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Take-Two (TTWO) Down 10.9% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Take-Two Interactive (TTWO - Free Report) . Shares have lost about 10.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Take-Two due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Take Two’s Q2 Results Benefit from Strong In-game Net Bookings.

Take Two Interactive Software reported second-quarter fiscal 2019 GAAP earnings of 22 cents per share. The company had reported loss of 3 cents in the year-ago quarter.

Net revenues increased 11.1% from the year-ago quarter to $492.7 million. The year-over-year growth was primarily driven by strong net bookings and solid demand for Grand Theft Auto V, Grand Theft Auto Online and the successful release of NBA 2K19.

The Zacks Consensus Estimate for earnings and revenues was pegged at 91 cents and $549 million, respectively.

Sales of Grand Theft Auto V substantially outperformed the company’s expectation and sold more than 100 million units.

Revenue Details

Digital revenues (72.7% of revenues) increased 18.3% to $358.4 million. However, revenues from Physical retailer and other segments (27.3% of revenues) dropped 4.5% to $134.3 million.

Region wise, revenues from the United States (56.7% of revenues) increased 1.2% year over year to $279.3 million. Moreover, revenues from International markets (43.3% of revenues) increased 27.3% to $213.4 million.

On the basis of platform, revenues from console (75.5% of revenues) increased 3.2% to $372.2 million. Revenues from PC and other (24.4%) surged 44.9% to $120.4 million.

Grand Theft Auto Online had another strong quarter and exceeded Take Two’s expectations. Management stated that the developer Rockstar Games has released a number of free content updates for the game.

Second-quarter results further benefited from other games including Social Point's mobile games, NBA 2K18, WWE SuperCard and NBA 2K Online 2 in China.

Notably, NBA 2K Online grew 85% in China, driven by the launch of NBA 2K Online 2 in August. Moreover, the franchisee NBA 2K is the predominant PC online sports game in China and has total registered user base of 40 million.

NBA 2K19, which was launched in September, witnessed 10% year-over-year growth due to increase in recurrent consumer spending.Further, Take Two released Red Dead Redemption 2 on Oct, 26 and sold a record $725 million in retail in the first three days of its release.

Notably, the company is coming up with the following releases, The Golf Club 2019 and Sid Meier's Civilization VI for Nintendo Switch, on Nov 16.

Booking Details

Net bookings of $583.4 million increased 1% on a year-over-year basis. Moreover, the figure came in better than the guided range due to robust performance of Grand Theft Auto Online and Grand Theft Auto V as well as the successful launch of NBA 2K19.

Recurrent consumer spending accounted for 53% of net bookings, growing 28% year over year. Take Two stated that recurrent consumer spending at WWE SuperCard grew 47% (net of platform fees) and the game has now been downloaded over 18 million times.

Additionally, recurrent consumer spending on NBA 2K increased 70% and was the single largest contributor to total recurrent spending in the second quarter. However, recurrent consumer spending on Grand Theft Auto Online stayed flat year over year.

Net bookings from United States increased 2% year over year to $362.5 million while the same from international declined 2% to $221 million.  

Notably, Catalog accounted for $287.8 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 (73% of net bookings) grew 20% to $426 million. Bookings from Physical retail (27% of net bookings) and other segments plunged 29% to $157.2 million.

Operating Details

Take Two’s reported gross margin of 52.3% expanded significantly from 44.4% reported in the year-ago quarter.

Reported operating expenses rose 11.3% year over year to $231.8 million primarily due to higher marketing and R&D expenses. As a percentage of revenues, operating expenses increased 10 basis points (bps) on a year-over-year basis to 47.1%.

In absolute dollars, general & administrative (G&A), selling & marketing (S&M), and research & development (R&D) expenses grew 10.3%, 22.3%, 21%, respectively. However, depreciation & amortization (D&A) expense declined 48.1%.

As percentage of revenues, G&A and D&A declined 10 bps and 230 bps, respectively. However, S&M and R&D increased 180 bps and 100 bps, respectively.

Income from operations came in at $26 million against an operating loss of $11.3 million in the year-ago quarter.

Guidance

For the third quarter of fiscal 2019, Take Two expects GAAP net revenues to be in a band of $1.1 to $1.15 billion. Net bookings are projected in a band of $1.40 and $1.45 billion, primarily driven by the launch of Red Dead Redemption 2.

Take Two expects growth in recurrent consumer spending to stay flat. Digitally-delivered net bookings are expected to increase 70%.

The company projects operating expenses in the range of $290 and $300 million, up 45% at mid-point due to higher marketing expenses. The company projects GAAP earnings between 31 cents and 41 cents per share.

For fiscal 2019, net bookings are expected between $2.8 billion and $2.9 billion, better than the previous guidance of $2.7 and $2.8 billion. The year-over-year increase of 43% reflects the launch of Red Dead Redemption 2 and expected growth from NBA 2K.

Take Two expects low-teen growth in recurrent consumer spending. Moreover, digitally-delivered net bookings are anticipated to increase approximately 30%. The increased forecast is primarily driven by higher full-game download mix for Red Dead Redemption 2 and NBA 2K 2019.

GAAP net revenues are likely to be in a band of $2.55 and $2.65 billion. The company now projects GAAP earnings in the range $1.73 to $1.98 per share.

The company projects operating expenses in the range of $890 and $930 million, driven by higher marketing, personnel, IT and R&D expenses. Additionally, capital expenditure is expected to be around $60 million.

Operating cash flow is expected to be around $730 million, an increase of $20 million from the prior guidance.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Take-Two has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Take-Two has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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