Activision Blizzard (ATVI 0.35%) reports its first-quarter earnings on Thursday, May 4, and investors should watch for news on the total engagement level across the publisher's portfolio of games.
The value of diversification
Activision Blizzard reported a strong fourth quarter 2016, with revenue increasing 49% year over year to $2 billion. The game publisher also reported full-year revenue over $1.5 billion from games across each platform -- console, PC, and mobile -- for the first time in company history.
This diversification helped the company weather a soft launch for its latest Call of Duty franchise, Infinite Warfare. While Call of Duty: Infinite Warfare still managed to be among the top-selling console games of the year, the results disappointed management. The developers of Infinite Warfare selected a science-fiction theme for the game's setting, which didn't resonate with Call of Duty fans.
The importance of engagement
The company was able to make up for Infinite Warfare's underperformance because players spent more time in previous versions of the franchise, especially the 2015 release of Black Ops III. Higher engagement with Call of Duty: Black Ops III led to higher sales of in-game content, which extended the playability of the one-year-old game.
Above all else, the fourth quarter of 2016 highlighted the importance of engagement, which has become the all-important metric for game publishers. Some games are played for no more than a month before the gamer moves on. Other games, such as Call of Duty, are purchased with the expectation that the publisher will distribute additional content that players can buy directly over a PC or console, usually for $10 or $15.
This additional content is an important business strategy for game companies to keep players engaged with older games. Instead of having gamers spend only a month or two with a particular game, gamers can buy additional content and enjoy playing a certain title for up to one or two years. As a result, engagement levels remain high and game publishers such as Activision Blizzard receive recurring, high-margin revenue year-round.
In the fourth quarter, players spent about 43 billion hours across Activision Blizzard's franchises. Video games compete with every other form of entertainment, so time spent with games will be the single most important number for investors to monitor quarter to quarter.
Of course, to drive high engagement, it helps to have great games that people find worthy of their time. Activision Blizzard has seven franchises that have generated at least $1 billion in revenue. All together, the company's franchise portfolio reached nearly 500 million monthly active users in the fourth quarter of 2016.
What to expect
Investors shouldn't expect the company to report year-over-year growth in revenue or earnings in the upcoming earnings report. Activision Blizzard's full-year 2017 revenue is expected to be down about 10% to $6 billion because of fewer releases this year compared with 2016. Earnings per share for 2017 are expected to be $1.70, down from $2.18 the previous year. Other than Destiny 2 and a new Call of Duty game in the fall, the company doesn't have any other big releases scheduled.
A lighter game slate will place more emphasis on time spent with games. On the Blizzard side, management is planning on releasing new in-game content for every title, including Overwatch, Hearthstone, and World of Warcraft.
For Activision, performance will be lower in the first half of 2017 compared with 2016. However, management is guiding for better performance in the 2017 fourth quarter over 2016 because of better expected sales of the new Call of Duty game and the addition of Destiny 2.
Investors should watch for updates on the progress of in-game advertising for King's mobile games. In-game advertising is expected to be a key revenue driver for King in the future.
Last but not least, management is currently trying to attract entrepreneurs to buy teams for the upcoming Overwatch League. This is one hurdle management must overcome for Overwatch League to have success. Investors should watch for any updates on the progress as to how the company is attracting prospective team owners and forming teams.