"Overwatch" is a future growth driver for Activision Blizzard. IMAGE SOURCE: ACTIVISION BLIZZARD INC.
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There was a lot to like in Activision Blizzard's (NASDAQ: ATVI) recent quarterly earnings report. Despite disappointing sales for Call of Duty: Infinite Warfare, the leading game publisher managed to grow revenue and earnings per share for the quarter, driven by high levels of engagement in both old and new franchises.
25 million and growing
Blizzard's new franchise -- Overwatch -- has become a global hit with 25 million registered players across the world.This bodes well for the upcoming Overwatch League, which could become the most-watched e-sports event in the world once it gets rolling.
The Overwatch franchise is positioned to continue growing. The registered player count stood at 20 million at the end of the third quarter, so 5 million more players were added in the fourth quarter, and the commencement of Overwatch League -- which the company touts as "on a mission to celebrate fans and afford them opportunities to become champions through a professional esports ecosystem that embraces passion and rewards excellence" -- will act as great marketing to attract more players over time.
43 billion hours
Attracting a mass audience is only the first step for the company. The next step is to keep players engaged with great content. Player engagement was very strong in 2016 across Activision publishing, Blizzard, and King. Players spent roughly 43 billion hours either playing or spectating Activision's games, according to the company, and this compares favorably with engagement levels from other media and entertainment companies. Activision reports Netflix at more than 45 billion hours and Snapchat at 22 million to 26 million.
With the exception of the recently released Call of Duty: Infinite Warfare, the company saw stable engagement for the Call of Duty franchise in the fourth quarter as players spent time with previous installments. But there is enough of a community built around Infinite Warfare for the company to benefit going forward. The company says this is the first time Activision has had three player communities "at scale" in the Call of Duty franchise, as Infinite Warfare, Modern Warfare Remastered, and Black Ops III all helped Activision generate record levels of monthly active users for 2016. Consequently, management is planning to steadily release additional content for these three Call of Duty games throughout 2017, which will help offset a light year of new game releases.
Across the portfolio, Activision Blizzard has about 450 million monthly active users. Growing audience reach and engagement are very important to fulfilling CEO Bobby Kotick's mission to make Activision Blizzard the leading stand-alone interactive entertainment company.
In the end, engagement and audience reach are designed to generate a growing and profitable business. All of the hours players spend in Activision Blizzard's games lead them to purchase in-game content to extend the life of the game, and this translated to about $1 billion in in-game digital revenue in the fourth quarter. For the full year, $3.6 billion out of total revenue of$6.6 billion was derived from in-game purchases.
The ongoing growth of in-game content purchases is important for the company's bottom line as it carries a much higher margin than game sales. The acquisition of King Digital Entertainment and in-game content purchases helped the company produce $2.2 billion in cash from operations in 2016, an increase of 71% over 2015.
The growth of cash from operations, or cash flow, allowed management to increase the dividend 15% to $0.30 per share, and announce a new $1 billion share repurchase program spread out over the next two years.
Overall, Activision Blizzard demonstrated good strength across its portfolio of billion-dollar franchises. As the top game maker enters new markets like e-sports and consumer products, it will be important for Activision Blizzard's audience reach and engagement to continue showing growth.
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