EUR 850.00 For Business Accounts Only

Morningstar | Take-Two Kicks Off Fiscal 2019 with Strong Quarter; Management Bullish on RDR 2 Online

Take-Two started fiscal 2019 on a strong note as first-quarter revenue and operating income both came in ahead the Street estimates. Recurrent consumer spending in both NBA 2K and GTA Online continues to drive growth on the top and bottom lines. While management issued improved revenue guidance for fiscal 2019 due to increased bullishness around Red Dead Redemption 2, GTA Online, and NBA 2K19, the new guidance range is in line with the previous consensus estimates. We are maintaining our narrow moat rating and our fair value estimate of $114. With shares trading above our fair value estimate, we would seek a wider margin of safety before investing.

Non-GAAP net revenue of $288 million (down 17% year over year) was driven by recurrent revenue spending in NBA 2K18 and GTA Online as well as sales of the full-game GTA V. Despite being first launched almost five years ago, GTA V remains a top-earner both in terms of microtransactions and unit sales and now has sold over 100 million units, implying unit sales of almost 10 million in 2018. Digitally delivered revenue in the quarter hit $253 million and made up 88% of non-GAAP total revenue, up from 81% a year ago. Recurring revenue increased to 63% of non-GAAP total revenue, up from 59% in the first quarter of fiscal 2018. Operating income on a non-GAAP basis fell to $11 million from $61 million a year ago due to lower revenue and increased headcount.

As we noted in our recent Observer, “The Evolution of the Video Game Experience” and follow-up ad-hoc report “The Evolution of Video Games Continued,” the business model for games has shifted from receiving a single upfront payment to collecting a recurring stream of payments, increasing the importance of recurrent spending or microtransactions for Take-Two and other video game publishers. We also outlined how Take-Two transformed its most popular franchise, GTA, from a game with primarily single-player focus to a game with two separate modes, GTA V (the traditional single player experience) and GTA Online (a multiplayer online experience). This transformation, along with a heavy release schedule of free DLC packs and game updates, has helped GTA remain relevant and heavily played over the last five years. The most recent update, After Hours, has received positive reviews after being released in July with a marketing blitz from Rockstar.

Despite this success, one of the main questions surrounding the firm is whether Rockstar will deliver a similar experience to players and benefit to Take-Two with the highly anticipated release of RDR 2 in October. We believe that an RDR Online mode would be popular but worry that the game setting of the Old West in the U.S. may make the experience less universal than the modern urban setting of GTA V. RDR 2 is launching into a more competitive landscape in which multiplatform games like Fortnite and PlayerUnknown's BattleGrounds are dominating in terms of the gamer time and wallet share. Also, the holiday season for 2018 will be stacked with high-profile multiplatform releases including Call of Duty: Black Ops 4, Battlefield V, and Fallout 76 along with Pokeman and Smash Brothers titles for Nintendo Switch. While we expect RDR 2 to stand out even against this level of competition, any stumbles could hurt the game's ability to sustain long-term success.