In Take-Two Interactive's (NASDAQ:TTWO) fiscal fourth quarter earnings release, management issued preliminary guidance for fiscal 2019 that made everyone overlook the lack of a new Red Dead Redemption game for fiscal 2018. Looking beyond the current fiscal year to fiscal 2019, Take-Two expects revenue to reach $2.5 billion on top of new releases, including Red Dead Redemption 2 and a yet unannounced title from one of Take-Two's biggest franchises (probably either a new BioShock or Borderlands game).
Take-Two also expects cash flow to double to $700 million in fiscal 2019, compared to over $300 million the company reported in fiscal 2017. The company last generated this level of cash flow and revenue in fiscal 2014, when Grand Theft Auto V was released. So given that Red Dead Redemption 2 will be the company's marquee release next year, and based on management's guidance, Red Dead Redemption appears to be a second franchise with enough buzz to power financial results along with Grand Theft Auto. We may be getting close to the end of the days when Take-Two released a new Grand Theft Auto game every other year, providing the company an adrenaline shot in the form of higher revenue that would sink the following year.
Take-Two is gradually becoming less dependent on Grand Theft Auto
Red Read 2 promises to be bigger and better than the original Red Dead game, given its debut on consoles more powerful than the ones available in 2010 when the first Red Dead game was launched.
Additionally, the gaming industry has shifted even more toward a very profitable digital distribution strategy. Take-Two is generating more revenue from digital content driven by Grand Theft Auto Online, which serves as an online, multiplayer extension of the game's single-player story mode. Digital revenue has doubled from $435 million in fiscal 2014 to $921 million in fiscal 2017. This has led to more consistent annual cash flow, since digital revenue carries a much higher margin than sales of game discs.
Management plans to have a similar online component for Read Dead Redemption 2, which could help grow digital revenue even more, especially if enough players continue to stay engaged with Grand Theft Auto V after the release of Red Dead Redemption 2. Although I wouldn't expect Red Dead 2 to sell 80 million copies like Grand Theft Auto V, the western action game is expected to have a large enough player base to make an online component meaningful to the company financially.
Two is better than one
Since Red Dead 2 is scheduled for fiscal 2019, which starts April 1, 2018, don't expect to see another Grand Theft Auto until at least fiscal 2020, as the company historically releases a new Grand Theft Auto title about every five years or so, and I assume management doesn't want to cannibalize sales of Red Dead Redemption 2.
Management expects Grand Theft Auto V sales to begin moderating this year, which points to the importance of Take-Two having a second established franchise to smooth out the company's revenue generation. After a few years of Red Dead 2 racking up profits from recurrent in-game spending, the next Grand Theft Auto game will be waiting around the corner to keep sales volume up.
Take-Two is becoming a more well-rounded company
In addition, the rest of the company's game lineup looks strong and seems to be getting stronger with time, as NBA 2K, Mafia III, and other games continue to be cited by the company as key contributors to quarterly results. Take-Two CEO Strauss Zelnick explained the solid position the company is in with respect to its franchise portfolio on a recent conference call with investors [transcript via Seeking Alpha]:
[The franchise] catalog now has much more value. We have the highest-selling catalog per [unit], frankly, because we have the highest Metacritic scores, and our quality holds up over time.
Take-Two appears to have turned the corner from inconsistent, lumpy results in years past, and management is making the right moves in adjacent growth opportunities like mobile gaming and esports to build on the success of Grand Theft Auto V and lay a foundation for growth.
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