Take Two Interactive's (TTWO) Q4 Earnings Top Estimates

Take-Two Interactive Software Inc (NASDAQ:TTWO) posted solid fourth quarter fiscal 2016 results wherein adjusted earnings of 41 cents per share and non GAAP revenues of $342.5 million easily surpassed the respective Zacks Consensus Estimate of 13 cents and $309 million.

However, the company’s revenues were down 20% year over year. Even non GAAP earnings per share of 46 cents were also down 6.1%.

On a GAAP basis, Take-Two Interactive’s revenues were $377 million, up 25.7% compared with $300 million in the fourth quarter of 2015.

On the basis of distribution channels, Take Two reported physical retail & other sales (non GAAP) of $115.9 million (down 48.5% year over year) and digital online revenues of $226.6 million (up 12%). Digital revenues contributed 66% of total revenue in the quarter.

On a geographical basis, revenues (non GAAP) from United States decreased 15.3% to $191.9 million, while International revenues were down 25.1% to $150.6 million.

Operating income (non GAAP) decreased 37.7% year over year to $49.5 million. Operating margin came in at 14.5% compared with 18.6% a year ago.

Cash Position

Take Two exited the quarter with $1.27 billion in cash and cash equivalents and short term investments. Long-term debt was $498 million. Cash flow from operations was $261.3 million.

Outlook

For first quarter of 2017, Take Two expects non-GAAP revenues of $225 million to $260 million. Non-GAAP loss is expected to be in a range of 30 to 40 cents per share.

For fiscal 2017, Take Two expects non-GAAP net revenues in the band of $1.5 billion to $1.6 billion and earnings to range from $1.00 to $1.25 per share. The company’s tepid outlook stems from the fact that revenues from its key offerings like Grand Theft Auto V and Grand Theft Auto Online will eventually start diminishing. Revenue contribution from Rockstar games will likely be 75% while from 2K it will be 25%. Gross margin is expected to be around 50%.

Our Take

We believe that Take Two is well positioned to benefit from higher sales of the digital version of the games, which is also adding to the company’s margins. This is because compared with the physical platform; digital games are more profitable due to minimum packaging cost. The company continues to expect growth in digital revenues and increases in recurrent consumer spending.

However, increasing competition from the likes of Electronic Arts (NASDAQ:EA) , Activision (NASDAQ:ATVI) and Zynga (NASDAQ:ZNGA) remains a headwind.

At present, Take Two carries a Zacks Rank #3 (Hold).