Take-Two Reports Q4 Loss, Misses on Revs - Analyst Blog

Take-Two Interactive Software Inc. TTWO reported loss of 4 cents per share (including stock-based compensation), which was much worse than the Zacks Consensus Estimate of earnings of 4 cents.

The miss was primarily attributable to a year-over-year decline in revenues. Take-Two's first-quarter and fiscal 2015 outlook also failed to impress.

Quarter Details

Take-Two reported revenues (including deferred revenues) of $233.2 million, which declined 23.1% from the year-ago quarter. On a GAAP basis, revenues were $195.2 million that missed the Zacks Consensus Estimate of $204.0 million. However, GAAP revenues were toward the higher-end of management's guided range of $170.0 to $200.0 million.

Despite the fact that non-GAAP revenues from digitally delivered content jumped 51.4% year over year to $122.3 million, revenues suffered due to lackluster performance of catalog games, which accounted for $75.7 million of total revenue.

From the geographic perspective, the United States accounted for 57.0% of revenues in the reported quarter compared with 60.0% in the year-ago quarter. The remaining 43.0% came from International markets, which increased from 40.0% in the year-ago quarter.

Gross margin (including stock-based compensation) contracted 160 basis points (bps) from the year-ago quarter to 47.3% due to higher internal royalties.

Total operating expenses as percentage of revenues increased significantly from 38.3% in the year-ago quarter to 47.4% in the last quarter. The year-over-year increase was due to higher general & administrative, research & development and depreciation & amortization expenses, which were up 850 bps, 530 bps and 60 bps, respectively.

The massive growth in these items fully offset a 530 bps decline in selling & marketing expense. As a result, Take-Two reported operating profit of $2.4 million, significantly down from $32.3 million in the year-ago quarter.

Net loss (including stock-based compensation but excluding other one-time items) was $4.1 million or 4 cents per share compared with $23.4 million or 23 cents. Excluding stock-based compensation and other one-time items, net income was $21.5 million or 21 cents per share compared with $42.5 million or 38 cents in the year-ago quarter.

Take-Two exited the quarter with cash and cash equivalent (including restricted cash) of $1.13 billion. Long-term debt was $454.0 million at the end of the fourth quarter. Cash flow from operations was $700.3 million at the end of the quarter.

Guidance

For the first quarter of fiscal 2015, Take-Two expects non-GAAP net revenues to be in the range of $120.0 to $135.0 million, much lower than the Zacks Consensus Estimate of $191.0 million. Non-GAAP loss is expected to be in the range of 35 to 25 cents per share.

For fiscal 2015, the company expects non-GAAP net revenue to be in the range of $1.35 to $1.45 billion, while earnings are expected to be in the range of 80 cents to $1.05 per share. Both revenues and earnings per share are expected to significantly decrease on a year-over-year basis.

Currently, the Zacks Consensus Estimate for revenues is pegged at $1.39 billion and that for earnings per share stands at 67 cents per share.

Total operating expenses are expected to increase by approximately 14.0% driven primarily by higher selling and marketing expense. Selling and marketing expense is expected to be about 20.0% of net revenue based on the mid-point of the company's revenue outlook range.

Our Take

We believe that Take-Two's robust product pipeline will drive top-line growth and profitability in fiscal 2015. The company will benefit from the upcoming launch of NBA2K15, Evolve, next-gen WWE title, Borderlands: The Pre-Sequel and Civilization: Beyond Earth.

However, we believe that Grand Theft Auto V has modest growth prospect in fiscal 2015, which is a major concern. Although Take-Two has a healthy product pipeline, we believe that it will be difficult for the upcoming games to repeat the success of Grand Theft Auto V in fiscal 2015.

Moreover, intensifying competition from companies such as Electronic Arts EA, Activision Blizzard Inc. ATVI and Zynga ZNGA remains a major headwind. Additionally, increasing expenses are expected to hurt profitability in fiscal 2015.

Currently, Take-Two has a Zacks Rank #3 (Hold).

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