Take-Two Interactive Software, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended March 31, 2019. The filing also reports fiscal fourth-quarter results. Take-Two develops and publishes interactive entertainment through Rockstar Games, 2K, Private Division and Social Point.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net revenue | $2.668 billion | $1.793 billion |
| Gross profit / gross margin | $1.145 billion / 42.9% | $895 million / 49.9% |
| Operating income / margin | $207 million / 7.7% | $136 million / 7.6% |
| Net income | $334 million | $174 million |
| Diluted EPS | $2.90 | $1.54 |
| Operating cash flow | $844 million | $494 million |
- Net bookings, a company-defined operating metric, rose 47.1% to $2.929 billion.
- Cash, cash equivalents and restricted cash totaled $1.392 billion at year-end; short-term investments were $744 million. Current assets were $2.828 billion and current liabilities were $1.952 billion.
- There were no borrowings outstanding. The five-year unsecured revolving facility provides $200 million in commitments; $198.3 million was available at year-end. Long-term debt was zero.
- Cash flow used in investing was $224 million and cash flow used in financing was $464 million, including $362 million of share repurchases and $101 million of tax payments related to restricted-stock net settlements.
- Contractual commitments totaled $1.090 billion, principally software development and licensing ($583 million), marketing ($262 million) and operating leases ($205 million).
Material changes and business drivers
- Reported revenue increased 48.8%, driven by Red Dead Redemption 2, NBA 2K and Grand Theft Auto Online. Red Dead Redemption products contributed 32.1% of FY2019 revenue and Grand Theft Auto products 25.7%; the five best-selling franchises together generated 91.8%.
- Comparability is materially affected by adoption of ASC 606 using the modified retrospective method. The company attributed $741 million of FY2019 revenue growth to the new standard. Without ASC 606, FY2019 revenue would have been $1.927 billion and net income $4 million, according to the filing. Prior-year results were not restated.
- Gross margin fell to 42.9% from 49.9%. The company said ASC 606 increased FY2019 gross margin by 6.1 percentage points; higher internal royalties as a share of revenue and release timing also affected the margin.
- Digital online channels contributed 63.0% of revenue, broadly unchanged from 63.1%; recurrent consumer spending contributed 40.1%, versus 41.6%. International revenue rose to 46.5% of total, from 41.3%.
- Fiscal Q4 revenue was $539 million and net income $57 million, compared with $450 million and $91 million, respectively, in FY2018 Q4.
Outlook, commentary, risks and unusual items
- The filing provides a product pipeline, not a clear quantified full-year financial forecast. Announced titles included Borderlands 3, expected September 2019, and The Outer Worlds and Ancestors: The Humankind Odyssey, planned for calendar 2019. Release timing and commercial performance remain uncertain.
- Management cited hit-title dependence, release timing and seasonality as important drivers of volatile results. Console platforms accounted for 83.7% of revenue; five customers accounted for 70.1%, with three individually exceeding 10%.
- FY2019 net income included a $107 million tax benefit from reducing the valuation allowance on certain U.S. deferred tax assets, based partly on the successful Red Dead Redemption 2 launch and improved earnings trends. The effective tax rate was negative 43.4%; future realization of deferred tax assets and tax outcomes remain uncertain.
- Other material exposures include intense competition, development cost and delay risk, dependence on platform owners and third-party distribution, data security and service interruptions, intellectual-property protection, foreign exchange and international regulation. The company noted uncertainty around Brexit and Chinese game approvals.
- Routine legal matters were not considered material; the previously disclosed litigation with former subsidiary president Leslie Benzies was resolved in February 2019. The filing reports no material off-balance-sheet arrangements.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Important facts for investors to verify
- How much of reported growth and earnings reflects ASC 606 timing effects versus sustained sales and cash generation.
- Whether Red Dead Redemption 2, Grand Theft Auto Online and NBA 2K engagement can offset declines in older releases and support future recurrent spending.
- Revenue and receivable concentration among major customers, and the company’s exposure to platform-owner fees and terms.
- The assumptions supporting the $107 million deferred-tax valuation allowance release, alongside $139 million of gross unrecognized tax benefits.
- Execution, budget and release timing for the announced pipeline, and the ability to meet $1.090 billion of contractual commitments while maintaining liquidity.