Image: Take-Two Interactive.
The video game industry has always been a competitive one, where the ultimate in success lies in creating hit franchises that keep delivering strong sales year after year. Over the past few years, Take-Two Interactive Software (TTWO +0.35%) has used that strategy to perfection, as its stock has tripled from its 2012 lows. Yet coming into Monday afternoon's fiscal fourth-quarter financial report, Take-Two had some questions to answer following a lackluster performance in its previous quarter that helped pull its stock back down from all-time highs. Let's take a closer look at Take-Two and why investors were so pleased about its latest performance.
Take-Two says game over for its rivals
Take-Two Interactive's fiscal fourth-quarter results had a lot of positives. Sales jumped 83% to $427.7 million on an adjusted basis, and even though that growth was slower than the near-doubling of revenue that investors had wanted to see, it still marked a considerable gain. Adjusted net income soared more than 150% to $54.3 million, creating earnings of $0.49 per share, easily outpacing the $0.27 per share consensus expectation among investors.
Several key factors helped drive Take-Two higher. Digitally delivered content sales jumped 66%, with Grand Theft Auto leading the way along with games in the NBA 2K, Evolve, Borderlands, and WWE 2K series. Moreover, consumers proved ready to spend money on recurring spending like buying virtual currency or paying for downloaded upgrades, with recurring revenue climbing 47% from the previous year's quarter and making up more than half of all digital revenue.
Take-Two was pleased with the results. As CEO Strauss Zelnick noted, "we seamlessly launched five triple-A titles for the holiday season, led by Grand Theft Auto V and NBA 2K15, and added an exciting new franchise with the successful release of Evolve." Launches of multiple new titles built on previous success, showing the follow-on value of Take-Two's major assets.
Image: Take-Two.
What's next for Take-Two?
What's not entirely clear, however, is whether the company will be able to give long-term investors the growth they want to see as fiscal 2016 begins. In its guidance, Take-Two said that it expects fiscal first-quarter revenue in the $325 million to $350 million range, producing earnings of $0.25 to $0.35 per share. With the game-maker typically seeing a slowdown during the spring quarter, that guidance actually looks reasonably good. But full-year projections for sales of $1.3 billion to $1.4 billion aren't nearly as ambitious as many investors would have liked, implying a contraction of 16% to 22% in the top line for the year. Similarly, earnings of $0.75 to $1 per share will be a considerable dropoff from the nearly $2 per share of adjusted net income per share the company produced in fiscal 2015.
Nevertheless, one thing investors probably will like is the decision from Take-Two's board of directors to boost its share repurchase authorization. Take-Two approved an increase to 10 million shares, which would represent almost 12% of the company's total shares outstanding if it were to carry through with buybacks for the full amount.
Still, the question is whether Take-Two will actually use its buyback power. During fiscal 2015, Take-Two spent absolutely nothing on share repurchases. For its part, Take-Two said that it has generated considerable cash flow, but there's still no assurance that the game-maker will follow through on its newly granted authority to use that cash to buy back stock.
Overall, Take-Two Interactive investors were pleased with the combination of solid earnings and future prospects, sending the company's shares up 7% in the first hour of after-market trading following the earnings announcement. Still, Take-Two will have to keep demonstrating its ability to cash in on existing and new titles in order to drive the growth that investors want to see not just this year but in the years to come as well.
