Take-Two Interactive Software, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2018, the first quarter of fiscal 2019. Unless noted, dollar amounts below are in U.S. dollars.
Business context
Take-Two develops and publishes interactive entertainment through Rockstar Games, 2K, Private Division and Social Point. Its business includes console, PC and mobile games, digital distribution, and recurring in-game spending. Grand Theft Auto products generated 47% of quarterly revenue.
Financial performance
- Revenue: $388.0 million, down 7.2% from $418.2 million. Net bookings, a company-defined operating metric, fell 17.2% to $288.3 million from $348.3 million.
- Profit and margins: Gross profit was $256.6 million, with a 66.1% gross margin versus 53.5%. Operating income was $70.8 million (18.3% margin), compared with $50.2 million (12.0%). Net income was $71.7 million versus $60.3 million; diluted EPS was $0.62 versus $0.56.
- Revenue mix: Recurrent consumer spending contributed $241.0 million (62.1% of revenue); full game and other revenue was $147.0 million. Digital online revenue was $315.0 million (81.2%). Console revenue was $294.7 million (76.0%); U.S. revenue was $221.4 million (57.1%).
- Cash flow: Operating activities used $11.2 million, compared with $49.9 million provided in the prior-year quarter. Investing used $40.0 million and financing used $211.9 million, including $153.5 million of share repurchases. Cash, cash equivalents and restricted cash declined $272.2 million during the quarter to $974.2 million.
- Liquidity and debt: Cash and cash equivalents were $464.8 million and short-term investments were $637.5 million. Restricted cash was $509.4 million. The company had $5.2 million of convertible notes at quarter-end and no borrowings under its credit agreement; $98.3 million was available to borrow. The notes matured July 1, 2018, and remaining conversion obligations were elected to be settled in shares.
- Balance sheet: Total assets were $3.456 billion and total liabilities were $1.604 billion at June 30, 2018. Current assets were $2.074 billion and current liabilities were $1.391 billion.
Material changes and comparability
- The company adopted ASC 606 on April 1, 2018 using the modified retrospective method; prior-year results were not restated. Adoption increased opening retained earnings by $470.3 million, net of tax. For this quarter, it reduced reported revenue by $14.0 million but increased gross profit by $11.7 million and net income by $4.6 million compared with results under the prior standard. Comparisons of revenue mix and margins are therefore affected by the accounting change.
- Revenue declined chiefly due to lower Grand Theft Auto V/Online sales and older titles, partly offset by growth in the NBA 2K franchise. Reported gross-margin improvement also reflected ASC 606, release timing and lower internal royalties as a share of revenue.
- Operating expenses rose 7.1% to $185.8 million, including higher general and administrative, marketing, and research and development costs. The prior-year period included $10.6 million of reorganization expense; the current period recorded a $0.2 million credit.
- Interest and other, net shifted to $6.6 million of income from $2.8 million of expense, mainly due to lower convertible-note interest expense and higher investment income.
Outlook, risks and unusual items
- The filing provides an announced release pipeline, not a numerical financial forecast. Listed upcoming titles included NBA 2K19, WWE 2K19 and Red Dead Redemption 2, with expected release dates in 2018.
- Management said current cash, investments, expected operating cash flows and credit availability should meet short- and long-term cash requirements. It also cautioned that interim results may not indicate full-year performance and that results fluctuate with release timing, seasonality and consumer demand.
- Customer concentration is significant: the five largest customers generated 78.7% of revenue, up from 72.3% a year earlier. The five largest represented 52.9% of gross receivables at quarter-end. Management cited customer credit, retailer consolidation, used-game sales and platform transitions as risks.
- Foreign exchange is another risk: 42.9% of revenue came from outside the U.S. Management estimated a hypothetical 10% U.S. dollar appreciation would reduce revenue by 4.3%, with some offset expected from local-currency costs. Hedging reduces but does not eliminate currency exposure.
- A former executive’s lawsuit seeks at least $150 million in damages. Twelve claims had been dismissed, with six remaining; the company said it had accrued an amount it considered adequate and intends to defend the claims. The company stated it did not expect additional costs under its 2018 reorganization plan.
- Income taxes remain subject to estimates and tax-law effects, including the Tax Cuts and Jobs Act; management noted these could materially affect the effective tax rate. The quarter’s effective tax rate was 7.4%, versus a benefit-driven negative rate in the prior-year period.
Important facts for investors to verify
- How ASC 606 affects comparisons of revenue, margins, deferred revenue and recurring-spending trends; reported deferred revenue was $466.4 million at quarter-end.
- Whether bookings and underlying demand stabilize, especially for Grand Theft Auto and NBA 2K, and whether the announced release schedule is achieved.
- The drivers of negative operating cash flow and the level and availability of restricted cash.
- Customer concentration and the status or financial outcome of the Benzies litigation.
- Post-quarter settlement of the convertible notes and subsequent share repurchases, if any.