Take-Two Interactive Software, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended March 31, 2012; filed May 22, 2012. This is an annual report, not a standalone “2011 Q4” filing. The company changed its fiscal year-end from October 31 to March 31, so some historical periods are not directly comparable.
Business context
Take-Two develops, markets and publishes interactive entertainment through Rockstar Games and 2K. Its portfolio includes Grand Theft Auto, Red Dead, NBA 2K, BioShock and Civilization. Revenue depends heavily on successful title launches, with sales primarily through console retail and digital channels.
Financial results and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net revenue | $825.8 million | $1,136.9 million |
| Gross profit / margin | $297.0 million / 36.0% | $447.5 million / 39.4% |
| Operating income (loss) | ($84.3) million | $77.1 million |
| Net income (loss) | ($108.8) million | $48.5 million |
| Diluted EPS | ($1.31) | $0.56 |
| Cash from operating activities | ($85.0) million | $134.8 million |
- At March 31, 2012, cash and cash equivalents were $420.3 million, working capital was $524.9 million and total assets were $1.149 billion.
- Long-term debt was $316.3 million carrying value. The company had issued $250 million of 1.75% convertible notes due 2016; outstanding convertible-note principal totaled $388 million. No revolving credit borrowings were outstanding, and $79.1 million was available under the credit facility.
- Management stated that cash, expected operating cash flow and credit availability should cover working capital, capital expenditures and commitments for at least 12 months.
Material changes versus prior year
- Revenue fell 27.4%, primarily because prior-year releases Red Dead Redemption, Mafia II, Civilization V and Top Spin 4 had no equivalent contribution in FY2012. New releases including L.A. Noire, Duke Nukem Forever and The Darkness II partly offset the decline.
- Gross margin declined 3.4 percentage points. Management cited product mix and increased royalties on externally developed titles; lower internal royalties partly offset these pressures.
- Operating expenses rose to 46.2% of revenue from 32.5%, despite only a 2.9% increase in dollar terms. Higher selling and marketing and general and administrative expenses contributed; G&A included increased stock compensation associated with the ZelnickMedia agreement.
- Operating cash flow swung from a $134.8 million inflow to an $85.0 million outflow, principally reflecting the net loss and investment in software development. Cash nevertheless increased by $139.9 million, mainly due to the convertible-note issuance.
- Fourth-quarter FY2012 revenue was $148.1 million and net loss was $66.8 million, compared with revenue of $182.3 million and net loss of $22.1 million in fourth-quarter FY2011.
Outlook, risks and unusual items
- The filing does not provide a clear numerical financial forecast. The disclosed pipeline included Max Payne 3 (released May 15, 2012), Spec Ops: The Line, Borderlands 2, NBA 2K13 and BioShock Infinite; Grand Theft Auto V had no announced release date.
- Key risks include dependence on hit titles and release timing; the top ten titles generated approximately 89.7% of FY2012 revenue. Grand Theft Auto products accounted for 13.8%.
- Customer concentration is significant: the five largest customers generated 43.9% of revenue, with GameStop at 19.0% and Wal-Mart at 10.7%. The five largest also represented 61.3% of gross receivables.
- Sony, Microsoft and Nintendo platforms accounted for approximately 89.4% of revenue by platform. Other risks include competition, retailer pricing and returns, used-game sales, platform transition costs, foreign exchange, digital-service security, and dependence on key creative personnel.
- Convertible-note obligations and credit-agreement covenants constrain financing flexibility. Total contractual commitments were $708.7 million, including $388 million of convertible-note principal. The company reported compliance with credit-facility and note covenants at year-end.
- Tax authorities were examining returns in the U.S. and certain foreign jurisdictions. Gross unrecognized tax benefits, including interest and penalties, were $22.4 million; timing of settlement was not estimable. Routine litigation was described as not material, although losses above accrued amounts were reasonably possible.
- Unusual items included a $2.2 million gain on sale of intellectual property and the November 2011 convertible-note issuance. The discontinued Jack of All Games distribution business had been sold in 2010; FY2012 discontinued-operations loss was $1.1 million.
Important facts for investors to verify
- Whether the announced game-release pipeline converted into timely launches and sales, particularly Grand Theft Auto V, and the associated development-cost exposure.
- Whether cash generation improves after the FY2012 operating cash outflow, and how the $388 million note principal and other commitments will be funded or settled.
- Whether retailer concentration, receivable exposure and the elevated returns and price-concession allowance remain manageable.
- Whether reported software-development assets are recoverable: $315.9 million was capitalized at year-end, including $313.1 million related to unreleased titles.
- Whether tax audits, foreign cash repatriation considerations and any legal claims produce material payments beyond recorded provisions.