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A Diverse Slate of Games Drove Take-Two Interactive's Second-Quarter Results

Take-Two Interactive (NASDAQ: TTWO) delivered better-than-expected earnings results for the fiscal second quarter. It was expected that Take-Two would enter fiscal 2020 with momentum, as Red Dead Redemption 2 continues to sell more copies following last year's release. But the game maker, once faulted by investors for its dependence on Grand Theft Auto, is starting to show it can generate consistent year-to-year revenue on the back of a diverse lineup of titles.

Here's a review of the quarter and what it means for the company's future.

Image source: Rockstargames.com.

Several games drove higher revenue and profits

Revenue increased 74% year over year to $858 million. Management likes to focus on net bookings, a non-GAAP measure of revenue that accounts for digital sales and other items, such as licensing fees and in-game advertising. Net bookings came in above management's expectations, increasing 63% year over year to reach $950.5 million.

Metric Fiscal Q2 2020 Fiscal Q2 2019
Revenue $858 million $493 million
Net bookings $951 million $583 million
Recurrent consumer spending as a % of bookings 45% 53%
Earnings per share $0.63 $0.22

Data source: Take-Two earnings releases.

The main drivers of the quarter were NBA 2K, Borderlands 3, Grand Theft Auto, and Red Dead Redemption. Borderlands 3 came out in September and has exceeded management's expectations with sales to date of nearly 7 million units. Also, NBA 2K20 seems on track to grow that franchise. The latest version in the best-selling basketball series had its "highest launch month sales for any sports game in history," CEO Strauss Zelnick mentioned on the conference call.

The real highlight of the quarter was the growth of recurrent consumer spending, or in-game purchases for virtual currency and digitally delivered content. Net bookings from recurrent consumer spending increased by 39% year over year, representing 45% of total bookings. Most notably, recurrent spending in Grand Theft Auto Online rose 23% year over year, reaching a new record for the 6-year-old title.

Management now expects Grand Theft Auto to grow as a franchise in fiscal 2020, as the game continues to outperform expectations. Grand Theft Auto got a major boost during the quarter with the Diamond Casino & Resort content update. This was the biggest content launch for the game yet and shows that Rockstar Games continues to have plenty of ideas to keep players engaged.

Grand Theft Auto is still expanding its audience, having reached 115 million sold copies during the quarter, up from 110 million copies reported in the first quarter.

Additionally, Rockstar's sibling title to Grand Theft Auto, Red Dead Redemption 2, is still gaining momentum after its fall 2018 launch. The western-action game has sold 26.5 million units. Red Dead Online grew sequentially over the previous quarter, and the company is supporting the game with content releases, as it continues to do with Grand Theft Auto Online.

During the call, Zelnick said, "We remain as excited as ever about the long-term opportunity for Red Dead Online to be a meaningful driver of recurrent consumer spending." The game should get at least a small boost in the short term after becoming available on PC this month.

Raising expectations for the short and long term

Based on the strong results, management raised guidance for the fiscal year. Net bookings are expected to be in the range of $2.75 billion to $2.85 billion, down from $2.929 billion in fiscal 2019. On a GAAP basis, Take-Two expects the top line to improve by a minimum of 10% to between $2.93 billion and $3.03 billion.

These expectations represent a significant milestone for the company. In fiscal 2015, the year after the successful launch of Grand Theft Auto V, revenue plunged from $2.35 billion to $1.082 billion, as there was no comparable title to pick up the slack. Back then, Take-Two was very dependent on sales of Grand Theft Auto, but not anymore. Thanks to year-round engagement trends and the growth in recurrent consumer spending, Take-Two is set to grow GAAP revenue even with no comparable release of Red Dead Redemption 2 this year.

Plus, smaller titles from the Private Division label are performing well. The recent release of Outer Worlds has been well received. Zelnick said, "It's outperforming our expectations handily."

Management reiterated that Take-Two has "the strongest development pipeline" in history. Take-Two will be releasing its big titles on the new streaming service from Alphabet's Google Stadia when it launches this month.

Take-Two believes new game streaming platforms and mobile releases will help expand the audience for its franchises. All said, the growth prospects for the company are looking better than ever, as Zelnick emphasized: "Take-Two is exceedingly well positioned to generate growth in margin expansion for our shareholders over the long term."

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Ballard owns shares of Take-Two Interactive. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Take-Two Interactive. The Motley Fool has a disclosure policy.


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