Activision Blizzard Inc. Earnings Point to More Record Growth Ahead

Activision Blizzard (NASDAQ: ATVI) has a habit of under promising and over delivering. The video game developer this week announced second-quarter results, and -- for the sixth consecutive time -- the headline numbers came in ahead of management's guidance.

The owner of hit franchises like Call of Duty and World of Warcraft set new second-quarter records on the top and bottom lines while raising its outlook for the full year.

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More on that brightening outlook in a moment. First, let's look at the latest operating trends.

Record operating results

Revenue improved to $1.63 billion compared to the $1.57 billion the company logged a year ago. In contrast, management had predicted in early May that sales would decline to $1.42 billion. Likewise, Activision's $0.55 per share of profit trounced the $0.38 per share that executives forecast three months ago.

Stepping back a bit, the company's operations are showing solid momentum through the first half of the year. Sales are up 11% and digital revenue has jumped to 80% of the business from 68%. That success helped operating margin soar to 39% of sales from 36% in the year-ago period.

Reach and engagement

The Blizzard side of the business stood out as a big winner. Its audience of active gamers jumped to a record 46 million -- up 38% year over year and 12% higher than the prior quarter. The Overwatch, Hearthstone, and Diablo 3 franchises all contributed to these healthy gains. A string of successful property releases over the last few years, meanwhile, have now pushed Blizzard's user base to more than double its level from early 2015.

The Activision segment saw its audience size decline slightly. Still, the division set a new profitability record with help from a fresh content release in the Call of Duty franchise.

Finally, the King Digital acquisition is paying healthy dividends for the company. The division contributed 29% of revenue over the past year and 27% of operating income. King's massive base of casual gamers continues to shrink -- falling to 314 million from 342 million last quarter. Engagement and monetization metrics keep marching higher, though, as management tinkers with rolling out new advertising approaches.

Looking ahead

CEO Bobby Kotick and his executive team raised their full-year outlook for the second straight quarter and now see revenue rising to $6.4 billion as earnings stop at $1.94 per share. Management is encouraged by early demand indications for the new installments in two of its biggest franchises, Destiny and Call of Duty. Destiny 2 pre-orders are already above those of the first title, they said. As for Call of Duty: WWII, set to release on November 3, pre-orders and early reviews have been strong. King also has a strong pipeline of casual game launches in store, including a potentially popular social casino title.

Looking further out, Activision Blizzard is busy cultivating new revenue streams that could become significant parts of the business in a few years. It is adding video advertising to broadcast to its huge base of King gamers, for one. The developer also just launched the industry's first city-based professional e-sports league around the Overwatch brand. "With hundreds of hours of broadcast content ahead of us, as well as significant sponsorship and media opportunities," Kotick said in a press release, "the Overwatch League will provide new ways for us to highlight and support the passion of e-sports fans."

Those opportunities are sure to contribute to the record operating results that Activision expects to hit this year. A few hit game releases this fall might even extend its positive quarterly surprise streak to seven in-a-row.

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Demitrios Kalogeropoulos owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard. The Motley Fool has a disclosure policy.