Pachter: 'All Things Are Not Perfect In Activision's World'

Following yesterday's fiscal 2007 results from Activision, Wedbush Morgan's Michael Pachter notes that the publisher's record sales are "remarkable," but moderately warns that "all things are not perfect in Activision’s world" as Rock Band looms, and Call of Duty's modern day Iraq setting could feel backlash from U.S. war efforts. "We think it is remarkable that Activision was able to report record revenues for FY:07," said Pachter, "given its relatively light lineup" compared to earlier cycles that saw the release of Spider-Man 2 and Shrek 2. While Pachter thinks Activision is in a good position, given its "significantly stronger" lineup of fiscal 2008 titles, to deliver sales between $50 and $200 million higher than its own guidance, he notes ominously that "all things are not perfect in Activision’s world." "The company received uneven reviews on its Spider-Man game, and we believe that sales will be somewhat tempered as a result," he noted. Additionally, Pachter somewhat tongue-in-cheekly says, "we understand that Call of Duty 4 Modern Warfare is set in Iraq in the present, and we believe that if true, there is some potential for sales to suffer as a result of widespread dissatisfaction with the U.S. war effort in that country. Of course, prior to release, it may be possible to change the venue for the game (we prefer the fictional country of Kreplachistan), and we are confident that Activision will consider carefully how to best position the product in the marketplace this fall." Finally, on the company's upcoming battle between its own Guitar Hero 3 and Harmonix/MTV's Rock Band, Pachter says, "notwithstanding Activision management’s statements to the contrary, we think that a guitar-only version of Rock Band with music by the original artists and created by the original Guitar Hero team would compete quite favorably with Activision’s game. We think that Guitar Hero will be a significant driver of revenues in FY:08 (we have conservatively modeled $400 million this year), but think that new entrants will impact future growth of the brand." Pachter sees Activision's fiscal 2009 as relatively solid, though, with the publisher's first James Bond franchise title, and staples such as Tony Hawk, Fantastic Four, Cabela’s, Guitar Hero, Call of Duty, World Series of Poker, sequels to Spider-Man and Shrek. "Given our view calling for industry growth of 18% in 2008 (Activision’s FY:09) and the company’s strong catalog following its big FY:08," says Pachter, "we think that Activision is well positioned to grow revenues and EPS again in FY:09," maintaining a strong buy rating on the company's stock.