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Take-Two's Q1 Loss Narrower than Expected, Revenues Beat

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Take-Two Interactive Software Inc. (TTWO - Free Report) recently announced first quarter 2015 results. The company reported a loss of 24 cents per share, much narrower than the Zacks Consensus Estimate of a loss of 45 cents and a loss of 60 cents per share reported in the year-ago quarter. This improvement was primarily attributable to robust revenue growth exhibited by the company in the quarter.
Take-Two delayed the launch of its much-anticipated Evolve title to Feb 10, 2015 from the fall of 2014. We believe that the delay will take away incremental revenues from the busy holiday season, and will also make the competition much easier for Activision Blizzard’s (ATVI - Free Report) upcoming Call of Duty annual installment.

Quarter Details    

Take-Two reported revenues (including deferred revenues) of $151.6 million, which increased 5.1% from the year-ago quarter. Revenues also managed to convincingly beat the Zacks Consensus Estimate of $136.0 million.

Non-GAAP revenues from digitally delivered content jumped 42.8% year over year to $106.4 million. The jump in revenues was mainly driven by Take Two’s portfolio of digitally delivered offerings, continued growth in NBA 2K franchise and persistent demand for Grand Theft Auto V.

From the geographic perspective, the United States accounted for 52% of revenues in the reported quarter compared with 60% in the year-ago quarter. The remaining 48% came from International markets, which increased from 40% in the year-ago quarter.

Gross profit (including stock-based compensation) was $86.6 million in the first quarter versus $50.0 million in the year-ago quarter. Gross margin expanded 2250 basis points (bps) to 57.1% in the reported quarter.

Total operating expenses as percentage of revenues increased 70 bps to 68.9% in the first quarter. The year-over-year growth was due to higher general & administrative, research & development and depreciation & amortization expenses, which were up 320 bps, 140 bps and 60 bps, respectively.

The significant increase in these items fully offset a 450 bps decline in selling & marketing expense. As a result, Take-Two reported an operating loss of $33.2 million which was however narrower than a loss of $49.6 million reported in the year-ago quarter.

Net loss (including stock-based compensation but excluding other one-time items) was $18.9 million or 24 cents per share compared with $50.8 million or 58 cents reported in the year-ago quarter.

During the quarter, the company broadened its portfolio with the releases of Borderlands 2 and Headhunters 5.

Balance Sheet & Cash Flow

Take-Two exited the quarter with cash and cash equivalents of $822 million compared with $1.13 billion in the prior quarter. Long-term debt was $459.4 million versus $454 million at the end of the fourth quarter. Cash outflow from operations was $87.5 million in comparison to cash flow of $700.3 million in the previous quarter.


For the second quarter of fiscal 2015, Take-Two expects non-GAAP net revenue to be in the range of $95 to $110 million, while the Zacks Consensus Estimate for the same is pegged at $109 million. Revenue in the second quarter is expected to be driven by catalog sales, led by the Grand Theft Auto Series 2K15 and Borderlands 2.

Non-GAAP loss is expected in the range of 60 to 70 cents per share while the Zacks Consensus Estimate stands of a loss of 75 cents per share.

For fiscal 2015, the company expects non-GAAP net revenue to be in the range of $1.35 to $1.45 billion, while earnings are expected to be in the range of 80 cents to $1.05 per share. Both revenues and earnings per share are expected to significantly decrease on a year-over-year basis.

Currently, the Zacks Consensus Estimate for fiscal 2015 revenues is pegged at $1.41 billion and that for earnings per share stands at 73 cents.

For fiscal year 2015, management expects its geographic revenue split to be 60% United States and 40% international. Gross margins are expected to be in the mid-40s. The company also expects the revenue breakdown from its labels top be approximately 40% from Rockstar games and 60% from 2K games.

The company expects to generate cash from operations in fiscal 2016.

Our Take

We believe that Take-Two’s robust product pipeline will drive top-line growth and profitability in fiscal 2015. The company will benefit from the upcoming launch of NBA2K15, Evolve, next-gen WWE 2K15, Borderlands: The Pre-Sequel, Grand Theft Auto V and Civilization: Beyond Earth.

Although we believe that GTA has a loyal customer base, a 2017 release will be way too slow to capture market share from the likes of Electronic Arts (EA - Free Report) , Activision and Zynga (ZNGA - Free Report) .Moreover, Take-Two's overdependence on console gaming sales and lack of mobile gaming titles is a major headwind in the long run. Additionally, increasing expenses are expected to hurt profitability in fiscal 2015.

Currently, Take-Two has a Zacks Rank #3 (Hold).

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