Take-Two Interactive Software Earnings Preview: Deep Stock Analysis

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

Take-Two Interactive Software (NASDAQ:TTWO) will report its fiscal Q2:13 (September) results after the market close on Tuesday, October 30, and host a conference call at 1:30pm PT (877-407-0984 or at http://ir.take2games.com).

Expecting Q2 results above the high-end of conservative guidance. We estimate Q2 revenue and EPS of $225 million and $(0.21), respectively, compared to consensus of $240 million and $(0.18) and guidance of $200 – 250 million and $(0.30) – (0.15). According to NPD, Take-Two’s US console software dollar sales were up 162%, above the guided increase of 87 – 134%. Take-Two’s (NASDAQ:TTWO) best-selling title in Q2 appears to have been September’s Borderlands 2, which benefitted from a Metacritic score of ≈ 90 and somewhat limited non-sports competition. Digital (in Q1 up 33% y-o-y and 14% of net revenue) should also contribute to the beat.

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Despite a likely Q2 beat, we expect Take-Two to maintain FY:13 guidance for revenue of $1.70 – 1.80 billion and EPS of $1.75 –  2.00 due to  the as yet unannounced  GTA  release date.  May’s Max Payne 3 underperformed our expectations even as a Rockstar game with solid reviews, while October’s XCOM: Enemy Unknown has fallen down online best-seller lists despite a solid Metacritic score of ≈ 90. The split between Q3 and (implied) Q4 guidance will indicate whether GTA V is a third or fourth quarter release.

If GTA V (which we expect by March) is delayed into FY:14,  we expect  a significant downward revision to FY:13 guidance. Current FY:13 guidance and the  allocation of revenues between Rockstar Games and 2K Games indicate a GTA V release before FYE. In mid-October, Game Informer announced that GTA Vwould be on its December cover, with an editor tweeting that he was viewing the game at Rockstar Games. Additional GTA V details, including release dates, are likely to be in the December Game Informer, distributed on December 1.

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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