Take Two Interactive Software Earnings Anlysis: What About GTA V??

Take Two Interactive Software (NASDAQ:TTWO) posted In-line Q4. Revenue was $148 million, vs. guidance of $112 – 162 million, our estimate of $150 million and the consensus estimate of $140 million. Key drivers included digital newer titles NBA 2K12, MLB 2K12, and The Darkness II, and catalog titles. EPS was $(0.60) versus guidance of $(0.65) – (0.50), our estimate of $(0.55) and the consensus estimate of $(0.54).

The company provided initial detailed FY:13 guidance for revenue of $1.75 – 1.85 billion and EPS of $2.00 – 2.25, vs. prior guidance for substantial revenue growth and EPS in excess of $2.00. We are decreasing our FY:13 revenue estimate to $1.86 billion from $1.90 billion, and for EPS to $2.50 from $3.00, and initiating FY:14 estimates for revenue of $1.90 billion and EPS of $2.00.

Weak Q1:13 EPS guidance. Management guided to earnings of $(0.75) – (0.60) on revenue of $225 – 275 million. In comparison, in Q3:12, Take-Two delivered net revenue of $236 million, and still produced positive EPS of $0.27. The loss in Q1:13 will be caused by a number of one-time factors.

Guidance strongly implies the release of Grand Theft Auto V in FY:13. Although management did not provide a release date or window for GTA V, its FY:13 revenue guidance is unattainable without a huge seller from Rockstar. Rockstar is expected to contribute ≈ $1.1 billion, with ≈ $300 million from Max Payne (including DLC) and ≈ $150 million from catalog. The remaining ≈ $650 million is simply not possible without the release of GTA V well before FY end.

We think that EPS guidance seriously understates the contribution that GTA V could generate. Revenue guidance suggests that around 14 million units of GTA V (or a multitude of high-profile releases that have yet to be announced) will be sold. We estimate that contribution margin at this sales level is around 30%, making earnings of more than $2.00 likely. Each 1 million units of sell-in above that level should contribute at least $0.10 – 0.12/share of incremental earnings.

Maintaining our OUTPERFORM rating and our 12-month price target of $19, which reflects a forward multiple of 15x estimated sustainable EPS of $1.20 (fully-taxed) plus an estimated $1/share in net cash. Our multiple is in line with the historical range, and reflects improving execution.

Michael Pachter is an analyst at Wedbush Morgan.

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