Activision Blizzard (NASDAQ:ATVI) continued to benefit from people at home playing video games during the second quarter. Net bookings jumped 72% year over year to $2 billion. The strong results were driven by various franchises across the business, but the Activision segment was the standout, with net revenue nearly doubling year over year to $993 million in the quarter. 

The Call of Duty franchise has helped the company reach a much wider audience across platforms and geographies, and that has put Activision Blizzard on pace to reach a record level of total bookings and earnings per share this year. While management is remaining cautious with its near-term outlook, it sees the surge in demand as laying a foundation for long-term growth. 

Group of men and women playing video games.

Image source: Getty Images.

Call of Duty is the star of the show

The strategy to release several versions of Call of Duty across platforms and price points has worked extremely well. The free-to-play Call of Duty: Warzone has attracted more than 75 million players. As millions of new players try out Warzone, they are upgrading to the premium version Call of Duty: Modern Warfare, which is driving higher revenue and engagement for the franchise. 

The hours played in Modern Warfare increased eight-fold year over year, driven by new and existing players. The Activision segment finished the quarter with 125 million monthly active users, up 22.5% over the first quarter. That's up from 37 million in the second quarter of 2019. 

Management called this a "step change" in engagement. "In its first three quarters, total in-game net bookings for Modern Warfare now exceeded the prior three Call of Duty titles combined over the same period," Chief Operating Officer Daniel Alegre said during the conference call. 

What's next?

Obviously, the pandemic is not going to be around forever to keep people shut up in their homes playing video games. However, higher player engagement levels will likely linger for a while.

Sony is reportedly stepping up its initial shipment of PlayStation 5 consoles to 10 million units for the upcoming launch this holiday, as it anticipates higher demand. 

During Activision's second-quarter call, CFO Dennis Durkin said: "We continue to experience strong momentum in the business even as tailwinds from shelter in place moderate." Activision Blizzard experienced a slackening in demand for King's mobile games during the second half of the quarter. But the rest of the company is enjoying tremendous momentum right now.

Alegre elaborated on this during the call, stating: "While casual franchises returned to more typical trends more quickly, our core franchises, with the greatest emphasis on social, multi-player gameplay are seeing engagement remain elevated even as regions reopen." 

Activision Blizzard is allowing for the possibility that a severe recession could alter its near-term performance, but management sees this period of high demand creating a new plateau for future performance. One reason for this is that Activision Blizzard's monthly active users across the company now total 428 million.

More specifically, the Activision and Blizzard segments have a combined 157 million users. That is 88 million more users than the year-ago quarter, providing the company with a much larger audience to launch new games into to grow revenue.

"In the second half, we are planning to launch major new content into key franchises with meaningfully larger audiences than we have seen previously, creating the opportunity for strong financial results," Durkin said. The two most important upcoming releases are the World of Warcraft: Shadowlands expansion, and the new premium release for Call of Duty

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Laying the foundation for long-term growth

The updated outlook calls for total net bookings to reach a record $7.6 billion for the full year, while non-GAAP earnings should reach $2.87. 

Beyond 2020, management is looking to apply the lessons from Call of Duty to other franchises. CEO Bobby Kotick referred to the recent success of Call of Duty as a "road map we plan to follow for the many franchises we have in our library, which dates back to 1980." 

Video game stocks are performing well right now for investors during the pandemic, but Kotick's comment suggests that Activision Blizzard has plenty more up its sleeve to drive returns over the long term.