Take-Two Interactive Software, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2020. Dollar amounts below are in millions unless stated otherwise. The filing is unaudited.
Business context and results
Take-Two develops and publishes interactive entertainment through Rockstar Games, 2K, Private Division, Social Point and Playdots. Its business depends on successful game releases and ongoing engagement with existing titles. Grand Theft Auto products generated 28.9% of revenue for the nine-month period.
| Metric | Quarter ended Dec. 31, 2020 | Quarter ended Dec. 31, 2019 | Nine months ended Dec. 31, 2020 | Nine months ended Dec. 31, 2019 |
|---|---|---|---|---|
| Net revenue | $860.9 | $930.1 | $2,533.3 | $2,328.4 |
| Gross profit / margin | $514.6 / 59.8% | $493.0 / 53.0% | $1,277.9 / 50.4% | $1,181.6 / 50.7% |
| Operating income / margin | $176.1 / 20.5% | $176.8 / 19.0% | $373.6 / 14.7% | $303.4 / 13.0% |
| Net income | $182.2 | $163.6 | $370.1 | $281.7 |
| Diluted EPS | $1.57 | $1.43 | $3.20 | $2.47 |
| Operating cash flow | Not separately presented | Not separately presented | $787.7 | $440.0 |
Financial position and liquidity
- At December 31, 2020, cash and cash equivalents were $1,649.8; short-term investments were $772.7; and restricted cash was $863.0, including long-term restricted cash. Cash, cash equivalents and restricted cash totaled $2,512.8.
- Current assets were $4,160.0 and current liabilities $2,341.8, representing working capital of approximately $1,818.2.
- The company reported no borrowings under its $200.0 revolving credit facility; $197.9 was available, with $2.1 of letters of credit outstanding. The facility runs through February 2024.
- Nine-month investing cash outflow was $240.9, including purchases of investments, fixed assets and the Playdots acquisition. Financing cash outflow was $46.4, primarily for tax payments on restricted-stock net settlements.
- Deferred revenue, current and non-current, was $1,023.3. Contract revenue allocated to unsatisfied performance obligations was $1,134.4; approximately $1,011.6 was expected to be recognized over the following 12 months.
Material changes and notable items
- Quarterly revenue fell 7.4%, while net income rose 11.4%. Nine-month revenue increased 8.8% and net income increased 31.3% year over year.
- Quarterly revenue declined mainly because prior-year releases, including The Outer Worlds, Red Dead Redemption 2 on PC and Borderlands 3, were not repeated at the same level. Growth in NBA 2K, Grand Theft Auto Online, Mafia and PGA TOUR 2K21 partly offset the decline.
- For the nine months, growth in NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Mafia and PGA TOUR 2K21 more than offset lower revenue from Borderlands 3, Red Dead Redemption 2 and The Outer Worlds.
- Recurrent consumer spending was 62.0% of quarterly revenue, up from 36.6%; for the nine months it was 59.5%, versus 41.8%. Digital online distribution was 84.6% of quarterly revenue and 85.5% for the nine months.
- Quarterly gross margin improved, attributed to release timing and lower capitalized software amortization, internal royalties and product costs. Nine-month gross margin edged down as higher internal and license royalties partly offset lower development royalties, amortization and product costs.
- Quarterly results included a $39.3 gain on long-term investments, principally from selling part of an investment and recognizing an observable increase in value on the remaining holding. This materially contributed to reported pretax income.
- The company recorded $25.2 of software-development impairment charges in the nine months, including charges related to discontinued development and costs expected to exceed a title’s net realizable value.
- Playdots was acquired on September 4, 2020 for consideration with an acquisition-date fair value of $195.5, including cash and stock. It contributed $8.5 in revenue and a net loss of $18.4 from acquisition through December 31.
Outlook, risks and contingencies
- The filing provides no specific financial guidance. Announced future releases include Grand Theft Auto V for PS5 and Xbox Series X in fiscal 2022 and Kerbal Space Program 2 in fiscal 2023.
- Management said pandemic-related restrictions had supported consumer engagement, but the duration of that benefit and potential effects of weaker economic conditions and consumer spending were uncertain. Remote work had caused minimal disruption to date, but may not remain effective if conditions persist.
- Customer concentration is significant: the five largest customers generated 77.4% of nine-month revenue, compared with 70.0% a year earlier, and represented 71.8% of gross receivables at December 31. Two customers accounted for 39.5% and 19.6% of gross receivables.
- Other risks include dependence on major console platforms and new-console availability, foreign-exchange volatility, release timing, seasonality, and reliance on key franchises. The company noted that new console transitions may affect demand.
- Cash restricted for the company’s offer to acquire Codemasters was no longer restricted after the offer lapsed on January 13, 2021. Routine legal proceedings were not believed material, though losses above accrued amounts were described as reasonably possible.
- The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. Playdots was excluded from management’s current-year internal-control assessment.
Important facts for investors to verify
- Whether growth in recurrent spending and digital distribution can offset lower revenue from full-game releases and sustain margins.
- How much reported earnings growth reflects core operations versus the $39.3 investment gain, and the impact of software impairments.
- Whether customer and receivables concentration, including exposure to two large customers, changes or affects collections.
- Playdots’ operating trajectory and integration, and the timing and commercial performance of the announced future releases.
- Whether pandemic-related engagement persists, and whether console availability, consumer spending or foreign-exchange movements alter results.