Investors had high expectations heading into Activision Blizzard's (NASDAQ:ATVI) third-quarter earnings report. Hit product releases have boosted audiences in its Call of Duty and World of Warcraft franchises, while the COVID-19 pandemic put a new premium on all forms of at-home entertainment.
This past week, Activision sailed past several of those Q3 operating forecasts while projecting an unusually strong finish to the fiscal year.
Growth was strong
The video game publisher extended its growth streak from the second quarter, which showed surging engagement and audience sizes. The Q3 outing was just as strong, with Call of Duty again leading the way. The CoD franchise attracted three times the gamer base as compared to a year ago, in part thanks to the success of the Warzone release. That free-to-play title is continuing to drive players toward the premium Modern Warfare, too, which has set a franchise record for first-year sales.
Activision noted solid engagement in the Blizzard and King Digital segments, supported by a flood of content around the Hearthstone, Overwatch, and Candy Crush brands. Overall, sales landed at $1.95 billion to comfortably surpass management's forecast of around $1.8 billion. "Our teams continued to execute our growth plans with excellence during incredibly challenging circumstances," CEO Bobby Kotick said in a press release.
The popularity of free games like Candy Crush and Warzone didn't dent Activision's earnings power. Instead, operating margin improved across the portfolio, landing at 44% for the quarter compared to management's 42% outlook.
That success was supported by the growing audience size, robust demand for in-game purchases, and a continued shift toward digitally delivered products. Two-thirds of Activision's premium Modern Warfare units, for example, have been sold directly to gamers.
Net income jumped to $604 million from $204 million, which translated into earnings per share of $0.78 compared to guidance calling for $0.64 per share in profits. Activision ended the quarter with plenty of cash and a manageable debt burden of roughly 1.2 times annual adjusted profits.
A strong finish ahead
Activision's fourth-quarter outlook departed from the cautious comments management made in early August. While there are still some major risks around economic growth rates and consumer spending, the video game publisher sees a banner period for growth over the coming weeks.
Sales should cross $2 billion in Q4, management predicted, which would push that metric to $7.7 billion for the full 2020 year. Activision's initial fiscal year forecast, issued in early February, was $6.5 billion. Earnings should now reach $2.61 per share compared to the initial estimate of $1.85.
The pandemic helps explain a big portion of those upgrades. But Activision's innovative content strategy has played a more important role.
Releases in the Call of Duty franchise are lifting engagement to record highs lately, and that's a great sign for the next premium installment of the brand, Black Ops Cold War. Given the huge built-in audience greeting this release, that title is almost a sure bet for topping 2020 sales charts after its launch in mid-November.