Business context and reporting period
Take-Two Interactive Software, Inc. (Rockstar Games and 2K) develops and publishes video games for consoles, PCs, mobile devices and online platforms. This is the Form 10-K for the fiscal year ended March 31, 2013—not a standalone 2012 Q4 filing. The filing also provides unaudited fourth-quarter results for the three months ended March 31, 2013, with the comparable quarter a year earlier.
Financial performance and position
Amounts below are in U.S. dollars; annual figures are for fiscal years ended March 31. The filing reports a single operating segment.
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $1,214.5 million | $825.8 million |
| Gross profit / margin | $498.6 million / 41.1% | $297.0 million / 36.0% |
| Operating income (loss) | $5.2 million | $(84.3) million |
| Net income (loss) | $(29.5) million | $(108.8) million |
| Basic and diluted loss per share | $(0.34) | $(1.31) |
| Cash from operating activities | $(4.6) million | $(85.0) million |
| Cash and cash equivalents at year-end | $402.5 million | $420.3 million |
| Long-term debt at year-end | $335.2 million | $316.3 million |
| Working capital at year-end | $529.2 million | $524.9 million |
FY2013 revenue rose 47.1%, led by Borderlands 2, BioShock Infinite, Max Payne 3, XCOM: Enemy Unknown and NBA 2K13. Gross margin improved five percentage points; operating expenses fell to 40.7% of revenue from 46.2%. Higher interest expense, primarily related to convertible notes, remained a drag on earnings. Operating cash flow was negative, with the company citing a substantial increase in receivables—especially following the late-year BioShock Infinite release—and higher fixed-asset purchases.
Fourth-quarter revenue was $299.5 million, operating income $29.1 million and net income $22.5 million, or $0.24 per basic share. In the comparable FY2012 fourth quarter, revenue was $148.1 million, operating loss $61.1 million and net loss $66.8 million, or $0.79 per basic share.
Liquidity included $73.6 million available under the revolving credit facility at March 31, 2013, with no borrowings outstanding and $1.7 million of letters of credit. Management said cash, projected operating cash flow and facility availability should meet working-capital, capital-expenditure and commitment needs for at least 12 months. The company reported compliance with debt covenants. Outstanding convertible notes had principal of $138 million at 4.375% due 2014 and $250 million at 1.75% due 2016.
Material changes versus the prior comparable period
- FY2013 revenue increased $388.7 million, while the net loss narrowed by $79.3 million. The prior year’s results were weaker in part because of lower revenue after earlier releases, including Red Dead Redemption and Mafia II.
- Digital online revenue increased to $256.1 million, or 21.1% of revenue, from $106.6 million, or 12.9%. PC and other platform revenue rose to 17.8% of revenue from 10.6%; console share declined to 80.4% from 85.1%.
- International revenue declined to 41.5% of total from 45.6%, partly reflecting Borderlands 2’s comparatively strong U.S. sales. Foreign exchange reduced FY2013 revenue by approximately $11.1 million.
- Year-end receivables rose to $189.6 million from $45.0 million, while cash declined $17.8 million. Long-term debt increased $18.9 million.
- Marketing expense increased $73.6 million, primarily due to advertising for major releases. General and administrative expense included a $15.0 million contractual provision triggered in June 2012.
Outlook, risks, contingencies and unusual items
The announced pipeline included The Bureau: XCOM Declassified (August 2013), Grand Theft Auto V (September 2013), NBA 2K14 (October 2013) and WWE 2K14 (October 2013). These were expected release dates, not a financial forecast; the filing does not provide a clear quantified revenue or earnings guidance range. Management expected digital delivery to become a larger part of the business over time and described the planned transition to next-generation consoles as an important opportunity and execution risk.
Key risks include reliance on hit releases and franchises (the ten largest titles generated 91.1% of FY2013 revenue), customer concentration (the five largest customers accounted for 52.5%, with GameStop at 23.8%), dependence on third-party console platforms, development delays and cost overruns, changing consumer demand and intense competition. Other disclosed risks include cybersecurity and service outages, intellectual-property disputes and piracy, foreign exchange exposure, product returns and price concessions, licensing costs, and the possibility that new platforms or digital business models disrupt established sales.
Contractual obligations totaled $711.1 million, including $388.0 million of convertible-note principal, $121.0 million of licensing and marketing commitments, and $75.7 million of software-development commitments. The company reported $21.7 million of gross unrecognized tax benefits, including interest and penalties; $14.3 million would affect the effective tax rate if realized. Routine litigation and claims were described as not expected to be material, although losses above accrued amounts were reasonably possible. The filing also noted that historical legal proceedings could lead to heightened scrutiny. No shares had been repurchased under the 7.5 million-share authorization as of year-end; no cash dividends had been paid.
Most important facts an investor should verify
- Whether the announced FY2014 releases launched on schedule and achieved commercial success, particularly Grand Theft Auto V.
- Whether the large year-end receivable balance converted to cash, and how operating cash flow and working capital developed after March 31, 2013.
- How the company managed its $388 million convertible-note principal and potential conversion or dilution, including the 2014 maturity.
- Whether the improvement in gross margin and profitability persisted after FY2013’s release-heavy year and elevated marketing spend.
- Whether customer concentration, digital-channel growth, next-generation console transition, tax uncertainties and contractual commitments changed materially after the reporting date.