Analysis: TTWO SONY

Take-Two Interactive Software (TTWO) reported strong fiscal fourth-quarter 2021 earnings results after the closing bell Tuesday. Net bookings of $784.5 million (+7.5% YoY) exceeded expectations of $661 million and were well above guidance for $602 million to $652 million. This was the highest level of 4Q net bookings in the company's record. Also, adjusted earnings per share of $1.88 topped estimates of $0.67, though this may not be an accurate comparison to consensus.

"Our strong fourth quarter results concluded an exceptional year for our organization," Chairman and CEO Strauss Zelnick said in the press release. "We delivered record operating results, including Net Bookings of approximately $3.6 billion and Adjusted Unrestricted Operating Cash Flow of $920 million. Throughout the year, we enhanced our organization for the long term by broadening our portfolio of offerings, capitalizing on diverse business models, enhancing our infrastructure, and most importantly, investing in our creative talent."

In Fiscal 2022, said Zelnick, the company plans to deliver an array of offerings, including four "immersive" core releases, of which two will be from new franchises. In addition, the company expects fiscal 2022 to be its second consecutive year of net bookings in excess of $3 billion.

"With the strongest pipeline in our Company's history, including many new releases planned for Fiscal 2023 and Fiscal 2024, we will be making significant investments this year to enhance our enterprise in key areas such as creative talent, IT, and other infrastructure. As we continue to grow our business, we believe that we will achieve sequential growth in Fiscal 2023 and establish new record levels of operating results over the next few years," Zelnick added.

Fiscal 2023 and fiscal 2024 are when the company is expected to really shine with over 40 titles expected to be released over this two year period. Of those, 19 are expected to be immersive core releases, seven of which will be sports simulation games. The strength of Take-Two's pipeline is what gives management confidence that it will achieve record operating results in the next few years. Investors just need to wait out one more fiscal year before the story here gets even better.

Back to the quarter, recurrent consumer spending (which includes virtual currency, add-on content, and in-game persons) grew 17% in the quarter and accounted for 67% of total net bookings. Some of the largest contributors coming from "NBA 2K21," "Grand Theft Auto Online" and "Grand Theft Auto V," "Red Dead Redemption 2" and "Red Dead Online." Catalog accounted for $514.7 million of net bookings. And digitally delivered net bookings grew 8% YoY to $723.7 million and accounted for 92% of total net bookings.

For some highlights by title, "Grand Theft Auto Online" active players hit a record during the quarter and resulted in the "second highest quarter of recurrent consumer spending on record." Moreover, to no surprise given the dynamics of 2020, full year participation levels for both new and returning players hit an all-time high, resulting in 31% recurrent consumer spending growth, an annual record.

"Grand Theft Auto V" sales also outpaced management's expectations and to date has sold over 145 million copies worldwide. The staying power of the "Grand Theft Auto V" (as well as the online iteration) truly speaks to the team's ability to maintain engagement and continuously add value well beyond the launch of a title. As many know, we are currently in the launch phase of PlayStation 5, however, what some may not realize if they haven't been following the franchise, is that "Grand Theft Auto V" originally launched on PlayStation 3 in September 2013 -- again an incredible testament to the team's ability to monetize well beyond a games launch. To this point, enhanced versions of both "Grand Theft Auto Online" and "Grand Theft Auto V" for next-gen consoles will be released on Nov. 11, with Rockstar expecting to share more detail on the releases in coming months.

As for the "Red Dead" franchise, we remind members that Take-Two previously released a standalone version of "Red Dead Online" allowing new players to play "Red Dead Online" in full, even if they did not already own "Red Dead Redemption 2."

On the call, management noted that as a result of the broader reach this move provided "Red Dead Online" exceeded its expectations as active players increased "significantly" and recurrent consumer spending came in above plan. Aiding the performance in the quarter were new content updates, including new missions for solo players. As for "Red Dead Redemption 2," the title continued to perform well, said management, and has to date sold over 37 million units worldwide.

In 2K sports, looking at "NBA 2K21," which was "built from-the-ground-up" for next-gen consoles, the title has sold-in over 10 million units to date. Additionally, the NBA 2K series saw net bookings growth of 37% in the quarter and recurrent consumer spending that exceeded management's expectations, growing 32% annually. The series also maintained "incredibly strong" engagement with over 2.3 million daily players. On the eSports front, the fourth season of the "NBA 2K League" will begin on May 19 and continue for 16 weeks. Moreover, the team reminded investors that "the League recently announced a landmark, multiyear partnership with Sony Interactive Entertainment (SONY) that makes the PlayStation 5 its official console that will be used by all teams and their 138 players during all games and events. The partnership marks the first-of-its kind for PlayStation 5 with an eSports league, and the first console partnership for the NBA 2K League." As a reminder, while eSports isn't the core pillar of our investment thesis, the industry has shown phenomenal growth. The pandemic has helped boost engagement and accelerate the trend that was already underway. We see eSports providing another meaningful revenue stream in the years to come.

Switching gears, management also called out the acquisition of HB Studios, which developed "PGA TOUR 2K21," and expressed excitement over the franchise's future growth trajectory now that "2K" has entered into an exclusive, long-term agreement with golf legend and icon, Tiger Woods, to serve as its executive director and consultant. The team expects this partnership to "enhance the series' ongoing innovation and authenticity."

You can read plenty more business and product highlights in the press release here.

Management also provided guidance for its fiscal year ending March 31, 2022. The company expects net bookings in the range of $3.2 billion to $3.3 billion. This is below consensus estimates of $3.456 billion, but there is likely some conservatism here, as management typically guides down and then delivers beats and raises as it moves through the year. For some proof, Take-Two's fiscal 2021 net bookings exceeded its initial guidance by roughly $1 billion.

In the company's presentation, it said it expects engagement trends will be "notably higher" than they were pre-pandemic; however, as the world returns to a new normal, it expects a moderation of the trends that benefited the industry over the past year. This should not come as a surprise to anyone, because as people will be playing less video games when they are spending more time outdoors.

Recurrent consumer spending is expected to grow 15% YoY, while digitally delivered net bookings is expected to increase about 8% YoY. Additionally, diluted unadjusted earnings are expected to be in the range of $1.95 to $2.20, and it would not be accurate to compare this against FactSet consensus estimates of $6.04.

For the company's fiscal first quarter, management expected net bookings in the range from $625 million to $675 million, which is nicely above estimates of $581 million. Recurrent consumer spending is expected to grow 30% YOY, while digitally delivered net bookings is expected to increase about 30% YoY. Additionally, diluted unadjusted earnings are expected to be in the range of $1.00 to $1.10, but again, it would not be accurate to compare this against FactSet consensus estimates of $0.76.

Overall, this was a very solid quarter for the company. Guidance wasn't as strong as expected, but we reiterate that this a team known to be conservative and coming out of the pandemic it makes more sense than ever to under-promise given the uncertainty relating to engagement and therefore in-game purchase activity as the world reopens. While we admittedly let out a bit of a groan after seeing that guide initially, we became much more optimistic as the conference call got underway. Giving us further confidence that there is plenty of upside to be had, management made it clear that the massive pipeline is now in play with "4 immersive core releases" coming this fiscal year before the new releases really ramp up in 2023.

It is worth noting that others also appear to have keyed in on this dynamic, as the stock initially sold off on the release after the closing the day in the red, only to reverse course and trade into the low-$170s as that pipeline commentary was music to investors' ears.

With shares coming into the print down nearly 20% on the year, we think expectations have now been sufficiently reset and moreover, believe that the "guide down" (i.e., the forecast that FY2022 net bookings will come in below FY2021 results), will likely end up being raised as the year progresses and that FY2022 can prove to be another growth year for the company -- and again, recall that management noted today expectations for sequential growth FY2023 as well.

While this video game stock may have been tossed aside since the end of last year, because of its CY2020 profile of being a "COVID winner," we are of a like mind with Zelnick as he commented on the call: "We believe that the pandemic initiated a transformational shift in entertainment consumption, revealing the possibilities of interactive entertainment to a much broader market with interactive entertainment becoming the #1 entertainment vertical. We anticipate that the overall addressable market for our industry will be notably larger going forward than it was pre-pandemic." 

Though some noise was to be expected in the gaming industry coming out of the pandemic, the future for Take-Two Interactive is bright and we look forward to additional commentary on the enhanced versions of "Grand Theft Auto," as well as the upcoming pipeline releases in the months to come. Even though the team remains mum on "Grand Theft Auto 6," and we don't expect to see it this year, the idea of two entirely new franchises coming later this fiscal year is incredibly exciting, especially given management's proven ability to build and monetize franchises for years beyond their initial launch both via entirely new iterations as well as a steady stream of downloadable add-on content. Our rating and price target are under review.

Action AlertsPLUS, which Cramer co-manages as a charitable trust, is long TTWO.