DEEP EQUITY ANALYSIS: Take-Two Interactive Software Earnings

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

Take-Two (NASDAQ:TTWO) Q1 revenue was at the low end of guidance, while EPS was well below expectations as new releases Max Payne 3  and Spec Ops: The Lineperformed poorly after lengthy development cycles. Revenue was $226 million, vs. our estimate of $275 million, consensus of $254 million, and guidance of $225 –275 million. Non-GAAP EPS was $(1.16) vs. our estimate of $(0.57), consensus of $(0.65), and guidance of $(0.75) – (0.60). The EPS miss was primarily due to earlier amortization of capitalized development costs in Q2 as sales for Max Payne 3 and Spec Ops: The Line did not meet expectations.

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The company decreased FY:13 guidance for revenue to $1.70 – 1.80 billion from $1.75 – 1.85 billion and Non-GAAP EPS to $1.75 – 2.00 from $2.00 – 2.25.Initial Q2:13 guidance is for revenue of $200 – 250 million and non-GAAP EPS of $(0.30) – (0.15), well below our prior expectations. Implied 2H:13 guidance is for revenue of $1.22 – 1.37 billion and non-GAAP EPS of $3.06 – 3.46.

Despite lowered FY:13 guidance, we do not believe Take-Two (NASDAQ:TTWO) can achieve 2H implied guidance without a Grand Theft Auto V release this fiscal year. FY:13 guidance is for revenue of $1.70 – 1.80 billion and EPS of $1.75 – 2.00, with 55% of revenue (≈ $963 million) from Rockstar Games and 45% (≈ $788 million) from 2K Games. For Rockstar, we estimate that Max Payne 3 will contribute up to $250 million depending on DLC, with $150 million from catalog sales of Rockstar games. We do not think that the remaining ≈ $550 million is not possible without a GTA V release before YE.

We expect a GTA V release date  announcement by as late as November. There was no such announcement at E3, making a pre-holiday release less likely (but still possible). An announcement at gamescom in August remains a possibility.

Maintaining our OUTPERFORM rating and our 12-month price target of $19, which reflects a forward multiple of 15x estimated sustainable EPS of $1.20 (fully taxed) plus an estimated $1/share in net cash. Our multiple is in line with the historical range, and reflects improving execution.

Michael Pachter is an analyst at Wedbush Securities.

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