5 Ways Activision Blizzard Is Building a Stronger Business

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The headline results for Activision Blizzard's (NASDAQ: ATVI) recent fiscal year weren't especially impressive. Sales rose by just 6% in 2017 as operating income fell to 19% of sales from 21% in 2016. The video game titan's pool of engaged players dipped to 385 million from 447 million, too.

Investors shouldn't assign much weight to those figures since the numbers don't begin to describe Activision's successes at building a stronger business. For a clearer picture of that progress, I reviewed the company's latest annual report. Below are a few of the highlights from the 10-K.

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More engaged gamers

The dip in audience size was confined to the King Digital side of the business, where monthly active users dove to 290 million from 355 million a year ago. Activision's total, on the other hand, set a record at 55 million, while Blizzard held steady at about 40 million.

The King Digital losses were driven by casual gamers leaving its franchises, but the remaining base was both more engaged and more profitable. Average spending per user grew at a double-digit rate and the Candy Crush game attracted higher gamer spending in each of the year's four quarters. That success helped the King division boost operating income by 7% to $700 million, or just below the Blizzard segment's $712 million of earnings.

A more diverse portfolio

The company's top four franchises -- Call of Duty, Candy Crush, World of Warcraft, and Overwatch -- accounted for 66% of revenue this past year, compared to 69% last year and 75% in 2015. As a result, the company isn't nearly as vulnerable to a surprise slump in one of its core brands.

Activision also achieved greater diversity in its distribution channels. Alphabet's Google became one of its top customers in 2017 thanks to the success of King Digital games. Meanwhile, the company expanded its proprietary sales channel by releasing the PC version of Destiny 2 directly through its Battle.net platform.

Less volatile sales

The video game business used to be intensely seasonal, with most sales and profits coming around key product releases during the holiday season. Two years ago, for example, Activision generated just under half of its revenue in the fourth quarter.

The surging popularity of downloadable content like expansion packs and microtransactions has spread out its revenue base and turned Activision's titles into year-round sales producers.

Revenue in the fourth quarter of 2017 accounted for just 36% of overall sales, meaning the business is both less seasonal and more heavily tilted toward predictable, recurring revenue.

A bigger digital network

One of Activision's standout releases last year was a downloadable expansion to a prior Call of Duty title. The hit Zombies Chronicles launch was a key factor behind the 13% boost the company logged in its digital sales channel. Retail sales, on the other hand, shrank 25% as gamers shifted more of their spending online.

The continued stampede toward digital delivery didn't show up in higher profit margins this year, mainly because Activision spent more heavily on marketing some of its new releases. It's a long-term positive for the business, though, since these sales are typically far more profitable than ones that occur through retailing middlemen.

Expanding the pie

Activision this year made an important addition to the part of its annual report in which it defines its business. Management didn't change its broad description of the company as "a leading global developer and publisher of interactive entertainment content and services." But it tacked on this sentence right afterwards: "We also operate esports events and leagues and create film and television content based on our games."

That change reflects Activision's major new growth initiatives that aim to morph the company into more of an entertainment giant. Whether through the large advertising network it began to roll out in 2017, consumer product sales, esports leagues, or content licensing to TV show and movie producers, these moves suggest opportunities to monetize its portfolio of intellectual property that extend far beyond the straight sale of video games.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Demitrios Kalogeropoulos owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard, GOOGL, and GOOG. The Motley Fool has a disclosure policy.