The State of Take-Two Interactive: 2013 Edition

We are about done with the all-important earnings week for the major players in the video game industry. The only titan we have left to discuss is Take-Two Interactive, the innovative, unwavering black sheep of the gaming space.

Being the smallest of the three major publishers (behind the previously discussed Electronic Arts and Activision Blizzard), Take-Two has to be a bit bolder than its competitors in order to stay viable.

Fortunately, they are up to the task and have proven year in and year out that they have the innovative focus, pedigree, and polish to produce some of the top titles within the gaming sector on a consistent basis.

Fiscal 2013 was no exception. The Grand Theft Auto publisher said it earned a non-GAAP profit of 38 cents a share, blowing away consensus calls from analysts for just 23 cents. Revenue came in at $299.5 million, easily besting estimates for $280.1 million. These numbers were so good, that multiple stock analysts immediately bumped up their target price from $18 a share to $21.

Further, revenue from digitally delivered content grew 148% year-over-year and 192% in the quarter when compared with the fourth quarter of 2012. This is a huge win for Take-Two, considering that digital delivery sales provide much better margins (profit vs. expenses) than physical delivery.

The top performer of the year was the 2k Games offerings, which included Bioshock Infinite, NBA 2K13 and XCOM: Enemy Unknown. These three titles provided a huge sales (and critical) boost to the publishers bottom line. Bi0Shock alone shipped 3.7 million copies, making it easily the biggest release of the acclaimed series.

The only relatively downbeat aspect of their strong performance was when management said that the BioShock Season Pass (DLC) had “solid demand” without offering any numbers. Usually ‘solid’ is a strong word, but investor speak like this (along with unwillingness to share numbers) could show that the initial launch will be the strongest part of BioShocks success story. It will surely hurt their bottom line if they cannot convince players to continue playing Infinite. But this is a minor qualm within a strongly positive call.

During the report, Take-Two’s CEO Strauss Zelnick mentioned:

“Take-Two delivered strong revenue growth and solid non-GAAP earnings for fiscal year 2013, driven by robust demand for our groundbreaking new releases, iconic catalog titles and expanding portfolio of digitally delivered offerings. Our commitment to delight consumers with the highest-quality interactive entertainment experiences enabled Take-Two to have an outstanding year, despite a challenging environment for many in our industry.”

Looking ahead, we have an extensive pipeline of next-generation and emerging platform titles in development, including both new intellectual property and releases from our proven franchises. As a result, our current outlook is to be profitable on a non-GAAP basis in fiscal 2015 and for the foreseeable future.”

But no matter how much they talk up their future prospects, the only thing that really matters over the next six months for Take-Two is the elephant in the room: Grand Theft Auto V. We have no idea how much money has been spent on GTAV, but considering that it was delayed by at least 3 months, lets hope that Take-Two has not used too much of its financial firepower in bringing this game to market. It could be the dbiggest selling game of the year (yes, it could even beat COD: Ghosts), but if they are unable to profit because of a $200 million dollar development, the publisher will quickly find themselves in hot water.

Take-Two has operated while losing money quite often over their lifespan, with large debt loads and massive development budgets, but they are always saved by the quality of the games the produce. Investors will soon tire of these speculative and risky business practices if they cannot make consistent profits (not just revenue). But it is hard to argue with how Take-Two handles things when they have multiple games that hit it out of the park on a yearly basis.

Overall, Take-Two is in a very strong position going forward. They do not have as much cash as their larger competitors and their market cap (1.53billion) is dwarfed by Activision (16.92billion) and Electronic Arts (6.72billion), but they do produce arguably the highest quality games among them, which has kept them in the forefront of the industry. I do not see this changing anytime soon.

What are your thoughts on Take-Two? Do you think they are the best publisher out there? Let us know!

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