Take-Two Interactive (NASDAQ:TTWO) reports earnings for its fiscal first quarter of 2018 on Aug. 2, after the market close. There are no new releases to drive sales, so the key to a good quarter will be player engagement with existing titles and how that affects digital revenue performance.

Digital revenue growth

With the delay of Red Dead Redemption 2, Take-Two is facing a lighter game slate for fiscal 2018 than was originally expected at the start of the year. This only means that fiscal 2019 will be a huge year for Take-Two, with Red Dead, the western action game, pushed back to spring 2018. For now, more focus will be on player engagement within Grand Theft Auto Online, and sports titles NBA 2K and WWE 2K.

Collage of game art from Grand Theft Auto depicting various characters holding weapons while engaging in various action-oriented activities.


High player engagement is the fundamental ingredient that drives growth in digital revenue, especially recurrent consumer spending, which includes virtual currency, downloadable add-on content, and microtransactions. In the last quarter, digital revenue increased 43% to $278.7 million, with recurrent consumer spending making up 50% of digital revenue and 24% of total revenue. The biggest contributor to recurrent consumer spending has been Grand Theft Auto V (GTA V), which surpassed 80 million players in the last quarter. It's the highest rated game on console and just keeps getting bigger and better for Take-Two.

Investors will be particularly interested to see how well GTA performed in the quarter, and here's why. In management's full year guidance, they factored in a moderating sales trend for GTA V, and it's not because the game itself is starting to slow down. The real reason, as CFO Lainie Goldstein disclosed on the previous quarterly conference call, is that the game is "unlike anything else that we've ever had and we have very little visibility into how long it will continue this trend of growth, [so] we've included it as moderating in this year's guidance."

In other words, GTA V sales are off the charts, and, therefore, management is doing the right thing to be conservative. However, there could be some unexpected upside to management's guidance if the player base continues to stay engaged at a high level. It's important to note that school is out, and GTA V remains one of the most watched games on social gaming sites like Twitch.tv and YouTube Gaming.

What to expect

Management is calling for non-GAAP net revenue to fall between $240 million and $290 million, while non-GAAP earnings per share are expected to be between $0.12 and $0.21. However, the stock will likely get a bump if actual results compare favorably with analysts estimates of $280.78 million for non-GAAP revenue and $0.19 per share for earnings.

Looking beyond the second quarter results, fiscal 2019 is shaping up to be a huge year for Take-Two -- perhaps the biggest year in its history. Take-Two is expected to reach $2.5 billion in revenue and generate about $700 million in cash from operations, which would match the high watermark set in fiscal 2014 when Grand Theft Auto V launched.  Next year will also be the inaugural season of Take-Two's professional esports league based on the NBA 2K franchise. Esports is a big growth opportunity for video game companies, and Take-Two expects NBA 2K eLeague to potentially be a significant revenue and profit generator for the company long term.

Take-Two should make it through the current year just fine since GTA V is doing so well. In the fall, Take-Two's sports titles will get a refresh with new versions of NBA 2K and WWE 2K hitting digital store shelves. For the fiscal first quarter earnings report, the main thing investors need to watch is digital revenue and potentially better than expected sales and engagement with GTA V.  

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