This has been a good year so far for video game industry investors. Both Activision Blizzard (ATVI) and Electronic Arts have trounced the market on optimism about surging demand, rising profit margins, and the bright outlook for new business lines such as advertising and esports.
That widespread optimism raises the stakes for Activision's fiscal second-quarter report that's due out after the market closes on Thursday, August 2. Below, we'll look at the key trends that investors will be watching in the upcoming announcement.
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Core growth metrics
Activision's long-term growth depends on its ability to attract a bigger pool of gamers to its franchises while convincing them to spend more time interacting with its titles. That's why the company closely tracks both its audience size and engagement levels.
Overall reach has been trending lower for over a year, but that's mostly due to expected declines within the King Digital casual-gaming segment. In fact, the Activision and Blizzard divisions kept their gamer pools even at 89 million players last quarter despite the lack of any major new title releases.
King Digital, on the other hand, saw its user base plunge to 285 million from 342 million in the prior year. The good news is that these declines have slowed in recent quarters and investors will be looking for further stabilization in this segment on Thursday.
Chart by author. Data source: Activision Blizzard.
While King's audience is shrinking, the remaining group is highly engaged, just as it is for both the Activision and Blizzard segments. Daily time spent playing King's casual games set a record last quarter, and the company saw similar benefits from its hit Overwatch sports league in the Blizzard division. Look for CEO Bobby Kotick and his team to give new details on these engagement initiatives in the upcoming report.
Profitability
Several positive trends are combining to push Activision's profitability higher. There's the stampede toward digital revenue, for example: The company's digital sales soared to $1.2 billion last quarter from $1.07 billion a year ago. Activision is doing everything it can to protect that positive momentum, including making more of its games available for full download, churning out episodic content, and promoting subscription services and microtransactions. The digital shift also is lifting the lifetime value of any given title, since, thanks to regular content releases, Activision can keep a game fresh for players for many months following its initial release.
Cutting against these profitability gains are investments that the company is making in growth initiatives like esports leagues, consumer products, and its proprietary digital-sales platform. The developer also will likely book elevated expenses this quarter related to product releases set for later in the year. Overall, management is targeting a healthy operating margin of 31% of revenue.
The 2018 outlook
Management took a cautious approach to updating the company's 2018 outlook last quarter, with a tweak which executives admitted was modest. The main reason for the restraint was that the first quarter amounts to just a small portion of Activision's expected sales and profits for the year.
With another quarter in the books, executives could take the opportunity on Thursday to make a bolder adjustment to its full-year forecast. But investors shouldn't get their hopes up for a dramatic revision. After all, the cadence of the company's game title releases will ensure that its 2018 results are more heavily tilted toward the second half of the year than usual. Thus, shareholders likely will have to wait until after Activision's next quarterly release before a clearer picture emerges on its short-term business trends.
