Analyst: Take-Two Expected to Provide EPS Guidance Below Consensus

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

Take-Two (NASDAQ:TTWO) will report its fiscal Q4:14 (March) results after the market close on May 13 and host a conference call at 1:30 p.m. Pacific Time (dial-in: 877-407-0984, webcast:

We expect a Q4 EPS upside from strong sales of Grand Theft Auto V, NBA 2K14, and digital (including GTA Online). Our current estimates are for revenue of $210 million and EPS of 15 cents, versus consensus of $202 million and 10 cents, and guidance of $170 million-$200 million and 0 cents to 10 cents. We note that Take-Two had digital revenue of $132.8 million in Q3:14, meaning it needs only a modest reorder number in Q4:14 to achieve guidance, assuming digital is relatively flat.

We expect Take-Two to provide initial FY:15 EPS guidance below consensus. Our current estimate is 40 cents, while consensus is over $1. Management previously stated that it expects to deliver “a profit” in FY:15 and every year for the foreseeable future. The announced lineup so far is underwhelming, and our expectations for GTA V DLC are modest, leading us to expect guidance for revenue of roughly $1.2 billion and EPS of 10 cents to 30 cents.

Take-Two exceeded those figures in its last non-GTA year, FY:13, when it released BioShock Infinite, Borderlands 2, and Max Payne 3. While we are confident there will be several other titles released next year, including one from Rockstar, we don’t know which games are planned, nor the timing. As such, we are unable to model profits at the level of consensus expectations.

We expect continued growth of high-margin digital revenue in FY:15, led by Grand Theft Auto Online. Management said GTA Online was the top contributor to Q3:14 digital revenue of $132.8 million. GTA Online should be augmented by the introduction of multiple DLC packs. We expect a DLC attach rate below 25 percent for the more than 32.5 million units of the game sold-in as of last quarter, as many gamers have already purchased next-gen consoles and GTA Online is incompatible with them.

We are maintaining our NEUTRAL rating and our 12-month price target of $19. Our price target is based upon a market multiple (15x) applied to “sustainable” earnings of  70 cents plus $8.45 net cash. This multiple is in line with industry peers and reflects an improving outlook for publishers on the next-gen consoles.

Michael Pachter is an analyst at Wedbush Securities. 

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