Key Takeaways

  • Adjusted EPS of $0.76 vs. the $0.65 analysts expected.
  • Monthly Active Users (MAU) saw a substantial YOY increase.
  • Revenue beat expectations.

What Happened

Activision Blizzard reported significantly better-than-expected results for Q1 2020. Its adjusted EPS was slightly down year over year, but significantly above analyst expectations, as well as its prior guidance. Its key MAU figure had substantial growth YOY, coming in well above expectations as it held on to most of the users it gained in Q4 2019. The company's revenue, while again declining slightly YOY, beat expectations. ATVI's stock was up sharply in after-hours trading.

(Below is Investopedia's original earnings preview, published 5/4/20.)

What to Look for

Shares of Activision Blizzard Inc. (ATVI) have managed to avoid the worst of this year's coronavirus-induced market plunge, rebounding to a new 2020 high in recent weeks. Investors appear confident that, like other gaming companies, Activision Blizzard will benefit from surging internet traffic even as traditional brick-and-mortar businesses have been forced to temporarily close their doors. Investors will be watching closely to see how this spike in gaming affects Activision Blizzard's results when it reports earnings on May 5, 2020 for Q1 2020. Bullish investors may be disappointed. Analysts currently expect declines in both adjusted earnings per share (EPS) and revenue, illustrating the brutally competitive nature of the video game market.

A key metric that investors will look at to measure Activision Blizzard's health is growth in monthly active users (MAU). Analysts expect the company to report its second quarterly increase in a row in Q1 on a year-over-year (YOY) basis. That's good news after posting declines in the 11 quarters from Q1 2017 to Q3 2019.

That improvement in MAU may be why Activision Blizzard's stock has mostly outperformed the broader market despite relatively weak earnings results over the past year. The company's shares have provided investors with a total return of more than 34% compared to the S&P 500's total return of about -3% over the past 12 months.

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

The last year was a difficult one for the video-game maker, at least partly due to its divestment of the Destiny game franchise. Annual adjusted EPS for 2019 fell 15.1% while annual revenue fell 13.5%, marking the first full-year declines in at least the past five years. During the final quarter of the year, adjusted EPS fell 31.6% and revenue dropped 16.6% compared to Q4 2018. It was the fourth consecutive quarter of YOY declines.

Adjusted EPS and revenue fell to their lowest levels in at least ten quarters in Q3 2019. Adjusted EPS declined 9.2% to $0.38 and revenue by 15.2% to $1.3 billion compared to the same quarter a year ago.

In spite of the difficult year, the company's stock has continued to move higher. While declining growth in adjusted EPS and revenue is expected to continue for Q1 2020, the magnitude of those declines is expected to be smaller. Analysts estimate adjusted EPS will fall 17.0% and revenue will decline 9.3% compared to the year-ago quarter. In the short term, these estimates indicate that analysts see no immediate benefit to Activision Blizzard from the broader surge in Internet traffic.

Activision Blizzard Key Metrics
  Estimate for Q1 2020 Actual for Q1 2019 Actual for Q1 2018
Adjusted earnings per share ($) 0.65 0.78 0.78
Revenue ($B) 1.7 1.8 2.0
Monthly Active Users (M) 346.6 345.0 374.0

Source: Visible Alpha

As indicated, 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 Activision Blizzard games in a given month. An individual who accessed one game counts as one user, for example, while a person who 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.

One bit of good news coming out of Activision Blizzard's Q4 earnings report was the increase in MAUs after 11 consecutive quarters of declines. The declines included a 20.8% drop in Q1 2017, a 13.5% decline in Q2 2018 and an 8.4% drop in Q3 2019. Then, MAUs suddenly started to rebound. In Q4 2019, average MAUs rose 14.9% to 409.0 million compared to the same three-month period a year earlier. That also was the highest MAU since Q1 2017. Analysts expect MAU growth to continue, though just barely. Forecasts indicate growth of 0.5% YOY to a total of 346.6 million for Q1 2020.