Take-Two Interactive and Rockstar Games announced that Red Dead Redemption 2 sold through more than 23 million copies in the third fiscal quarter ended December 31.

At $60 each at retail, that means the Wild West game that took nearly eight years to make generated $1.38 billion in revenues in its first quarter, not counting any money made from Red Dead Online. That blows some of the estimates on sales out of the water, but Take-Two’s stock price has fallen 13 percent today ($93.72 a share at this writing) because the company warned the current quarter could be weak.

Take-Two also said it sold-in more units in its first eight days than its predecessor, Red Dead Redemption of 2011, sold in its first eight years. And Red Dead Redemption 2 was the best-selling game in the U.S. in 2018, according to market researcher NPD. Red Dead Redemption 2 got a 97-out-of-100 on review aggregator Metacritic, tying the score for Rockstar’s previous giant hit, Grand Theft Auto V. Grand Theft Auto Online continues to generate revenue more than five years after its launch.

The numbers are “sell-in” numbers to retailers, as opposed to “sold-through” numbers where retailers sell to consumers. But that difference is increasingly narrow as more games are sold directly through digital downloads now.

But the stock fell in part because of a mix up in interpreting the numbers and because Take-Two said it expects fiscal fourth-quarter earnings of 67 cents to 77 cents a share on net revenue of $530 million to $580 million. Analysts were looking for profit of 84 cents a share on sales of $609 million. The new guidance was above Take-Two’s previous guidance, but investors were expecting more.

Don't shoot. My aim is a little slow.

Above: Fix the economy, or I shoot!

Image Credit: Rockstar

During the days after Red Redemption 2 launched on October 26, Take-Two had previously said that Red Dead Redemption 2 had sold $725 million worth in its first three days of sales. That indicated roughly 10 million copies sold at the outset (and if you consider average game prices, 12 million units at $60 each), according to analyst Ben Schachter at Macquarie Research. And it means that game sales could have hit 15 million or 20 million copies sold by the end of the holidays, he said.

I previously did some calculations that suggested the game could be profitable in its first quarter. (The company itself doesn’t disclose these kinds of details). The company reported overall GAAP net income of $179.9 million, or $1.57 a share, on revenues of $1.25 billion.

“Take-Two delivered better-than-expected results in the fiscal third quarter,” said Strauss Zelnick, chairman and CEO of Take-Two, in a statement. “Our outperformance was driven primarily by the record-breaking launch of Red Dead Redemption 2 along with strong results from NBA 2K19. In addition, consumers engaged significantly with our offerings, and recurrent consumer spending grew 31 percent to a new record. We generated strong cash flow and ended the period with $1.6 billion in cash and short-term investments, after deploying $109 million to repurchase 1 million shares of our stock.”

He added, “As a result of our outstanding third quarter performance, we are raising our outlook for fiscal 2019, which is poised to be a record year for Net Bookings and Adjusted Operating Cash Flow. Looking ahead, as our industry continues to embrace new technologies that enhance consumers’ experience with, and access to interactive entertainment, we remain focused on broadening the reach of our content and expanding further globally. Take-Two is exceedingly well-positioned – creatively, strategically and financially — to capitalize on the vast opportunities that will shape the future of our business, and to deliver long-term growth and margin expansion.”

John Marston was the hero of Red Dead Redemption, and he is back in Red Dead Redemption 2.

Above: John Marston was the hero of Red Dead Redemption, and he is back in Red Dead Redemption 2.

Image Credit: Rockstar

Given where the sales are, Red Dead Redemption 2 could keep pushing onward. But it’s a long game, with one report saying only 22 percent of players had finished the entire game’s 105 missions in the single-player campaign. (I am one of those who finished it).

Even so, as I noted, the stock price fell. In an email, analyst Michael Pachter (a speaker at our upcoming GamesBeat Summit 2019) at Wedbush Securities said today, “Sympathy with EA [which missed earnings targets] is the biggest reason. I think that expectations for RDR2 were higher, and they said that they had shipped 23 million and didn’t expect a large number of reorders this quarter, so people spooked that overall number not higher.”

Now we can come to some of my own analysis. With a $60 price, about $43 (based on an estimate from Baird Research’s Colin Sebastian) comes back to the publisher Take-Two Interactive and its studio Rockstar Games. That’s because digital stores take a chunk of revenue, and retail distributors also take their share. At 23 million copies sold, overall revenue for Rockstar Games would be $989 million in revenues.

As for costs, most of it is related to how many developers worked on it and for how long. Rockstar listed more than 2,800 contributors to the game in its thank-you note, but obviously it was only handful at the beginning of the project more than eight years ago.

Take-Two’s capitalized software costs — the measure of how much it has invested in software that hasn’t launched yet — gave us a clue in the previous quarter. Take-Two’s balance for those costs is $733 million. That’s the amount invested in all software at the company, which has about 4,200 employees across 17 studios, according to Strauss Zelnick, CEO of Take-Two.

If Red Dead Redemption 2 only had a 17th share of the costs, that would be $43 million. But we know that’s impossible for a game this big, with 2,800 contributors and an eight-year development span. Last fall, Pachter previously said that a good rule of thumb to use is about 200 people working for 8.5 years, at maybe $100,000 in cost per person. That equals about $170 million in development costs, or about 23 percent of the overall costs of games in development at Take-Two.

We know, however, that Rockstar’s costs were probably higher. Rockstar shared some details as it tried to defend itself from allegations that it forced employees to work overtime in order to finish the game. Jennifer Kolbe, head of publishing at Rockstar, said in a statement to GamesBeat last quarter that the company logged 67,000 employee weeks this year, and only 20 percent of the people had to work more than 60 hours in a week, and only 0.4 percent of the time was for people who worked more than 80 hour weeks.

This basically like where I live.

Above: This is basically like where I live.

Image Credit: Rockstar Games

So 67,000 divided by 52 weeks leaves us with 1,288 employee years worked on Red Dead Redemption 2 during 2018. That sounds reasonably accurate, as Rockstar has said it doubled the size of its previous team and the number was over 1,000 people, or double the size of the 2010 original game, Red Dead Redemption. That gibes well with the notion there were 2,800 contributors. But, obviously based on the fairly low capitalized software costs, that Rockstar doesn’t spend a ton on its people and it also didn’t have them working for a full eight years. So I’ll take Pachter’s estimate and beef it up some, so that maybe 300 people worked for eight years at $100,000, on average. That gets us to $240 million in development costs for the game. (Here’s something that muddies the picture: Companies can decide what software development costs to capitalize, or take out of expenses, and which costs to simply expense).

I’ve also heard different estimates as well on the marketing costs for the game, which could run $200 million to $300 million. Let’s take $300 million, giving us a total cost of $540 million, which is lower than my previous estimate in the DeanBeat column by a large margin.

So we take revenue estimated at $989 million, and then costs of $540 million, and this game itself could have had a profit of $449 million by December 31. Add to that revenues from Red Dead Online, which are likely to be good. The breakeven point would be about 12.5 million games sold, and clearly Take-Two nearly doubled that target.

Pachter estimated that Take-Two gets $100 million in revenue per quarter from GTA Online, which has been out for five years. That’s been a huge success, with the peak quarter at maybe $125 million. It will take Red Dead Online some time to ramp up its revenues. But it’s a conservative bet to say it could generate $50 million per quarter for Take-Two, or an additional $200 million a year. It will have costs as well, but not nearly as much as it took to create the game.