Business context and reporting period
Take-Two Interactive Software, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended December 31, 2019, in fiscal 2020. It develops and publishes games through Rockstar Games, 2K, Private Division, and Social Point. Results are sensitive to release timing, title performance, digital engagement, and platform transitions.
Financial performance and liquidity
| Metric | Quarter ended Dec. 31, 2019 | Prior-year quarter | Nine months ended Dec. 31, 2019 | Prior-year nine months |
|---|---|---|---|---|
| Net revenue | $930.1 million | $1,248.7 million | $2,328.4 million | $2,129.4 million |
| Gross profit / margin | $493.0 million / 53.0% | $350.3 million / 28.0% | $1,181.6 million / 50.7% | $864.7 million / 40.6% |
| Operating income / margin | $176.8 million / 19.0% | $51.8 million / 4.1% | $303.4 million / 13.0% | $148.6 million / 7.0% |
| Net income | $163.6 million | $179.9 million | $281.7 million | $277.0 million |
| Diluted EPS | $1.43 | $1.57 | $2.47 | $2.41 |
| Net bookings | $888.2 million | $1,568.6 million | $2,260.9 million | $2,440.3 million |
For the nine-month period, operating cash flow was $440.0 million, versus $390.2 million a year earlier. Investing activities used $27.1 million, compared with providing $22.3 million; financing activities used $60.7 million, versus $348.2 million. Cash, cash equivalents, and restricted cash totaled $1,742.4 million at period-end. Separately, the balance sheet reported $1,284.9 million of cash and cash equivalents, $699.3 million of short-term investments, and $457.6 million of restricted cash.
Total assets were $4,879.6 million and total liabilities were $2,477.6 million at December 31, 2019. The company had no borrowings under its $200 million revolving credit facility, with $198.3 million available after letters of credit. Lease liabilities were $175.5 million, including $24.1 million current and $151.4 million non-current.
Material changes versus the prior comparable period
- Quarterly revenue fell 25.5% and net bookings fell 43.4%, primarily because the prior-year quarter included the October 2018 release of Red Dead Redemption 2. Quarterly net income declined despite substantially higher operating income, mainly reflecting a prior-year tax benefit: the prior-year quarter recorded a $120.1 million tax benefit, compared with a $25.1 million tax provision this quarter.
- Nine-month revenue rose 9.3%, while net bookings declined 7.4%. Growth from Borderlands 3, The Outer Worlds, and the NBA 2K franchise was partly offset by lower Red Dead Redemption 2 revenue relative to its launch period.
- Gross margin improved in both comparisons, which management attributed primarily to the timing of releases and lower royalties and software-cost amortization as a proportion of revenue.
- Digital online revenue represented 75.3% of quarterly revenue and 74.9% of nine-month revenue, up from 47.6% and 59.6%, respectively. Nine-month recurrent consumer spending revenue increased 25.1% to $973.8 million and accounted for 41.8% of revenue.
- Nine-month operating expenses rose 22.7% to $878.2 million, including higher selling and marketing, general and administrative, and research and development costs. The company reported $176.6 million of stock-based compensation in operating cash flow adjustments.
Outlook, management commentary, risks, and unusual items
- The filing does not provide clear numerical financial guidance. The company identified Disintegration and Kerbal Space Program 2 as planned fiscal 2021 releases. Management cautioned that release timing and title success can cause substantial quarterly and annual variability.
- Management said available cash, short-term investments, projected operating cash flows, and credit-facility availability should meet short- and long-term working capital, capital expenditure, and commitment needs.
- Concentration is significant: the five largest customers generated 70.0% of nine-month revenue. Two customers represented 34.4% and 14.4% of gross receivables at December 31, 2019. The company cited trade credit insurance and ongoing credit monitoring, but noted customer credit problems could affect collections and liquidity.
- Other key business risks include dependence on a limited number of major franchises, consumer acceptance of third-party gaming platforms, used-game sales, seasonality, foreign currency movements, and international trade and regulatory conditions. A hypothetical 10% U.S. dollar appreciation would reduce reported revenue by an estimated 4.2%, with some anticipated offset from local-currency costs.
- The Ninth Circuit’s reversal in the Altera tax case led to a $19.8 million discrete tax expense in the nine months. Further judicial review remained possible, leaving the final outcome uncertain. Tax credits, audit settlements, geographic earnings mix, and stock-based compensation can also cause effective tax-rate variability.
- The company adopted lease accounting Topic 842 on April 1, 2019, recognizing right-of-use assets and lease liabilities; adoption did not affect reported operations or cash flows. Routine litigation and claims, including intellectual-property claims, were described as not expected to be material, though losses above accrued amounts were considered reasonably possible. Management reported no material risk-factor changes and effective disclosure controls.
Most important facts for investors to verify
- Whether sustained sales and engagement from new releases and recurrent consumer spending can offset weaker comparisons following major title launches.
- How net bookings, revenue recognition, deferred revenue, and the $967.6 million of remaining performance obligations translate into future reported revenue.
- Customer concentration, receivable collections, and the extent to which trade credit insurance mitigates exposure.
- The status and potential financial consequences of the Altera tax matter, tax audits, and changing effective tax rates.
- Release schedules and spending requirements for the stated fiscal 2021 pipeline, alongside lease commitments and other contractual cash needs.