The first-quarter earnings release from Activision Blizzard Inc. (ATVI) had a little more drama than we would usually expect from a public company. Dow Jones "inadvertently" published some details of the earnings announcement, which caused the trading of shares to be halted and Activision Blizzard to release its quarterly results at about 3 p.m. EDT, an hour before the market closed. 

Shares were volatile when earnings started to leak, but luckily that volatility doesn't affect Foolish long-term investors, who care more about the direction of Activision Blizzard's business. So, let's get to the numbers. 

Man playing esports in a stadium.

An esports player in a stadium. Image source: Getty Images.

Activision Blizzard: The raw numbers

Metric Q1 2018 Q1 2017 Year-Over-Year Change
GAAP revenue $1.97 billion $1.73 billion  13.8% 
Net income $500 million  $426 million  17.4% 
GAAP EPS $0.65  $0.56  16.2% 
Non-GAAP EPS $0.78 $0.72 8.3%

Data source: Activision Blizzard Inc.'s Q1 2018 earnings release. 

What happened with Activision Blizzard this quarter? 

At a high level, results were very strong. But when we dig into the segment operating metrics, we can see what exactly is working well for Activision Blizzard. 

  • Digital revenues accounted for 74% of total revenue in the quarter. That's down from 80% of revenue a year ago, but record revenue of $1.46 billion. 
  • Operating margin was 30% on a GAAP basis and 39% on a non-GAAP basis, down from 43% a year ago. Management said the decline in operating margin was because of investments in Overwatch League, the Major League Gaming (MLG) network, and
  • Monthly active users (MAUs) were down across the board sequentially for Activision Blizzard. Activision MAUs were 51 million, Blizzard MAUs were 38 million, and King had 285 million MAUs. That compares to 55 million, 40 million, and 290 million respectively in Q4 2018. The decline was largely due to a lack of major new game releases in the first quarter. 
  • Despite the drop in users, net bookings increased 16% versus a year ago to $1.38 billion. 
  • Activision segment revenue was $312 million, and operating profit was $92 million on growth in Call of Duty's digital sales growth. 
  • Blizzard revenue was a record $480 million on World of Warcraft expansion presales and the newly launched Overwatch League. 
  • King revenue was $534 million, and operating profit was up 15% versus a year ago to $191 million. 
  • Overall, operating cash flow rose 29% from a year ago to $529 million, and free cash flow was up 28% to $498 million. 
  • On the balance sheet, Activision went from a net debt position of $1.17 billion a year ago to a net cash balance of $860 million. 

Esports was a big focus for Activision Blizzard in the quarter, with the launch of Overwatch League and continued growth of Call of Duty World League and the MLG network. 

  • Esports engagement is high, with the average Overwatch League viewer spending over an hour watching each day. 
  • New Overwatch League franchises are expected to be added by the end of the year. The expansion fees weren't disclosed, but the initial franchise fee was $20 million, and reports have new expansion fees at as much as $60 million. 
  • There wasn't much operational detail given on esports engagement or revenue, except to say that "millions" of people each week are engaging in esports leagues. 

What management had to say

One comment during the conference call stuck out as indicating what management sees as the future of video games and esports. CEO Robert A. Kotick said: 

The Overwatch League continues to thrive, and our players are getting even broader recognition of their incredible talents in mainstream media. We see even greater opportunity with the playoffs and Grand Finals still to come. And we've begun sales of our next round of Overwatch League teams. And over time, we believe our esports initiatives could rival traditional sports for audience interest, advertiser interest, sponsors, ticket sales, and merchandise sales, both virtual and physical. 

The idea of building stadiums around the world for esports and people buying merchandise on a mass scale may sound crazy, but the Overwatch League is already moving in that direction. This could be the future of Activision Blizzard's business. 

Looking forward

After another strong quarter, the focus for Activision Blizzard turns to Activision's May 17 reveal of Black Ops 4, which will be released this fall. It's a highly anticipated launch and could set up the Activision segment for a strong second half of 2018. 

The other thing to keep an eye on is engagement in Overwatch League, which begins playoffs in June; $1 million in prize money will go to the champion, which should draw even more viewers than the 10 million who watched opening weekend. That's when we could see the real potential of esports for Activision Blizzard.