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Activision Blizzard’s Outlook Is Too Conservative

By Demitri Kalogeropoulos – May 8, 2020 at 11:06AM

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Here are a few reasons to expect a big finish to the video game giant's fiscal year.

Activision Blizzard (ATVI -2.70%) continues to find ways to engage gamers with its venerable Call of Duty franchise. This week, the publisher announced surprisingly strong sales and earnings, thanks in part to extra demand from stay-at-home mandates across the U.S. and Europe. Yet the bigger takeaway was the health of its core shooter franchise, which is attracting record engagement even as it moves onto new platforms and business models.

Let's look at some head-turning Call of Duty metrics from the fiscal first quarter and why they suggest a big second half for the fiscal year ahead.

A young man playing video games.

Image source: Getty Images.

Warzone: 60 million players and counting

The COD franchise has had a busy year so far, with a mobile version launching alongside the latest major installment, Modern Warfare, in late 2019. Those releases were both successful and helped push Activision's gamer base up to 102 million this quarter compared to 41 million a year ago.

Management was especially happy with the engagement figures from its Warzone release, which has attracted more than 60 million players since the launch on March 10. That title gives Activision a strong foothold in the popular free-to-play battle royale niche. Executives said in a conference call that the game has also boosted demand for premium content like Modern Warfare.

Operating margin: 35% of sales

Activision has been pouring resources into the development process for the franchise, and the accelerated content-release pace is already paying off. New seasonal releases are hitting the mobile game every four weeks, for example, down from the previous eight-week gap.

As a result, in-game spending jumped across all of the Call of Duty titles and helped push profitability for the Activision side of the business up to 35% of sales, compared to 23% a year ago. "Performance in the quarter was led by Call of Duty," CEO Bobby Kotick told investors, "which is achieving tremendous scale and momentum across platforms, geographies and business models."

Can the momentum last?

The company increased its outlook for 2020, largely thanks to Call of Duty metrics, which went on to set more records in the first month of the fiscal second quarter. The forecasts are erring on the side of being conservative, though, because lots of risks could end up offsetting the extra demand the company is seeing today. Those risks include unemployment and pricing challenges and other economic factors that are impossible to predict today.

Yet the bigger-picture trend is decidedly positive. Development is on track for the newest marquee installment in the Call of Duty franchise, now being polished by employees working remotely. If Activision can maintain its positive momentum up to that fall launch, then the franchise could benefit from some of the most supportive sales and engagement trends it has ever seen.

"We have attempted to be conservative in our assumptions around the impact of these [growth] trends beyond the second quarter," CFO Dennis Durkin said in the call, "but the backdrop does create greater potential for operating overperformance later this year." That's why investors who are optimistic about the Call of Duty brand might want to boost their expectations for the wider business in 2020.

Demitrios Kalogeropoulos owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard. The Motley Fool has a disclosure policy.

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