Activision Blizzard (ATVI) recently announced earnings results that edged past management's targets. The video game publisher notched important first-quarter wins in core metrics such as engagement and profitability. However, due to the timing of its biggest releases, and plans to ramp up the esports and advertising businesses, investors won't have a clear picture on Activision's 2018 performance until later in the fiscal year than usual.
Let's take a closer look at the results.
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Healthy audience and engagement
Activision's audience base came in at 374 million, which marked a drop from the prior quarter's 385 million. The company shed active users in each of its three divisions, King, Activision, and Blizzard.
Demand for fresh content in major franchises, including Call of Duty, World of Warcraft, and Overwatch, kept the Activision and Blizzard audience sizes relatively stable while continued shifts in casual gaming pushed the King Digital segment lower. Broadly speaking, Activision's audience size suffered from the lack of large content releases during the seasonally slow period.
Monthly active gamers, in millions. Data source: Activision. Chart by author.
The company offset that audience dip with healthy engagement metrics. Time spent on casual games like Candy Crush reached a new record, and fans interacted with the Overwatch franchise more than ever thanks in part to strong viewership for its new sports league.
Profits driven by digital growth
Monetization results were generally positive. The Activision segment boosted profitability thanks to strong demand for digital sales in the Call of Duty: WWII title. King Digital also posted higher operating margins as two of its titles, Candy Crush Saga and Candy Crush Soda Saga, finished at the top of the sales charts. Blizzard's profitability slipped, as expected, due to major investments in growth initiatives like the Overwatch league.
Overall, operating margin came in at 39% of sales to edge past management's 36% target. As a result of that overperformance, earnings stopped at $0.78 per share, while executives had forecast $0.65 per share. As usual, profit margin was aided by a continued shift toward the digital sales channel, which reached a record $1.2 billion out of the company's overall $1.38 billion of first-quarter bookings.
Management's cautious outlook
CEO Bobby Kotick and his team were pleased with the broader trends during the traditionally quiet period for video game demand. The numbers "demonstrate our ability to deliver strong results," said the earnings report, "even in quarters without large content releases." That success reflects "the enduring nature of our franchises and our shift to a games-as-a-service model."
Activision has a busy few quarters ahead that include a packed gaming pipeline and aggressive growth initiatives in new business lines like esports, advertising, and consumer products. The advertising opportunity, aimed mainly at casual gamers, is particularly exciting considering the massive size of King's engaged gamer base.
As it has in many of the last of eight quarters, management lifted its full-year outlook, but this time the upgrade was modest. Activision now sees revenue rising to $7.36 billion in 2018, up slightly from the prior $7.35 billion target. Earnings got a similarly tiny upgrade and should improve to $2.46 per share rather than the $2.45-per-share goal executives issued back in February. Kotick and his team decided to take a restrained approach to their outlook despite the fact that the business outperformed their expectations this quarter.
The caution was warranted, they said, because the timing of new releases means Activision's 2018 earnings will be more heavily tilted toward the latter part of the year than usual.
