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Highlights From TTWO's Q1 Conference Call: Strong Game Sales Across All Platforms; Raises Guidance


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March 4, 2010 1:01 PM EST
TTWO Hot Sheet
EPS Growth %: -233.3%

Financial Fact:
Continuing operations (in dollars per share): -0.78

Today's EPS Names:
TARO, BRLI, TLB, More
Take-Two (NASDAQ: TTWO) reports Q1 loss of $0.31, 20 cents better than the analyst estimate of ($0.51). Revenue for the quarter was $163.2 million, which compares to the estimate of $127 million. Shares are up 9.63% today.

Highlights From TTWO's Q1 Conference Call:

  • Cutting 15% of corporate head count.
  • Sees Q2 EPS $0.20 - $0.30, versus $0.07 consensus. Sees Q210 sales $250 - $300 million, versus $267 million consensus.
  • Raises FY10 loss to $0.40 - $0.60, versus ($0.56) consensus. Raise Fy10 sales to $725 - $925 million, versus $844 million consensus.
  • (Strauss Zelnick, Chairman) Net revenue was $163 million, 9% higher than 2009's Q1 net revenue of $149 million.
  • Non-GAAP net loss was $24.4 million or $0.31 a share, a significant improvement over a non-GAAP net loss of $42.8 million or $0.56 a share for Q1 of 2009.
  • These results reflect the strong performance of several of our recent new releases, including NBA 2K10 and Borderlands. Our Grand Theft Auto, Carnival Games and Civilization franchises were also key contributors.
  • While traditional retailers will continue to be the primary channel for our business and industry for the foreseeable future, we've begun to capitalize on new platforms and digital distribution channels to expand the market for our high-quality entertainment experiences.
  • Our digital business has delivered solid growth year-over-year and represented 12% of our revenue in Q1.
  • We also made positive strides to improve the efficiency of our business further and align our corporate cost structure more closely with our current goals, and the associated cost reductions benefited our results.
  • U.S. retailers haven't changed their conservative outlook and they're still limiting initial launch quantities and consumers remain equally careful with their spending. That said, premium entertainment experiences in proven brands still drive strong demand.
  • Our planned 2010 lineup is our most diverse ever and includes both new intellectual property and sequels to a number of our proven and highly successful franchises. BioShock 2, LA Noire, Mafia II, Max Payne 3, Red Dead Redemption and Sid Meier's Civilization V.
  • (CEO) BioShock 2 has shipped 3 million units worldwide. We're very proud of reaching this milestone after less than one month in the market. BioShock franchise has now surpassed 7 million units.
  • Borderlands has proven to be a solid addition to our portfolio and continues to build upon its success in the market.
  • 2K Sports remains dominant in the basketball category and successfully increased its market share with NBA 2K10. The game has now sold more than 2 million units worldwide, which underscores its unparalleled, realistic game play that captures all of the nuances and excitement of the NBA.
  • Our internally owned and developed Carnival Games franchise reached another milestone, achieving over 6 million units sold worldwide.
  • Our catalog business has also been strengthened by digital delivery of our products.
  • Rockstar has launched all of their market-leading PSP catalog of titles on TSN and we have continuing sales of the Grand Theft Auto downloadable episodes.
  • Building upon our select offerings for the iPhone and iTouch, Rockstar games released its critically acclaimed handheld title Grand Theft Auto: Chinatown Wars. The title quickly became the top-selling application on the app store and was Rockstar's top-selling app for the iPhone, ahead of Beaterator. We will continue to bring our intellectual property to this and other emerging platforms when it makes sense to do so.
  • Rockstar is also gearing up for the eagerly-anticipated launch of Red Dead Redemption. We shifted the launch of the game by several weeks into our Q3. The North American Street date now is May 18 and the international date is May 21.
  • We also plan to introduce LA Noire, a groundbreaking new title from Rockstar during our fourth quarter. Already featured on the cover of February issue of Game Informer Magazine, LA Noire is an unique blend of action and crime solving that uses a massive game world, a street-for-street recreation of 1947 Los Angeles.
  • And we'll also launch the next installment of 2K Sports' number one NBA 2K franchise during our fourth quarter.
  • As part of our ongoing commitment to improve the efficiency of our business, we initiated a targeted restructuring focused on our corporate departments in order to align our cost structure more closely with our current goals. This initiative will result in savings of approximately $8 million during fiscal year 2010 and annualized savings of approximately $15 million.
  • Our business in Latin America has been showing signs of increased strength, and we have seen our revenue grow in both Mexico and Brazil over the prior year.
  • (CFO) On the revenue side, a variety of our titles performed better than expected, including NBA 2K10, Carnival Games, Grand Theft Auto IV and Borderlands. Our digital business was also strong.
  • Our packaged goods catalog business was also very strong, representing approximately 40% of our revenue in the quarter.
  • Gross margins were slightly lower than expected due to our product mix, which carried higher internal and external royalty costs.
  • On the expense side, we achieved some initial savings during the quarter from our cost-cutting initiatives and lower personnel expenses along with reduced professional fees.
  • Sales and marketing expenses were less than expected due to the timing of our marketing spend and new hires along with a more efficient allocation of marketing dollars.
  • R&D expenses declined more significantly than anticipated as a result of the timing of new hires and higher capitalization rates.
  • G&A expenses decreased by nearly $5 million, or 15% primarily due to lower professional fees, personnel expenses and bad debt expense. R&D expenses decreased by 5.8 million due to the timing of new hires and increased capitalization rates.
  • Moving on to our balance sheet, at the end of Q1, we had 106 million in cash. This number does not include 37.5 million in cash from the sale of Jack of All Games that we received on February 26.
  • Our accounts receivable reserve was about 34 million at the end of the quarter, which represented
    approximately 43% of gross receivables.
  • Inventory at the end of the quarter was approximately $51 million, up from this time last year, primarily due to the inventory build for BioShock 2, which shipped in the first week of Q2.
  • We expect gross margins for fiscal 2010 to be in the high-30s. This is up from fiscal 2009, primarily due to the number of internally-owned and developed titles we have launching in 2010, as well as the Rockstar royalty plan, which is a profit-sharing arrangement.
  • We expect our split between North America and international revenue to be about 65% to 35%. Excluding our sports business, our North America-International split is expected to be 60% to 40%.
  • We expect the revenue breakdown from our labels to be roughly 30% from Rockstar and 70% from 2K. The 70% from 2K breaks down as follows. 45% from 2K Games, 20% from 2K Sports, and 5% from 2K Play.
  • Both R&D and depreciation and amortization will remain about flat year-over-year.
  • Our fiscal 2010 guidance reflects tax expense of about $6 million primarily attributable to our international operation, and an estimated share count of approximately 79 million.
  • (Q&A) Just a couple of things I want to go over. You had a really big beat in the first quarter, and relative to consensus, numbers are going up in the second quarter. But when I look at the second, third, and fourth quarters combined, with the $0.20 beat in the first quarter, the $0.10 positive results from cost cutting, why aren't more of those dollars flowing through in your guidance for the bottom line? (A)When we took a look at the full year, we still have a lot of things that are unknown towards the end of the year. And as much as we have the cost savings, as well as the better performance in Q1, we also have some titles that are moving and our release schedule moved a little bit. So we did - took a prudent approach to those sales estimates continuing throughout this year, and this is where the whole year turned up. So we feel great that we were able to raise our guidance some, but it's certainly - it's still early in the year, and we're continuing to watch as we go through each quarter.
  • You also had - the first quarter revenue number was a big beat relative to what you were thinking back in December. What changed? What really kicked in that provided a lot of that upside from what you were looking for originally? (A)Well, when we started to go into Q1, the retail environment was really soft leading into the holiday season. And we had a good Thanksgiving, but we had a lot of promotions on a lot of our products. So we did take a prudent approach in the rest of the holiday season, and several of our catalog titles and our NBA title performed better than we had expected. We also did not have as much history on how the Borderlands DLC would perform. So that really performed above our expectations as well. And then as we started focusing on our costs, we were really - especially during Q1, as we were identifying areas for improvement throughout the year - we were very tight on our expenses, and that was how we were able to achieve the first quarter.
  • Just a couple of questions. First, you've talked a lot in the past about the impact that the used market had on the original version of BioShock. Can you give us a sense, just here in the first few weeks, what you're seeing in terms of whether or not there's been a change to that kind of impact for BioShock 2, and if so, what you think's driving that? And then I noticed on the release schedule that the NHL title for this year is Wii-only, and the NBA title is to be determined in terms of the platforms that you've got it planned for. Can you just give us some insight into the strategy for your Sports business in the year ahead? (A)It's Ben speaking. On the impact of used games on our business, specifically BioShock and Borderlands, in a way, you never know the sales that you don't have, so it's hard for us really to tell. I will say that we've seen an uptick in our BioShock 1 catalog, which we think - we do think was impacted by used games. We've seen a big uptick in BioShock 1 as a result of BioShock 2. We announced today total units for the entire franchise, 7 million units. 3 million for BioShock 2, that implies 4 million for BioShock 1. On the order of higher mathematics. And so we're pleased with it. We think that DLC is providing value to our consumers. We think consumers like it and they want it. We continue to work with our retail partners to provide maximum value for our consumers. It's hard to tell. We don't have a great sense for sales loss, but we do think that we've got it dialed in pretty good right now. In terms of NHL, we're taking the year off on our PS3 and Xbox 360. We're doing that because we're so committed to competing and winning, and we think those platforms need a breather so we can go back, redesign, rethink as opposed to continuing to iterate. And we think as a result of that, we'll - the following year, we'll just come back a lot stronger. We're continuing to develop for the Wii, which we think is exciting, and we have a - we've built a presence in Canada, specifically, on the Wii title, with the help of - and support of Nintendo, for which we're very grateful. So that's the thinking. I don't think there is much more beyond that, other than an intention to win and maximize the opportunity.

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