Why Is Take-Two (TTWO) Down 7.9% Since Last Earnings Report?

A month has gone by since the last earnings report for Take-Two Interactive (TTWO). Shares have lost about 7.9% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Take-Two due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Take Two’s (TTWO) Q3 Earnings and Revenues Decrease Y/Y

Take Two Interactive Software reported third-quarter fiscal 2020 GAAP earnings of $1.43 per share, down 8.9% year over year.

Net revenues declined 25.5% from the year-ago quarter to $930.1 million.

Recurrent consumer spending (virtual currency, add-on content and in-game purchases, including the allocated value of virtual currency and add-on content incorporated in special editions of certain games) increased 15% and accounted for 37% of total GAAP net revenues.

Recurrent consumer spending on Grand Theft Auto Online grew 54% driven by Rockstar Games’ continued release of new content.

The Zacks Consensus Estimate for earnings and revenues was pegged at $1.73 and $911 million, respectively.

Top-Line Details

Digital revenues (74.2% of revenues) increased 17.8% year over year to $700.3 million. Notably, growth was driven by NBA 2K20 and NBA 2K19, Grand Theft Auto Online and Grand Theft Auto V, The Outer Worlds, Red Dead Redemption 2 and Red Dead Online, Borderlands 3, Sid Meier’s Civilization VI, Social Point’s mobile offerings, and WWE SuperCard and WWE 2K20.

However, revenues from Physical retailer and other segments (21.2% of revenues) decreased 64.9% to $242.1 million.

Region-wise, revenues from the United States (57.7% of revenues) decreased 17.6% year over year to $536.8 million. Moreover, revenues from International markets (42.3% of revenues) decreased 34.1% to $393.2 million.

On the basis of platforms, revenues from console (73.1% of revenues) decreased 40.6% to $679.8 million while revenues from PC and other (26.9% of revenues) surged 140.1% to $250.3 million.

Booking Details

Net bookings of $888.2 million declined 43.2% on a year-over-year basis.

Net bookings from recurrent consumer spending grew 6% year over year and accounted for 41% of total net bookings.

Notably, Catalog accounted for $359.7 million of net bookings. Strong demand for Grand Theft Auto, Red Dead Redemption, and Social Point’s mobile offerings was observed in the reported quarter.

Digitally-delivered net bookings (77.7% of net bookings) declined 1.9% to $690.6 million. Moreover, bookings from Physical retail (22.3% of net bookings) and other segments declined 77.1% to $97.6 million.

Operating Details

Take Two’s gross profit increased 40.8% year over year to $493 million. Reported gross margin of 53% expanded significantly from 28% in the year-ago quarter.

Reported operating expenses increased 5.9% year over year to $316.2 million, primarily due to higher research & development (R&D) and general & administrative (G&A) expenses in the quarter. R&D and G&A expenses increased 32.4% and 19.7%, respectively, on a year-over-year basis.

Meanwhile, selling & marketing (S&M) expenses decreased 15% year over year to $137.1 million in the reported quarter.

Income from operations came in at $176.8 million, up 241.5% year over year. Operating margin of 19% expanded significantly from 4.1% in the year-ago quarter.

Guidance

For the fourth quarter of fiscal 2020, Take Two expects GAAP net revenues between $635 million and $685 million. The company projects GAAP earnings between 92 cents and $1.12 per share.

Net bookings are projected between $540 million and $580 million. Significant contribution to net bookings is expected to be made by Grand Theft Auto Online and Grand Theft Auto V, NBA 2K20, Red Dead Redemption 2 and Red Dead Online, Sid Meier’s Civilization VI and Borderlands 3.

The company projects recurrent consumer spending to grow approximately 10% year over year, driven primarily by growth in Grand Theft Auto Online and Red Dead Online.

Moreover, digitally delivered net bookings are expected to increase over 20%. The company assumes that 66% of current generation console games will be delivered digitally, up from 57% in the same period last year.

For fiscal 2020, net bookings are expected between $2.8 billion and $2.85 billion. GAAP net revenues are likely to be in the range of $2.96-$3.01 billion.

Take Two projects GAAP earnings of $3.38-$3.58 per share. The company projects operating cash flow to be more than $500 million.

Take Two expects recurrent consumer spending for the NBA 2K20 franchise to grow in strong double digits in fiscal 2020.

Note: The EPS data mentioned in the text of this section differs from the rest of report due to the difference in calculation or consideration of one-time items.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -18.41% due to these changes.

VGM Scores

Currently, Take-Two has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Take-Two has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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