Take-Two Interactive (NASDAQ:TTWO) has experienced strong growth in digital revenue lately stemming from consistently high player engagement in Grand Theft Auto V and NBA 2K. Engagement levels in Grand Theft Auto has been so strong, in fact, that management has had to temper expectations for sales performance in their previous guidance for fiscal 2018.

Grand Theft Auto V continues to trend high on the list of most watched games on Twitch all summer, which sets up the potential for better-than-expected performance going into the first quarter earnings release and, consequently, the potential for raised guidance for the year. And that's exactly what we got.

Grand Theft Auto game art depicting a man and woman dressed in 1920's attire holding machine guns.

Grand Theft Auto Online has been the big moneymaker for Take-Two in recent years. IMAGE SOURCE: ROCKSTAR GAMES  

Additionally, NBA 2K17 engagement remained strong as Take-Two gets ready to launch NBA 2K18 in September. Recent acquisitions of mobile game developer Social Point and the popular PC game Kerbal Space Program also performed better than expected. The quarter was a really great start to what is expected to be a down year financially for Take-Two. 

Key games outperformed management's expectations

Grand Theft Auto V continues to rock along, being the single largest contributor to Take-Two's recurrent consumer spending, which made up more than 40% of total net revenue in the quarter. The game has sold more than 80 million units over the last four years since release. Management continues to see Grand Theft Auto generating record engagement in the current quarter, and for fiscal 2018.

As the NBA season wound down in June, NBA 2K demand remained strong. Recurrent consumer spending for the top-rated sports game on console increased 64% year over year, driven by high player engagement. NBA 2K has also built a sizable following in China, with over 35 million registered players.

Recent acquisitions performing at a high level

The recent acquisitions of Spain-based mobile game maker Social Point and the popular PC game Kerbal Space Program also outperformed management's expectations in the quarter. Social Point posted double-digit net sales growth, driven by its two top mobile games -- Dragon City and Monster Legends. Social Point has several new games planned for release over the next few years, and represents a growth opportunity for Take-Two in the fast growing mobile game market.

Margin expansion

The mentioned games contributed to an excellent start to the new fiscal year for Take-Two. Digitally delivered net revenue increased 56% to $268.2 million. Sales from virtual currency, downloadable add-on content, and micro-transactions, drove recurrent consumer spending growth of 72%. In total, recurrent consumer spending made up 41% of net revenue, which is up from 31% in the year ago quarter.

In addition, console players continue to transition to digital direct full game downloading as a way to purchase games. Digital distribution has been a mainstream way of buying games on PC for a while, but console gamers have lagged the digital trend. Console gamers are beginning to catch up. In the fiscal first quarter, Take-Two reported full game downloads as a percentage of total sales was 40% -- higher than what management typically expects. For the full year, management anticipates full game downloads to make up 30% of total sales.

As digital revenue grows as a percentage of total revenue, margins expand because digitally delivered content has much lower cost to produce than physical game discs. This can be seen in the year over year improvement in gross margin where it was 53% in the first quarter compared to 38% in the year ago quarter.

Fiscal 2018 guidance

The better than expected performance across major titles in Take-Two's catalog was good enough for management to raise guidance for the fiscal year. Management now expects non-GAAP net revenue to be $1.65 billion to $1.75 billion, which is up from their prior guidance of $1.42 billion to $1.52 billion. Cash from operations is now expected to be $200 million for the full year, up from previous guidance of $150 million. This is mainly due to better-than-expected player engagement levels in NBA 2K and Grand Theft Auto V in the first quarter, which management expects to continue throughout the year.

After the recent news that one of the game maker's biggest franchises was being delayed to fiscal 2019, the current year was expected to be down. However, if Take-Two keeps showing strong engagement and sales performance with existing games, fiscal 2018 may be more flat than down compared to fiscal 2017. This result would be a great tee-off for what's expected to be a big year of growth in fiscal 2019.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.