Take Two Interactive Software stock took a tumble after it announced disappointing earnings, missing EPS by $0.07 and missing on top line after the close Monday. TTWO also guided FY23 EPS and net bookings below consensus. However, from bring down at a low of $106.31 the stock soared to a high of $115.21 and closed up just under 8%. The bounce came from a look past the earnings picture towards the future “highlighted a FY2023-’25 line-up that features 87 games, including 24 immersive core titles, supported by a record $1.104B of software development costs on the balance sheet” said Stifel analyst Drew Crum.
After the lofty premium the gaming company paid for Zynga it has taken a while to stabilize the books. KeyBanc analyst Tyler Parker said “We’re encouraged Zynga stabilized and maintain that TTWO represents a potent multiyear story for the investor with duration,” Parker said. The two companies merged in an effort to create a leading mobile game developer. However mobile games slowed after two years of elevated sales and engagement during the Covid-19 pandemic. Zynga also completed its acquisition of Storemaven on Sept. 12, 2022.
Take-Two fiscal third-quarter 2023 earnings.
Highlights
- Loss: Net loss of $153.4 million, or 91 cents a share. The consensus among analysts polled by FactSet was for a net loss of 85 cents a share
- Non-GAAP earnings were 86 cents a share, below expectations for adjusted earnings of 89 cents a share.
- Bookings: Net bookings, which reflects products and services sold digitally and physically, rose 60% year-over-year to $1.38 billion, short of company forecasts of bookings between $1.41 billion to $1.46 billion.
- Recurrent consume spending jumped 104% and accounted for 79% of total GAAP net revenue, the company said.
- Digitally delivered GAAP net revenue jumped 68% to $1.34B and made up 95% of the total.
- The segment includes items like virtual currency, add-on content, in-game advertising and in-game purchases.
- Key titles for the company in the third quarter were NBA 2K23, Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online and Words With Friends contributed most to the bookings.
TTWO Stock Market Reaction
- $113.85 ▲ +8.29 (+7.85%) today (Close Tuesday Updated)
- $113.85 ▼-61.25 (-34.98%) past year
- $113.85 ▲+6.81 (+6.36%) past 5 years
“Our new game releases and post-launch content received significant critical acclaim; however, our Net Bookings of $1.38 billion were slightly below our prior guidance, as we believe that consumers shifted their holiday spending toward established blockbuster franchises and titles that were offered with pricing promotions in light of macroeconomic conditions,” said CEO/Chairman Strauss Zelnick.
Analysts Comments
Stifel analyst Drew Crum maintained its Buy rating.
“Based on commentary from peers over the last few weeks, Take-Two’s update wasn’t entirely surprising to us, nor to the market in our opinion, which is likely to now shift focus to FY2024 where there remains a high degree of uncertainty,” said analyst Drew Crum. “Hence, we think the shares trade sideways in the interim, pending more visibility on the development pipeline, any stabilization in [free-to-play] mobile, and/or a release date announcement” for Grand Theft Auto VI.
Take Two “highlighted a FY2023-’25 line-up that features 87 games, including 24 immersive core titles, supported by a record $1.104B of software development costs on the balance sheet.” The slate looks more weighted to 2024-25, but uncertainty about which games will be part of next year’s lineup makes it difficult to model, Crum said.
KeyBanc analyst Tyler Parker reiterated an Overweight rating
“Zynga wasn’t the culprit this time” but rather underperformance from most of the PC/console catalog. “it should get better from here … we’re nearing the time to look forward toward FY25.”
“We’re encouraged Zynga stabilized and maintain that TTWO represents a potent multiyear story for the investor with duration,” Parker said.
Outlook
As a result of an “environment that is in many ways more challenging than we anticipated,” Take-Two CEO Strauss Zelnick said, the company is lowering its fiscal 2023 bookings guidance to $5.2 billion to $5.25 billion, down from $5.4 billion to $5.5 billion.
Take-Two is seeking $50 million in cost reductions, with a focus on “corporate and publishing functions,” that will begin to realize in the current quarter, the company said in its earnings release. The reductions will come in addition to the $100 million in “cost synergies” stemming from its $12.7 billion Zynga acquisition.
Lainie Goldstein, Take-Two’s chief financial officer, told analysts to expect the $50 million figure to rise as it is part of an “ongoing” cost reduction program at the company. “These are permanent and structural changes to the organization’s overall corporate overheard structure,” Goldstein said, pointing to “efficiency” as a core tenant of Take-Two.
Zynga Merger
This marked the second full quarter of Zynga results for Take-Two after the mobile game company was acquired earlier this year. Zynga also completed its acquisition of Storemaven on Sept. 12, 2022.
Zynga (ZNGA) stock had halved over 2021 before Take Two made the $9.68/share cash and stock buyout offer, representing a huge 64% premium to its previous closing price. Zynga made mobile games such as FarmVille and Words with Friends and had been struggling mightily from an execution and financial performance perspective, evidenced by eight straight quarterly EPS misses.
The buyout was considered a generous acquisition offer, valuing ZNGA at roughly $12.7 billion which caused a healthy amount of skepticism regarding the merits of the deal from TTWO’s perspective sending its stock sharply lower on the deal. Considering the pricey buyout premium, ZNGA’s dismal quarterly earnings track record, and TTWO taking on additional debt to finance the transaction, the negative reaction was realistic to the risk.
So why did TTWO buy them? The key advantages from a strategic point of view were:
- With increased mobility, gamers are allocating more playing time to mobile devices, rather than to at-home gaming consoles. Combining ZNGA, TTWO its new mobile gaming portfolio was estimated to see mobile represent over 50% of net bookings in FY23, compared to only 12% in FY22 for Take Two.
- This deal responded to Electronic Arts’ (EA) $2.4 billion acquisition of Glu Mobile the previous year. Securing a more diverse and mobile-leaning game lineup that’s less reliant on core titles like Grand Theft Auto and NBA 2K should put TTWO in a better competitive position.
- TTWO’s quarterly results, like ZNGA has had erratic and unpredictable like most gaming companies with blockbuster games. Revenue growth ranged from -29% to +125% over the six quarters ahead of the merger.
- ZNGA’s top-line results have been solid and steady, the company hadn’t missed quarterly revenue estimates in at least five years. The expenses is what had them miss EPS numbers. This consistency is related to ZNGA’s high level of Recurrent Consumer Spending (RCS), which will lessen volatility across quarters for TTWO.
- The premium over the previous closing price was significant but the total transaction amount values ZNGA at about 4x next year’s revenue. When considering that ZNGA is expected to add $100 million in annual cost synergies within the first two years of closing and at least $500 million in annual net bookings opportunities over time, the purchase price looks not so outrageous.
Source: Take Two, Alpha Street
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