Key Takeaways

  • Adjusted EPS was $0.81 vs. the $0.66 analysts expected
  • ATVI's monthly active users (MAU) growth far surpassed expectations, increasing for the third consecutive quarter.
  • ATVI saw its biggest revenue growth in 14 quarters.

What Happened

Activision Blizzard reported substantially higher earnings and sales than analysts had expected as the number of of people playing its games grew substantially. Its number of monthly active users (MAU), a key figure in an industry increasingly switching to a business model based on recurring micro-transactions and service subscriptions, grew more than 30% year over year. Its guidance for next quarter was also significantly higher than expected.

Shares fell 2% in after-hours trading, but are up 43% in 2020.

(Below is Investopedia's original earnings preview, published July 28, 2020)

What to Look For

Activision Blizzard Inc. (ATVI) has prospered despite the stock market's wild swings in 2020, rising more than 35% this year and significantly outperforming the S&P 500. Activision Blizzard has seen a spike in users as video game players spend more time at home during the pandemic. The company fueled that growth by keeping its video game releases on schedule in spite of potential disruptions.

Investors will watch closely to see how this spike in gaming affects the company's financials when it reports earnings on August 4, 2020 for Q2 FY 2020. Analysts predict dramatic growth in both adjusted earnings per share (EPS) and revenue, fueled in part by gains in monthly active users (MAU).

MAU growth is a key metric that investors will look at to measure Activision Blizzard's health. Large and sustained user bases in video games help to ensure continued revenue growth, often through micropayment transactions. Analysts expect Activision Blizzard to report a year-over-year (YOY) quarterly increase in MAU for the third consecutive quarter, although growth in this area may slow somewhat.

Activision Blizzard's recent gains in MAU may have been a critical factor in the company's strong performance in recent months. Shares of Activision Blizzard have outperformed the broader market dramatically following a strong Q1 FY 2020 earnings report in which the company exceeded expectations on adjusted EPS and revenue, and posted significant growth in MAU. For the past 12 months, the stock has posted a total return of 69.6%, about 10 times bigger than the 7.2% gain for the S&P 500. All figures are as of July 27.

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

Activision Blizzard produced a number of disappointing earnings reports in 2019 and early 2020, following the January 2019 divestment of its Destiny game franchise. The company posted five straight quarters of YOY declines in adjusted earnings and revenue between Q1 FY 2019 and Q1 FY 2020. Adjusted EPS was especially affected in Q4 FY 2019, when it declined by 31.6% YOY. Now, analysts expect Activision Blizzard to report a 24.5% increase in Q2 FY 2020, its strongest growth since Q4 FY 2016.

Revenue also has been hit hard in the last several quarters, having declined to nearly a four-year low of $1.3 billion in Q3 FY 2019. Consensus estimates of $1.8 billion for Q2 FY 2020 represent a healthy 26.5% increase YOY.

Activision Blizzard Key Metrics
  Estimate for Q2 2020 Actual for Q2 2019 Actual for Q2 2018
Adjusted earnings per share ($) 0.66 0.53 0.62
Revenue ($B) 1.8 1.4 1.6
Monthly Active Users (M) 350.0 327.0 352.0

Source: Visible Alpha

As indicated, in the Q2 report investors also will focus 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 is an important metric for video game companies because it is linked with earnings potential. Video game 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.

Activision Blizzard's growth in MAU, until recently, has been bleak. Between Q1 FY 2017 and Q3 FY 2019, Activision Blizzard saw 11 consecutive quarters of YOY MAU decline. This negative trend was reversed in Q4 FY 2019 as MAU jumped by 14.9% YOY to 409 million users. The company followed with a second strong quarter in Q1 FY 2020, when MAU increased by 18.0%. Analysts have predicted a third straight quarter of YOY MAU growth, albeit a more modest increase of 7.0% to 350 million.