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Take Two (TTWO) Q1 Earnings Up Y/Y on Gross Margin Expansion

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Take Two Interactive Software (TTWO - Free Report) reported first-quarter fiscal 2019 earnings of 62 cents per share that increased 11.3% from the year-ago quarter.

Net revenues declined 7.2% from the year-ago quarter to almost $388 million. However, the figure was better than management’s guidance, driven by strong recurrent spending and solid demand for Grand Theft Auto V. The title is fast approaching the coveted milestone of 100 million sold-in units.

Recurrent consumer spending (virtual currency, add-on content and in-game purchases) accounted for 62% of revenues compared with 41% in the year-ago quarter.

The Zacks Consensus Estimate for earnings and revenues were pegged at 15 cents and $259 million, respectively.

Revenue Details

Digital revenues (81.2% of revenues) increased 17.5% to $315 million. However, revenues from Physical retailer and other segments (18.8% of revenues) plunged 51.4% to almost $73 million.
 

 

Region wise, revenues from the United States (57.1% of revenues) declined 14.3% to $221.4 million. However, revenues from International markets (42.9% of revenues) increased 4.1% to $166.6 million.

On the basis of platform, revenues from console (76% of revenues) dropped 14.6% to $294.7 million. Revenues from PC and other (24%) surged 27.2% to $93.3 million.

Grand Theft Auto Online had a strong quarter and exceeded Take Two’s expectations. Management stated that since Apr 1, developer Rockstar Games has released a number of free content updates for the game, including the most recent GTA Online: After Hours.

Moreover, during the quarter, Rockstar Games released the Grand Theft Auto V: Premium Online Edition.

Further, Rockstar Games is set to release Red Dead Redemption 2 on Oct 26.

Take Two also stated that more than 10 million units of NBA 2K18 has already been sold. The game is the highest-selling sports title ever in the company’s history.

Moreover, NBA 2K Online remains the number-one PC online sports game in China with over 37 million registered users.

Booking Details

Net bookings of $288.3 million decreased 17.2% on a year-over-year basis.

However, the figure came in better than management’s guidance thanks to robust performance of Grand Theft Auto Online and Grand Theft Auto V as well as recurrent consumer spending on NBA 2K18.

Recurrent consumer spending accounted for 63% of net bookings compared with 59% in the year-ago quarter. Take Two stated that recurrent consumer spending at WWE SuperCard grew 18% and the game has now been downloaded over 17 million times.

Moreover, Catalog accounted for $282.3 million of net bookings. Strong demand for Grand Theft Auto, NBA 2K, Dragon City and Monster Legends were observed in the quarter.

Digitally-delivered net bookings (88% of net bookings) grew 10% to $252.8 million. Bookings from Physical retail and other segments plunged 47.2% to $35.6 million.

Operating Details

Take Two’s reported gross margin of 66.1% expanded significantly from 53.5% reported in the year-ago quarter, primarily due to a decline in software development as well as product costs.

Reported operating expenses rose 7.1% year over year to $185.8 million due to growth across all expense lines. As percentage of revenues, operating expenses surged 640 basis points (bps) on a year-over-year basis.

In absolute dollars, general & administrative (G&A), selling & marketing (S&M), research & development (R&D) and depreciation & amortization (D&A) expenses grew 11.8%, 11.7%, 20% and 19.6%, respectively.

As percentage of revenues, G&A, S&M, R&D and D&A surged 300 bps, 250 bps, 300 bps and 50 bps, respectively.

However, income from operations surged 41.1% year over year to $70.8 million, driven by solid gross margin. Operating margin expanded 630 bps on a year-over-year basis to 18.3%.

Balance Sheet

As of Jun 30, 2018, Take Two had $1.15 billion in cash and short-term investments (including restricted cash) compared with $1.86 billion as of Mar 31, 2018.

The company repurchased 1.60 million shares for $153.5 million, since Apr 1.

Guidance

For the second quarter of fiscal 2019, Take Two expects GAAP net revenues to be in a band of $480-$530 million.  Net bookings are projected in a band of $500-$550 million.

Take Two expects high-single-digit growth in recurrent consumer spending. Digitally-delivered net bookings are expected to be approximately flat. NBA 2K, Grand Theft Auto Online, Grand Theft Auto V, and Social Point's mobile offerings are expected to be major contributors.

The company projects operating expenses in the range of $235-$245 million, up 15% at mid-point due to higher marketing expenses. The company projects GAAP earnings between 43 cents and 53 cents per share.

For fiscal 2019, net bookings are expected between $2.70 billion and $2.80 billion, better than the previous guidance of $2.67-$2.77 billion. The year-over-year increase of 38% reflects the launch of Red Dead Redemption 2 and expected growth from NBA 2K.

Take Two expects high-single digit growth in recurrent consumer spending. Moreover, digitally-delivered net bookings are anticipated to increase by approximately 20%.

GAAP net revenues are likely to be in a band of $2.50-$2.60 billion. The company now projects GAAP earnings in the range $1.45-$1.70 per share, down from the previous guidance of $1.53-$1.80.

The company projects operating expenses in the range of $900-$940 million.

Operating cash flow is reiterated to be around $785 million.

Zacks Rank and Stocks to Consider

Take Two currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader Consumer Discretionary sector include Activision (ATVI - Free Report) , AMC Networks (AMCX - Free Report) and Comcast (CMCSA - Free Report) . All three stocks have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

Long-term earnings growth rate for Activision, AMC and Comcast is projected to be 15.4%, 7.2% and 11.2%, respectively.

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