Take-Two Interactive Software, Inc.

Derek Chait, Trey Coppinger, Lukas Neske, Travis Wolf

April 10, 2015

Investment Thesis (NASDAQ: TTWO )

Take-Twos potential to capitalize on the next-gen console era with unprecedented intellectual property and a cashrich cushion is overlooked by an unnerved market seeking solid forward guidance.
Recommendation: BUY

Current Price: $25.45

1Y Price Target: $30.90 (+21.41%)

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
CATALYSTS

E3 Gaming Conference probable release of Red Dead Redemption 2 or other notable title
Continued growth of mobile and recurring digital revenue
2

Industry Overview
CURRENT TRENDS

INDUSTRY DYNAMICS
Main Players:

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

Video game sector is an ever-changing industry

International market rapidly expanding

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

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

Game Revenue by Geographic Location ($B)

Video Game Revenue by Type ($M)

140

120

27%

100
80
60
40
20
0

49.38

44.29

55.05

45%

37.4
20.92

9.28

13.21

17.15

22.01

17.76

18.06

15.08

16.4

2012

2013

2014

2015

14.44

Handheld

Mobile

PC

Console

4%

21.6

17.72

22%

Location
North America
Latin America
Europe
Africa
Asia-Pacific

Sales ($B)
$
22.2
$
3.3
$
17.7
$
1.4
$
36.8

2%

North America

Latin America

Europe

Africa

Asia-Pacific
3

Company Overview
REVENUE STREAM

HISTORY
Category Breakdown

Gross Margin and Digital Revenue Increase

21%

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

Gross Margin

Founded in 1993, HQ in New York City

50%

30%

40%

25%

20%

30%

15%
20%

10%

10%

5%

79%
0%

0%
2011

PC and Other

Console

2012
Gross Margin

2013

2014

2015

Percent of Revenue

MANAGEMENT TEAM
CEO: Strauss Zelnick
MBA and JD from Harvard

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

Pays himself $11k annually rest in stock

Owns over 2mm shares, one of the largest

holders

CFO: Lainie Goldstein

Former VP of Finance and Business
Development at Nautica Enterprises
Audit and reorganization department at
Grant Thornton LLP

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)

Executive VP: Seth Krauss

ED in Legal & Compliance Division at
Morgan Stanley

Digital Revenue

Take-Two Interactive Software, Inc. is a leading developer, publisher

and marketer of interactive entertainment

Underestimated Ability to Create Lasting Brands

TRACK RECORD OF PRODUCING EXCELLENT BRANDS WITH LONG LIVES
1997:
Grand Theft Auto

2004
Sid Meiers
Civilization

2005
NBA2K

2004
Red Dead

2001
Max Payne

2012
XCOM: Enemy
Within

2007
BioShock

2009
Borderlands

2005
NHL2K

2016
Battleborn

2014
WWE2K

2011
LA Noire

2015
Evolve

Since 2007, launched 7 new successful franchises and released 39 distinct multi-million selling titles
Implement proprietary open-world RAGE gaming engine across franchises
Releases Per Brand
16
14
12
10
8
6
4
2
0

BRAND EXTENSIONS AND NEW BRANDS

Evolve

Red Dead Redemption 2

Incredible Launch

E3 2015 (June)

LA Noire 2
An important franchise

Borderlands 3 NBA2K, WWE2K

The Big One

Annual installments

Hangar 13 Studios
Adam Blackman- fastest selling
Star Wars video game

NBA2K Growth
GROWTH OF NBA GLOBALLY

PREDOMINANCE OF NBA2K

Soccer Should Fear the NBA

Basketball is the sport of the modern world internationalized,
well-marketed, fast-paced, and urban
Basketball Market
300 million Chinese play
basketball regularly
101 foreign players from 37
countries on rosters
50% of the NBAs followers
on social media are
international

NBA Strategy

NBA becomes
more valuable

#3 title overall for next-gen consoles

24 million users of NBA2K online in China

NBA2K15 Best selling NBA2K yet

NBA International revenue

grown 18% annually

Plans to open 4 NBA

franchises in Europe

NBA2K top selling and top rated NBA game from 2008 onwards

#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

NBA has offices in 15

International countries

NBA2K INTERNATIONAL GROWTH

1.5

25%
20%

15%
10%

0.5

5%
0

0%
Non North America sales

Percent of Total Sales

Games Sold (millions)

NBA2K Non North American Sales Increase

Non North American Sales Percent of Total

Unjustified Market Concern over Changing Industry

MOBILE MARKET CONCERN

MARKET REALITY

We believe the sub-industry has been adversely affected by a

shift toward mobile games and away from console games

Two separate markets

Video Game Industry

Disrupted in 2015

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)

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

TAKE TWOS RESPONSE

Percent of Releases That Are Mobile
80%

40%
20%
0%
Q4 2013

Q1 2014

Q2 2014

Q3 2014

Q4 2014

Q1 2015

Q2 2015

Continue to make top quality AAA games for consoles

Leverage existing brands across screen sizes with new mobile games

Mobile Releases Per Brand

60%

Mobile Games

7
6
5
4
3
2
1
0

= projected

= existing

Mobile Releases

Uncharacteristic Cash Buildup Financial Edge

INCREDIBLY STRONG BALANCE
Market Cap: $2.16 B
Free Cash Flow: $976.6 M
Almost half of market cap in cash
Strong willingness to utilize cash

Cash Buildup
1400

12

1200

10

1000

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

800
6
600
4

400

200
0

0
2012

2013

R&D Plan

2014

2015E

2016E

2017E

R&D Plan

INVESTOR-FRIENDLY CULTURE

M&A History

No major shareholder equity dilution

Additional capital raising has taken place through careful, limited
private placement

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

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

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
8

Disclosure Discount Edge

LACK OF GAME RELEASE VISIBILITY
Great reputation with gamers
Skittish reputation with Wall Street
Despite recent successes, continued market sell-offs

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

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

Despite lack of transparency, severe market discount

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

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
Digital Distribution
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

Revenue & Operating Margins

2500

20%
15%

2000

10%
1500

5%

1000

0%
-5%

500

-10%

-15%
2010

2011

2012

2013

2014

Risks
TRANSITION TO NEXT GENERATION PLATFORMS

SENSITIVITY TO HIT TITLES

Fluctuations in quarterly reports due to seasonal publishing

Average Budget vs Average Developer Team Size

10,000,000

60

8,000,000

Budget ($)

Intense competition for relatively small number of hit titles

From an investors and the companys perspective, it is difficult to
predict new hit titles

70

9,000,000
7,000,000

50

6,000,000

40

5,000,000
4,000,000

30

3,000,000

20

2,000,000

10

1,000,000
0

0
Kiosk

HARDWARE LICENSORS ARE ALSO COMPETITORS

Competition

# Team Members

Sales of GTA generated 68.9% of net revenue for 2014

Facebook Mobile

Web

MMO

PC/MAC Console

GAMING AS A TREND-BASED INDUSTRY

Gaming is based on trends
Set by average customer and technological standards
Similarities to fashion industry

Licensing

Approval for publication on title-by-title basis

Sales of games heavily influenced by reviews and ratings

TTWO submits products to Entertainment Software Rating Board (ESRB)

Possible limitations include number of titles and timing of publications

Risk of failure to obtain a target rating

Dependence on licensor, who is a competitor for games production, to

renew or extend current license agreements

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.
10

Valuation
COMPARABLE ANALYSIS

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

Lack of regular guidance requires unconventional valuation

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
vastly expands

Recurring
revenue expands
but below
expectations

Recurring slightly
expands

10%

5%

2.5%

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
Recurring
digital revenue will allow Take-Two to increase revenue even in Trough Revenue
years
Revenue is still cyclical, but each successive peak and trough increase in value

Cash Flow

Bear: $27.49

Base

Cash Flow= sin(t) + t; = constant; > 0

Using mean comparable P/E of

20.8, valuation is $36.41
Comparable Price Target:

Bull

View cash flow as cyclical, yet increasing function

Trough Year
Revenue
Growth

Blockbuster Year

Price ($)

Allow valuation of Take-Two

without disclosure discount

DISCOUNTED CASH FLOW ANALYSIS

Base: $29.88
Bull: $35.24
Trough Year

From this point

onwards, cash
flow is always
positive

40
35
30
25
20
15
10
5
0

TTWO Stock Price

Bull: $37.35
Base: $30.90
Bear: $27.53

Final Valuation:
$30.90
21% Upside
11

Appendix
SLIDE 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

12

Comparable Company Analysis

Company
Ticker

Activison Blizzard, Inc.

Share Price
(US$)

ATVI

Ubisoft Entertainment

23.02

UBI

18.30

Share Price
% of
52 week high

Market
Cap
(US$mm)

95.2%

16,453

Assumed # shares (mm): 213.3

Assumed # shares (mm): 213.3

96.0%

1.55
2,067

2014E EPS Ranges:

Electronic Arts, Inc.

Capcom Co Ltd.
Mean
Median
High
Low
Take-Two
Interactive
Inc.
Assumed
# shares (mm):
213.3

18.8

1.55
Assumed
shares (mm): 213.3 1.75
2014E
EPS #Ranges:

2014E EPS Ranges:

29.15

1.95
1.55

32.91
18.8
36.67
29.15

1.75
1.95

EA

59.47

2014E EPS Ranges:

98.8%

1.95
18,438
1.75

CCOEF

19.35

100.0%

1,323

TTWO

30.04
21.19
59.47
18.30
25.21

P/E Multiple Range (Using Mean P/E)

19.8
30.70

20.8

32.25

21.8
33.80

P/E Multiple Range (Using Mean P/E)

22.8

35.35

34.66
19.8
38.62
30.70

36.41
20.8
40.57
32.25

38.16
21.8
42.52
33.80

39.91
22.8
44.47
35.35

32.91

34.66

36.41

38.16

39.91

36.67

38.62

40.57

42.52

44.47

P/E Multiple Range (Using Median P/E)

Assumed # shares (mm): 213.3

18.1
1.55

28.11

Assumed
shares (mm): 213.3 1.75
2014E
EPS #Ranges:

1.95
1.55

31.74
18.1
35.36
28.11

1.75

19.1
29.66

20.1
31.21

21.1
32.76

P/E Multiple Range (Using Median P/E)

22.1
34.31

33.49
19.1
37.31
29.66

35.24
20.1
39.26
31.21

36.99
21.1
41.21
32.76

38.74
22.1
43.16
34.31

31.74

33.49

35.24

36.99

38.74

Assumed # shares (mm): 213.3 1.95

35.36
195.5

EBITDA Range
37.31
39.26(US$mm)
41.21

220.5

245.5

270.5

43.16
295.5

8.45

19.57

22.08

24.58

27.08

29.59

2014E EV/EBITDA Multiple

Assumed # shares (mm): 213.3 9.45

21.89

24.69

2014E EPS Ranges:

1.75
1.55

EBITDA Range (US$mm)

27.49

30.29

33.09

1.95

97.5%
9570
Assumed # shares (mm): 213.3
1.55
97.4%
9260
2014E EPS
Ranges:
100.0%
18438
1.75
1.55
95.2%
1323
1.95
2014E EPS Ranges:
1.75
81.9%
2,127
1.95

2014E EV/EBITDA Multiple

Range (Using Median):
2014E EV/EBITDA Multiple
Range (Using Median):

15,920
19.8

20.8

1,468
21.8

22.8

29.15
18.8

30.70
19.8

32.25
20.8

33.80
21.8

35.35
22.8

32.91
29.15

34.66
30.70

36.41
32.25

38.16
33.80

39.91
35.35

36.67
32.91

38.62
16,131
34.66

40.57
36.41

42.52
1,205
38.16

44.47
39.91

36.67

38.62

40.57

42.52

44.47

P/E Multiple Range (Using Mean P/E)

2,123

1,136

554

188

P/E
CY2015E

3.4x

3.6x

13.0x

10.8x

19.4

1.6x

1.3x

4.1x

3.9x

17.9

3.6x

3.8x

14.5x

13.4x

25.0

1.8x

2.0x

8.9x

9.7x

20.8

18.1
28.11
18.1
31.74
28.11
35.36
31.74

35.36

19.1
8,827 20.1

21.1
854

22.1

32.76
879
21.1
1,468
36.99
32.76
188
41.21
36.99
246
41.21

34.31
22.1

P/E Multiple Range (Using Median P/E)

2.6x
2.6x
3.6x
1.6x
1.7x

2.7x
2.8x
3.8x
1.3x
1.0x

10.1x
10.9x
14.5x
4.1x
19.6x

9.5x
10.3x
13.4x
3.9x
6.6x

20.8
20.1
25.0
17.9
14.4

29.66
9,021
19.1
16,131
33.49
29.66
1,136
37.31
33.49
1,621
37.31

31.21
20.1
35.24
31.21
39.26
35.24

39.26

38.74
34.31
43.16
38.74

43.16

195.5

220.5

245.5

270.5

295.5

8.45

19.57
195.5

22.08
220.5

24.58
245.5

27.08
270.5

29.59
295.5

9.45
8.45

21.89
19.57

24.69
22.08

27.49
24.58

30.29
27.08

33.09
29.59

$400.0

10.45
9.45

24.21
21.89

27.30
24.69

30.40
27.49

33.49
30.29

36.59
33.09

$300.0

10.45

24.21

27.30

30.40

33.49

36.59

EBITDA Range (US$mm)

195.5

220.5

245.5

270.5

295.5

9.27

21.47
195.5

24.22
220.5

26.96
245.5

29.71
270.5

32.46
295.5

10.27
9.27

23.80
21.47

26.84
24.22

29.88
26.96

32.93
29.71

35.97
32.46

11.27
10.27

26.11
23.80

29.44
26.84

32.78
29.88

36.12
32.93

39.46
35.97

11.27

26.11

29.44

32.78

36.12

39.46

EBITDA Range (US$mm)

Take-Two EBITDA 2010-2015E

$500.0

$200.0

EBITDA Range (US$mm)

Assumed # shares (mm): 213.3

Assumed # shares (mm): 213.3

P/E Multiple Range (Using Mean P/E)

18.8

EBITDA Range (US$mm)

Assumed # shares (mm): 213.3

Assumed # shares (mm): 213.3

EBITDA
(US$mm)

Enterprise Value as a Multiple of

EBITDA (x)
Revenue (x)
LTM
CY2015E
LTM
CY2015E

P/E Multiple Range (Using Median P/E)

Assumed # shares (mm): 213.3

2014E EV/EBITDA Multiple

Range (Using Mean):
2014E EV/EBITDA Multiple
Range (Using Mean):

Enterprise
Value
(US$mm)

$100.0
$$(100.0)

2010

2011

2012

2013

2014

EBITDA ($MM)

13

2015E

Base Case
Historical Year
2012
2013

2011

2014
*Blockbuster*
$ 2,148,419
$ 192,747
$
9,402
$ 2,350,568

2015E

2016E
*Blockbuster*
$ 1,903,960
$ 211,551
$
$ 2,115,511

2017E

Sales
Console
PC & Other
Handheld
Total Sales

$ 974,303
$ 110,277
$
52,296
$ 1,136,876

$
$
$
$

702,775
87,537
35,510
825,823

$ 976,444
$ 216,178
$
21,861
$ 1,214,483

Cost of goods sold

Gross Profit

$
$

689,381
447,495

$
$

528,855
296,968

$
$

715,837
498,646

$ 1,414,327
$ 936,241

$
$

520,000
578,100

$ 1,121,221
$ 994,290

$
$

675,606
587,209

Selling and Marketing

General and Administrative
Research and Development
Total Operating Expenses
EBITDA
% Margin

$
$
$
$
$

176,294
109,484
69,576
355,354
92,141
8.1%

$
$
$
$
$

183,749
121,200
64,162
369,111
(72,143)
-8.7%

$
$
$
$
$

257,329
147,260
78,184
482,773
15,873
1.3%

$
$
$
$
$

$
$
$
$
$

232,900
165,200
108,500
506,600
71,500
6.5%

$
$
$
$
$

$
$
$
$
$

171,617
122,038
80,088
381,370
205,839
16.3%

Less: Depreciation & Amortization

EBIT
% Margin

$
$

14,999 $
77,142 $
6.8%

Taxes
EBIAT
Plus: Investing Activities
Plus: Depreciation & Amortization
Less: Capital Expenditures
Change in Net Working Capital
Unlevered Free Cash Flow

$
$

4
77,138

Sales Growth (%)

COGS (% of Sales)
SG&A (% of Sales)
Depreciation and Amortization (% of Sales)
Capital Expenditures (% of Sales)
Effective Tax Rate
Change in Working Capital (% of Sales)

$
$

12,123 $
(84,266) $
-10.2%

3,900
(88,166)
150,000.0
$
14,999 $
12,123
$
(9,650) $ (10,790)
$ (118,982) $ (49,000)
($36,494.9)
$14,167.0

$
$
$
$
$

10,634 $
5,239 $
0.4%
5,000
239

$
$

240,996
161,374
105,256
507,626
428,615
18.2%

$ 988,290
$ 109,810
$
$ 1,098,100

282,738
201,058
131,944
628,307
365,983
17.3%

$ 1,136,534
$ 126,282
$
$ 1,262,815

Projected Year
2018E
*Blockbuster*
$ 2,115,511
$ 235,057
$
$ 2,350,568

2019E

2020E

$ 1,363,840
$ 151,538
$
$ 1,515,378

$ 2,493,100
$ 277,011
$
$ 2,770,111

$ 1,269,307
$ 1,081,261

$
$

825,881
689,497

$ 1,523,561
$ 1,246,550

$
$
$
$
$

$
$
$
$
$

212,759
151,295
99,288
472,798
216,699
14.3%

$
$
$
$
$

395,156
281,000
184,406
878,125
368,425
13.3%

324,731
230,920
151,541
721,624
359,637
15.3%

13,359 $
415,256 $
17.7%

18,600 $
52,900 $
4.8%

23,271 $
342,713 $
16.2%

20,205 $
185,634 $
14.7%

49,362 $
310,275 $
13.2%

39,400 $
177,299 $
11.7%

85,873
282,551
10.2%

14,500
400,756

13,000
39,900

52,778
289,935

28,588
157,046

47,782
262,493

27,304
149,995

43,513
239,038

$
$

$
$

$
$

$
$

$
$

$
$

10,634 $
13,359 $
18,600 $
23,271 $
20,205 $
49,362 $
39,400 $
85,873
(16,820) $ (29,810) $ (42,900) $ (42,310) $ (25,256) $ (47,011) $
(30,308) $ (55,402)
(22,000) $ 137,000 $ (25,000) $ 105,776 $ (31,570) $ 117,528 $
(37,884) $ (69,253)
($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)

-27.4%
47.1%
93.5%
-53.3%
64.0%
58.9%
60.2%
47.4%
44.7%
39.8%
21.6%
46.1%
1.5%
0.9%
0.6%
1.7%
0.8%
1.3%
1.4%
1.3%
20.3%
NM
15.4%
15.4%
-10.5%
-5.9%
-1.8%
5.8%

-10.0%
53.0%
29.7%
1.1%
2.0%
15.4%
5.0%

15.0%
53.5%
30.2%
1.6%
2.0%
15.4%
-2.5%

0.0%
54.0%
30.7%
2.1%
2.0%
15.4%
5.0%

20.0%
54.5%
31.2%
2.6%
2.0%
15.4%
-2.5%

82.8%
55.0%
31.7%
3.1%
2.0%
15.4%
-2.5%

Step
0.0%
0.5%
0.5%
0.5%
0.0%
0.0%
0.0%

14

Base Case
EQUITY VALUE CALCULATION

KEY ASSUMPTIONS
Blockbuster Percent of GTA V Sales
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

WACC

SENSITIVITY ANALYSIS

9.0%
9.5%
10.0%
10.5%
11.0%

1.0%
$32.26
$30.83
$29.56
$28.44
$27.42

Terminal Growth Rate

1.5%
2.0%
$33.13
$34.13
$31.57
$32.40
$30.19
$30.90
$28.98
$29.58
$27.89
$28.41

Perpetuity Growth Method

80.0%

2.5%
$35.27
$33.36
$31.70
$20.26
$28.99

3.0%
$36.61
$34.46
$32.62
$31.03
$29.64

WACC
Net Present Value of FCF

10.00%
$1,239,997.16

Terminal Growth Rate

Terminal Value
Present Value of TV

2.00%
$2,553,275.01
$984,398.04

Enterprise Value
Less Debt
Less Preferred Securities
Less Noncontrolling Interest
Plus: Cash and Equivalents

$2,224,395.21
470,420
0
0
976,600

Equity Value

$2,730,575.21

Diluted Shares:
Equity Value Per Share

88,370
$30.90

15

Bull Case
Historical Year
2012
2013

2011

2014
*Blockbuster*
$ 2,148,419
$ 192,747
$
9,402
$ 2,350,568

2015E

2016E
*Blockbuster*
$ 2,538,613
$ 282,068
$
$ 2,820,682

2017E

Projected Year
2018E
*Blockbuster*
$ 2,961,716
$ 329,080
$
$ 3,290,795

$ 1,927,166
$ 214,130
$
$ 2,141,295

$ 3,276,181
$ 364,020
$
$ 3,640,202

2019E

2020E

Sales
Console
PC & Other
Handheld
Total Sales

$ 974,303
$ 110,277
$
52,296
$ 1,136,876

$
$
$
$

702,775
87,537
35,510
825,823

$ 976,444
$ 216,178
$
21,861
$ 1,214,483

Cost of goods sold

Gross Profit

$
$

689,381
447,495

$
$

528,855
296,968

$
$

715,837
498,646

$ 1,414,327
$ 936,241

$
$

520,000
578,100

$ 1,494,961
$ 1,325,720

$
$

763,729
663,801

$ 1,777,029
$ 1,513,766

$ 1,167,006
$ 974,289

$ 2,002,111
$ 1,638,091

Selling and Marketing

General and Administrative
Research and Development
Total Operating Expenses
EBITDA
% Margin

$
$
$
$
$

176,294
109,484
69,576
355,354
92,141
8.1%

$
$
$
$
$

183,749
121,200
64,162
369,111
(72,143)
-8.7%

$
$
$
$
$

257,329
147,260
78,184
482,773
15,873
1.3%

$
$
$
$
$

$
$
$
$
$

232,900
165,200
108,500
506,600
71,500
6.5%

$
$
$
$
$

$
$
$
$
$

194,001
137,956
90,534
431,114
232,687
16.3%

$ 454,623
$ 323,288
$ 212,158
$ 1,010,274
$ 503,492
15.3%

$
$
$
$
$

$ 519,275
$ 369,262
$ 242,328
$ 1,153,944
$ 484,147
13.3%

Less: Depreciation & Amortization

EBIT
% Margin

$
$

14,999 $
77,142 $
6.8%

Taxes
EBIAT
Plus: Investing Activities
Plus: Depreciation & Amortization
Less: Capital Expenditures
Change in Net Working Capital
Unlevered Free Cash Flow

$
$

4
77,138

Sales Growth (%)

COGS (% of Sales)
SG&A (% of Sales)
Depreciation and Amortization (% of Sales)
Capital Expenditures (% of Sales)
Effective Tax Rate
Change in Working Capital (% of Sales)

$
$

12,123 $
(84,266) $
-10.2%

3,900
(88,166)
150,000.0
$
14,999 $
12,123
$
(9,650) $ (10,790)
$ (118,982) $ (49,000)
($36,494.9)
$14,167.0

$
$
$
$
$

10,634 $
5,239 $
0.4%
5,000
239

$
$

240,996
161,374
105,256
507,626
428,615
18.2%

$ 988,290
$ 109,810
$
$ 1,098,100

376,984
268,078
175,926
837,742
487,978
17.3%

$ 1,284,777
$ 142,753
$
$ 1,427,530

300,638
213,787
140,298
668,084
306,205
14.3%

13,359 $
415,256 $
17.7%

18,600 $
52,900 $
4.8%

31,027 $
456,950 $
16.2%

22,840 $
209,847 $
14.7%

69,107 $
434,385 $
13.2%

55,674 $
250,532 $
11.7%

112,846
371,301
10.2%

14,500
400,756

13,000
39,900

70,370
386,580

32,316
177,530

66,895
367,490

38,582
211,950

57,180
314,120

$
$

$
$

$
$

$
$

$
$

$
$

10,634 $
13,359 $
18,600 $
31,027 $
22,840 $
69,107 $
55,674 $ 112,846
(16,820) $ (29,810) $ (42,900) $ (56,414) $ (28,551) $ (65,816) $
(42,826) $ (72,804)
(22,000) $ 137,000 $ (25,000) $ 141,034 $ (35,688) $ 164,540 $
(53,532) $ (91,005)
($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)

-27.4%
47.1%
93.5%
-53.3%
64.0%
58.9%
60.2%
47.4%
44.7%
39.8%
21.6%
46.1%
1.5%
0.9%
0.6%
1.7%
0.8%
1.3%
1.4%
1.3%
20.3%
NM
15.4%
15.4%
-10.5%
-5.9%
-1.8%
5.8%

20.0%
53.0%
29.7%
1.1%
2.0%
15.4%
5.0%

30.0%
53.5%
30.2%
1.6%
2.0%
15.4%
-2.5%

40.0%
54.0%
30.7%
2.1%
2.0%
15.4%
5.0%

50.0%
54.5%
31.2%
2.6%
2.0%
15.4%
-2.5%

70.0%
55.0%
31.7%
3.1%
2.0%
15.4%
-2.5%

Step
0.0%
0.5%
0.5%
0.5%
0.0%
0.0%
0.0%

16

Bull Case
EQUITY VALUE CALCULATION

KEY ASSUMPTIONS
Blockbuster Percent of GTA V Sales
Annual Increase in Recurring Revenue

100.0%
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

SENSITIVITY ANALYSIS

17

Bear Case
Historical Year
2011

2012

2013

Sales
Console
PC & Other
Handheld
Total Sales

$ 974,303
$ 110,277
$
52,296
$ 1,136,876

$
$
$
$

702,775
87,537
35,510
825,823

$ 976,444
$ 216,178
$
21,861
$ 1,214,483

$
$
$
$

Cost of goods sold

Gross Profit

$
$

689,381
447,495

$
$

528,855
296,968

$
$

715,837
498,646

$
$

Selling and Marketing

General and Administrative
Research and Development
Total Operating Expenses
EBITDA
% Margin

$
$
$
$
$

176,294
109,484
69,576
355,354
92,141
8.1%

$
$
$
$
$

183,749
121,200
64,162
369,111
(72,143)
-8.7%

$
$
$
$
$

257,329
147,260
78,184
482,773
15,873
1.3%

$
$
$
$
$

Less: Depreciation & Amortization

EBIT
% Margin

$
$

14,999 $
77,142 $
6.8%

Taxes
EBIAT
Plus: Investing Activities
Plus: Depreciation & Amortization
Less: Capital Expenditures
Change in Net Working Capital
Unlevered Free Cash Flow

$
$

4
77,138

Annual Assumptions (Adjust Projections As Needed)

Sales Growth (%)
COGS (% of Sales)
SG&A (% of Sales)
Depreciation and Amortization (% of Sales)
Capital Expenditures (% of Sales)
Effective Tax Rate
Change in Working Capital (% of Sales)

12,123 $
(84,266) $
-10.2%

$
$

3,900
(88,166)
150,000.0
$
14,999 $
12,123
$
(9,650) $ (10,790)
$ (118,982) $ (49,000)
($36,494.9)
$14,167.0

-27.4%
64.0%
44.7%
1.5%
0.8%
20.3%
-10.5%

$
$
$
$
$

10,634 $
5,239 $
0.4%
5,000
239

$
$

10,634 $
(16,820) $
(22,000) $
($27,947.0)

47.1%
58.9%
39.8%
0.9%
1.3%
NM
-5.9%

2014
*Blockbuster*
2,148,419
192,747
9,402
2,350,568
1,414,327
936,241
240,996
161,374
105,256
507,626
428,615
18.2%

2015E
$ 988,290
$ 109,810
$
$ 1,098,100

2016E
*Blockbuster*
$ 1,375,082
$ 152,787
$
$ 1,527,869

2017E
$ 1,062,412
$ 118,046
$
$ 1,180,458

Projected Year
2018E
*Blockbuster*
$ 1,480,858
$ 164,540
$
$ 1,645,398

2019E

2020E

$ 1,195,213
$ 132,801
$
$ 1,328,015

$ 2,184,850
$ 242,761
$
$ 2,427,611

$
$

520,000
578,100

$
$

809,771
718,099

$
$

631,545
548,913

$
$

888,515
756,883

$
$

723,768
604,247

$ 1,335,186
$ 1,092,425

$
$
$
$
$

232,900
165,200
108,500
506,600
71,500
6.5%

$
$
$
$
$

204,200
145,209
95,293
453,777
264,321
17.3%

$
$
$
$
$

160,424
114,079
74,865
356,498
192,415
16.3%

$
$
$
$
$

227,312
161,644
106,079
505,137
251,746
15.3%

$
$
$
$
$

186,453
132,589
87,012
414,341
189,906
14.3%

$
$
$
$
$

346,299
246,257
161,606
769,553
322,872
13.3%

13,359 $
415,256 $
17.7%

18,600 $
52,900 $
4.8%

16,807 $
247,515 $
16.2%

18,887 $
173,527 $
14.7%

34,553 $
217,192 $
13.2%

34,528 $
155,378 $
11.7%

75,256
247,616
10.2%

14,500
400,756

13,000
39,900

38,117
209,398

26,723
146,804

33,448
183,745

23,928
131,450

38,133
209,483

$
$

$
$

$
$

$
$

$
$

$
$

13,359 $
18,600 $
16,807 $
18,887 $
34,553 $
34,528 $
75,256
(29,810) $ (42,900) $ (30,557) $ (23,609) $ (32,908) $
(26,560) $ (48,552)
137,000 $ (25,000) $
76,393 $ (29,511) $
82,270 $
(33,200) $ (60,690)
$521,305.0
($9,400.0) $272,040.2 $112,570.8 $267,660.1
$106,217.3 $175,496.8

93.5%
60.2%
21.6%
0.6%
1.4%
15.4%
-1.8%

-53.3%
47.4%
46.1%
1.7%
1.3%
15.4%
5.8%

-35.0%
53.0%
29.7%
1.1%
2.0%
15.4%
5.0%

7.5%
53.5%
30.2%
1.6%
2.0%
15.4%
-2.5%

-30.0%
54.0%
30.7%
2.1%
2.0%
15.4%
5.0%

12.5%
54.5%
31.2%
2.6%
2.0%
15.4%
-2.5%

82.8%
55.0%
31.7%
3.1%
2.0%
15.4%
-2.5%

Step
0.0%
0.5%
0.5%
0.5%
0.0%
0.0%
0.0%

18

Bear Case
EQUITY VALUE CALCULATION

KEY ASSUMPTIONS
Blockbuster Percent of GTA V Sales
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

WACC

SENSITIVITY ANALYSIS

9.0%
9.5%
10.0%
10.5%
11.0%

1.0%
$28.69
$27.45
$26.36
$25.38
$24.51

Terminal Growth Rate

1.5%
2.0%
$29.45
$30.33
$28.10
$28.83
$26.91
$27.53
$25.85
$26.38
$24.92
$25.37

Perpetuity Growth Method

60.0%

2.5%
$31.33
$29.66
$28.23
$26.98
$25.88

3.0%
$32.50
$30.63
$29.03
$27.65
$26.45

WACC
Net Present Value of FCF

10.00%
$1,063,630.59

Terminal Growth Rate

Terminal Value
Present Value of TV

2.00%
$2,237,584.75
$862,685.79

Enterprise Value
Less Debt
Less Preferred Securities
Less Noncontrolling Interest
Plus: Cash and Equivalents

$1,926,316.38
470,420
0
0
976,600

Equity Value

$2,432,496.38

Diluted Shares:
Equity Value Per Share

88,370
$27.53

19

Evolve
RECEPTION

OVERVIEW
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

A must-own for
next gen gamers
NY Daily News

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 year

Best of Show
E3 2014

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.

Best of Show
GamesCon

20

Violence Concerns
OVERVIEW
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

TAKE TWOS RESPONSE

This is a criminal setting; its a gritty underworld;

and its beautiful art Strauss Zelnick

Women rights activists outcry over ability to hire and kill prostitute in
GTA V

On the same level of disturbance as the evening news or Hollywood

movies

Target Australia pulled GTA V after three survivors of sexual violence

started a petition

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

GTA V still went on to sell over $1 billion in its opening weekend

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

21

Virtual Reality
OVERVIEW
Facebook bought Oculus VR for $2 billion
Oculus developing Developer Kit so help gaming companies create VR
content

TAKE TWOS STRATEGY

If thats what consumers want, well be first in

line to give it to them Strauss Zelnick

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

22

Twitch Interactive
KEY GROWTH

OVERVIEW
Originally launched in 2007 by Justin Kan and Emmet Shear
A live streaming video platform focusing on video gaming

Percent of Peak Internet Traffic

35%
30%

Attracts 35 million unique visitors a month

25%

Primetime Twitch is bigger CNN, MSNBC, and MTV

15%

20%
10%

Includes playthroughs of video games and broadcasts of e-sports

Bought for $970 million by Amazon on August 25, 2014

5%
0%
Netflix

Google

Apple

Twitch

Hulu

Facebook

Valve

Amazon

Pandora

Take Two received $22 million in cash - > $.27/share

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

23

Sources
INFORMATION

GRAPHS
NPD Group

S&P Capital IQ Stock Report March 2015

Mintel Video Game Industry Research

Bloomberg, Financial Analysis TTWO

Credit Suisse Equity Research, Report February 2015

Thompson One, Financial Statements TTWO

Wedbush Equity Research, Report February 2015

Cowen and Company Equity Research

ValuEngine Forecast and Research Report

Piper Jaffray Research and Hot Comment

Macquarie Research USA, Report March 2015

Hilliard Lions, Company Update/Estimate Change February 2015

BMO Capital Markets, Digital Entertainment and Internet eCommerce

Report February 2015

Brean Capital, LLC Target Price Change TTWO March 2015

Take-Two Investor Relations

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
24