Take-Two (NASDAQ:TTWO): Turn in Gaming +13% Today

Many play video games but few invest in video gaming. I follow World of Warcraft stock (Nasdaq:ATVI), but don’t play the game, I do the same with Majesco (Nasdaq:COOL), and also TakeTwo (Nasdaq:TTWO) because it is a billion dollar industry. The more I read, the more I understand the importance of the console to sales and the cycle. Below are some risks for Take Two and Key points from the guys at Think Equity..they are all over this space and a great read…

Gaming continues to be a hit-or-miss-driven business, and predicting successful titles versus unsuccessful titles is extremely difficult.The risk is especially high for the new and unproven IPs, and the company’s reliance on the new IPs to reach the revenue target puts the company at risk for revenue misses.

Growth in the current cycle is largely driven by Wii, where third parties have not been very successful.
Macro headwinds and the popularity of used games and free-to-play online games. Given the current macro headwinds, used games and free-to-play online games create higher substitute competition for video games.
The gaming industry is dependent on the console cycle. The unexpected start of a new console cycle will likely constrain revenue growth and affect the profitability of gaming vendors.

Foreign-currency-exchange risk. The company generates almost half of its revenue from international operations, which exposes the company to foreign-currency-exchange risk.

Total revenue was $354 million, up 156% Y/Y and significantly better than our estimate of $278 million and the Street estimate at $295 million. Revenue outperformance was driven by a better-than-expected performance of Red Dead Redemption (sold 6.9 million units to date) and catalog sales. Catalog sales contributed 14% of the company’s revenue and were down 15% Y/Y. Digital revenue was $18 million, up from $7 million Y/Y.
Operating expenses were lower than our estimates driven by lower sales & marketing expenses from the timing on the games launch, a $2.5 million benefit from legal settlement, and continued efforts for cost reduction.

Higher-than-expected sales and lower-than-expected operating expenses resulted in EPS at $0.30 versus our estimate at a loss of $0.12 and the Street estimate at a loss of $0.09. Cash flow from operations was $0.64 per share and the company ended the quarter with net cash of $130 million, or $1.52 per share. Management attributed the turnaround to a strong portfolio of IPs, efficient expense management, and strong development capabilities. Management was also optimistic about 4Q’s outlook, highlighting that the Mafia II launch was better than its expectation (management expects it to be a profitable title) and that NBA 2K11 preorders were tracking better Y/Y. On the other hand, the company confirmed the push-out of LA Noire from 4Q to the first half of FY11.

Management expects key titles in 4Q to be Mafia II, Sid Meier’s Civilization V, NBA 2K11, NHL 2K11, Carnival Games, Nickelodeon Fit, and downloadable packs for BioShock 2, Borderlands, and Red Dead Redemption. Despite the push-out of LA Noire, the company raised 4Q guidance on account of continued strength in Red Dead Redemption and better-than-expected early activity on Mafia II and NBA 2K11. For 4Q10, management raised the revenue guidance to $270-320 million (up from $200-250 million) versus the Street estimate at $246 million and EPS guidance to $0.20-0.30 (up from a loss of $0.10-0.20) versus the Street estimate at a loss of $0.11.