Activision Blizzard Sales Surge on Strong Digital Content

By Markets Fool.com

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Image source: Getty Images.

Activision Blizzard Inc.(NASDAQ: ATVI) continues to make all the right moves in the game market right now, and the company's third-quarter results, reported Thursday, show the momentum on the financial side. A growing base of users is more engaged in the company's games than ever, and management can't upgrade its own financial outlook fast enough. Here are the highlights from the quarter.

Activision Blizzard results: The raw numbers

Metric

Q3 2016 Actuals

Q3 2015 Actuals

Guidance After Q2

GAAP revenue

$1.57 billion

$990 million

$1.49 billion

GAAP earnings per share

$0.26

$0.17

$0.06

Non-GAAP EPS

$0.49

$0.20

$0.39

Data source: Activision Blizzard Q3 2016 earnings report.

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For the full year, GAAP revenue guidance was increased from $6.4 billion to $6.45 billion and GAAP earnings per share are expected to be $0.98, up from last quarter's $0.87 guidance. On a non-GAAP basis, EPS guidance was increased from $1.83 to $1.92.

What happened with Activision Blizzard this quarter?

Overall, the business is doing extremely well, but it isn't new games from King Digital that are driving the growth. It's actually the legacy business that's performing extremely well.

  • Activision had a record of 46 million monthly active users and generated $377 million in revenue for the quarter. Operating income was $123 million on strong Call of Duty follow-on content and the launch of Destiny: Rise of Iron.
  • Blizzard's monthly active users jumped from 33 million last quarter to 42 million users in the third quarter. Revenue nearly doubled, to $727 million in the quarter, and operating income more than doubled, to $321 million, or 44% of revenue.
  • King's user base was 394 million, down slightly from 409 million last quarter. That resulted in a slight decline in revenue, to $459 million, and operating income came in at $138 million.
  • Digital revenues increased to $1.34 billion, or 86% of revenue. That shows the huge strategic shift the company has made in game and mobile-device sales in recent years.
  • Net debt stood at $2.8 billion in the quarter, down from $3.0 billion a quarter ago, including $2.3 billion in cash and $5.10 billion in debt.

What management had to say

Activision Blizzard's business continues to outperform its plan on strong engagement in legacy games like Call of Duty, Destiny, Candy Crush, and World of Warcraft. It alsoadded new franchises like Overwatch. Augmenting game sales, Major League Gaming had 50 million views, helped by a partnership with Facebook.

The great thing about the strategy of making great games that drive engagement, then monetizing them with digital sales, and adding e-sports, is that the model generates consistent long-term revenue. And with the user base rising, particularly in Blizzard, the financial future looks bright.

Looking forward

Continued momentum in engagement will be key for Activision Blizzard, and the momentum is strong. And the cash generated is helping improve the balance sheet. In the quarter, $185 million of debt was repaid and $1.5 billion has been repaid so far in 2016. At this rate, the company could have a net cash position by the end of 2017.

Momentum continues to be strong for gaming, in general, and Activision Blizzard, specifically. The company has the content consumers crave and a strong monetization strategy.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.