Take-Two Interactive (NASDAQ:TTWO) delivered a strong quarter marked by the ongoing success of Grand Theft Auto V and the new release of NBA 2K18. The company reported growth in GAAP revenue and net bookings but reported a loss in earnings per share. However, the loss fails to reflect strong sales of Grand Theft Auto V, as the company is not able to account for the full sale of the game due to its digital content (more on that below).
Overall, the year is shaping up to be a lot better than management originally expected, leading to an improved outlook for the balance of fiscal 2018 ending in March.
There may be no end to Grand Theft Auto V's amazing run
It's official: Grand Theft Auto V is now the all-time best-selling video game based on both digital and physical sales of the game, across all platforms. It's amazing how well this four-year-old game has performed, and there's no one, not even management, that knows how long this game will continue to grow.
Grand Theft Auto V's online component is like a playground for gamers to gather friends and complete missions together online. Take-Two steadily releases new content for gamers to keep coming back to play, which is why the game continues to generate revenue with over 85 million units sold since 2013.
Here's what CEO Strauss Zelnick had to say about the current trend in gaming that is fueling the growth of Grand Theft Auto V:
The business that, once upon a time, was a big, chunky opportunity to engage for tens of hours or perhaps 100 hours, has turned into ongoing engagement day after day, week after week. You fall in love with these titles, and they become part of your daily life.
It's safe to say Grand Theft Auto is the most valuable franchise property in the video game industry, given ongoing strength in financial performance and player engagement after four years.
Reported earnings per share were negative, but that's misleading
Strong performance of Grand Theft Auto V, as well as the newly released NBA 2K18, fueled 20% growth for the quarter in total net bookings -- a metric that adjusts GAAP revenue for sales of digitally delivered items that the company can't report on its income statement until a later date. Digitally delivered net bookings grew 31% in the quarter and made up 68% of total net bookings.
These are great numbers, but Take-Two reported a GAAP net loss of $0.03 per share for fiscal Q2, which doesn't look as good on the surface. However, as management explained on the conference call with investors, given how the company is required to account for revenue from the digitally delivered content it doesn't reflect how well the business is actually performing. CFO Lainie Goldstein said:
While the operating performance of our business exceeded our expectations, this outperformance was not fully reflected in our GAAP results ... Our better-than-expected net bookings were driven by titles that we are required to defer, and therefore, our GAAP revenues and profits will not fully benefit from these sales until future periods.
What this means is that when someone purchases Grand Theft Auto V, for example, Take-Two receives cash for the full value of the sale upfront, but it's required under GAAP rules to report only a portion of the sale on its income statement. The portion of the game's value that is derived from digital online content has to be realized over time, which can understate the actual amount of cash the company is generating from its games.
To get a better sense of how much actual cash the company generated, we can turn to the cash flow statement, which removes all of the accounting maneuvers and simply shows us how much cash is available for management to reinvest in the business. For the recent quarter, Take-Two generated $19.7 million of cash from operating activities, higher than the reported net loss of $2.7 million based on GAAP.
Take-Two raises outlook for the year
Based on the continued strong performance of Grand Theft Auto V, management is no longer expecting the game's sales to moderate through the end of the fiscal year in March. This is a reversal of their previous guidance that it would moderate. Management is now calling for net bookings between $1.93 billion to $2.03 billion for the full year. Previously, it had expected $1.75 billion at best.
Also, cash from operating activities is now expected to be approximately $300 million, which is double the amount management previously predicted in May, when they announced the delay of Red Dead Redemption 2. This would put Take-Two's cash from operations close to what it generated in fiscal 2017, which puts the game maker in a strong position when the highly anticipated new Red Dead game releases in spring 2018.