing platforms, given their huge install base. We will be discussing more details of our next gen initiatives on future calls.

Finally, in fiscal '05, we will continue to focus on maintaining our balance sheet strength and overall financial position as we have over the past few years. Today, we have the development talent, the brands, the resources and the drive to make fiscal '05, another record year for Activision.

Before turning to our current financial outlook, I would like to reiterate that our outlook represents our views as of today, and there are a number of internal and exinterpretal factors that can cause our actual results to differ materially. I refer you to our financial filings with the SEC for a full review of our risk factors.

Having said that, today we are increasing our outlook for fiscal '05, driven by better visibility and confidence in our upcoming lineup. For the fiscal year we expect revenues of $1 billion and 50 million, up 50 million, of our prior guidance and up 11% verses the prior year. We are increasing our numbers today despite moving one title, The Movies, into fiscal '06.

In fiscal '05, we expect to increase operating income by 25%, translating that into a record 13% operating margin. Fiscal year we expect EPS of 64 cents up 4 cent versus our prior guidance and up 19% versus the prior year. For fiscal '05, we expect manufacturing and distribution costs of 44% of net revenues with operating expenses, including royalties to 43%. Operating expenses will be higher than in fiscal '04, as we have more titles that have licensed IP in addition to increased sales and marketing investments behind our big propositions. For the full year, we project interest income of .8%, the tax rate of 33%, which should remain consistent throughout the year and a fully diluted share count of 152.8 million.

For first quarter of fiscal '05, we are raising our revenue outlook by $15 million to $185 million, representing a 17% increase year-over-year, despite the strong performance of last year's X-2 and Return to Castle Wolfenstein. We're also raising our earnings per share outlook 4 cents, up a penny. We expect manufacturing and distribution costs of 41% of net revenues with operating expenses, including royalties of 55%. Operating expenses will be meaningfully higher than the historical average, as we have more products in development and substantial sales and marketing spending behind two of our biggest propositions. We project interest income of 1.1% and a fully diluted share count of 155 million.

The first quarter of fiscal '05 will mark one of the most exciting times in our company's history and it's off to a great start. We started fiscal year shipping more than 1 million units of Shrek 2. The title is hitting stores this week in advance of the May 19 movie release. The game was developed by our own studio, the developer behind the top selling True Crime: Streets of L.A. and it's of high quality offering a fun and entertain gaming experience.

In addition to our large-scale marketing program, DreamWorks has a massive marketing campaign in place for the upcoming movie release. Everyone is excited about this property, including retail, many of which for the first time, have set up big in-store displays.

Our second release this quarter will be True Crimes: Streets of L.A. for the PC. This game is not a straight port of the pest selling console game. It's a significantly enriched and embellished version of the original. There there are a lot of cool features including a multi player online component which is rare for PC driving games. The launch of True Crimes for the console proved to be one of the most successful launches in our history and the release of this game for the PC will help broaden aware necessary and maintain awareness for the franchise.

Then on June 29th, the second to the last day of the quarter, we will release Spider-Man 2 in the U.S. only on multiple platforms. The hype around this movie is just starting to ramp, and it's already obvious that it has major block buster potential. The movie will open in the U.S. in front of the huge July 4 holiday weekend. We will launch Spider-Man 2 with the biggest marketing campaign in the company's history. The game is the first free roaming superhero game and we believe Spider-Man 2 will be one of our best selling titles ever.

We have high expectations for this product and on a fiscal year basis, are aiming for it to outsell the first Spider-Man movie game which sold more than 2 million units. On a quarterly basis, however, we expect Spider-Man 2 revenue to trail Spider-Man 1 significantly and that's due to the difference in timing of the movie release. Remember, that the first Spider-Man movie was released in May and the game back then shipped in April. In addition to Spider-Man 2 game has significantly more movie reveal embedded in it. That also means we're not able to launch the title much in advance of the movie.

Moving to the second quarter now, we expect revenues of $230 million, an EPS of 6 cents. We expect manufacturing and distribution costs of 42% of net revenues with operating expenses, including royaltys, of 53%. We project interest income of .8% and a fully diluted share count of 156.8 million.

For planning purposes, we have included the much anticipated release of Doom 3 for the PC in the second quarter, but as you know, this is for financial planning purposes only as software makes the decision on the game's release.

In Q2, we will also release Shark Tale on multiple platforms, based on the next movie from DreamWorks due out in October. The movie tells the story of what happens when a little fish, Will Smith, tells a great white lie. The movie is very funny, but a huge star-studded cast, including Jack Black, Robert DeNiro, Renee Zellweger and Angelena Jolie. We've been working very close with DreamWorks on this title and it looks and feels just like the movie. The game is visually stunning and a lot of fun with more than 25 adventure-packed missions.

Also due out in Q2 is Roam, Total War, a realtime strategy game for the PC which is the latest edition in Creative Assemblies award winning Total War series.

For the balance of the year, we will release Lemony Snicket's A Series of Unfortunate Events, based on the Nickelodeon movie slated for a holiday release which stars Jim Carrey aside Meryl Streep and Jude Law. This title has a Harry Potter-type literary flair and we're very excited about the game and its worldwide appeal. Today the book series sold over 15 million copies in 34 countries.

In addition to the big movie properties we'll release, we have four strong console titles including the sequel to the 2003 hit, Tony Hawk Underground. Tony Hawk is one of the highest rated, most popular brands of all time, now with the fifth consecutive season track record, over $800 million of cumulative sales Tony Hawk has proven to be one of the most valuable franchises in the business. There's no question that the new direction the brand has taken is working. Tony Hawk's Underground outsold Tony Hawk 4 by 29% on comparable platforms. Our concept for the original Tony Hawk's Underground tested very high and the results are coming in equally strong for the sequell. We're very excited about Tony Hawk's Underground 2, as we expect the franchise to approach the billion dollar mark in fiscal '05.

X -men Legends is another console slated -- title slated for Q3. The game is being developed by our own Raven studios, the team behind the top-selling Lucas Arts Entertainment Star Wars Jedi Knights series. It's a 3D action, role playing game featuring many of the best known characters in the Marvel universe.

Also slated for release in the back half with the fiscal is the console game Call of Duty, Finest Hour. And it's a new installment of the brand. Finest Hour is a completely new game designed to maximize the Call of Duty experience on the console. This game has true breakout potential and we see it as one of our largest, our best opportunities in fiscal '05.

Last but not least, on the console, will be Doom 3 for the Xbox but as you know this is for Activision planning purposes only and its software decides when the title will ship not Activision. You will be able to see a lot more on this title and what it can done at E3 next week.

Turning to the Nintendo DS and Sony PSP. We have games in development on each platform based on our top franchise. We should have one title for the Nintendo DS and two for the Sony PSP but the impact of our if many expectations is pretty minor. For the PC only, we expect to release two other very high quality properties in the back half of '05. We will release an expansion pack for Call of Duty called United Offensive. The fans of the Call of Duty for the PC wanted more, and we are delivering with ten new levels. We're also planning to release Vampire Bloodlines, a game that blends the genres of RPG and first-person action and is being built used Val Source technology.

Finally as I quickly mentioned, before we have moved the release of Peter Molyneux's The Movies, a simulated PC where you run your own movie studios into fiscal '06 for modeling purposes. This game is scheduled for release in late fiscal '05, while we hope to release it at that time we have taken it out of our outlook for conservatism. We're very excited about this property and as we have gotten deeper into development, the title garners more and more enthusiasm.

So that was our review, of the major properties we have in development for next fiscal year.

Fiscal '05, is shaping up to be an incredible year. While there are certainly risks we are bullish on our prospects as we seek to cross the billion dollar mark and improve our operating margin. In terms of our outlook for the balance of the fiscal year for modeling purposes we expect revenues in the third quarter of $515 million and earnings per share of 52 cents, and for the fourth quarter we expect revenues of $120 million, and earnings per share of 1 cent.

The momentum what we create in fiscal '05, should continue into '06. Our slate in fiscal '06, already consists of some of the most proven, predictable brands we have ever had, including sequels to True Crime, Call of Duty, Tony Hawk, Quake and Spider-Man. In addition, we have a number of high-profile motion picture releases in development, including Marvel's Ironman and Fantastic 4, and Madagascar from DreamWorks. Add to our strong slate of large worldwide install base and the ramp up of the new hand helds, and you have the makings for a very exciting year.

We look forward to seeing you at this year's E3, which should prove to be one of the most exciting, ever. That's it for our prepared remarks. We will now open the call to questions.

If you would like to ask a question, please press the star key followed by the digit one on your touch-tone phone. If you are using a speaker phone, please be sure that your mute function is turned off to allow your signal to reach our equipment. Once again, if you have a question, please press star one.

We'll take our first question from Mike Wallace with UBS.

A couple of questions. First, it looks like the distribution revenue was pretty strong in the fourth quarter. Can you talk about what drove that, and is that something you expect to see going forward? I think in the past you have seen it was sequentially flat from March to June. Just touch on that and for the year what sort of mix do you expect to see between publishing and distribution? And last question is: Do you think the DS will ship this calendar year.

You said the DS?

Yeah.

Okay, thanks, Mike. On the distribution revenue side, you're right it had a good quarter. Frankly part of that was driven by favorable exchange rates, and part was driven by some new customers that came in to the fold late in the year.

The distribution overall, as we look ahead, is facing sort of a decline on the hardware side which is about 30% of our distribution revenues. That's, as we expect to sell fewer harrware units and we expect to sell those at a lower price point. So year-over-year, we expect our distribution business to actually go down a little bit, changing the mix percentage between publishing and distribution from 70/30 this year to pretty close to 80/20 next year.

As far as the DS is concerned, yes, as far as we know right now, it should go out before the holidays.

Okay. Thanks.

We'll take our next question from Heath Terry with Credit Suisse First Boston.

Thanks. I was wondering if you could give us an idea -- I realize it's early -- on what retail reaction has been like on Shrek 2 so far. And then I guess if, you know, just looking at the numbers for this past quarter, hand held was only about 4% of revenues. I realize you deposit have any big releases on -- or any meaningful releases on hand held this past quarter but as you look out with DS coming out later on this year and PlayStation Portable early next year, what do you think the growth is in the hand held category over the next 12 to 24 months.

Okay. Shrek, the reaction overall has been very good. Now, you know, mind you, we have just shipped out the title. So people are really gauging it more by the game and the movie, and we have seen the movie here. It's simply fantastic! It's a total blast. In fact, DreamWorks yesterday announced that in response to overwhelming early demand, the opening date has been moved up to May 19. That's two weeks from now. The game is great. We know that from extensive play testing involving hundreds of kids. Actually including my 10-year-old son and 7-year-old daughter who love this game. You know it's a younger targeted game, and that means that, you know, in some of the channel where the hard core gamers shop, we have to wait a little bit until the actual movie releases and the frenzy starts but all the indications are positive as far as we're concerned.

As far as the hand held business, you're right, that's a great opportunity for the company. We haven't emphasized it much earlier in the cycle but as we move to later in the cycle, in our IP portfolio adjusts from more hard core to more mass oriented, that's a clear opportunity for us. I expect to, you -- you know the goal is for us to at least double the business, let's put it that way, behind properties like Shrek, Spider-Man, Lemony Snicket and Shark Tale we see a clear opportunity to do that and we'll go after that.

Thank you.

We'll go next to Jeetil Patel with Deutsche Bank.

I had a couple of questions. First of all, on the impact of the movies getting pushed out of fiscal '05, can you talk about the revenue impact there, and where it's being made up in terms of other products? Second, can you talk about in-game advertising opportunity? Have you talked to any CMOs out there, what their level of interest is? Any initial thinking on CPMs and kind of when do you think the in-game advertising opportunities start to kind of get going and at least start to have an impact on the model?

Okay. Hey, Jeetil, the movie was already prereleased in fiscal year so it didn't have a huge impact and it was sort of made up kind of across the board. We have more visibility, of course, than we had in January open a number of titles and so it was made up in one particular title but across a number of them. As far as the in-game advertising, Bobby, I will ask you to address this question.

Jeetil, you know we have a long way to go before you see any significant revenues being generated by it. Right now we're in that phase where Nielsen is developing this measurement tool, and we did, in fact, have 25 CMOs in from leading advertisers about a month and a half ago. A lot of people are enthusiastic about the idea but we don't really feel it will be a good opportunity and we have a measurement tool which will be sometime from now.

Great. And one follow-up, just you talked about Tony Hawk having what this year will eclipse $1 billion mark in terms of revenues and already done $800 million. Is it safe to assume that you are kind of thinking Tony Hawk 2 does about $200 million this year or about 6 million copies?

We didn't say that. We said as we close in on the billion dollar mark.

Okay. Thanks.

You bet.

We'll go next to Anthony Gikas with Piper Jaffray.

Good afternoon, guys. A couple of questions... You talked about new initiatives to expand the international publishing reach, maybe you could elaborate on that a little bit. Also, I noticed that Lemony Snicket wasn't one of your top five or six titles for the years. Maybe could you characterize for us. It looks like a game with a lot of promise and maybe it's the sixth or seventh game. And then a housekeeping question; the share count you gave us for the quarter in front of us was 155, I believe, and for the year you gave us a 152.8. Is there potential use of some cash here for a share buyback or what's the change there?

We'll start with the first question, the international expansion. We are expanding our operations internationally, specifically in Europe. We are putting people in the ground in a number of territories where previously we used distributors to sell our products, and we'll continue to do that as the size of the company expanded and the scale justifies. That sort of expanse of the infrastructure. Burt it is certainly an opportunity for the company and we're focused on continuing to build out our presence in the European market.

You're right about Lemony Snicket. We do mention it at times as one of the top titles as well. We certainly like it. But having said that, it's still a new property, and, you know, we still have a lot to learn about how the movie project is evolving. So far it looks very good, but, you know, I wouldn't put it right just yet in the top five for the company. That's why it sometimes gets left off.

And then use of cash and the share count for the year?

We're tind of looking it up.

Maybe we had -- we're kind of looking it up. Maybe we had a typo. We'll get back to that.

Okay. With the cash building as it is any potential use of that cash.

We're hoping for an interest rate increase sometime this year.

Okay. Thanks.

We'll take our next question from Shawn Milne with Friedman, Billings, Ramsey.

It's Shawn Milne, thanks.

Hi.

You talked about your expectations for ten titles to be greater -- or roughly 1 million units and four to be multi million unit properties. If you -- I wanted to see if you could -- using that as a basic starting point, and adding your distribution revenue, you know if I just use 1 million units on the ten properties and two on the four, it gets me 720 million in revenue plus your distribution number gets you to your number without any catalog numbers. Can you help me out on that one.

Yeah, we said the four is included in the 10.

Okay.

So you double counted there and that's probably why.

Okay within that you talked about Spider-Man is going to be more than three?

That's our goal.

Okay. Into and do you have -- just for housekeeping purposes do you have the catalog number in the fourth quarter just reported as well, as well as first quarter?

The fourth quarter that we just closed 36% of consolidated. For the upcoming first quarter, it's only going to be 10%.

That's because we have, you know, a couple of big launches in the quarter.

Right. And just lastly, can you repeat what you said for earnings in the September quarter?

I will do that. Earnings, the September quarter 6 cents.

Just when you look at the -- I mean I know you are stepping up on the sales and marketing line with the Spider-Man launch, it just seems with that type of revenue number we would get higher earnings.

Well, you are right. We are stepping up on the marketing side quite a bit. We also have, you know, the cost of the IP. You know, you're comparing against a year when we had three big hits with low or no IP costs associated with it. We talked about True Crime, Call of Duty and Tony Hawk Underground. So that is a meaningful difference year-over-year, both the marketing and the IP costs.

Okay. Thanks a lot, Ron.

You're welcome.

We'll go next to John Taylor with Arcadia.

Can you talk about what your total product development spending budget looks like in fiscal '05 versus '04 and how that will break down between product development and what you put on the balance sheet. That's first question. And then, two housekeeping things on Q4; what was the impact on revenue and earnings and what was catalog as a percentage of sales.

what was the last question into catalog as a percent of sales. For?

In Q4.

I just gave that out. That was 36%.

Oh, I'm sorry.

Okay. That was consolidated.

Mm-hmm.

The product costs we like to discuss it in the context of we call product creation costs which is the cost of IP and software and development and product development expense, all combined because that's really the total picture of what it costs us to take products to market and we expect those costs to go up slightly next year. About a point. In terms of the balance sheet, the combination of capitalized software and IP, we expect that to go up about -- about 8%.

Okay. So -- Okay. So did that mean that the actual product development spend through the P&L will be a little bit lower percentage-wise?

Yeah.

It does? Okay. So let me switch over to sales and marketing, can you give us a sense of what the percentage of revenue will be there year-on-year.

We are not going to get too specific there, JT for competitive reasons but we we have indicated it's up pretty significantly.

Okay. Thank you.

We'll go next to Arvind Bhatia with Southwest Securities.

Good afternoon, guys.

Hi, Arvind.

A couple of questions. The first one is I know you guys raised your guidance from fiscal '05 from 60 cents to 64, but if you were to look for where the upside might come from, where the maximum leverage might be, I know you touched on some of the line items but maybe talk about from the product standpoint, where do you see the maximum upside, versus what you modeled in terms of number of units, et cetera? Which may be a couple of products do you see having the maximum upside potential?

It's a really tough question to answer, Arvind. I could give you a reason for every title in our slate as to why they could significantly overperform if everything goes right. Last year we had pretty high expectations of True Crime and crime of duty and even so for Tony Hawk Underground and all three cases we saw a significant overperformance. There were some titles where we saw some underperformance. So we think the outlook represents the best total view of the portfolio and we'll play it out starting with Shrek, which as we indicated is off to a good start.

Okay. What is your best selling game in your history? What has been the best selling game I think you mentioned that as a benchmark for Spider-Man. How much -- what's the -- how many -- what's the maximum number of units you sold.

We said on Spider Man, 3 plus million units and Tony Hawk is in that league. Those are the two biggest for the company.

Okay. A couple of follow-up then. What are the number of SKUs that you are planning for fiscal '05, I think last call you said 51. Is that the same now.

Yeah, we've decided to answer that question a little differently, because we have a value division that now has entered the console business too, with console games for Cabela's and other smaller propositions and it's getting a little confusing. So I will answer your question by telling you the SKUs that we're putting out on our main line business in fiscal '05, and that's 40 SKUs across 12 titles. In comparison, apples to apples our mainline business put 34 SKUs across 15 titles. So more SKUs but fewer titles in fiscal '05. That's good, so it means we're leveraging the big proposition across multiple platforms more so than we did last year.

And final question is I think on the last conference call, you said you might look up a number for us representing the internal -- or not -- internally developed products, you know, for fiscal '05, you think that you have an idea right now what -- how much revenue might be generated internally?

Yeah, we think that it's going to be about two-thirds. With the historical performance.

Great. Thanks, guys.

Thank you.

We'll go next to Karen Risilo with Merrill Lynch.

A couple of questions. Can you go over the tax issue that you explained? Can you explain that again and then go over why -- is it just more international why that rate is is coming down again this quarter or next quarter rather?

The tax rate for the year went to 33%. In the fourth quarter we kind of caught up with the benefit from prior quarters of a lower tax rate stemming from more income in our overseas territories where there is a lower tax rate. So by having more foreign source income, your average tax rate actually comes down.

Okay. And then, you know, you talked a lot about increasing the sales and marketing, especially for these key titles. Can you maybe talk about for the -- all that in-store -- the in-store advertising that some of the big box retailers do, do you split that with the -- do you split those costs with the movie developers for, like, Shrek and Spider-Man.

I wish I could say yes to that but the game merchandising is our responsibility but we do do a lot together with them. Already a lot of programs that we jointly develop and there are times when we kind of do a barter deal where a game is part of a movie program in exchange for the movie being part of a game program. So it's -- it's that kind of deal.

Okay. Thank you very much.

Operator, we'll take one more question.

We'll take our final question from Edward Williams with Harris Nesbitt Gerrard.

Hi, good afternoon. Just a couple of quick questions for you. First of all, could you let us know what cash flow from operations was for the quarter and the year?

Okay. Cash flow from operations for the quarter was $21 million, for the year was $67.5 million. Okay. And then what is the head count at this point in your -- within your development group? About 700.

About 700. And what are you expecting? I think you indicated about two-thirds of your products are coming from internal studios at this point?

Two-thirds of the revenue.

Two-thirds of the revenue. Do you plan to grow that going forward, especially as we kind of go through the transition or is that a number that you are thinking will remain relatively static.

Philosophically the focus is taking the proven, predictable franchises and aligning them with the internal studios as we continue to see the proven, predictable franchises to represent the larger revenue you are likely to see the percentage of revenues derived by our internal studios increase slightly. Historically it's been two-thirds at least the last couple of years.

And then with regards to other transition strategies should we assume -- you had mentioned, Bobby, that you will expand your European presence and get more people on the ground in European countries selling your products. Are there other strategies that you can discuss at this point that you envision using over the next couple of years to kind of help get flew a platform transition, or is that kind of the extent of it at this point?

No, we were very successful last launch of hardware in growing earnings and it was a combination of things that we -- we utilized. One is the focus on big brands and greater realization. The second is having more properties that are mass market appropriate, as price points come down. The last transition, while we did manage to grow and expand the operating margins, we did walk away from the install base a little bit earlier than we're likely to this time around. As Ron pointed out earlier, we deemphasized hand held because of so many other opportunities and we'll reemphasize hand helds particularly in light of the new device introductions. We'll be first to market on bigger franchises at the time the new devices launch.

All of those things in combination with an increased emphasis on opportunities we see outside of North America and then a few other things that we'll get into later in the year. But we had good success with the strategy last time and we feel fairly comfortable in being able to take some of those types of strategies and deploy them again successfully.

Okay, great. Thanks a lot, guys.

Great. Thank you all for joining us today, and on behalf of everyone at Activision, we appreciate your time.

This concludes today's conference. Thank you for your participation. You may disconnect at this time.