Take-Two Interactive Software, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2017 (the first quarter of fiscal 2018). Comparisons are with the three months ended June 30, 2016. Financial amounts below are in U.S. dollars, in millions, unless noted.
Business context
Take-Two develops and publishes interactive entertainment through Rockstar Games and 2K, with products across console, PC, mobile, and online channels. Results depend substantially on release timing and the performance of major franchises. Grand Theft Auto products generated 40% of quarterly revenue. The company acquired mobile-game developer Social Point in January 2017.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $418.2 | $311.6 |
| Gross profit / gross margin | $223.6 / 53.5% | $120.2 / 38.6% |
| Operating income (loss) / margin | $50.2 / 12.0% | $(39.0) / (12.5)% |
| Net income (loss) | $60.3 | $(38.6) |
| Diluted earnings (loss) per share | $0.56 | $(0.46) |
| Net cash used in operating activities | $(18.6) | $(47.2) |
| Net cash used in investing activities | $(45.4) | Net cash provided: $72.9 |
| Net cash used in financing activities | $(57.7) | $(24.3) |
Revenue rose 34.2%. Growth came principally from NBA 2K (+$49.6 million), Grand Theft Auto V and Online (+$38.9 million), Mafia III (+$7.7 million), and Social Point titles (+$6.5 million). Digital online revenue was $268.2 million, or 64.1% of revenue, versus 55.2% a year earlier. Recurrent consumer spending increased $71.0 million and represented 63.2% of digital online revenue.
Gross margin improved primarily because software-development cost amortization was lower as a share of revenue and the prior-year period included an impairment. Selling and marketing expense fell $18.9 million, while general and administrative expense rose $13.9 million and research and development rose $8.4 million. The quarter included $10.6 million of business reorganization expense.
The $12.9 million income-tax benefit included approximately $16.5 million of discrete excess tax benefits from employee stock compensation. Accordingly, the reported net profit benefited materially from tax items.
Balance sheet, debt and liquidity
- At June 30, 2017, cash and cash equivalents were $828.1 million, short-term investments $452.9 million, and restricted cash $406.3 million. Cash and cash equivalents were down from $943.4 million at March 31, 2017.
- Current assets were $2,113.1 million and current liabilities $1,466.1 million. Total assets were $3,219.6 million; total liabilities were $2,119.8 million; stockholders’ equity was $1,099.8 million.
- Long-term debt carrying value was $212.9 million, representing 1.00% convertible notes with $223.7 million principal outstanding. The notes mature July 1, 2018. No borrowings were outstanding under the credit facility; $98.3 million was available, with $1.7 million of letters of credit outstanding.
- Operating cash outflow reflected investment in software development and licenses and funding of internal royalty payments. Investing cash outflow included a $25.4 million asset acquisition and fixed-asset purchases. Financing outflow was primarily tax payments related to net share settlements of stock awards.
Material changes, outlook and risks
- Revenue estimate change: Take-Two extended Grand Theft Auto V’s estimated service period from 41 to 50 months. This reduced Q1 revenue by $25.7 million and operating income by $23.7 million; the company expects a material impact on fiscal 2018 statements.
- Product outlook: No key titles were released in the quarter. Announced releases included NBA 2K18 in September 2017, WWE 2K18 in October 2017, and Red Dead Redemption 2 in spring 2018. The filing provides no quantified financial guidance.
- Convertible-note conversion and dilution: Following the stock-price test, holders could convert the 1.00% notes at their option through September 30, 2017. During the quarter, $44.4 million principal was settled in shares; management said it intended to settle future conversions in shares if exercised.
- Concentration and operating risks: The five largest customers accounted for 72.3% of revenue; consoles represented 82.5% of revenue. The company highlighted dependence on major franchises, product-release timing, customer concentration, platform transitions, used-game sales, foreign exchange, and international operations.
- Litigation: A former subsidiary executive’s lawsuit seeks at least $150 million in damages. The company disputes the claims, intends to defend itself, and states it has accrued an amount it considers adequate; the outcome is uncertain.
- Accounting outlook: The company expects to adopt the new revenue-recognition standard on April 1, 2018, using the cumulative catch-up method, and anticipates a material financial-statement impact, particularly for online-enabled games with post-contract support.
- Management stated that liquidity sources were sufficient for expected requirements and that there were no material changes to previously disclosed risk factors. The filing cautions that interim results may not indicate full-year results.
Important facts for investors to verify
- How much of revenue and profit growth is recurring, particularly from NBA 2K and Grand Theft Auto Online, and how service-period estimates affect reported results.
- The cash-flow profile, development spending, restricted-cash balance, and availability of short-term investments for operating needs.
- Potential share dilution and cash or share settlement outcomes for the convertible notes due in 2018.
- Customer and franchise concentration, upcoming title performance, and the $150 million litigation claim and related accrual.
- The eventual impact of adopting the new revenue-recognition standard and the fiscal 2018 effect of the revised GTA V service-period estimate.