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Take-Two (TTWO) Down 8.3% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Take-Two Interactive (TTWO). Shares have lost about 8.3% 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 catalysts.

Take Two’s Q3 Results Benefit from Solid Top-Line Growth.

Take Two Interactive Software reported third-quarter fiscal 2019 GAAP earnings of $1.57 per share compared with 21 cents in the year-ago quarter.

Net revenues surged 159.7% from the year-ago quarter to $1.25 billion. The growth was driven by robust performance of Red Dead Redemption 2, NBA 2K19 and NBA 2K18, Grand Theft Auto Online and Grand Theft Auto V, WWE 2K19 and WWE SuperCard, Dragon City and Monster Legends, and Sid Meier’s Civilization VI.

Recurrent consumer spending (virtual currency, add-on content and in-game purchases, including the allocated value of virtual currency and add-on content included in special editions of certain games) increased and accounted for 24% of total net revenues.

The Zacks Consensus Estimate for earnings and revenues was pegged at $2.75 and $1.49 billion, respectively.

Red Dead Redemption 2 Hits Milestones

Take Two division Rockstar Games launched Red Dead Redemption 2 for PlayStation 4 and Xbox One in the quarter. The game was an instant hit as it recorded the biggest opening weekend in retail sell-through across all entertainment releases (over $725 million).

It was also the second biggest launch (three days) in retail sell-through across all entertainment releases (trailed Grand Theft Auto V).

Per The NPD Group, based on combined physical and digital sales in the United States, Red Dead Redemption 2 was the best-selling video game of 2018. To date, 23 million units of Red Dead Redemption 2 have been sold worldwide.

Rockstar Games also launched the public Beta for Red Dead Online.

Top-Line Details

Digital revenues (47.6% of revenues) surged 130% year over year to $594.7 million. Revenues from Physical retailer and other segments (52.4% of revenues) soared 194.1% to $654 million.

Region wise, revenues from the United States (52.2% of revenues) surged 148.4% year over year to $651.6 million. Moreover, revenues from International markets (47.8% of revenues) skyrocketed 173.3% to $597.2 million.

On the basis of platforms, revenues from console (91.6% of revenues) surged 190.1% to $1.14 billion. Revenues from PC and other (8.4%) increased 20.7% to $104.3 million.

Booking Details

Net bookings of $1.57 billion surged 139.8% on a year-over-year basis.

Net bookings from recurrent consumer spending accounted for 22% of net bookings and grew 31% year over year.

Notably, Catalog accounted for $243.9 million of net bookings. Strong demand for Grand Theft Auto, Dragon City and Monster Legends, and Sid Meier’s Civilization VI were observed in the quarter.

Digitally-delivered net bookings (44.9% of net bookings) grew 85.4% to $703.8 million. Bookings from Physical retail (55.1% of net bookings) and other segments surged 215.4% to $864.8 million.

Operating Details

Take Two’s reported gross profit jumped 64.6% year over year to $350.2 million. However, reported gross margin of 28% contracted significantly from 44.3% reported in the year-ago quarter.

Reported operating expenses jumped 46.3% year over year to $298.5 million primarily due to higher selling & marketing (S&M), research & development (R&D) and general & administrative (G&A) expenses in the quarter. S&M, R&D and G&A expenses grew 103%, 24.6%, 7%, respectively.

Income from operations came in at $51.8 million compared with $8.9 million in the year-ago quarter. Operating margin expanded 230 basis points (bps) to 4.1%.

Guidance

For the fourth quarter of fiscal 2019, Take Two expects GAAP net revenues to be in a band of $530 to $580 million. Net bookings are projected between $450 million and $500 million. The company projects GAAP earnings between 67 cents and 77 cents per share.

For fiscal 2019, net bookings are expected between $2.89 billion and $2.94 billion. GAAP net revenues are likely to be in a band of $2.66 and $2.71 billion, up from the previous guidance range of $2.55-$2.65 billion.

Take Two now projects GAAP earnings in the range $3.07 to $3.18 per share.

The company projects operating expenses in the range of $921 to $931 million. Additionally, capital expenditure is expected to be around $60 million.

Operating cash flow is expected to be around $545 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Take-Two has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, Take-Two has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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