TAKE-TWO INTERACTIVE SOFTWARE, INC. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2015 (second quarter of fiscal 2016). Financial statements are unaudited. Dollar amounts below are in millions unless noted.
Business context
Take-Two develops, publishes, and markets interactive entertainment through Rockstar Games and 2K. Revenue comes from games for consoles, PCs, and mobile devices, sold through digital and physical channels. Results are sensitive to release timing and the performance of major titles.
Financial performance
| Metric | Three months ended Sept. 30, 2015 | Six months ended Sept. 30, 2015 |
|---|---|---|
| Revenue | $347.0; up 174.8% year over year | $622.3; up 147.2% |
| Gross profit / margin | $203.0 / 58.5% | $275.7 / 44.3% |
| Operating income (loss) | $66.4 | $3.8 |
| Net income (loss) | $54.7; diluted EPS $0.55 | $(12.3); diluted loss per share $0.15 |
| Operating cash flow | Not separately presented for the quarter | $20.0, versus $(131.8) in the prior-year period |
Quarterly revenue growth primarily reflected recognition of previously deferred revenue from Grand Theft Auto V and Grand Theft Auto Online, plus the PC release of Grand Theft Auto V and higher NBA 2K revenue. For the six-month period, revenue also benefited from recognition of previously deferred Evolve revenue. Grand Theft Auto products generated 63.9% of six-month revenue.
Six-month gross margin declined from 57.8% to 44.3%, primarily because of increased internal royalties associated with Grand Theft Auto. Quarterly gross margin was nearly flat year over year. Six-month operating expenses rose 19.7% to $271.9 million, including higher marketing, administrative, research and development, and depreciation costs.
Liquidity, cash flow, and debt
- At September 30, cash and cash equivalents were $711.7 million and short-term investments were $353.0 million. Restricted cash was a further $215.2 million, primarily for certain royalty obligations.
- Current assets were $1,964.6 million and current liabilities were $1,213.9 million; the current ratio was approximately 1.62.
- Six-month investing cash outflow was $193.2 million, mainly $167.4 million of net short-term investment purchases and $25.8 million of fixed-asset purchases. Financing cash outflow was $27.4 million, including $26.6 million of share repurchases. Cash declined $199.4 million from fiscal year-end.
- Long-term debt carrying value was $487.6 million. The two convertible note issues had aggregate principal of $537.5 million; the company had no borrowings under its revolving credit facility and reported $98.3 million available, subject to borrowing-base restrictions. The company stated it was compliant with debt covenants.
- Management said cash, short-term investments, projected operating cash flow, and credit availability were expected to cover working capital, capital expenditures, and commitments for at least the next 12 months.
Material changes and outlook
- Revenue increased sharply versus the prior-year quarter and six-month period, but results reflect title mix and timing, especially deferred Grand Theft Auto revenue recognition.
- Digital online channels generated 57.3% of six-month revenue; recurrent consumer spending represented 61.0% of digital revenue. Console products accounted for 84.1% of revenue.
- Both convertible note issues became eligible for holder conversion during October–December 2015 after the share-price conversion threshold was met. The company said it currently intended and was able to settle conversions in shares, creating potential dilution.
- The board expanded the repurchase authorization by 6.7 million shares in May 2015. The company repurchased 953,647 shares for $26.6 million during the six months; 9,046,353 shares remained authorized for repurchase at period-end.
- No quantified financial guidance is provided in the filing text. The disclosed upcoming title schedule included XCOM 2 and Battleborn in fiscal 2016 and Mafia III in fiscal 2017; WWE 2K16 was listed as released after quarter-end.
Risks, contingencies, and unusual items
- Revenue and earnings depend on release timing and hit titles; Grand Theft Auto represented a substantial share of period revenue. Quarterly results are seasonal and can fluctuate materially.
- Customer concentration is significant: the five largest customers generated 66.9% of six-month revenue and represented 65.5% of gross receivables at September 30. Retailer distress, consolidation, or collection problems could affect results and liquidity.
- Foreign exchange movements reduced year-over-year six-month revenue by $17.4 million and gross profit by $12.3 million. The company uses short-term currency forwards but says hedging does not eliminate currency risk.
- The prior-year comparison included a $19.0 million gain from the sale of the company’s Twitch investment; there was no corresponding gain in 2015.
- The company reported routine litigation, including intellectual property claims, and said accrued amounts were appropriate; possible losses beyond accruals were not expected to be material. It reported no material changes to previously disclosed risk factors or commitments.
Important facts for investors to verify
- How much of reported growth reflects recurring demand versus recognition of previously deferred game and online-content revenue.
- Whether Grand Theft Auto and customer concentration remain at comparable levels, and the performance of upcoming releases.
- Potential share dilution or cash effects if holders convert the $537.5 million principal amount of convertible notes.
- Cash conversion and development-cost investment: operating cash flow was positive for the six-month period, while capitalized software costs and licenses increased materially.
- Whether management’s stated liquidity outlook remains supported by operating cash flow, available investments, and credit-facility access.