Take-Two Interactive Software, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter 2020, the three months ended June 30, 2019. Comparisons are with the three months ended June 30, 2018 unless otherwise noted. Amounts are in millions except per-share data.
Business context
Take-Two develops and publishes interactive entertainment through Rockstar Games, 2K, Private Division and Social Point. Results are driven by title releases, ongoing player engagement and recurrent consumer spending. Digital online channels generated 79.2% of quarterly revenue. The five largest customers represented 79.8% of revenue.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net revenue | $540.5 | $388.0 | +39.3% |
| Gross profit / margin | $299.0 / 55.3% | $256.6 / 66.1% | Margin down 10.8 percentage points |
| Operating income / margin | $51.7 / 9.6% | $70.8 / 18.3% | Income down 27.0% |
| Income before taxes | $62.2 | $77.4 | Down 19.7% |
| Net income | $46.3 | $71.7 | Down 35.4% |
| Diluted EPS | $0.41 | $0.62 | Down $0.21 |
| Net bookings | $422.2 | $288.3 | +46.4% |
Revenue growth reflected Red Dead Redemption 2 and Red Dead Online, NBA 2K and Borderlands, partly offset by lower Grand Theft Auto V and Grand Theft Auto Online revenue. Recurrent consumer spending was $314.9 million (58.3% of revenue), versus $241.0 million (62.1%) a year earlier. Higher amortization of capitalized software costs as a share of revenue contributed to the gross-margin decline. Selling and marketing rose 57.5%, principally on advertising for Red Dead Online and Borderlands and higher personnel costs.
Cash flow, liquidity and obligations
- Operating cash flow was $108.5 million, versus cash use of $11.2 million in the prior-year quarter. Investing activities provided $166.8 million, mainly reflecting changes in bank time deposits and proceeds from available-for-sale securities. Financing activities used $52.1 million, primarily for tax payments on net share settlements of restricted awards.
- Cash, cash equivalents and restricted cash totaled $1,612.0 million at June 30, 2019; cash and cash equivalents were $984.6 million and short-term investments were $557.7 million. Restricted cash was $627.4 million.
- The company had no credit-facility borrowings and $198.3 million available under its $200 million revolving facility, which runs through February 2024. The filing states that available liquidity and projected operating cash flows should cover short- and long-term requirements.
- Current assets were $2,821.1 million and current liabilities were $1,942.0 million. Lease liabilities recognized following adoption of the new lease standard totaled $146.9 million, including current and non-current amounts.
- Deferred revenue was $848.2 million. Contract revenue allocated to unsatisfied performance obligations totaled $1,042.1 million; approximately $959.0 million was expected to be recognized over the next 12 months.
Material changes, outlook and risks
- The effective tax rate was 25.5%, compared with 7.4% a year earlier. A discrete $19.8 million tax expense followed the Ninth Circuit’s reversal in the Altera case; a $11.6 million tax benefit from audit settlements partly offset it. The case outcome remained uncertain after a rehearing request.
- Management highlighted planned releases including NBA 2K20, Borderlands 3, WWE 2K20 and The Outer Worlds. The filing provides no quantified financial guidance for the full year in the supplied text.
- Management cited dependence on release timing and title performance, platform transitions, customer concentration, used-game sales, foreign currency movements and seasonal results. The five largest customers accounted for 71.6% of gross receivables at quarter-end; two customers represented 41.8% and 19.3%, respectively.
- Routine legal and intellectual-property claims were described as not material; the company noted possible losses above accrued amounts but did not expect such excess losses to be material. No material changes to previously reported risk factors or commitments were disclosed.
- The company adopted lease accounting Topic 842 on April 1, 2019, recording right-of-use assets and lease liabilities. Management said adoption did not affect the income statement or cash flows.
Important facts for investors to verify
- Whether bookings and engagement remain strong, and how upcoming releases perform relative to expectations.
- Whether gross margins recover as software amortization and royalty timing change.
- The outcome of the Altera tax litigation and its effect on future tax rates.
- Customer and receivables concentration, and the availability and use of restricted cash.
- Future cash generation relative to development spending, lease obligations and other commitments.