Investors anticipated that video game publisher Activision Blizzard (NASDAQ:ATVI) would report strong results for the first quarter, given more people at home during the COVID-19 outbreak. Still, the results released Tuesday completely obliterated Wall Street's highest expectations.

Activision Blizzard reported non-GAAP (adjusted) revenue of $1.52 billion, which came in above analysts' estimates of $1.32 billion. The performance was primarily driven by higher in-game spending, as the company's most popular franchises experienced heightened levels of player activity during the quarter. 

The boost in digital revenue led to better-than-expected adjusted earnings per share of $0.76, which blew past analysts' EPS estimates of $0.38. Here's the lowdown on what drove these impressive results.

A screenshot from Call of Duty showing soldiers looking out from the roof of a building, with a helicopter flying in the background.

Image source: Activision Blizzard. 

More content leads to more revenue

With some of the most popular games in the industry, such as Call of Duty, World of Warcraft, Overwatch, and the Candy Crush mobile game franchise, Activision Blizzard was in a perfect position to deliver entertainment to its more than 400 million monthly active users at the height of the self-quarantine period. 

The outperformance started with solid execution across the company. Last year, Activision announced a company-wide restructuring to double-down on more content releases and invest more in the biggest franchises. While management couldn't have foreseen the stay-at-home orders over the novel coronavirus, those investments set the company up for a strong start to 2020, led by the recent releases from the Call of Duty franchise. 

Call of Duty is experiencing tremendous momentum after the release of Call of Duty Mobile last fall. The latest free-to-play offering for PC and console, Call of Duty: Warzone, has been downloaded more than 60 million times since its release on March 10. 

The Activision segment posted revenue growth of 64% year over year, reaching $519 million, with a high operating margin of 35%. Management credited the combination of stay-at-home dynamics, new content, and in-game events for the strong performance. 

Blizzard's World of Warcraft continued to see strong momentum, as the growth in the active community after the release of World of Warcraft Classic in 2019 drove an increase in monthly subscription plans through the first quarter. The World of Warcraft team delivered more content between expansions than ever before, including the release of Warcraft 3: Reforged during the quarter. These efforts contributed to revenue growth of 31% year over year for the Blizzard segment, reaching $452 million, with an operating margin of 44%. 

The King segment saw an increase of 24 million monthly active users in the quarter to reach 273 million, which reverses some of the decline over the last few years. But segment revenue was slightly down over the year-ago quarter, as management prioritized growing the user base over player monetization. 

Overall, the higher engagement levels across these segments led to an increase in in-game spending of 20% year over year, reaching $956 million, or 63% of the total business. That led to most of the incremental increase in total revenue over the year-ago quarter.

What's next

The obvious question is, will this performance last? One analyst asked management about the sustainability of this engagement level after things return to normal. CFO Dennis Durkin responded by explaining that it is mostly an unknown. While the company doesn't have any data to suggest what will happen when the stay-at-home situation is over, Durkin said that recent trends in Asia look promising:

We have seen in Asia that the strong momentum continues even as they started to transition back. So, we hope that's a sign of the similar opportunity we may have in other parts of the world, as they start to return to normal as well.

Since the novel coronavirus has put the economy in uncharted territory, management wanted to be conservative in its forward guidance. But even factoring in the risk of economic uncertainty and how long engagement will last once stay-at-home is over, management still felt comfortable in issuing full-year guidance.

Activision Blizzard now expects 2020 adjusted revenue to be $6.9 billion, up 8% over 2019. Adjusted earnings per share are expected to be $2.62 for the year, representing a growth rate of 13.4%. But due to the conservative stance management is taking with guidance, Durkin stated that "the backdrop does create greater potential for operating overperformance later this year." 

Many companies are not offering full-year guidance right now. But not only is Activision Blizzard providing guidance, the company expects to deliver growth in 2020. That's why the stock was up sharply after earnings. The digital nature of its content puts this top video game stock in a strong position to continue delivering results for investors.