Although shares were trailing the market heading into its third-quarter earnings report, a summer rally showed that investors were gaining confidence in Activision Blizzard's (ATVI) rebound strategy. After seeing audience size and engagement metrics fall for almost a year, the video game giant is directing a flood of content releases toward quickly ending that slide.
Activision's quarterly update confirmed that the company can indeed move the needle by upping the quality and pace of its game development. However, investors haven't yet seen the company recover from a shrinking user base.
Let's take a closer look at the latest trends.
Moving back toward growth
Sales declined in each of the company's three divisions: Activision, Blizzard, and King Digital. Yet the results still beat management's outlook by a wide margin, with revenue landing at $1.3 billion compared to the $1.1 billion that executives had predicted.
Image source: Getty Images.
The difference was strong demand for a few hit launches, including content in the Call of Duty franchise and the release of World of Warcraft Classic. These new products helped the tentpole brands return to growing their audience, although the divestment of the Destiny brand still pressured overall gamer reach.
The company counted 316 million engaged gamers compared to 345 million a year ago. Blizzard slipped to 36 million from 37 million and Activision lost 10 million users tied to the Destiny move. King Digital landed at 247 million from 262 million as the company continued to focus more on casual gamer engagement.
Spending money
The positive surprise was more pronounced on the financial side of the business. Non-GAAP operating margin held steady at 27% of sales to blow past the 18% that CEO Bobby Kotick and his team had predicted.
This success allowed the tech stock's earnings to ease down to $0.26 per share from $0.34 per share last year rather than plummeting to $0.05 as executives had forecast. The company credited robust digital spending in the Call of Duty: Black Ops brand plus soaring advertising revenue in games like Candy Crush for lifting earnings. That casual game was again the top-grossing brand across mobile device app stores in the quarter.
The outlook
Management said "strong momentum" is holding into the current quarter, which includes the launch of the latest chapter in the Call of Duty shooter franchise and the mobile version of the brand. Activision also plans to capitalize on new seasons in its esports franchises and the release of Diablo IV. "We are intent on building on this momentum as we invest this quarter to maximize the potential of our franchises in 2020 and beyond," Kotick said in an investor presentation.
The fourth-quarter outlook shows that Activision isn't done with its rebound plan, though. Sales are expected to fall about 5% over the holiday season, in fact. Operating margin is predicted to hold steady at about 27%, but the company is still predicting that earnings will decline to roughly $2.13 per share this year compared to $2.72 in 2018.
The good news is that audience size and engagement trends are heading in the right direction, with plenty of new content releases set to press that advantage over the next few quarters and likely return Activision Blizzard to its market-beating growth path beginning in fiscal 2020.
