Going into Take-Two Interactive Software's (NASDAQ:TTWO) first-quarter earnings report, investors had plenty of lingering doubts that had carried over from its fourth-quarter report in May. The surging popularity of free-to-play games in the battle royale genre, led by Epic Games' Fortnite, had many wondering whether it was merely the latest fad, or a continuing trend that could upend the existing hierarchy in the gaming world.

Take-Two was able to put some of those fears to rest when the company reported results that were surprising on more than one account. 

For the just completed fiscal first quarter, which ended on June 30, Take-Two reported that revenue fell 7% year over year to $388 million, but soared past analysts' consensus estimates for $288.32 million, and was at the high end of management's forecast. Profits also impressed, with adjusted earnings per share of $0.12 easily surpassing the $0.07 expected by analysts. 

A red sports car being chased by police cars and helicopters.

Image source: Rockstar Games.

Just the numbers

Metric

Q1 19

Q1 18

Year-Over-Year Change

Net revenue

$388.0 million

$418.2 million

(7%)

Net bookings

$288.3 million

$348.3 million

(17%)

Operating income

$70.8 million

$50.2 million

41%

Net income

$71.7 million

$60.2 million

19%

Diluted earnings per share

$0.62

$0.56

11%

Data source: Take-Two First-Quarter Financial Report.

Grand Theft Auto is driving growth

Take-Two said the largest contributor to its better-than-expected revenue was the continuing health of its flagship Grand Theft Auto franchise, which is still going strong nearly five years after its initial release. During the conference call, Strauss Zelnick, Chairman and CEO of Take-Two, called the game the "standard-bearer for the current console generation," having sold nearly 100 million units to date. The game had no significant update in the current quarter, compared to a major upgrade in the prior-year quarter, so the robust sales of the game continue to surprise. NBA 2K18, Dragon City and Monster Legends, and WWE franchises also helped contributed to the positive results. NBA 2K18 also surpassed a milestone, selling more than 10 million units, setting a new record for the franchise. Digitally delivered revenue grew 17% year over year to $315 million and accounted for 81% of total sales, up from 64% in the year-ago quarter.

In one of the most important revelations from the report, Take-Two's recurrent consumer spending -- from virtual currency, add-on content, and in-game purchases -- grew to 62% of total net revenue, up from 41% in the prior-year quarter. Recurring revenue provides stable ongoing sales for the company and smooths out the lumpy results that accompany new game releases. 

Even more impressive was the company's spending discipline, as Take-Two was able to drive down costs to improve both its gross profit and operating income compared the the prior-year quarter, even in the face of lower revenue. Both helped contribute to the company's improved profitability. 

The company also bought back 1.6 million shares for $153.5 million, or about $96 per share, and ended the quarter with $1.1 billion in cash.

Looking ahead

While revenue is currently down year over year, the long-awaited launch of Rockstar Games' Red Dead Redemption 2 is scheduled for Oct. 26, and the company will also be releasing the 20th-anniversary edition of the NBA 2K franchise, NBA 2K19, as well as WWE 2K19 over the next several quarters.

Four cowboys on horseback riding the plains silhouetted by a full moon, in a scene from Red Dead Redemption 2.

Image source: Rockstar Games.

"Fiscal 2019 is poised to be another year of profitable growth for Take-Two, and we expect to deliver record operating results," Zelnick said. "Looking ahead, we have a strong development pipeline across our labels and are exceedingly well positioned for long-term growth and margin expansion."

For the upcoming second quarter, Take-Two is expecting revenue in a range of $480 million to $530 million, which would represent year-over-year growth of 14% at the midpoint of guidance. GAAP earnings per share are expected to be between $0.43 and $0.53 per share, a decline of 5% to 23% compared to the year-ago quarter. This falls far short of analysts' consensus estimates, which are calling for revenue of $583.81 million and earnings per share of $0.89. 

Take-Two was able to allay any concerns related to incursions by the battle royale genre for now, and with new releases scheduled for several of the company's top franchises, this could be a banner year for Take-Two shareholders.

Danny Vena owns shares of Take-Two Interactive. The Motley Fool owns shares of and recommends Take-Two Interactive. The Motley Fool has a disclosure policy.