Take-Two Interactive Software: Analyst Lowers Estimate on Outlook
Take-Two Interactive Software (NASDAQ:TTWO) Q3 earnings was in-line with guidance. Revenue was $236 million, compared with our estimate of $225 million, consensus of $252 million, and guidance of $225 – 275 million. Non-GAAP EPS was $0.27, compared with our estimate of $0.20, consensus of $0.23, and guidance of $0.20 – 0.30. Key drivers of revenue were new release NBA 2K12, catalog (34% of total sales), and digital (11%).
A weak end to FY:12 overshadowed by strong FY:13 guidance. Take-Two decreased FY:12 guidance for revenue to $790 – 840 million from $1.0 – 1.1 billion, and for EPS to $(0.75) – (0.60) from $0.10 – 0.35. It maintained FY:13 guidance for EPS “in excess” of $2.00. In addition, it expects substantial revenue growth.
We are lowering our FY:12 estimates for revenue to $840 million from $866 million and for EPS to $(0.42) from $(0.25) to reflect updated guidance. We are maintaining our FY:13 estimates for revenue of $1.95 billion and EPS of $3.20.
Weak guidance for Q4:12. With Max Payne 3 and XCOM shifted out of FY:12, the company is left with three releases before year-end. However, Q4:12 earnings guidance reflects a number of factors in addition to these delays, including: (1) an adjusted sales forecast, (2) a more challenging retail environment in Europe, (3) increased interest expense, and (4) higher software development costs.
Commitment to producing high quality games should translate into consistent profits starting in FY:13. Of the major publishers, Take-Two has had the fewest “misses” in terms of game quality over the last two years. FY:13 should be one of the strongest years in the company’s history due to the releases of
BioShock Infinite, Borderlands 2, Grand Theft Auto V, Max Payne 3, Spec Ops: The Line, and two XCOM games. These games should allow the company to show substantial revenue growth and exceed $2.00 in EPS next year, as it has guided to.
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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