3 Key Takeaways From Take-Two's Earnings Call

Take-Two Interactive (TTWO 0.42%) reported second-quarter earnings after market close on Nov. 7, delivering results that topped the average analyst estimate. The average target had called for adjusted earnings per share of $0.93, with actual per-share earnings for the period coming in at $1.05. The table below breaks down sales and earnings for the period compared to the second quarter of 2017.

Data source: Take-Two Interactive; Table by author. 

Shares are down roughly 10% following the second-quarter release, as guidance for per-share earnings of $2.55 in the current quarter came in below the market's average target for earnings per share of $2.59. However, with Red Dead Redemption 2 outperforming expectations, the weaker-than-expected profit target could be down to development ramping up on other titles and doesn't suggest any real change in the company's long-term outlook.

Read on for a deeper look at Take-Two's second-quarter performance, some of the most interesting information from the earnings call, and what's ahead for the video-game publisher. 

Image source: Take-Two Interactive. 

The company's latest game is a smash hit

Take-Two launched Red Dead Redemption 2 (RDR 2), the latest title from the company's Rockstar Games development unit, on Oct. 26 -- and sales performance has been nothing short of spectacular. The title recorded $725 million in sales across its first three days on the market, good for between 10 million units and 12 million units sold depending on the breakdown of the standard and higher-priced, special-edition versions of the game. During the earnings call, management revealed that Red Dead Redemption 2 has now sold over 17 million copies -- exceeding the company's expectations, trouncing its prequel's 15 million lifetime sales, and putting the game on track to be one of the most successful ever.

Here's Take-Two's Chief Financial Officer Lainie Goldstein outlining increases to the company's third-quarter and full-year guidance: 

We expect net bookings to range from $1.4 billion to $1.45 billion, up from $654 million in the third quarter last year, driven by the record-breaking launch of Red Dead Redemption 2.

Turning to our outlook for the full fiscal year, we are raising our fiscal 2019 operating outlook primarily as a result of our stronger than expected second quarter results and increased outlook for Red Dead Redemption 2 as well as higher recurrent consumer spending on NBA 2K. These are partially offset by modestly reduced unit expectations for NBA 2K19 and WWE 2K19. We now forecast net bookings to range from $2.8 billion to $2.9 billion, up from our prior outlook of $2.7 billion to $2.8 billion. At the midpoint, this represents a 43% increase over fiscal 2018 driven primarily by the launch of Red Dead Redemption 2 and expected growth from NBA 2K, which we forecast to be partially offset by lower net bookings from Grand Theft Auto V and Grand Theft Auto Online.

RDR 2 is off to a monster start, and attention now turns to its still-to-be-released online mode. The game's multiplayer component will have its beta version go live at the end of November and looks to be a key performance driver for Take-Two. The company expects Red Dead Online to be one of its biggest sales generators in the current quarter and fiscal year.

Grand Theft Auto V is slowing but still has gas

With attention drawn to Take-Two's latest release and management guiding for sales from GTA V to decline next quarter, there might be some temptation to overlook the importance of the game that's driven the company's impressive performance over the last five years. GTA V might not be the hot story of the season, but the game was a key factor in Take-Two delivering better-than-expected performance in the second quarter, and it will remain a key performance driver over the next couple of years. Here's chief executive officer Strauss Zelnick detailing the performance for the title and its online mode:

Grand Theft Auto Online continued to exceed expectations in the second quarter, as it has in every period since its release. Recurrent consumer spending and the title grew sequentially and was close to flat year-over-year. During the quarter, Rockstar Games supported Grand Theft Auto Online with an array of new content, highlighted by the highly successful After Hours update, and they have much more plans going forward. Sales of Grand Theft Auto V also outperformed our expectations, and the title is now sold in more than 100 million units.

Management also indicated that it doesn't expect RDR 2 and its online mode to cannibalize GTA V's performance. While the two titles share some game design elements and are built on the same engine, their respective tones, settings, and gameplay mechanics differ in significant ways, and this differentiation may allow the two mega hits to continue succeeding in tandem.

It's worth noting that management has often guided for GTA Online sales to decline, but the game has routinely defied expectations. GTA V will eventually weaken, but with Red Dead Redemption 2 on the scene, a mainline Grand Theft Auto sequel probably a couple of years out from release, and other big games in the pipeline, some slowdown after years of stellar performance shouldn't frighten Take-Two shareholders.

Recurring revenue is up and will continue rising

In addition to selling games through retail and digital channels, the sale of virtual items and currencies is Take-Two's other major business pillar. Sales for in-game items (what the company refers to as "recurrent consumer spending") rose 12% year over year to reach 49% of total sales. These products tend to be higher-margin than triple-A games because they're relatively inexpensive for developers to create and cost next to nothing to duplicate, and Take-Two continues to see strong growth for the category.

Here's Goldstein outlining in-game purchase performance for the company's NBA 2K19, the latest installment in the company's basketball franchise:

During the second quarter, recurrent consumer spending on NBA 2K grew approximately 70% to a new record. In fact, NBA 2K was the single largest contributor to recurrent consumer spending in the period. We expect the net bookings from NBA 2K19, including recurrent consumer spending, will be the highest ever for a 2K Sports title.

NBA 2K's fantastic recurring revenue performance comes even as unit sales for the title are slightly below where management expected them to be. Meanwhile, the NBA 2K Online series for the Chinese market saw sales climb 85% year over year thanks to the launch of a new installment. Recurrent consumer spending for WWE Supercard, a digital card game built on the wrestling franchise, grew 47% compared to the prior-year period.

Net bookings from the company's Social Point development unit also grew substantially compared to the prior-year quarter. Social Point, a mobile-focused developer that Take-Two acquired in 2017 for $276 million, now has 10 games in its development pipeline. That's substantially more titles in the works at the studio than had previously been known. Take-Two expects Social Point to account for roughly 5% of sales this year, but with so many titles in the works, the development unit's contribution could rise if some of their projects go on to be hits.