Take-Two Interactive Software, Inc. — Form 10-Q
Business context and reporting period: Fiscal 2022 second quarter and first half ended September 30, 2021; comparisons are with the corresponding 2020 periods. Take-Two develops and publishes interactive entertainment through Rockstar Games, 2K, Private Division, and T2 Mobile Games. Results are unaudited; dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Quarter ended Sep. 30, 2021 | Quarter ended Sep. 30, 2020 | Six months ended Sep. 30, 2021 | Six months ended Sep. 30, 2020 |
|---|---|---|---|---|
| Net revenue | $858.2 | $841.1 | $1,671.5 | $1,672.5 |
| Gross profit / margin | $401.5 / 46.8% | $408.6 / 48.6% | $885.1 / 53.0% | $763.3 / 45.6% |
| Operating income / margin | $20.2 / 2.3% | $115.4 / 13.7% | $190.6 / 11.4% | $197.5 / 11.8% |
| Net income | $10.3 | $99.3 | $162.6 | $187.8 |
| Diluted EPS | $0.09 | $0.86 | $1.39 | $1.63 |
| Net bookings | $984.9 | $957.5 | $1,696.3 | $1,953.8 |
- For the quarter, revenue rose 2.0%, while net income fell about 90%. Operating expenses increased 30% to $381.4 million, including higher marketing, personnel, research and development, and acquisition-related costs.
- For the six-month period, revenue was essentially flat and net income declined about 13%. Net bookings fell 13.2%.
- Quarterly revenue growth reflected Two Dots, Grand Theft Auto Online, Top Eleven, Red Dead Online, and NBA 2K, partly offset by declines in PGA TOUR 2K21, Mafia, and Red Dead Redemption 2. First-half revenue benefited from NBA 2K, Two Dots, Grand Theft Auto Online, Red Dead Online, and Top Eleven, offset by declines in several full-game titles.
- Recurring consumer spending accounted for 65.7% of quarterly revenue and 68.0% of first-half revenue, up from 61.8% and 60.8%, respectively. Digital online revenue represented 90.8% of the quarter and 90.9% of the first half.
Cash flow, liquidity, and debt
- First-half operating cash flow was $283.7 million, down from $626.7 million. Investing cash outflow was $384.1 million; financing cash outflow was $244.4 million, including $200.0 million of share repurchases.
- Cash, cash equivalents, and restricted cash totaled $1,714.7 million at September 30, 2021, versus $2,060.2 million at March 31, 2021. Short-term investments were $1,440.6 million.
- The company reported no outstanding borrowings under its $250 million unsecured revolving credit facility; $247.8 million was available, net of letters of credit. The facility runs through February 2024 and includes financial covenants.
- Current assets were $4,243.5 million and current liabilities were $2,566.9 million. Total liabilities were $3,149.4 million; the filing reports no outstanding debt borrowings at quarter-end.
- Management stated that cash, investments, operating cash flows, and available credit were expected to meet short- and long-term cash requirements. Fiscal 2022 capital expenditures were expected to be approximately $170 million; $111.2 million was spent in the first half.
Material changes, outlook, and risks
- Gross margin declined in the quarter, primarily due to royalty timing and software development impairments; the first-half margin improved year over year due mainly to lower development and internal royalties, partly offset by impairments.
- Software development impairment charges were $55.3 million in the quarter and $65.0 million in the first half, related to projects discontinued or capitalized costs exceeding expected net realizable value.
- On June 1, 2021, Take-Two acquired 94.5% of Nordeus, then exercised an option to acquire the remaining 5.5%. Acquisition-date consideration was valued at $289.8 million, including cash, stock, deferred consideration, and a potential earn-out of up to $153 million. Nordeus contributed $12.2 million in revenue and a $19.7 million net loss from acquisition through September 30. A $20.0 million quarterly expense from remeasurement increased the contingent earn-out liability.
- Management described a fiscal 2022 release slate that included NBA 2K22, with planned releases including Grand Theft Auto V and standalone Grand Theft Auto Online for next-generation consoles, Grand Theft Auto: The Trilogy, WWE 2K22, Tiny Tina’s Wonderlands, and OlliOlli World. The filing does not provide clear revenue or earnings guidance.
- Management expected elevated gaming engagement to moderate as pandemic restrictions eased, while noting continuing uncertainty around COVID-19, consumer demand, inflation, currencies, and console availability. Product-release timing and title success can cause substantial quarterly variability.
- Customer concentration is significant: the five largest customers generated 79.8% of first-half revenue and held 76.9% of gross receivables at September 30. Two customers represented 45.4% and 18.9% of gross receivables.
- Other exposures include dependence on console platforms, foreign currency movements, legal and tax matters, and the commercial performance of major franchises. Management reported no material change to previously disclosed risk factors and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether revenue and net bookings trends improve as the announced release slate launches, and whether recurring consumer spending sustains its increased share.
- The nature and future effects of the $65.0 million first-half software impairment, including any additional project cancellations or write-downs.
- Nordeus performance against earn-out targets, the resulting potential cash payments, and the impact of acquisition-related costs and losses.
- Customer concentration, receivable collection, and exposure to key digital storefronts and platform partners.
- Actual fiscal 2022 capital expenditures versus the approximately $170 million outlook, alongside operating cash flow and share repurchases.