Take Two Stock Falls 15% After Cuts Guidance as it Digests Zynga Merger

Take Two Interactive Software stock took a tumble after it announced disappointing second-quarter 2023 results Monday after the closing bell. $TTWO traded at $90.55▼ 17.85 or 16.47% after hours at a new 52 week low. TTWO incurred a loss of $257 million or $1.54 per share in the September quarter, compared to a profit of $10.2 million or $0.09 per share in the prior-year quarter. Clearly the lofty premium the gaming company paid for Zynga is still impacting. The two companies merged in an effort to create a leading mobile game developer. However mobile games have slowed after two years of elevated sales and engagement during the Covid-19 pandemic. 

Take Two Core Game GTA

Take-Two fiscal second-quarter 2023 earnings

This marked the first 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.

Highlights

  • Loss: $1.54 loss per share
  • Adjusted earnings per share $1.30 missing a Street estimate of $1.37
  • GAAP revenue: $1.4 billion, up 62% year-over-year.
  • Bookings: $1.5 billion, vs. $1.55 billion as expected by analysts, according to Refinitiv
  • Recurrent consumer spending was up 95% year-over-year and made up 79% of GAAP revenue.
  • The segment includes items like virtual currency, add-on content, in-game advertising and in-game purchases.
  • Digital net revenue was up 69% to $1.3 billion in the second quarter.
  • Key titles for the company in the second quarter were NBA 2K22, NBA 2K23, Grand Theft Auto Online, Grand Theft Auto V, Empires & Puzzles, Red Dead Redemption 2 and Red Dead Online.
  • NBA 2K23 was released on Sept. 9 by the company.

Stock Market Reaction

  • 52wk Low $101.85 (Stock is trading below there after hours)
  • 90.55▼ 17.85 (16.47%) After Hours 
  • 90.55▼ -78.8 (-42.09%) past year
  • 90.55▼ -0.53 (-0.49%) past 5 years

Outlook

Take-Two said in a statement that its fiscal 2023 net bookings would come in between $5.4 billion and $5.5 billion, lower than the company’s previous expectations of $5.77 billion at the midpoint. Analysts surveyed by Refinitiv expected $5.88 billion in sales for the year. Take-Two’s net bookings primarily includes digital game sales or sales to wholesalers, as well as licensing fees and merchandise.

Take Two said it expects a fiscal year ending March 31, 2023, net loss between $674 million to $631 million, worse than the guidance of a net loss between $438 million to $398 million that it provided in its first-quarter earnings. The prospects of rising interest rates hangs over growth stocks.

“Our reduced forecast reflects shifts in our pipeline, fluctuations in FX rates, and a more cautious view of the current macroeconomic backdrop, particularly in mobile,” Take-Two CEO Strauss Zelnick said in a statement.

Zynga Merger

This marked the first 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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