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By ELIZABETH HAYES

Staff Reporter

Activision Inc. hopes Santa went high-tech this year.

It’s nail-biting time at the Santa Monica-based company because game developers typically make between 30 percent and 50 percent of the year’s revenue during the three months before Christmas. While it’s still too early to say how well Activision fared over the holidays, Chairman and Chief Executive Robert Kotick is optimistic. So are analysts.

Activision, which develops, publishes and distributes interactive entertainment software for personal computers and advanced console game systems, released more than 20 new products this season, including Heretic II, Sin and Asteroids.

While Kotick wouldn’t comment on the quarter’s performance, he said he was “comfortable with analysts’ estimates,” which, on a consensus basis, amount to earnings of 63 cents per share. For the year ending March 31, Activision estimates sales of $450 million, up from just under $260 million last year.

Despite the rosy forecast, Wall Street remains wary. The stock has been up and down for the past year, closing at $10.50 last week, down from around $16 a year ago.

While analysts agree that the company will have a big quarter, attention remains focused on the current numbers which aren’t good. Net income for fiscal 1998 was $5.8 million (31 cents a share), down from $9.2 million (52 cents) the year before. The company also had a weak showing in the first two quarters of the current fiscal year, reporting losses of $3.8 million and $2.2 million, respectively.

Part of the problem is the seasonal nature of the gaming business. Also, there have been delays in the release of new games.

“The basic reason for the stock’s performance has to do with earnings disappointments, in particular last year’s March quarter,” said Edward Williams, an analyst with Monness, Crespi, Hardt & Co. in New York, who has a “buy” recommendation on the stock.

Kotick isn’t worried. He blames the losses on expenses tied to acquisitions costs he believes will pay off down the road.

“There’s some skepticism as to whether we’ll achieve the (projected) earnings for the year,” Kotick said. “We have institutional investors waiting to see the results for this quarter and next. Ultimately, we’re not really concerned about the short-term movement in the price.”

Last June, Activision bought a competing game maker called HeadGames Publishing. During its past fiscal year, it expanded around the world, opening offices in London, Paris, Sydney, Tokyo, Germany and Latin America. The company also made several overseas acquisitions, including CentreSoft Ltd. in the United Kingdom and NBG Distribution in Germany.

Next year, Kotick said, 65 percent of the company’s revenues are expected to come from international sales.

James Lin, an analyst at Wedbush Morgan Securities in Los Angeles, said that despite having solid management, Activision is in a transition period.

“If the company can be criticized for one thing, the communication of the changes was not as clear as they could have been. The change caught a lot of people off guard, even though it was positive,” Lin said.

Also, Activision may have been overshadowed in the past few months by other, more successful game developers.

“When you look at entertainment software companies, you had quite a few good stories,” Lin said. “All in all, when you look at the big picture, you look at Activision and say, ‘Now it’s time for them to perform.’ ”

Marina Jacobsen, an analyst at Bear Stearns, said investors haven’t given the company enough credit. She has a rating of “attractive” on the stock somewhere between a “buy” and a “hold.”

“They had some pretty disappointing results, but a lot of interesting titles in the pipeline,” Jacobsen said. “I think the market’s really not focused on that.”

Activision was founded in 1979 and had a slew of hits in the ’80s. But by the time Kotick took over in 1991, the company had five years of straight losses totaling $56.4 million, after an unsuccessful foray into business software and a string of duds.

Kotick, who is 35 and a longtime gamer, mounted a debt restructuring plan, persuading most of Activision’s creditors to swap existing debt for equity stakes. Since then, there has been dramatic growth. With 4 percent to 5 percent of the computer-games market, sales have grown at a rate of 89 percent per year. The goal is to hit $1 billion in revenues for the 2000 fiscal year, Kotick said.

And he sees Activision increasing its operating margin from 6.5 percent to 10 percent. “Our strategy has not changed in the last seven years. We hope to be the largest independent interactive entertainment (game) company,” he said.