Take-Two Interactive Software, Inc. — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended December 31, 2015. Unaudited results; dollar amounts below are in millions unless stated otherwise. Take-Two develops and publishes games through Rockstar Games and 2K.
Key financial metrics
| Metric | Three months ended Dec. 31, 2015 | Prior-year quarter | Nine months ended Dec. 31, 2015 | Prior-year nine months |
|---|---|---|---|---|
| Net revenue | $414.2 | $531.1 | $1,036.5 | $782.8 |
| Gross profit / margin | $156.4 / 37.7% | $253.1 / 47.7% | $432.1 / 41.7% | $398.7 / 50.9% |
| Operating income (loss) / margin | $(59.2) / (14.3)% | $65.6 / 12.4% | $(55.4) / (5.3)% | $(16.1) / (2.1)% |
| Net income (loss) | $(42.4) | $40.1 | $(54.7) | $(36.7) |
| Diluted EPS | $(0.51) | $0.42 | $(0.66) | $(0.46) |
| Operating cash flow | Not separately provided | Not separately provided | $188.8 | $60.5 |
- Liquidity at December 31: Cash and cash equivalents were $835.2; short-term investments were $379.4; restricted cash was $204.1. The company said available liquidity and expected operating cash flow should cover requirements for at least 12 months.
- Debt: Long-term debt was reported at a net carrying amount of $491.6, comprising convertible notes with aggregate principal of $537.5. No credit-agreement borrowings were outstanding; $98.3 was available under the revolving facility, subject to borrowing-base restrictions.
- Balance-sheet movements since March 31, 2015: Total assets increased to $2,585.0 from $2,228.1; deferred revenue increased to $831.6, including current and non-current balances, from $647.4. Stockholders’ equity declined to $527.0 from $563.1.
Changes versus comparable periods
- Quarterly revenue fell 22.0%, primarily because NBA 2K16 revenue was deferred and Borderlands: The Pre-Sequel had been released in the prior-year period. Grand Theft Auto franchise revenue partially offset the decline, increasing by $109.6 million year over year in the quarter.
- Nine-month revenue rose 32.4%, principally from a $407.7 million increase in Grand Theft Auto franchise revenue, including recognition of previously deferred revenue and the PC release of Grand Theft Auto V. Lower NBA 2K and Borderlands: The Pre-Sequel revenue partly offset growth.
- Gross margin fell in both comparisons. Management attributed the decline mainly to higher internal royalties associated with Grand Theft Auto, partly offset by product mix and a higher digital share.
- Digital online revenue represented 35.4% of quarterly revenue and 48.5% of nine-month revenue, up from 28.2% and 39.7%, respectively. Recurrent consumer spending represented 55.1% of digital revenue for the nine-month period, compared with 44.8% a year earlier.
- Nine-month cash from operations increased to $188.8 million. Investing activities used $224.9 million, including $196.3 million of net purchases of short-term investments and $28.6 million of capital expenditures. Cash and cash equivalents declined by $75.9 million over the nine months.
Outlook, commentary, and risks
- Unusual charge: The company recorded $71.2 million of reorganization expense for employee separations, reorganizing one development studio, and closing two studios. $66.6 million remained accrued at quarter-end, and up to $8.0 million of additional charges could arise.
- Tax item: A discrete $26.4 million benefit was recognized for a UK video-game tax deduction related to a prior period. The company estimated a net tax benefit of approximately $12 million for fiscal 2016.
- Convertible notes: Following the stock-price conversion thresholds being met, holders of both the 1.75% notes due 2016 and 1.00% notes due 2018 could convert during the period through March 31, 2016. Management stated its current intent and ability was to settle conversions in shares.
- Product pipeline: Announced releases included XCOM 2 (February 2016), Battleborn (May 2016), and Mafia III (fiscal 2017). The filing does not provide clear financial guidance for the full year.
- Business concentration and volatility: Grand Theft Auto products generated 56.4% of nine-month revenue. The five largest customers represented 65.3% of nine-month revenue and 66.3% of gross receivables at quarter-end. Results are sensitive to release timing, title performance, seasonality, platform transitions, and retail demand.
- Other risks and controls: Foreign exchange changes reduced nine-month revenue by $26.5 million and gross profit by $17.4 million versus the prior year. Management cited routine litigation, including intellectual-property claims, but did not expect undisclosed losses to be material. It reported no material risk-factor changes and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether deferred NBA 2K16 revenue and future major releases translate into recognized sales and improved margins.
- The remaining cash costs and final charges associated with the studio reorganization.
- The timing and share dilution or cash implications of possible conversion of the two convertible-note issues.
- How sustainable digital and recurrent consumer spending growth is, given dependence on Grand Theft Auto and a concentrated customer base.
- Whether operating cash flow can support development spending, capital expenditures, and commitments while preserving liquidity.