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Morningstar | Take-Two Posts Strong 3Q Driven by RDR2; Weak 4Q Guidance Just a Blip on the Screen

Take-Two reported strong fiscal 2019 third-quarter results as revenue came in ahead of the Street estimates and EBITDA met expectations. Strong sales and recurrent consumer spending in NBA 2K19 and the launch of Red Dead Redemption 2 drove growth on the top and bottom lines. RDR2 sold over 23 million units worldwide and was the top-selling game of 2018 in the U.S. Despite the strong quarter, shares tumbled lower intraday on Feb. 6 as the company issued weaker-than-expected guidance for the fiscal fourth quarter. We are maintaining our narrow moat rating and our fair value estimate of $114, however, as our estimates were already below consensus for fiscal 2019, as we continue to believe RDR2 will have a shorter revenue tail than GTA V. With shares now trading in 4-star territory, the current levels may provide an attractive entry point for investors.

Non-GAAP net bookings of $1.6 billion (up 140% year over year) were driven by sales of RDR2 and NBA 2K19 as well as recurrent revenue spending (up 22% year over year) in NBA 2K19 and GTA Online. Digitally delivered net bookings in the quarter hit $704 million, up 85%, and made up 45% of non-GAAP net bookings, down from 58% a year ago. Digital full-game sales for current titles increased to 31% of all sales, up from 26% a year ago, but came in well below the firm’s full-year fiscal 2019 target of 37%. The lower digital revenue in the quarter can largely be attributed to RDR2 as the game likely sold a larger-than-average share of physical copies than a normal new title, particularly since some retailers used physical copies of the game as an important part of their promotional holiday console bundles. Non-GAAP EBITDA increased to $418 million, up sharply from $175 million in the same period last year, but EBTIDA margin declined by 20 basis points year over year to 26.6%. The slight margin decline was due in part to lower-margin physical sales more than offsetting the growth in high margin recurrent revenue.

The strong launch of RDR2 demonstrates the strength of Rockstar Games beyond the GTA franchise. While RDR2 has already outsold its prior installment, we continue to believe that the game will not have as long of a tail in terms of lifetime sales or recurrent revenue as GTA V. While RDR Online will have some success, we think that the relatively slower pace and turn of the 20th century Western setting will limit the appeal of the game. Also, the title is vying for player time and attention in a much more competitive landscape than GTA Online faced. While consumers are spending more time watching and playing video content and video games, there are more options to choose from every year. RDR Online will not only need to compete for players’ attention against the elephant in the video game room, Fortnite, but also from Call of Duty, PUBG, League of Legends, Overwatch, and numerous other video games. Beyond games, the title will need to grab screen time against Netflix, Amazon Prime, Twitch, YouTube, and good old pay television.

The NBA 2K titles were once again the largest contributors to recurrent revenue in the quarter. The most recent installment of the basketball title was the third-highest selling game in 2018 and the best-selling sports game of the year despite launching over a month after EA’s Madden 19. Engagement across NBA 2K19 is significantly up versus the predecessor title with MyTeam daily average users up 28% and games played up 46% for the MyTeam mode. Users have been playing almost 12 million NBA 2K19 games daily, which helped to grow recurrent spending over 39% year over year. While the sports titles at EA garner much of investor attention, 2K Games has established NBA 2K as a top-tier sports franchise that may only be second to EA’s FIFA in terms of player engagement.