Is Take-Two Interactive Having a "Fortnite" Crisis?
Competition in the video game industry has never been fiercer, and companies like Take-Two Interactive Software (NASDAQ: TTWO) have to work hard to keep up with the pace of innovation. Even with key franchises like Grand Theft Auto and Red Dead Redemption, Take-Two's status among the leaders of the video game industry will only last as long as its customers are happier with its games than with those of its competitors. The recent popularity of the Epic Games release Fortnite shows just how fragile a competitive advantage can be in this industry.
Coming into Wednesday's fiscal fourth-quarter financial report, Take-Two investors were looking for solid growth in bookings even as they anticipated pressure on its bottom line. Take-Two was generally comfortable with how it did to finish off its fiscal year, but shareholders seemed worried that new threats could weigh on its prospects in the coming year.
A big turn downward for Take-Two
Take-Two's fiscal fourth-quarter results showed the pressures that come about when you have to compare current performance against a strong year-earlier period. Net revenue was down 21% to $450.3 million, disappointing many of those who follow the stock. Net income fell a more modest 8% to $90.9 million, but the drop in the reported earnings per share of $0.77 was closer to 13% because of a big rise in shares outstanding.
Take-Two's fundamental performance wasn't quite as ugly as its headline numbers would suggest. The company had some success in generating greater digitally delivered sales, as that figure rose 8% to top the $300 million mark. As we've seen recently, Grand Theft Auto-related games and various installments of the NBA 2K, WWE 2K, and Sid Meier's Civilization series made major contributions to digital revenue. Recurring customer spending from virtual currency, add-on content, and in-game purchases soared by 42% from year-earlier figures, and that made up 44% of Take-Two's total revenue, up from less than a quarter this time last year.
Yet Take-Two disappointed on the bookings front as well. The quarter's figure was up just 1% to $411.4 million, with recurring spending gains of 15% offsetting declines in game sales. Digitally delivered net bookings were higher by 12% from year-earlier numbers.
Take-Two took dramatic efforts on the cost side to offset the loss in revenue. Software development costs plunged, and product costs and internal royalties also helped reduce Take-Two's overall costs of goods sold. Yet rising costs on the selling and market and research and development line items boosted operating expenses and led to a substantial decline in pre-tax income, and only a big drop in taxes due prevented the bottom-line damage from being even worse than it was.
CEO Strauss Zelnick tried to keep his eyes on the longer term. "Our solid performance marked the completion of another outstanding year for our company," Zelnick said, "highlighted by growth in net bookings, earnings, and net cash provided by operating activities, along with margin expansion." The CEO pointed to the continuing success of Grand Theft Auto in propelling Take-Two forward.
What's next for Take-Two?
Take-Two is optimistic about the coming year. As Zelnick put it, "We expect fiscal 2019 to be another year of profitable growth for Take-Two, including both record net bookings and record net cash provided by operating activities." The long-anticipated release of Red Dead Redemption 2, currently slated for later this year, will play a key role in helping Take-Two achieve its goals.
Take-Two's guidance was somewhat mixed. Revenue of $345 million to $395 million in the fiscal first quarter is expected to translate to earnings of $0.53 to $0.63 per share, and those figures are lower than what the video game company predicted this time last year for the fiscal first quarter of 2018. On the other hand, fiscal 2019 projections could see considerable revenue growth, with net sales expected to be between $2.5 billion and $2.6 billion. However, GAAP earnings of $1.53 to $1.80 per share would be highly disappointing if you don't account for nearly $300 million in anticipated stock-based compensation that would otherwise cut more than $2.50 per share off its adjusted bottom line.
Take-Two investors seemed troubled by fears of competition from Fortnite and other rivals, and the stock was lower by 3% in after-hours trading following the announcement. Take-Two can bounce back if its future releases draw the same attention as its past games have, but an increasingly crowded field makes it more important than ever for Take-Two to keep making big splashes with its games.
10 stocks we like better than Take-Two InteractiveWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Take-Two Interactive wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of May 8, 2018
Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Take-Two Interactive. The Motley Fool has a disclosure policy.