What Happened

Activision Blizzard reported that, for the first time since Q4 2016 its user base had grown year-over-year. Analysts had expected its user base to fall further, down to about 294 million monthly average users (MAU). Instead, it jumped to over 400 million. The last time Activision Blizzard saw MAU numbers like that was in early 2017. ATVI's profits for Q4 2019 were also much higher than expected. While still down from Q4 2018, the drop was less-than-half as small as expected.

(Below is Investopedia's original earnings preview, published 1-30-20)

What to Look for

Earlier this week, Activision Blizzard Inc. (ATVI) announced the launch of Warcraft III: Reforged, a re-imagining of one its real-time strategy games that the company hopes will attract new gamers worldwide. Meanwhile, investors will be looking to next week's quarterly earnings report to see how many gamers the video-game publisher has been able to attract and retain over the three-month period. The key metric they will be focused on is monthly active users (MAU) when Activision Blizzard reports earnings on February 6, 2020 for Q4 2019. Analysts are expecting the company's MAU, earnings per share (EPS), and revenue to continue their year-over-year (YOY) declines.

Activision Blizzard's stock has performed well compared to the broader market despite relatively weak earnings results in the first three quarters of the year. The company's shares have provided investors with a total return of nearly 32% compared to the S&P 500's total return of almost 23% over the past 12 months.

One Year Total Return for S&P 500 and Activision Blizzard
Source: TradingView.

One bit of good news in Activision Blizzard's earnings reports over the past year is that they have all beaten analysts' estimates by a fairly wide margin for each of the first three quarters of 2019. However, each of those quarterly reports were followed by multi-day declines in the company's stock price. While ATVI's stock initially rose following the Q1 2018 earnings report, the stock shed most of its gains over the following week and a half. Despite this, the stock has proven fairly resilient and has continued to trend higher overall.

Activision Blizzard reported a Q3 2019 EPS decline of 21.5% YOY, marking the largest of three consecutive quarters of YOY earnings declines. The third quarter also saw revenues decline by 15.2% YOY, the third consecutive such decline.

Analysts don't expect much improvement for the final quarter of 2019. EPS for Q4 is expected to decline 46.6% compared to Q4 2018, and revenue is expected to decline 15.4%. If both forecasts are right, it will be the worst quarter of the year for the company. Investors might take solace in the fact that, like the first three quarters of the year, this quarter's earnings results could surpass analysts' expectations by a healthy margin.

Activision Blizzard Key Metrics
  Estimate for Q4 2019 Actual for Q4 2018 Actual for Q4 2017
Earnings per share ($) 0.45 0.84 (0.76)
Revenue ($B) 2.0 2.4 2.0
Monthly Active Users (M) 294.0 356.0 385.0

Source: Visible Alpha

But as mentioned previously, investors will also be focused on Activision Blizzard's MAU, a key measure of the overall size of the company's user base. The metric is a tally of the total number of individuals who accessed a particular game in a given month, so an individual that accessed two games in a month would be counted as two users.

MAU has become an important metric for video game companies because it is linked with earnings potential. Such companies are generating more and more of their revenue from online subscriptions and from the sale of in-game content, as opposed to the more traditional way of selling packaged, full-games.

While quarter-to-quarter fluctuations in the metric should be expected in an industry where new content is continually being released, the trend in Activision Blizzard's user base has been worrisome as of late. The company reported an 8.4% decline in MAU YOY in Q3 2019. This was the 11th-consecutive quarterly YOY decline in MAU. Analysts don't expect things to get much better in Q4, forecasting a decline of 17.4% compared to the same quarter a year ago. That would be the biggest quarterly YOY decline since Q3 2017.