Take Two Interactive Missed Game Sales with this Expected Hit
Take-Two Interactive’s (NASDAQ:TTWO) Duke Nukem Forever sales were lower than we expected due to poor reviews. We had previously expected Duke to be one of the year’s top sellers due to a high degree of hype and a dedicated fan base, and expected solid profit contribution as the bulk of development had been previously expensed. However, the game’s poor reviews (average Metacritic score of 49) likely had a negative impact on sales, causing us to lower our Q1 sell-in estimate to 1.5 million units from 3.0 million units.
• Upside to our L.A. Noire sales estimate. On June 23, Take-Two (NASDAQ:TTWO) announced that L.A. Noire (360, PS3) had shipped in ≈ 4 million units. As a result, we have raised our L.A. Noire sell-in estimate to 4.0 million units from 3.5 million units.
• Lowering our Q1 estimates as Duke downside offsets L.A. Noire upside. We now expect revenue of $350 million, down from $375 million, and EPS of $0.10, down from $0.25. On May 24, Take-Two guided to Q1 revenue of $325 – 375 million, and EPS of $0.00 – 0.10. Q1 guidance implies y-o-y revenue growth of -13% to flat, and a non-GAAP EPS decline of $0.33 – 0.43. Although we had previously viewed Q1 guidance as weak, we now view it as realistic given Duke’s sales drop-off and the strong performance of Red Dead Redemption last year.
• Despite the release of a disappointing Duke sequel, we expect Take-Two’s (NASDAQ:TTWO) commitment to high quality games to translate into consistent profits. Of the major publishers, Take-Two has had the fewest “misses” in terms of game quality over the last two years, and as a result, delivered a profitable FY:11 without a GTA release. It has over a dozen core franchises, and if it can streamline development, can be expected to increase franchise releases to three or more per year.
• We continue to expect the release of Grand Theft Auto V in FY:13. We view the extension of Rockstar employment contracts and FY:13 guidance for EPS of over $2.00 as indicators of a GTA release in FY:13, likely holiday 2012.
Michael Pachter is the video game analyst at Wedbush Morgan.