Take-Two Q2 2023 Interactive Software Preview: More Clarity Ahead (NASDAQ: TTWO)

Marko Geber

After the market closed on November 7, the video game developer’s management team Take-Two interactive software (NASDAQ:TWO) is expected to report financial results covering the second quarter of its fiscal year 2023. Recently, the financial performance of society has been quite mixed. Although revenues have been strong, expectations for bottom line results are discouraging. While this represents a new normal for the company, shares of the company look rather expensive. But if we assume that financial performance can return to what it was in previous years, the overall potential for investors could be solid, making the company a “buy” for those who view its problems as short-lived. . But for those like me who are more conservative in their approach to investing, a solid hold is more reasonable right now.

Results around the corner

As I mentioned before, Take-Two Interactive Software should announce its financial results quite soon. For this reason, it might be useful to understand exactly what analysts anticipate. For starters, revenues are currently anticipated at around $1.54 billion. This would be a significant improvement from the company’s reported $858.2 million in the second quarter of its fiscal year 2022. For context, management was forecasting revenue between $1.37 billion and $1.42 billion. . However, this increase is not due to organic growth. Instead, he should be motivated by Take-Two Interactive Software’s acquisition of Zynga. Of course, that doesn’t mean organic growth can’t be part of the equation. It’s just that with video game sales intended fall by 1.2% this year globally, organic growth will not be possible for all players in this space.

Ultimately, analysts expect a net loss of $0.82 per share, with adjusted net earnings of $1.38. To put that into perspective, in the company’s second quarter of fiscal 2022, the company generated earnings per share of $0.09. This translated into a net profit of $10.3 million. To understand why the bottom line could suffer this year, one need only look at the company’s performance during the first quarter of the year.

Historical financial data

Author – SEC EDGAR Data

To begin with, just as the second quarter should be, the revenues of the first quarter 2023 came in strong at $1.10 billion. This compares to $813.3 million generated in the same quarter a year earlier. However, the company incurred a net loss of $104 million. This compares to the loss of $152.3 million generated in the first quarter of 2022. Frankly, this pain has become widespread. although the company’s gross profit margin improved from 59.5% to 60.5%, its sales and marketing costs soared from 12.8% of sales to 24.7%. Part of this increase comes from an increase in stock-based compensation in this category, which rose from $8 million to $35.7 million. However, the company also said that marketing spend increased due to titles resulting from its acquisition of Zynga, such as Toon Blast, Merge Dragons!, Empires & Puzzles, and more. The company has also seen higher marketing costs associated with its Top Eleven release and NBA 2K franchise. Higher personnel costs resulting from the aforementioned acquisition also proved problematic.

There were, of course, other areas of pain for the company. General and administrative expenses, for example, rose from 12.8% of sales to 21.5%. Higher professional fees related to its acquisition of Zynga, as well as the integration of the business, were factors here. Another factor related to personnel expenses for higher headcount due to the said acquisition. These same factors also contributed to pushing research and development costs up from 11.3% of sales to 15.7%. Collectively, the price increases in these three categories alone represent additional costs to the company, on a pretax basis, of $275.6 million. Although these issues exist, management is optimistic about the future. In addition to discussing potential new projects that could help the company deliver more than $500 million in annual net bookings opportunities on top of existing operations, the company also estimates it can generate approximately $100 million in annual cost synergies in the first two years. after the closing of said acquisition. So naturally, investors would be wise to keep an eye out for any developments on this front. In addition to appearing as net income or net loss, these items may also appear in cash flow figures. For context, the company’s operating cash flow in the second quarter of 2022 was $135.4 million. If we adjust for changes in working capital, it would be higher at $216 million.

Regarding the 2023 financial year as a whole, management waits revenues between $5.73 billion and $5.83 billion. At the same time, however, they expect the company to lose between $398 million and $438 million. If there’s a silver lining, it’s that cash flow from operations is expected to exceed $710 million, while EBITDA is expected to be between $499 and $548 million. To put this into perspective, in my last article About the merger of Take-Two Interactive Software and Zynga, I used the figures provided by the two companies to calculate the adjusted operating cash flow of $1.41 billion and the EBITDA of 1, $66 billion. Clearly, the higher costs are weighing on the business more than I had anticipated.

Trading multiples

Author – SEC EDGAR Data

Whether or not the company can return to its former levels of profitability would be extremely important in determining whether the shares are attractively priced or overvalued. For example, if management meets its targets for the current fiscal year, the business trades at a forward price for an adjusted operating cash flow multiple of 26.7. The advanced EV/EBITDA multiple would be even higher at 38.7. By comparison, using the data from my previous article, those numbers would be 13.4 and 12.2, respectively. To put this into perspective, the biggest comparable we can look at is the implied acquisition price that Microsoft (MSFT) paid for Activision Blizzard. The price/operating cash flow ratio for this transaction was 20.2, while the EV/EBITDA multiple was 16.9.

Company Price / Operating Cash EV / EBITDA
Take-Two interactive software 26.7 38.7
Activision Blizzard (Buyout) 20.2 16.9

Carry

Truth be told, Take-Two Interactive Software is in an interesting position right now. Basically, the 2023 financial year is likely to be disappointing. Management is working to cut costs, but it’s unclear if the company could return to the kind of profits enjoyed by each stand-alone business. Naturally, this creates a very binary outcome that investors need to think about. Either the stocks deserve to be trading lower than they are today or the upside potential could be significant. Obviously, the company could fall somewhere in between. But what I do know is that it lacks the kind of clarity that I personally value significantly from an investment perspective. For this reason, while I recognize the potential of the business and am a huge fan of the gaming industry, I think a more appropriate rating for the business at this time is an “expectation”.

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