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Tough Comps Take Down Take-Two

By Danny Vena - Feb 14, 2018 at 11:06AM

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The company met or exceeded its own fiscal third-quarter forecasts, but investors expected even more from the high-flying video game purveyor.

The video game industry has been on fire for the last couple of years, and investors have been winning along with it. Take-Two Interactive (TTWO -2.35%) has benefited thanks to its growing stable of fan favorites, and its stock has been on a non-stop thrill ride worthy of a car chase in Grand Theft Auto -- one of the company's flagship franchises.

With the stock up more than 100% in 2017, Take-Two shareholders were naturally hoping that the rally would continue. But while the company's fiscal third-quarter 2018 results came in at the high end of its own forecasts, the market was apparently expecting more.

Man walking horse over beautiful, rugged terrain in screen shot from Red Dead Redemption 2.

Was Take-Two's stock hit with a penalty for delay of game? Image source: Rockstar Games.

Would you like to play a game?

For the quarter, which ended Dec. 31, Take-Two generated net revenue of $480.8 million, up 1% year over year. This hit near the high end of management's forecast range of $440 million to $490 million, but well below analysts' consensus estimate of $493 million.

Net income increased to $25.1 million, compared to a loss of $29.8 million in the prior-year quarter. This generated earnings of $0.21 per diluted share compared to a loss of $0.33 per diluted share in the same period last year.

It is important to note that these results were boosted by the recently passed corporate tax cuts, which gave the company a net tax benefit of $11.9 million, or $0.10 per share. Excluding this one-time event, net income would have been $11.2 million, with earnings of $0.11 per diluted share. Analysts had expected a loss of $0.10 per diluted share.

Net bookings, a non-GAAP measure the company believes provides investors with a more accurate benchmark for its performance, declined to $653.9 million, or 12% year over year. Take-Two pointed out that two launches in the prior-year quarter, Mafia III and Sid Meier's Civilization VI, provided for difficult comparisons in the current quarter.

Recurring revenue continued to be a bright spot for the company. Consumer spending on items like virtual currency, add-on content, and micro-transactions increased 64% year over year, and grew to 32% of total net revenue. Digitally delivered net revenue topped $258.4 million, up 8% over the prior-year quarter, and now accounts for more than half of Take-Two's total sales.

Several items of note

Take-Two has made several recent announcements that will be of interest to shareholders.

Numerous men riding on horseback in the show in a screenshot from Red Dead Redemption 2.

Delayed releases are nothing new to longtime watchers of the video game industry. Image source: Rockstar Games.

Earlier this week, the company's Rockstar Games division revealed a second delay to the long-awaited release of Red Dead Redemption 2, pushing it back until Oct. 26. That follows the previous delay that rescheduled it for spring of this year. In a blog post this week, Rockstar Games said, "we require a little extra time for polish." 

The company announced the release date of Kerbal Space Program: Making History Expansion. The expansion to the highly popular physics-based space simulation game is scheduled to debut on March 13.  

Late last year, Take-Two announced the formation of Private Division, a new label "dedicated to bringing titles from top independent developers to market." Private Division has several upcoming titles created by well-known industry veterans, and will be the third publishing label under the Take-Two umbrella, along with Rockstar Games and 2K.

Take-Two reminded investors that it had been added to the NASDAQ-100 Index, which comprises the 100 largest non-financial companies on the NASDAQ.

"Our stellar results were highlighted by record recurrent consumer spending on both Grand Theft Auto Online and NBA 2K18, robust ongoing sales of Grand Theft Auto V, and the successful launch of WWE 2K18," said Chairman and CEO Strauss Zelnick.

Looking ahead

Take-Two showed its confidence for the future by raising its forecast. For the upcoming fiscal fourth quarter, which ends March 31, Take-Two expects revenues in the $460 million to $510 million range, generating income before taxes of $77 million to $88 million, and earnings per share in a range of $0.73 to $0.83. Analysts' consensus estimates are for revenue of $450 million, and earnings per share of $0.63. 

Longtime watchers of Take-Two have come to expect delays like those affecting Red Dead Redemption 2. But shareholders have also been rewarded for their patience, as the company has a history of delivering the goods when it finally does release a new game.

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