Take-Two Interactive Software, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2021. Results are unaudited; dollar amounts below are in millions unless otherwise noted.
Business context
Take-Two develops and publishes interactive entertainment through Rockstar Games, 2K, Private Division, and T2 Mobile Games. Revenue comes from console, PC, and mobile products, including full-game sales and recurring in-game spending. Digital online channels generated 89.9% of nine-month revenue. Grand Theft Auto products contributed 32.3% of nine-month revenue.
Financial performance
| Metric | Three months ended Dec. 31, 2021 | Year-over-year change | Nine months ended Dec. 31, 2021 | Year-over-year change |
|---|---|---|---|---|
| Net revenue | $903.3 | +4.9% | $2,574.8 | +1.6% |
| Net Bookings | $866.1 | +6.4% | $2,562.4 | -7.4% |
| Gross profit / margin | $552.9 / 61.2% | Up from 59.8% | $1,438.0 / 55.8% | Up from 50.4% |
| Operating income / margin | $154.1 / 17.1% | Down from $176.1 / 20.5% | $344.7 / 13.4% | Down from $373.6 / 14.7% |
| Net income | $144.5 | -20.8% | $307.1 | -17.0% |
| Diluted EPS | $1.24 | Down from $1.57 | $2.63 | Down from $3.20 |
| Operating cash flow | Not separately stated | — | $19.2 | Down from $787.7 |
Quarterly revenue growth reflected Grand Theft Auto, including the November release of Grand Theft Auto: The Trilogy – The Definitive Edition, and mobile titles Top Eleven and Two Dots. For the nine-month period, growth in Grand Theft Auto, Two Dots, NBA 2K, and Top Eleven was partly offset by declines across several other franchises. Quarterly recurring consumer spending revenue declined 0.8% to $547.8 million; nine-month recurring spending rose 7.3% to $1,683.7 million.
Operating expenses increased 17.8% in the quarter and 20.9% year to date, including higher personnel, research and development, and general and administrative costs. Nine-month results included $65.7 million of software development impairments, versus none in the comparable 2020 period. General and administrative expense also included a $30.0 million increase in the fair value of Nordeus contingent consideration for the nine months.
Financial position and liquidity
- At December 31, 2021, cash and cash equivalents were $986.7 million, short-term investments were $1,479.0 million, and restricted cash totaled $370.5 million. Cash, cash equivalents, and restricted cash together were $1,357.2 million.
- Cash, cash equivalents, and restricted cash decreased $703.1 million from March 31, 2021. Investing activities used $479.8 million, including securities purchases, the Nordeus acquisition, and fixed-asset purchases; financing activities used $239.7 million, including $200.0 million of share repurchases and employee tax withholding on share awards.
- The company reported no borrowings under its revolving credit facility and $247.7 million available to borrow, with $2.3 million of letters of credit outstanding. The facility runs through February 2024 and has $250 million of commitments. The filing does not report other funded debt.
- Current assets were $3,705.0 million and current liabilities were $2,072.3 million. Current deferred revenue was $910.9 million. Total liabilities were $2,692.2 million.
- Management said existing cash, short-term investments, expected operating cash flows, and credit availability should be sufficient for working capital, capital expenditures, and commitments. Fiscal 2022 capital expenditures were expected to be approximately $170 million; $133.4 million had been spent in the first nine months.
Material changes, outlook, and risks
- Gross margin improved, particularly year to date, as development royalties and amortization of capitalized software costs were lower, primarily due to release timing. The improvement was partly offset by software impairments.
- Lower operating income and net income reflected increased operating expenses and substantially smaller gains on long-term investments than in the prior-year periods. The nine-month effective tax rate was 10.6%, influenced by tax credits and stock-compensation tax benefits; management cautioned that the rate may vary.
- After quarter-end, Take-Two agreed to acquire Zynga for cash and stock, at an announced value of $9.86 per Zynga share and an implied enterprise value of $12.7 billion based on January 7, 2022 market prices. The company secured $2.7 billion of committed financing and intended to fund the cash portion with balance-sheet cash and new debt. Closing was expected in fiscal 2023 first quarter, subject to shareholder, regulatory, and other conditions. Termination fees of up to $550 million may apply in specified circumstances.
- For the remainder of fiscal 2022, announced releases included Grand Theft Auto V and standalone Grand Theft Auto Online for newer consoles, WWE 2K22, and Tiny Tina’s Wonderlands. These are release plans, not quantified financial guidance.
- Management cited uncertainty around COVID-19 and consumer spending, release timing and title performance, platform transitions and console availability, customer and receivables concentration, foreign exchange, and the Zynga transaction and integration. The five largest customers generated 79.2% of nine-month revenue; two customers represented 41.9% and 17.2% of gross receivables at period-end.
- Routine legal matters were described as not material; the company said it had accrued for certain claims and that any reasonably possible excess loss was not expected to be material. No material changes to previously disclosed risk factors were reported other than new Zynga-related risks.
Important facts for investors to verify
- Whether upcoming releases and recurring consumer spending sustain bookings and revenue, given the reported dependence on major franchises and release timing.
- Why operating cash flow fell to $19.2 million, including the effects of software-development spending and working-capital movements, and whether cash conversion recovers.
- The progress, final financing, approvals, closing conditions, and integration economics of the proposed Zynga acquisition, including potential debt and termination-fee exposure.
- Whether the $65.7 million of software-development impairments and $90.6 million period-end Nordeus contingent-consideration liability change further.
- Customer concentration, foreign-exchange exposure, and the effects of changing tax benefits on future results.