This month, Activision Blizzard (ATVI) reported its fourth-quarter and full-year 2020 earnings. The gaming studio conglomerate generated record annual cash flow and net bookings (the video game equivalent of sales). However, the highlight of the quarter came from its Activision studio, which owns and operates the Call of Duty franchise. The segment knocked it out of the park for the quarter and fiscal year and has set itself up for many years of future growth. Here's why.
The numbers in Q4 and 2020 overall
Before looking into why Activision had such a great quarter, let's take a look at some of the numbers it put up. In 2020, Activision generated $1.87 billion in operating income and had a staggering 47% operating margin. Call of Duty revenue (the majority of Activision's business, and really all that investors should care about) doubled year over year in 2020, with operating income growing at 120%. All else equal, those are some fantastic numbers for a business of Activision's size and scale.
Image source: Getty Images.
What drove earnings growth
Outside of a temporary tailwind from COVID-19 lockdowns, Activision and Call of Duty had phenomenal years because of the company's three-pillared mobile, free-to-play, and premium strategy. Historically, the only way gamers could truly access the Call of Duty franchise was through its yearly console/PC title with a $60 purchase price. This limited the franchise to the hardcore gamers who played the title on a regular basis and owned a console.
However, starting in late 2019 with the release of Call of Duty Mobile, anyone with a phone could access the franchise for free. The game, as you might expect, was a roaring success, and had over 300 million downloads in its first year. Then, in March of last year, Activision doubled down by releasing Call of Duty Warzone, a free-to-play battle royale (think Fortnite) title. It is also hugely popular, reaching 75 million downloads this summer. The success of both these titles was the main contributor to Call of Duty, averaging more than 100 million active players each month in 2020, which in turn led Activision to more than double its operating income, as mentioned above.
Bobby Kotick, the CEO of Activision Blizzard (Activision's parent company, which also owns the Blizzard and King studios), recently talked about implementing this three-pillared strategy for all of its franchises in the coming years. If you're an investor in Activision Blizzard, look for announcements regarding new modes of play with games like World of Warcraft and Candy Crush.
What the future looks like
The future for Activision and Call of Duty will hopefully be more of the same. Mobile and Warzone should continue to grow, driving customers to the annual premium title and monetizing its own content with in-game purchases. Esports can also fortify the Call of Duty brand, and hopefully be another pillar to drive financial growth over the long term. The Call of Duty league launched a little over a year ago and is already one of the most popular esports tournaments globally. In its September tournament, the championship match drew over 200,000 concurrent viewers, an impressive number for a league that was less than a year old at the time.
Kotick's stated goal is for Activision Blizzard to reach a total of 1 billion users. A big part of that will no doubt come from Call of Duty. Last quarter, Activision (the individual studio) had 128 million monthly active users, indicating to me that management thinks it is nowhere near saturation with its current player base. Right now, Activision Blizzard has a cumulative 397 million monthly active users, which it will need to grow by 150% if it is to reach its 1 billion user goal.
It's possible that Activision's business will see a slowdown in 2021 once the world economy fully reopens and consumers have more options for what to do with their time. However, investors shouldn't worry. With all the initiatives talked about above, plus any new game releases, management has set itself up for growth over the long haul.
Activision had a phenomenal 2020, driving the growth of its parent company, Activision Blizzard, and sending its stock to all-time highs. However, investors shouldn't think they've missed the boat. Management has many growth initiatives up its sleeve, setting up success for years to come.
