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Activision: Back from the Brink -- Again

In a way, the history of Activision has been like a rough-and-tumble video game. The company was an early pioneer in gaming, founded in 1979. Activision developed games for such platforms as Atari (yep, when I was a kid, I spent some time playing these games). However, by the early 1990s, the company was mired in bankruptcy. An investment group purchased the company and began a turnaround.

Unfortunately, in the past few years, Activision has been beset with hard times. In April, the company took a $66 million restructuring charge.

But the game console market is undergoing much change, as the technology is heading inexorably into the next generation. But as Microsoft, Sony, Nintendo and Sega prepare to launch their new products, consumers have been holding off. Also, the development costs for the new consoles are hefty.

But this is temporary. What's more, with so many new consoles, there will be high demand for cutting-edge content. And Activision definitely understands content.

No doubt, the company has been making key changes. For example, there has been a focus on reducing operating expenses. A big help has been signing deals with Disney, Paramount and other content developers. This helps to save on marketing costs.

In terms of the financials, revenues were $84.5 million in the past quarter, which was up slightly from $84.1 million in the same period last year. Earnings per share were -$0.21, although this was better than what Wall Street expected (the estimate was 29 cents). In fact, the company announced that it would likely see a profit in the next quarter. The company also completed a $15 million share buyback.

The momentum is likely to continue. After all, Sony will launch its PlayStation 2 in the fall. And Sony is making a huge push.

Even though Activision is making a comeback, there is still lots of risk. The gaming business is very similar to Hollywood - that is, driven by big hits. If Activision hits a dry spell, the stock will fall hard.

But, the company has solid management and technical talent, as well as great brand products. If the stock stays low for long, it seems likely that Activision will be buyout bait. And there are a variety of companies that can easily make the acquisition, such as Electronic Arts or even Microsoft .