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Derek Chait, Trey Coppinger, Lukas Neske, Travis Wolf April 10, 2015
Take-Two Interactive Software, Inc.
Investment Thesis (NASDAQ: TTWO )Take-Twos potential to capitalize on the next-gen console era with unprecedented intellectual property and a cash-rich cushion is overlooked by an unnerved market seeking solid forward guidance.
INVESTMENT EDGES
Underestimated ability to create multiple lasting brands Has nine existing franchises that have sold 5M or more units
Unjustified market concern over changing industry Increase in mobile gaming will not cannibalize console sales Take-Two will leverage its brands across new gaming platforms
Uncharacteristic cash buildup Almost of market cap in cash Sign of recurring, strong cash flows and undervaluation
Disclosure discount Market is nervous about Take-Twos lack of forward guidance despite proven track record
2
CATALYSTS
E3 Gaming Conference probable release of Red Dead Redemption 2 or other notable title Continued growth of mobile and recurring digital revenue
Recommendation: BUY 1Y Price Target: $30.90 (+21.41%)Current Price: $25.45
3Industry OverviewINDUSTRY DYNAMICS
Main Players:
Video game sector is an ever-changing industry
Companies in the space must constantly be evolving to new consoles and trends (old gen next gen)
Cloud is starting to be utilized to make games smoother and more expansive
Increasing popularity of subscriptionbased models and in-game purchases
Explosion of very low quality mobile games and continued popularity of high quality (AAA rated) games is squeezing middle tier games out
67% of people in the U.S. play video games
47% of gamers are women, up from 42% in 2012
New video games cater to this new demographic market
International market rapidly expanding
Asia is currently the largest market for video games
Currently 7.2B people on Earth with only 2.9B that have internet access
In Asia only 36% of the population are internet users
Video Game Industry grew to $81.5B in 2014
Predicted CAGRs from 2012-2016 for tablet and mobile gaming are 46.6% and 18.8%, respectively
CURRENT TRENDS
27%
4%
22%
2%
45%
North America Latin America Europe Africa Asia-Pacific
Game Revenue by Geographic Location ($B)
Location Sales ($B)
North America 22.2$
Latin America 3.3$
Europe 17.7$
Africa 1.4$
Asia-Pacific 36.8$ 17.76 18.06 15.08 16.4
9.28 13.21 17.1522.01
14.4417.72 20.92
21.637.4
44.2949.38
55.05
0
20
40
60
80
100
120
140
2012 2013 2014 2015
Video Game Revenue by Type ($M)
Handheld Mobile PC Console
4Company OverviewHISTORY REVENUE STREAM
MANAGEMENT TEAM
Take-Two Interactive Software, Inc. is a leading developer, publisher and marketer of interactive entertainment Founded in 1993, HQ in New York City
2,530 employees, 1,800 developers in 14 studios around the world
Focus on AAA gaming across different genres Offer games for PlayStation (Sony), Xbox (Microsoft), Smartphones and Tablets
Physical retail, digital download, online platforms and cloud streaming services
Proprietary, cutting-edge open-world gaming engine used across game titles
Rockstar Games GTA
Max Payne
Red Dead Redemption
Focus on most innovative and progressive games, R&D heavy
2K Games BioShock
Borderlands
NBA + MLB2K
Focus on yearly revenue generators
CEO: Strauss Zelnick MBA and JD from Harvard
Pays himself $11k annually rest in stock
Owns over 2mm shares, one of the largest holders
COO of 20th Century Fox at 35 years old
President: Karl Slatoff MBA from HBS
Former: Corporate Finance, M&A (Lehman) and strategic planning (Walt Disney Company)
CFO: Lainie Goldstein Former VP of Finance and Business
Development at Nautica Enterprises
Audit and reorganization department at Grant Thornton LLP
Executive VP: Seth Krauss ED in Legal & Compliance Division at
Morgan Stanley
21%
79%
PC and Other Console
0%
5%
10%
15%
20%
25%
30%
0%
10%
20%
30%
40%
50%
2011 2012 2013 2014 2015
Dig
ital
Rev
enu
e
Gro
ss M
argi
n
Gross Margin Percent of Revenue
Category Breakdown Gross Margin and Digital Revenue Increase
5Underestimated Ability to Create Lasting BrandsTRACK RECORD OF PRODUCING EXCELLENT BRANDS WITH LONG LIVES
BRAND EXTENSIONS AND NEW BRANDS
2001Max Payne
2004Red Dead
2005NHL2K
2009Borderlands
2011LA Noire
2015Evolve
1997:Grand Theft Auto
2004Sid MeiersCivilization
2007BioShock
2012XCOM: Enemy
Within
2014WWE2K
2016Battleborn
2005NBA2K
Since 2007, launched 7 new successful franchises and released 39 distinct multi-million selling titles Implement proprietary open-world RAGE gaming engine across franchises
02468
10121416
Red Dead Redemption 2E3 2015 (June)
LA Noire 2An important franchise
Borderlands 3The Big One
NBA2K, WWE2KAnnual installments
Hangar 13 StudiosAdam Blackman- fastest selling
Star Wars video game
EvolveIncredible Launch
Releases Per Brand
6NBA2K GrowthGROWTH OF NBA GLOBALLY
NBA2K INTERNATIONAL GROWTH
PREDOMINANCE OF NBA2K
Basketball is the sport of the modern world internationalized,
well-marketed, fast-paced, and urban
Soccer Should Fear the NBA
NBA International revenue grown 18% annually
Plans to open 4 NBA franchises in Europe
NBA has offices in 15 International countries
50% of the NBAs followers on social media are
international
101 foreign players from 37 countries on rosters
300 million Chinese play basketball regularly
NBA StrategyBasketball Market
NBA2K Non North American Sales Increase
NBA2K top selling and top rated NBA game from 2008 onwards
#3 title overall for next-gen consoles
24 million users of NBA2K online in China
NBA2K15 Best selling NBA2K yet
#1 sports game for next gen consoles
7 million copies sold (Bigger than EAs Madden)
NBA2K vs. NBA Live
Beat EAs NBA Live out of the market from 2010-2014
Google Search NBA2K vs. NBA Live
0%
5%
10%
15%
20%
25%
0
0.5
1
1.5
Per
cen
t o
f To
tal S
ales
Gam
es
Sold
(m
illio
ns)
Non North America sales Non North American Sales Percent of Total
NBA becomes more valuable
7Unjustified Market Concern over Changing IndustryMOBILE MARKET CONCERN
TAKE TWOS RESPONSE
MARKET REALITY
Two separate markets
Mobile growth has been additive to the industry
Mobile gaming attracts those who dont want to own a dedicated
gaming console
Console and PC game time has not decreased
Gamers still want AAA high quality games
76% of gamers rank graphics as an important feature
Gamers still want realistic story-driven plots
Mobile games limited to simplistic plot and designs
Continue to make top quality AAA games for consoles
Leverage existing brands across screen sizes with new mobile games
0%
20%
40%
60%
80%
Q2 2015Q1 2015Q4 2014Q3 2014Q2 2014Q1 2014Q4 2013
Mobile Releases
We believe the sub-industry has been adversely affected by a
shift toward mobile games and away from console games
Mobile Kills the Console
Market is worried that mobile gaming will starve console gaming
More optimistic about mobile gaming companies like Zynga and
Rovio (Angry Birds)
Video Game Industry
Disrupted in 2015
01234567
Mo
bile
Gam
es
Percent of Releases That Are Mobile
Mobile Releases Per Brand
= projected
= existing
8Uncharacteristic Cash Buildup Financial Edge
Market Cap: $2.16 B Free Cash Flow: $976.6 M
Almost half of market cap in cash
Strong willingness to utilize cash
Always contemplating if returning cash to shareholders is accretive
Bought back $277 million at ~$17 a share in past
Potential use to fund organic growth opportunities
Even more bullish means pipeline is innovating
Possible funding of inorganic growth opportunities
Purchasing the license of Evolve, WWE, or other enterprise
INVESTOR-FRIENDLY CULTURE
0
2
4
6
8
10
12
0
200
400
600
800
1000
1200
1400
2012 2013 2014 2015E 2016E 2017E
Cash Buildup
M&A History
INCREDIBLY STRONG BALANCE
R&D Plan
No major shareholder equity dilution
Additional capital raising has taken place through careful, limited private placement
Currently approximately $8.57 in cash per share
Expected to rise in foreseeable future with new revenue inflows
High short interest of 18.2%
Upward pressure as short sellers cover their short positions
Mid-February, 2008: Electronic Arts (EA) made US$25 per share all cash acquisition offer worth ~$2 billion
Declined EA undervalued business & failed to recognize value of efforts to expand intellectual property
2013: TTWO purchases the rights to games of THQ
Often seeks to acquire licensing from highly distressed companies
Possible Activision / Take-Two deal if progress on movie studios
R&D Plan
9Disclosure Discount EdgeLACK OF GAME RELEASE VISIBILITY
Great reputation with gamers Skittish reputation with Wall Street
Despite recent successes, continued market sell-offs
Little detailed guidance on blockbuster game release schedule
Sporadic releases led to historically fluctuating earnings
No breakout AAA products announced yet for FY15
Unwillingness to establish clear probability targets
Track record of repeatedly delivering on record-breaking games
Management committed to extensive pipeline of next-gen development
Platform of proven franchises and new intellectual property
LESS VOLATILE, SMOOTHER ENTERPRISE
Zelnick: Recognizes need for more predictable and stable revenue streams between massive tent pole releases
New outlets / business model to ensure more consistent profitability
Downloadable Add-On Content (DLC)
High margin method to capitalize on recurrent consumer spending
First company to launch map packs, heists, & virtual currency
Engages consumers with games for longer periods of time
Taking advantage of another high margin industry trend
Represents about 25% of revenue in LTM
In FY2013, digital revenues increased more than 100% over FY2012
-15%
-10%
-5%
0%
5%
10%
15%
20%
0
500
1000
1500
2000
2500
2010 2011 2012 2013 2014
Revenue & Operating Margins
Despite lack of transparency, severe market discount
Digital Distribution
10
RisksSENSITIVITY TO HIT TITLES TRANSITION TO NEXT GENERATION PLATFORMS
GAMING AS A TREND-BASED INDUSTRY
Fluctuations in quarterly reports due to seasonal publishing
Sales of GTA generated 68.9% of net revenue for 2014
Intense competition for relatively small number of hit titles
From an investors and the companys perspective, it is difficult to predict new hit titles
HARDWARE LICENSORS ARE ALSO COMPETITORS
Gaming is based on trends
Set by average customer and technological standards
Similarities to fashion industry
Sales of games heavily influenced by reviews and ratings TTWO submits products to Entertainment Software Rating Board (ESRB)
Risk of failure to obtain a target rating
Risk of unexpected AO rating (age 18 and older), which decreases retail interest and customer base
High product sensitivity to software errors, online problems etc.
Approval for publication on title-by-title basis
Possible limitations include number of titles and timing of publications
Dependence on licensor, who is a competitor for games production, to renew or extend current license agreements
Competition
Licensing
0
10
20
30
40
50
60
70
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
10,000,000
Kiosk Facebook Mobile Web MMO PC/MAC Console
# Te
am M
emb
ers
Bu
dge
t ($
)
Average Budget vs Average Developer Team Size
11
ValuationCOMPARABLE ANALYSIS
Allow valuation of Take-Two without disclosure discount
Using mean comparable EV/EBITDA of 9.45, valuation is $27.49
Using median comparable EV/EBITDA multiple of 10.27, valuation is $29.88
Using median comparable P/E of 20.1, valuation is $35.24
Using mean comparable P/E of 20.8, valuation is $36.41
DISCOUNTED CASH FLOW ANALYSIS
View cash flow as cyclical, yet increasing function
Cash Flow= sin(t) + t; = constant; > 0
Lack of regular guidance requires unconventional valuation
Have Blockbuster years and Trough years Blockbuster years: Release a hit game like Red Dead Redemption 2 or GTA VI
Trough years: Big cash burn developing blockbuster games and rely on recurring revenue
In the next three years, revenue from annual franchises and recurring digital revenue will allow Take-Two to increase revenue even in Trough years
Revenue is still cyclical, but each successive peak and trough increase in value
Trough Year
Blockbuster Year
From this point onwards, cash flow is always
positive
Cas
h F
low
Bull Base Bear
Hit Game Success
Produce 2 hit games on par with GTA V Sales
Produce a hit game below expectations
Fail to produce a hit game close to GTA V
Blockbuster Revenue Growth
100% GTA V Cash Flow 80% GTA V Cash Flow
60% GTA V Cash Flow
Recurring Revenue
Recurring revenue vastly expands
Recurring revenue expandsbut below expectations
Recurring slightly expands
Trough Year Revenue Growth
10% 5% 2.5%
Comparable Price Target:
Bear: $27.49
Base: $29.88
Bull: $35.24
0
5
10
15
20
25
30
35
40
Pri
ce (
$)
Bull: $37.35
Base: $30.90
Bear: $27.53
Final Valuation: $30.90
21% Upside
TTWO Stock Price
12
AppendixSLIDE TITLE SLIDE NUMBER
Comparable Company Analysis 13
Base Case Discounted Cash Flow Analysis 14
Base Case Conclusion 15
Bull Case Discounted Cash Flow Analysis 16
Bull Case Conclusion 17
Bear Case Discounted Cash Flow Analysis 18
Bear Case Conclusion 19
Evolve Release 20
Violence Concerns 21
Virtual Reality 22
Twitch Interactive 23
Sources 24
13
Comparable Company Analysis
P/E Multiple Range (Using Mean P/E)
18.8 19.8 20.8 21.8 22.8
1.55 29.15 30.70 32.25 33.80 35.35
1.75 32.91 34.66 36.41 38.16 39.91
1.95 36.67 38.62 40.57 42.52 44.47
P/E Multiple Range (Using Median P/E)
18.1 19.1 20.1 21.1 22.1
1.55 28.11 29.66 31.21 32.76 34.31
1.75 31.74 33.49 35.24 36.99 38.74
1.95 35.36 37.31 39.26 41.21 43.16
195.5 220.5 245.5 270.5 295.5
8.45 19.57 22.08 24.58 27.08 29.59
9.45 21.89 24.69 27.49 30.29 33.09
10.45 24.21 27.30 30.40 33.49 36.59
195.5 220.5 245.5 270.5 295.5
9.27 21.47 24.22 26.96 29.71 32.46
10.27 23.80 26.84 29.88 32.93 35.97
11.27 26.11 29.44 32.78 36.12 39.46
2014E EV/EBITDA Multiple
Range (Using Mean):
Assumed # shares (mm): 213.3EBITDA Range (US$mm)
2014E EV/EBITDA Multiple
Range (Using Median):
Assumed # shares (mm): 213.3
2014E EPS Ranges:
Assumed # shares (mm): 213.3
2014E EPS Ranges:
Assumed # shares (mm): 213.3EBITDA Range (US$mm)
P/E Multiple Range (Using Mean P/E)
18.8 19.8 20.8 21.8 22.8
1.55 29.15 30.70 32.25 33.80 35.35
1.75 32.91 34.66 36.41 38.16 39.91
1.95 36.67 38.62 40.57 42.52 44.47
P/E Multiple Range (Using Median P/E)
18.1 19.1 20.1 21.1 22.1
1.55 28.11 29.66 31.21 32.76 34.31
1.75 31.74 33.49 35.24 36.99 38.74
1.95 35.36 37.31 39.26 41.21 43.16
195.5 220.5 245.5 270.5 295.5
8.45 19.57 22.08 24.58 27.08 29.59
9.45 21.89 24.69 27.49 30.29 33.09
10.45 24.21 27.30 30.40 33.49 36.59
195.5 220.5 245.5 270.5 295.5
9.27 21.47 24.22 26.96 29.71 32.46
10.27 23.80 26.84 29.88 32.93 35.97
11.27 26.11 29.44 32.78 36.12 39.46
2014E EV/EBITDA Multiple
Range (Using Mean):
Assumed # shares (mm): 213.3EBITDA Range (US$mm)
2014E EV/EBITDA Multiple
Range (Using Median):
Assumed # shares (mm): 213.3
2014E EPS Ranges:
Assumed # shares (mm): 213.3
2014E EPS Ranges:
Assumed # shares (mm): 213.3EBITDA Range (US$mm)
P/E Multiple Range (Using Mean P/E)
18.8 19.8 20.8 21.8 22.8
1.55 29.15 30.70 32.25 33.80 35.35
1.75 32.91 34.66 36.41 38.16 39.91
1.95 36.67 38.62 40.57 42.52 44.47
P/E Multiple Range (Using Median P/E)
18.1 19.1 20.1 21.1 22.1
1.55 28.11 29.66 31.21 32.76 34.31
1.75 31.74 33.49 35.24 36.99 38.74
1.95 35.36 37.31 39.26 41.21 43.16
195.5 220.5 245.5 270.5 295.5
8.45 19.57 22.08 24.58 27.08 29.59
9.45 21.89 24.69 27.49 30.29 33.09
10.45 24.21 27.30 30.40 33.49 36.59
195.5 220.5 245.5 270.5 295.5
9.27 21.47 24.22 26.96 29.71 32.46
10.27 23.80 26.84 29.88 32.93 35.97
11.27 26.11 29.44 32.78 36.12 39.46
2014E EV/EBITDA Multiple
Range (Using Mean):
Assumed # shares (mm): 213.3EBITDA Range (US$mm)
2014E EV/EBITDA Multiple
Range (Using Median):
Assumed # shares (mm): 213.3
2014E EPS Ranges:
Assumed # shares (mm): 213.3
2014E EPS Ranges:
Assumed # shares (mm): 213.3EBITDA Range (US$mm)
P/E Multiple Range (Using Mean P/E)
18.8 19.8 20.8 21.8 22.8
1.55 29.15 30.70 32.25 33.80 35.35
1.75 32.91 34.66 36.41 38.16 39.91
1.95 36.67 38.62 40.57 42.52 44.47
P/E Multiple Range (Using Median P/E)
18.1 19.1 20.1 21.1 22.1
1.55 28.11 29.66 31.21 32.76 34.31
1.75 31.74 33.49 35.24 36.99 38.74
1.95 35.36 37.31 39.26 41.21 43.16
195.5 220.5 245.5 270.5 295.5
8.45 19.57 22.08 24.58 27.08 29.59
9.45 21.89 24.69 27.49 30.29 33.09
10.45 24.21 27.30 30.40 33.49 36.59
195.5 220.5 245.5 270.5 295.5
9.27 21.47 24.22 26.96 29.71 32.46
10.27 23.80 26.84 29.88 32.93 35.97
11.27 26.11 29.44 32.78 36.12 39.46
2014E EV/EBITDA Multiple
Range (Using Mean):
Assumed # shares (mm): 213.3EBITDA Range (US$mm)
2014E EV/EBITDA Multiple
Range (Using Median):
Assumed # shares (mm): 213.3
2014E EPS Ranges:
Assumed # shares (mm): 213.3
2014E EPS Ranges:
Assumed # shares (mm): 213.3EBITDA Range (US$mm)
Share Price Market Enterprise
Company Share Price % of Cap Value EBITDA P/E
Ticker (US$) 52 week high (US$mm) (US$mm) (US$mm) LTM CY2015E LTM CY2015E CY2015E
Activison Blizzard, Inc. ATVI 23.02 95.2% 16,453 15,920 1,468 3.4x 3.6x 13.0x 10.8x 19.4
Ubisoft Entertainment UBI 18.30 96.0% 2,067 2,123 554 1.6x 1.3x 4.1x 3.9x 17.9
Electronic Arts, Inc. EA 59.47 98.8% 18,438 16,131 1,205 3.6x 3.8x 14.5x 13.4x 25.0
Capcom Co Ltd. CCOEF 19.35 100.0% 1,323 1,136 188 1.8x 2.0x 8.9x 9.7x 20.8
Mean 30.04 97.5% 9570 8,827 854 2.6x 2.7x 10.1x 9.5x 20.8
Median 21.19 97.4% 9260 9,021 879 2.6x 2.8x 10.9x 10.3x 20.1High 59.47 100.0% 18438 16,131 1,468 3.6x 3.8x 14.5x 13.4x 25.0
Low 18.30 95.2% 1323 1,136 188 1.6x 1.3x 4.1x 3.9x 17.9
Take-Two Interactive Inc. TTWO 25.21 81.9% 2,127 1,621 246 1.7x 1.0x 19.6x 6.6x 14.4
Enterprise Value as a Multiple of
Revenue (x) EBITDA (x)
$(100.0)
$-
$100.0
$200.0
$300.0
$400.0
$500.0
2010 2011 2012 2013 2014 2015E
EBITDA ($MM)
Take-Two EBITDA 2010-2015E
14
Base CaseHistorical Year
2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Sales *Blockbuster* *Blockbuster* *Blockbuster*
Console 974,303$ 702,775$ 976,444$ 2,148,419$ 988,290$ 1,903,960$ 1,136,534$ 2,115,511$ 1,363,840$ 2,493,100$
PC & Other 110,277$ 87,537$ 216,178$ 192,747$ 109,810$ 211,551$ 126,282$ 235,057$ 151,538$ 277,011$
Handheld 52,296$ 35,510$ 21,861$ 9,402$ -$ -$ -$ -$ -$ -$
Total Sales 1,136,876$ 825,823$ 1,214,483$ 2,350,568$ 1,098,100$ 2,115,511$ 1,262,815$ 2,350,568$ 1,515,378$ 2,770,111$
Cost of goods sold 689,381$ 528,855$ 715,837$ 1,414,327$ 520,000$ 1,121,221$ 675,606$ 1,269,307$ 825,881$ 1,523,561$
Gross Profit 447,495$ 296,968$ 498,646$ 936,241$ 578,100$ 994,290$ 587,209$ 1,081,261$ 689,497$ 1,246,550$
Selling and Marketing 176,294$ 183,749$ 257,329$ 240,996$ 232,900$ 282,738$ 171,617$ 324,731$ 212,759$ 395,156$
General and Administrative 109,484$ 121,200$ 147,260$ 161,374$ 165,200$ 201,058$ 122,038$ 230,920$ 151,295$ 281,000$
Research and Development 69,576$ 64,162$ 78,184$ 105,256$ 108,500$ 131,944$ 80,088$ 151,541$ 99,288$ 184,406$
Total Operating Expenses 355,354$ 369,111$ 482,773$ 507,626$ 506,600$ 628,307$ 381,370$ 721,624$ 472,798$ 878,125$
EBITDA 92,141$ (72,143)$ 15,873$ 428,615$ 71,500$ 365,983$ 205,839$ 359,637$ 216,699$ 368,425$
% Margin 8.1% -8.7% 1.3% 18.2% 6.5% 17.3% 16.3% 15.3% 14.3% 13.3%
Less: Depreciation & Amortization 14,999$ 12,123$ 10,634$ 13,359$ 18,600$ 23,271$ 20,205$ 49,362$ 39,400$ 85,873$
EBIT 77,142$ (84,266)$ 5,239$ 415,256$ 52,900$ 342,713$ 185,634$ 310,275$ 177,299$ 282,551$
% Margin 6.8% -10.2% 0.4% 17.7% 4.8% 16.2% 14.7% 13.2% 11.7% 10.2%
Taxes 4$ 3,900$ 5,000$ 14,500$ 13,000$ 52,778$ 28,588$ 47,782$ 27,304$ 43,513$
EBIAT 77,138$ (88,166)$ 239$ 400,756$ 39,900$ 289,935$ 157,046$ 262,493$ 149,995$ 239,038$
Plus: Investing Activities 150,000.0
Plus: Depreciation & Amortization 14,999$ 12,123$ 10,634$ 13,359$ 18,600$ 23,271$ 20,205$ 49,362$ 39,400$ 85,873$
Less: Capital Expenditures (9,650)$ (10,790)$ (16,820)$ (29,810)$ (42,900)$ (42,310)$ (25,256)$ (47,011)$ (30,308)$ (55,402)$
Change in Net Working Capital (118,982)$ (49,000)$ (22,000)$ 137,000$ (25,000)$ 105,776$ (31,570)$ 117,528$ (37,884)$ (69,253)$
Unlevered Free Cash Flow ($36,494.9) $14,167.0 ($27,947.0) $521,305.0 ($9,400.0) $376,671.0 $120,424.6 $382,371.6 $121,203.0 $200,256.9
Annual Assumptions (Adjust Projections As Needed) Step
-27.4% 47.1% 93.5% -53.3% -10.0% 15.0% 0.0% 20.0% 82.8% 0.0%
64.0% 58.9% 60.2% 47.4% 53.0% 53.5% 54.0% 54.5% 55.0% 0.5%
44.7% 39.8% 21.6% 46.1% 29.7% 30.2% 30.7% 31.2% 31.7% 0.5%
1.5% 0.9% 0.6% 1.7% 1.1% 1.6% 2.1% 2.6% 3.1% 0.5%
0.8% 1.3% 1.4% 1.3% 2.0% 2.0% 2.0% 2.0% 2.0% 0.0%
20.3% NM 15.4% 15.4% 15.4% 15.4% 15.4% 15.4% 15.4% 0.0%
-10.5% -5.9% -1.8% 5.8% 5.0% -2.5% 5.0% -2.5% -2.5% 0.0%
Effective Tax Rate
Change in Working Capital (% of Sales)
Projected Year
Sales Growth (%)
COGS (% of Sales)
SG&A (% of Sales)
Depreciation and Amortization (% of Sales)
Capital Expenditures (% of Sales)
15
Base CaseKEY ASSUMPTIONS EQUITY VALUE CALCULATION
SENSITIVITY ANALYSIS
WACC 10.00%
Net Present Value of FCF $1,239,997.16
Terminal Growth Rate 2.00%
Terminal Value $2,553,275.01
Present Value of TV $984,398.04
Enterprise Value $2,224,395.21
Less Debt 470,420
Less Preferred Securities 0
Less Noncontrolling Interest 0
Plus: Cash and Equivalents 976,600
Equity Value $2,730,575.21
88,370
$30.90
Diluted Shares:
Equity Value Per Share
Perpetuity Growth Method
Terminal Growth Rate
1.0% 1.5% 2.0% 2.5% 3.0%
9.0% $32.26 $33.13 $34.13 $35.27 $36.61
9.5% $30.83 $31.57 $32.40 $33.36 $34.46
10.0% $29.56 $30.19 $30.90 $31.70 $32.62
10.5% $28.44 $28.98 $29.58 $20.26 $31.03
11.0% $27.42 $27.89 $28.41 $28.99 $29.64
WA
CC
Blockbuster Percent of GTA V Sales 80.0%
Annual Increase in Recurring Revenue 5.0%
COGS, SG&A, D&A Annual Increase 0.5%
Blockbuster Year Change in Working Capital as a Percent of Sales 5.0%
Trough Year Change in Working Capital as a Percent of Sales -2.5%
Effective Tax Rate 15.4%
Ending Year FCF $200 MM
16
Bull CaseHistorical Year
2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Sales *Blockbuster* *Blockbuster* *Blockbuster*
Console 974,303$ 702,775$ 976,444$ 2,148,419$ 988,290$ 2,538,613$ 1,284,777$ 2,961,716$ 1,927,166$ 3,276,181$
PC & Other 110,277$ 87,537$ 216,178$ 192,747$ 109,810$ 282,068$ 142,753$ 329,080$ 214,130$ 364,020$
Handheld 52,296$ 35,510$ 21,861$ 9,402$ -$ -$ -$ -$ -$ -$
Total Sales 1,136,876$ 825,823$ 1,214,483$ 2,350,568$ 1,098,100$ 2,820,682$ 1,427,530$ 3,290,795$ 2,141,295$ 3,640,202$
Cost of goods sold 689,381$ 528,855$ 715,837$ 1,414,327$ 520,000$ 1,494,961$ 763,729$ 1,777,029$ 1,167,006$ 2,002,111$
Gross Profit 447,495$ 296,968$ 498,646$ 936,241$ 578,100$ 1,325,720$ 663,801$ 1,513,766$ 974,289$ 1,638,091$
Selling and Marketing 176,294$ 183,749$ 257,329$ 240,996$ 232,900$ 376,984$ 194,001$ 454,623$ 300,638$ 519,275$
General and Administrative 109,484$ 121,200$ 147,260$ 161,374$ 165,200$ 268,078$ 137,956$ 323,288$ 213,787$ 369,262$
Research and Development 69,576$ 64,162$ 78,184$ 105,256$ 108,500$ 175,926$ 90,534$ 212,158$ 140,298$ 242,328$
Total Operating Expenses 355,354$ 369,111$ 482,773$ 507,626$ 506,600$ 837,742$ 431,114$ 1,010,274$ 668,084$ 1,153,944$
EBITDA 92,141$ (72,143)$ 15,873$ 428,615$ 71,500$ 487,978$ 232,687$ 503,492$ 306,205$ 484,147$
% Margin 8.1% -8.7% 1.3% 18.2% 6.5% 17.3% 16.3% 15.3% 14.3% 13.3%
Less: Depreciation & Amortization 14,999$ 12,123$ 10,634$ 13,359$ 18,600$ 31,027$ 22,840$ 69,107$ 55,674$ 112,846$
EBIT 77,142$ (84,266)$ 5,239$ 415,256$ 52,900$ 456,950$ 209,847$ 434,385$ 250,532$ 371,301$
% Margin 6.8% -10.2% 0.4% 17.7% 4.8% 16.2% 14.7% 13.2% 11.7% 10.2%
Taxes 4$ 3,900$ 5,000$ 14,500$ 13,000$ 70,370$ 32,316$ 66,895$ 38,582$ 57,180$
EBIAT 77,138$ (88,166)$ 239$ 400,756$ 39,900$ 386,580$ 177,530$ 367,490$ 211,950$ 314,120$
Plus: Investing Activities 150,000.0
Plus: Depreciation & Amortization 14,999$ 12,123$ 10,634$ 13,359$ 18,600$ 31,027$ 22,840$ 69,107$ 55,674$ 112,846$
Less: Capital Expenditures (9,650)$ (10,790)$ (16,820)$ (29,810)$ (42,900)$ (56,414)$ (28,551)$ (65,816)$ (42,826)$ (72,804)$
Change in Net Working Capital (118,982)$ (49,000)$ (22,000)$ 137,000$ (25,000)$ 141,034$ (35,688)$ 164,540$ (53,532)$ (91,005)$
Unlevered Free Cash Flow ($36,494.9) $14,167.0 ($27,947.0) $521,305.0 ($9,400.0) $502,228.0 $136,132.1 $535,320.2 $171,265.1 $263,157.4
Annual Assumptions (Adjust Projections As Needed) Step
-27.4% 47.1% 93.5% -53.3% 20.0% 30.0% 40.0% 50.0% 70.0% 0.0%
64.0% 58.9% 60.2% 47.4% 53.0% 53.5% 54.0% 54.5% 55.0% 0.5%
44.7% 39.8% 21.6% 46.1% 29.7% 30.2% 30.7% 31.2% 31.7% 0.5%
1.5% 0.9% 0.6% 1.7% 1.1% 1.6% 2.1% 2.6% 3.1% 0.5%
0.8% 1.3% 1.4% 1.3% 2.0% 2.0% 2.0% 2.0% 2.0% 0.0%
20.3% NM 15.4% 15.4% 15.4% 15.4% 15.4% 15.4% 15.4% 0.0%
-10.5% -5.9% -1.8% 5.8% 5.0% -2.5% 5.0% -2.5% -2.5% 0.0%
Effective Tax Rate
Change in Working Capital (% of Sales)
Projected Year
Sales Growth (%)
COGS (% of Sales)
SG&A (% of Sales)
Depreciation and Amortization (% of Sales)
Capital Expenditures (% of Sales)
17
Bull CaseKEY ASSUMPTIONS EQUITY VALUE CALCULATION
SENSITIVITY ANALYSIS
Blockbuster Percent of GTA V Sales 100.0%
Annual Increase in Recurring Revenue 10.0%
COGS, SG&A, D&A Annual Increase 0.5%
Blockbuster Year Change in Working Capital as a Percent of Sales 5.0%
Trough Year Change in Working Capital as a Percent of Sales -2.5%
Effective Tax Rate 15.4%
Ending Year FCF $263 MM
18
Bear CaseHistorical Year
2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Sales *Blockbuster* *Blockbuster* *Blockbuster*
Console 974,303$ 702,775$ 976,444$ 2,148,419$ 988,290$ 1,375,082$ 1,062,412$ 1,480,858$ 1,195,213$ 2,184,850$
PC & Other 110,277$ 87,537$ 216,178$ 192,747$ 109,810$ 152,787$ 118,046$ 164,540$ 132,801$ 242,761$
Handheld 52,296$ 35,510$ 21,861$ 9,402$ -$ -$ -$ -$ -$ -$
Total Sales 1,136,876$ 825,823$ 1,214,483$ 2,350,568$ 1,098,100$ 1,527,869$ 1,180,458$ 1,645,398$ 1,328,015$ 2,427,611$
Cost of goods sold 689,381$ 528,855$ 715,837$ 1,414,327$ 520,000$ 809,771$ 631,545$ 888,515$ 723,768$ 1,335,186$
Gross Profit 447,495$ 296,968$ 498,646$ 936,241$ 578,100$ 718,099$ 548,913$ 756,883$ 604,247$ 1,092,425$
Selling and Marketing 176,294$ 183,749$ 257,329$ 240,996$ 232,900$ 204,200$ 160,424$ 227,312$ 186,453$ 346,299$
General and Administrative 109,484$ 121,200$ 147,260$ 161,374$ 165,200$ 145,209$ 114,079$ 161,644$ 132,589$ 246,257$
Research and Development 69,576$ 64,162$ 78,184$ 105,256$ 108,500$ 95,293$ 74,865$ 106,079$ 87,012$ 161,606$
Total Operating Expenses 355,354$ 369,111$ 482,773$ 507,626$ 506,600$ 453,777$ 356,498$ 505,137$ 414,341$ 769,553$
EBITDA 92,141$ (72,143)$ 15,873$ 428,615$ 71,500$ 264,321$ 192,415$ 251,746$ 189,906$ 322,872$
% Margin 8.1% -8.7% 1.3% 18.2% 6.5% 17.3% 16.3% 15.3% 14.3% 13.3%
Less: Depreciation & Amortization 14,999$ 12,123$ 10,634$ 13,359$ 18,600$ 16,807$ 18,887$ 34,553$ 34,528$ 75,256$
EBIT 77,142$ (84,266)$ 5,239$ 415,256$ 52,900$ 247,515$ 173,527$ 217,192$ 155,378$ 247,616$
% Margin 6.8% -10.2% 0.4% 17.7% 4.8% 16.2% 14.7% 13.2% 11.7% 10.2%
Taxes 4$ 3,900$ 5,000$ 14,500$ 13,000$ 38,117$ 26,723$ 33,448$ 23,928$ 38,133$
EBIAT 77,138$ (88,166)$ 239$ 400,756$ 39,900$ 209,398$ 146,804$ 183,745$ 131,450$ 209,483$
Plus: Investing Activities 150,000.0
Plus: Depreciation & Amortization 14,999$ 12,123$ 10,634$ 13,359$ 18,600$ 16,807$ 18,887$ 34,553$ 34,528$ 75,256$
Less: Capital Expenditures (9,650)$ (10,790)$ (16,820)$ (29,810)$ (42,900)$ (30,557)$ (23,609)$ (32,908)$ (26,560)$ (48,552)$
Change in Net Working Capital (118,982)$ (49,000)$ (22,000)$ 137,000$ (25,000)$ 76,393$ (29,511)$ 82,270$ (33,200)$ (60,690)$
Unlevered Free Cash Flow ($36,494.9) $14,167.0 ($27,947.0) $521,305.0 ($9,400.0) $272,040.2 $112,570.8 $267,660.1 $106,217.3 $175,496.8
Annual Assumptions (Adjust Projections As Needed) Step
-27.4% 47.1% 93.5% -53.3% -35.0% 7.5% -30.0% 12.5% 82.8% 0.0%
64.0% 58.9% 60.2% 47.4% 53.0% 53.5% 54.0% 54.5% 55.0% 0.5%
44.7% 39.8% 21.6% 46.1% 29.7% 30.2% 30.7% 31.2% 31.7% 0.5%
1.5% 0.9% 0.6% 1.7% 1.1% 1.6% 2.1% 2.6% 3.1% 0.5%
0.8% 1.3% 1.4% 1.3% 2.0% 2.0% 2.0% 2.0% 2.0% 0.0%
20.3% NM 15.4% 15.4% 15.4% 15.4% 15.4% 15.4% 15.4% 0.0%
-10.5% -5.9% -1.8% 5.8% 5.0% -2.5% 5.0% -2.5% -2.5% 0.0%
Effective Tax Rate
Change in Working Capital (% of Sales)
Projected Year
Sales Growth (%)
COGS (% of Sales)
SG&A (% of Sales)
Depreciation and Amortization (% of Sales)
Capital Expenditures (% of Sales)
19
Bear CaseKEY ASSUMPTIONS EQUITY VALUE CALCULATION
SENSITIVITY ANALYSIS
Terminal Growth Rate
1.0% 1.5% 2.0% 2.5% 3.0%
9.0% $28.69 $29.45 $30.33 $31.33 $32.50
9.5% $27.45 $28.10 $28.83 $29.66 $30.63
10.0% $26.36 $26.91 $27.53 $28.23 $29.03
10.5% $25.38 $25.85 $26.38 $26.98 $27.65
11.0% $24.51 $24.92 $25.37 $25.88 $26.45
WA
CC
WACC 10.00%
Net Present Value of FCF $1,063,630.59
Terminal Growth Rate 2.00%
Terminal Value $2,237,584.75
Present Value of TV $862,685.79
Enterprise Value $1,926,316.38
Less Debt 470,420
Less Preferred Securities 0
Less Noncontrolling Interest 0
Plus: Cash and Equivalents 976,600
Equity Value $2,432,496.38
88,370
$27.53
Diluted Shares:
Equity Value Per Share
Perpetuity Growth MethodBlockbuster Percent of GTA V Sales 60.0%
Annual Increase in Recurring Revenue 2.5%
COGS, SG&A, D&A Annual Increase 0.5%
Blockbuster Year Change in Working Capital as a Percent of Sales 5.0%
Trough Year Change in Working Capital as a Percent of Sales -2.5%
Effective Tax Rate 15.4%
Ending Year FCF $175 MM
20
EvolveOVERVIEW RECEPTION
DLC CONCERNS
Has drawn criticism for more than $60 of DLC not covered with purchase
Continual release of new hunters and monsters
4 new hunters released March 31, 2015
Evolve not a huge expense and so its disappointing launch not integral to Take-Twos success.
Developed by Turtle Rock Studios and originally owned by THQ
Take-Two bought rights for $10.8 million during THQs bankruptcy
Players can either join a group of four hunters or be the monster and kill alone
Released February 10, 2015 and debuted #1 in UK software-sales chart, becoming the first 2K games since 2013
Take Two satisfied with an incredible launch
Estimated 1.5 million copies sold by the end of the yearBest of Show
E3 2014
Best of ShowGamesCon
A must-own for next gen gamers
NY Daily News
21
Violence ConcernsOVERVIEW TAKE TWOS RESPONSE
MANHUNT CONTROVERSY
Intense realistic violence in a stealth horror video game
Game allegedly linked to the murder of 14-year-old Stefan Pakeerah by 17-year-old friend in Leicestershire, England
Police deny any connection between Manhunt and the game
Banned in Russia and New Zealand
Still released Manhunt 2 to mixed to positive reviews
Belief that violent video games like Grand Theft Auto and Red Dead Redemption will increase violence among children
No evidence as of yet that the two are correlated
Women rights activists outcry over ability to hire and kill prostitute in GTA V
Target Australia pulled GTA V after three survivors of sexual violence started a petition
GTA V still went on to sell over $1 billion in its opening weekend
On the same level of disturbance as the evening news or Hollywood movies
Supreme Court ruled 7-2 to overturn a California law that would ban the sale of violent video games to children under grounds of free speech
This is a criminal setting; its a gritty underworld;and its beautiful art Strauss Zelnick
22
Virtual RealityOVERVIEW TAKE TWOS STRATEGY
Facebook bought Oculus VR for $2 billion
Oculus developing Developer Kit so help gaming companies create VR content
Sony developing Project Morpheus VR expected to release in 2016
Samsung developed Samsung Gear VR in collaboration with Oculus
Still no games developed for VR
Concerns over nausea
If thats what consumers want, well be first in line to give it to them Strauss Zelnick
23
Twitch InteractiveOVERVIEW KEY GROWTH
IMPORTANCE
Shows Take Twos integral understanding of the industry
Clear sign that Take Two can strategically its cash stockpile
Confirms the video game industrys growth and solid user base
Originally launched in 2007 by Justin Kan and Emmet Shear
A live streaming video platform focusing on video gaming
Attracts 35 million unique visitors a month
Primetime Twitch is bigger CNN, MSNBC, and MTV
Includes playthroughs of video games and broadcasts of e-sports
Bought for $970 million by Amazon on August 25, 2014
Take Two received $22 million in cash - > $.27/share
0%
5%
10%
15%
20%
25%
30%
35%
Netflix Google Apple Twitch Hulu Facebook Valve Amazon Pandora
Percent of Peak Internet Traffic
24
SourcesGRAPHS INFORMATION
NPD Group
Mintel Video Game Industry Research
Credit Suisse Equity Research, Report February 2015
Wedbush Equity Research, Report February 2015
ValuEngine Forecast and Research Report
Macquarie Research USA, Report March 2015
BMO Capital Markets, Digital Entertainment and Internet eCommerceReport February 2015
Take-Two Investor Relations
S&P Capital IQ Stock Report March 2015
Bloomberg, Financial Analysis TTWO
Thompson One, Financial Statements TTWO
Cowen and Company Equity Research
Piper Jaffray Research and Hot Comment
Hilliard Lions, Company Update/Estimate Change February 2015
Brean Capital, LLC Target Price Change TTWO March 2015
Jefferies TTWO Company Note and Estimate Change, March 2015
Buysellsignals Equity Research Report TTWO February 2015
MKM Partners Research and Company Update
Take-Two Investor Relations
NY Times 2014: N.B.A. Looks to Asia for Next Growth Spurt
BBC 2015: NBA boss Adam Silver hopes for global basketball bounce