Take-Two Interactive Software, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Quarter and six months ended September 30, 2014. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise. The company develops and publishes interactive entertainment through Rockstar Games and 2K and reports one operating segment.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Revenue | $126.3 | $148.8 | $251.7 | $291.5 |
| Gross profit / margin | $74.3 / 58.8% | $56.4 / 37.9% | $145.5 / 57.8% | $105.2 / 36.1% |
| Operating loss | $(48.5) | $(117.9) | $(81.7) | $(167.5) |
| Net loss | $(41.4) | $(124.1) | $(76.8) | $(186.0) |
| Diluted loss per share | $(0.51) | $(1.40) | $(0.96) | $(2.12) |
- Q2 revenue fell 15.2% year over year; six-month revenue declined 13.7%. Lower sales of several prior-year releases were partly offset by higher Grand Theft Auto franchise sales.
- Gross margin expanded substantially, reflecting lower development costs and product costs as a share of revenue, partly offset by higher internal royalties tied to Grand Theft Auto.
- Operating expenses were $122.8 million in Q2, down 29.5%, mainly because prior-year selling and marketing included substantial Grand Theft Auto V advertising. Six-month operating expenses decreased 16.6% to $227.3 million.
- The company recorded a $19.0 million pretax gain from its September sale of its Twitch investment. Q2 tax expense was $4.3 million, primarily associated with that gain.
- Six-month operating cash flow was $(131.8) million, versus $135.1 million provided in the prior-year period. Management attributed the outflow mainly to payment of year-end accrued liabilities and investment in software development, partly offset by restricted-cash funding and increased deferred revenue.
Liquidity, debt, and balance sheet
- At September 30, 2014, cash and cash equivalents were $754.4 million, short-term investments $49.4 million, and restricted cash $77.6 million. Cash and cash equivalents had been $935.4 million at March 31, 2014.
- Current assets were $1.267 billion and current liabilities $379.1 million. The company said available cash, investments, projected operating cash flow, and credit availability were expected to meet working-capital, capital-expenditure, and commitment needs for at least 12 months.
- Balance-sheet long-term debt was $464.9 million, primarily convertible notes. The notes’ aggregate principal was $537.5 million: $250 million of 1.75% notes due 2016 and $287.5 million of 1.00% notes due 2018. The reported debt carrying value reflects unamortized discounts.
- The amended revolving credit facility runs to August 2019, had no borrowings outstanding, and had $98.3 million available; $1.7 million of letters of credit were outstanding. The company reported compliance with its credit-facility and convertible-note covenants.
- Six-month investing cash outflow was $50.7 million, including fixed-asset purchases and short-term investment purchases, partly offset by proceeds from the Twitch investment sale. Financing cash inflow was $4.8 million.
Material changes and business drivers
- Q2 revenue declined as sales of Borderlands 2, Civilization V: Brave New World, BioShock Infinite, The Bureau: XCOM Declassified, and other earlier releases were lower; Grand Theft Auto V and Grand Theft Auto Online provided a partial offset. The six-month comparison showed the same pattern.
- Digital online channels generated 63.9% of six-month revenue, up from 55.7%; recurrent consumer spending was 47.9% of digital online revenue. Console products represented 70.5% of revenue, compared with 65.9%.
- Grand Theft Auto products accounted for approximately 40% of six-month revenue. The filing noted that release timing can cause significant quarterly and annual fluctuations.
- The company released no key titles during the six months ended September 30. Subsequent scheduled or recently released titles included NBA 2K15, Borderlands: The Pre-Sequel, Civilization: Beyond Earth, WWE 2K15, and planned next-generation and PC versions of Grand Theft Auto V.
- Five largest customers generated 64.7% of six-month revenue, up from 57.7% a year earlier, and represented 76.4% of gross receivables at quarter-end. Management cited trade-credit insurance and ongoing credit monitoring.
Outlook, risks, and contingencies
- The filing provides no quantified financial guidance. Management stated that liquidity should be sufficient for at least the next 12 months and described a product pipeline, while emphasizing that results depend on release timing and commercial success.
- Key risks include dependence on a concentrated set of customers, significant Grand Theft Auto contribution, consumer acceptance and transition between gaming hardware platforms, product development and launch execution, used-game sales, foreign-exchange movements, and seasonal demand. Holiday-quarter shipments are typically higher.
- Foreign operations generated 50.7% of six-month revenue. Management’s sensitivity analysis estimated that a hypothetical 10% U.S. dollar appreciation against all currencies would reduce revenue by 5.1%, with some offset expected from local-currency costs.
- Routine litigation and claims, including intellectual-property matters, were described as not material; the company noted losses above accrued amounts were reasonably possible but not expected to be material. No material changes to previously reported commitments or risk factors were disclosed.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the strong gross-margin improvement is sustainable as upcoming releases and their associated development, marketing, and royalty costs affect results.
- Revenue and cash-flow performance after the release of the titles identified in the pipeline, including the timing and performance of Grand Theft Auto releases and online spending.
- Customer concentration, receivable collection, and the extent to which trade-credit insurance mitigates exposure.
- Cash use, software-development investment, and the company’s ability to maintain liquidity while servicing convertible notes and meeting credit-facility covenants.
- The recurring earnings impact of the one-time Twitch sale gain and the potential effects of tax assessments, foreign exchange, and litigation contingencies.