Grand Theft Auto Push Is Key For Take-Two Interactive

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Take-Two (NASDAQ:TTWO) Q4 EPS beat from better-than-expected top-line growth and gross margin. Revenue was $303 million, vs. our estimate of $290 million, consensus of $280 million, and guidance of $235-285 million. Key drivers of the revenue beat included strong sales of BioShock Infinite, digital (27 percent of total revenue), and catalog (25 percent). EPS was $0.38, vs. our estimate of $0.27, consensus of $0.23, and guidance of $0.10-0.25. Key drivers of the EPS beat included better-than-expected top-line growth and gross margin improvement from a lower license expense due to the expiration of its previous contract with Major League Baseball.

Take-Two provided bullish guidance (after getting past a difficult Q1). Initial FY:14 guidance is for revenue of $1.75-1.85 billion and EPS of $2.05-2.30, well above FY:13 levels; however, initial Q1:14 guidance is for revenue of $100-125 million and EPS of $(0.70)-(0.55), below the Street’s prior expectations. It also announced that it expects to be profitable in FY:15 and for the foreseeable future.

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Maintaining our FY:14 estimates for revenue of $2.10 billion and EPS of $3.00. Our estimates are more heavily weighted to Q2-Q4 due to Q1 guidance.

Weak Q1 guidance creates a hole that Take-Two must climb out of to deliver FY guidance. In order to hit the high end of its guided range, it must deliver EPS of $2.60-3.00 from Q2-Q4. We think EPS at this level is likely, and note guidance for revenues suggests only 15-17 million units of GTA V will ship during FY:14.

Grand Theft Auto V is on track, and sell-in should hit a record in FY:14. GTA V is scheduled for a September release, so Take-Two will enjoy over 6 months of its fiscal year with the game in stores. This contrasts to prior releases, which typically came out near fiscal year-end and which did not benefit from holiday sales in the same fiscal year as launch. We expect a greater number of units sold in FY:14 than in any prior year of release for a GTA title. We expect GTA V to sell 20 million units in FY:14 and 24 million units lifetime, assuming an attach rate of 20 percent.

Maintaining our OUTPERFORM rating and 12-month price target of $19. Our price target reflects a forward multiple of ≈ 16x estimated sustainable EPS of $1.20 (fully taxed). This multiple is in line with industry peers, and reflects an improving outlook for video game publishers ahead of the launches of the next-gen consoles.

Michael Pachter is an analyst at Wedbush Securities.

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