Activision Blizzard, Inc. (NASDAQ:ATVI) reports its fourth-quarter earnings on Thursday, Feb. 8, after the market closes and investors are wondering if it'll be another blowout quarter. The company has ridden a wave of growth as hit games like World of Warcraft, Call of Duty, and Overwatch have swept the world and it certainly looks like the momentum will continue. 

Financial performance of existing games will be important, but one eye will also be on the emerging esports business with Overwatch League and Call of Duty World League leading the way. Here's where investors should keep their focus when the fourth-quarter numbers come out

Man playing a first-person shooter game on his television.

Image source: Getty Images.

Where investors should look first

The first thing to look at is how Activision Blizzard performs against its own expectations. Here are some of the fourth-quarter estimates management gave when third-quarter results were released on Nov. 2, 2017. 

Metric Q4 2017 GAAP Q4 2017 Non-GAAP
Net revenue $1.70 billion $1.70 billion
Cost of goods sold 24% 24%
Operating margin 9% 24%
EPS $0.10 $0.36

Learn about GAAP here. Non-GAAP = adjusted. Data source: Activision Blizzard. 

Activision Blizzard management has a habit of under-promising and over-delivering, so investors shouldn't be surprised by an earnings beat. What'll be important is to see where engagement is growing and where it's not. Last quarter there were 384 million monthly active users (MAUs) across the company's businesses with record engagement at Activision (49 million MAUs) and Blizzard (42 million MAUs), numbers it hopes to grow. 

The hits keep coming

Activision Blizzard has announced that Call of Duty: WWII and Destiny 2 were the two best-selling console games of 2017 with Call of Duty: WWII surpassing $1 billion in sales. These are still core games for Activision Blizzard, despite the fact that new digital sources of revenue have become key financial drivers. 

What I'll be watching is how the company is able to expand revenue per user with digital purchases and new content packs released after the initial game launch. That's where the real profitability comes in and those add-ons can be revenue generators for years to come. 

Overwatch League is here

Growing the existing business platforms will be important, but there's an emerging business in esports -- which turns video games into a spectator sport and video game players into paid professionals -- that investors will want to keep an eye on. The inaugural season of the Overwatch League started on Jan. 10 and updates to the league will be important to watch. There were a few announcements that management will likely expand on in the conference call. 

  • Twitch was announced as the Overwatch League media partner in a two-year deal. Twitch TV will be the home of Overwatch League and it will be broadcast in at least three languages (English, Korean, and French) around the world. 
  • We do know that the Overwatch League's first week drew more than 10 million viewers with an average of 408,000 viewers for the initial four days of competition. That's the kind of engagement that Activision can build the league on. 
  • Toyota was also announced as a partner for the league, collaborating on behind-the-scenes content. Advertising dollars will be key to Overwatch League's success, so it's good to see big names jumping aboard. 

Activision may not break out financial results for Overwatch League or Call of Duty World League, but right now what investors should be looking for is indications that these leagues are driving higher engagement. The more people engage with content, the more likely they'll buy games or in-game content, which would make the esports leagues a win even if they aren't moneymakers on their own for Activision Blizzard. 

Will the streak continue

We recently learned that Activision Blizzard's biggest competitor, Electronic Arts, reported an outstanding quarter and gave strong guidance, which is a good data point for video game demand. Now, Activision Blizzard will have to show its momentum is strong as well, which it should be with the two best-selling console games of 2017. 

While investors shouldn't be surprised by an earnings beat, they should pay attention to the engagement and revenue momentum in the Activision, Blizzard, and King divisions.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.