Bear of the Day: Take-Two Interactive (TTWO)

Take Two Interactive Software (TTWO) dropped to the cellar of the Zacks Rank after a disappointing Q4 fiscal 2018 report delivered in mid-May. The maker of video games such as Grand Theft Auto reported earnings of 77 cents per share which declined 13.5% from the year-ago quarter.

The company's net revenues came in at $450.3 million, declining 21.2% from the year-ago period. Underperformance of NBA 2K was a dampener.

The EPS was a beat, but the top line was miss.

Headed into the report, analysts were already taking down estimates for the company with the current June quarter dropping from $0.54 to $0.49. And the full fiscal year 2019 (began in April) fell from $5.15 to $5.06.

But after the company's outlook, estimates have continued their slide for the company's key game franchises and this year's EPS projection is now $4.65. The trend is expected to persist into next year with analysts bringing down fiscal 2020 from $5.77 to $4.83 in the past 60 days.

Take-Two Interactive is a leading developer, publisher and marketer of interactive entertainment for consumers around the globe. The company develops and publishes products principally through its two wholly-owned labels Rockstar Games and 2K.

Net bookings of $411.4 million increased 1% on a year-over-year basis. Digitally delivered net bookings (81% of total net bookings) grew 11.6% to $380 million, driven by Grand Theft Auto Online, Grand Theft Auto V, NBA 2K18, Sid Meier’s Civilization VI, WWE 2K18 and WWE SuperCard.

Bookings from Physical retail and other segments plunged 28% to $78.2 million. Recurrent consumer spending net bookings increased 42% and represented 44% of total net bookings.

In the free-to-play games space, Social Point's mobile games Dragon City and Monster Legends contributed meaningfully to net bookings. Social Point is also expected to provide a long-term growth opportunity to the company.

Per the company, digital revenues (67% of total revenue) increased 8.1% to $301.4 million while revenues from Physical retailer and other segments (33% of total revenue) were down 49.2% to $148.9 million.

Region-wise, revenues from the United States (57% of total revenue) were down 13.6% to $255.7 million. International markets revenues (43%) declined 29.4% to $194.6 million.

On the basis of platform, revenues from console (81%) dropped 29.4% to $194.6 million. Revenues from PC and other (19%) declined 5.2% to $86.8 million.

For the first quarter, the company expects net bookings to be in the band of $215–$265 million, driven by Grand Theft Auto Online, Grand Theft Auto V and NBA 2K18 as well as the acquisition of Social Point. GAAP net revenues are projected in the band of $345–$395 million.

The company projects operating expenses to be in the range of $190 million to $200 million, up 12% at mid-point due to higher expenses for R&D and stock compensation. The company projects GAAP income per share in the range of 53–63 cents.

For fiscal 2019, net bookings are projected in the band of $2.67–$2.77 billion. The company expects Red Dead Redemption 2 (to launch on Oct 26) and NBA 2K to drive growth. Launch of NBA 2K19 and WWE 2K19 in fall 2018 is expected to boost the top line in the fiscal year.

However, lower net booking from Grand Theft Auto V and Grand Theft Auto Online will remain a drag.

Net bookings from current consumer spending are expected to witness modest increase while digitally-delivered net bookings are projected to increase 15%. The company expects Rockstar Games to contribute 55% of net bookings, followed by 2K with 40% and the rest from Social Point and others.

GAAP net revenues are likely to be in the band of $2.50–$2.60 billion. The company now projects earnings per share in the range $1.53-$1.80.

The company projects operating expenses to be in the range of $885-$925 million, which reflects an increase of 19% at mid-point, owing to higher marketing, personnel and software development costs. Operating cash flow is expected to be around $710 million.

The revenue outlook of $2.72 billion (mid-point) compares to the Street at $2.87 billion and EPS of $4.12 vs. the Street at $4.81.

From what I read from Wall Street analysts, the primary motivations for reducing estimates has been the weaker-than-expected bookings projections. Yet several investment banks reiterated their Buy ratings and price targets near $130, including Stifel Nicolaus and Piper Jaffray.

Apparently, they still like the projected 41% revenue growth and 67% EPS growth this year.

Bottom line for TTWO: As gaming platforms become more competitive and differentiated, it seems that new blockbuster franchises are required to keep sales and profits flowing. Until the estimates stop going down and start going back up for TTWO, it may be best to sit this game out. The Zacks Rank will let you know.

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