Take-Two Interactive Software, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended September 30, 2013; fiscal second quarter. The unaudited statements cover the company’s interactive entertainment publishing business, including Rockstar Games and 2K.
Financial performance and position
| Metric | Three months ended September 30, 2013 | Six months ended September 30, 2013 |
|---|---|---|
| Revenue | $148.8 million, down 45.5% year over year | $291.5 million, down 41.6% |
| Gross profit and margin | $56.4 million; 37.9% (42.0% prior year) | $105.2 million; 36.1% (30.8% prior year) |
| Operating loss | $117.9 million; operating margin approximately -79.2% | $167.5 million; operating margin approximately -57.4% |
| Net loss | $124.1 million; $1.40 per diluted share | $186.0 million; $2.12 per diluted share |
| Operating cash flow | Not separately presented for the quarter | $135.1 million provided, versus $82.3 million used in prior year |
- At September 30, cash and cash equivalents were $661.9 million, versus $402.5 million at March 31. Current assets were $2.251 billion and current liabilities $1.738 billion.
- Long-term debt carrying value was $443.5 million. The company had $250.0 million principal outstanding on 1.75% convertible notes due 2016 and $287.5 million on 1.00% convertible notes due 2018. It had no borrowings under its revolving credit facility and reported $70.7 million available, subject to borrowing-base restrictions.
- Operating cash flow included substantial working-capital movements, notably a $1.128 billion increase in deferred revenue and an $821.8 million accounts-receivable cash use. Investing cash use was $15.5 million; financing cash provided was $143.2 million.
Material changes and drivers
- Revenue fell as the prior-year period benefited from Borderlands 2, Max Payne 3 and Spec Ops: The Line. In the six-month comparison, these titles accounted for much of the decline; newer releases, NBA 2K and other franchise sales partly offset it.
- Grand Theft Auto V launched in September, but the company deferred all related revenue and costs at quarter-end because it lacked vendor-specific evidence to allocate value to later-delivered elements. The game included access to Grand Theft Auto Online, which launched in October. Deferred revenue was $1.154 billion and deferred cost of goods sold was $302.3 million at September 30; the balances primarily related to GTA V.
- Quarterly gross margin contracted year over year, reflecting development costs and royalties for The Bureau: XCOM Declassified, product mix and higher internal royalties, partly offset by lower product costs. For the six months, margin improved from the prior year, primarily due to lower product costs and a different release mix.
- Quarterly selling and marketing expense increased $35.5 million, mainly from advertising for GTA V and The Bureau. Six-month research and development expense rose $12.8 million, primarily due to lower capitalization of studio payroll as resources moved to new projects. Six-month general and administrative expense was broadly flat.
- Digital online distribution represented 55.7% of six-month revenue, up from 17.7% a year earlier. Console revenue share declined to 65.9% from 80.9%.
Outlook, risks and unusual items
- The filing provides no specific quantitative revenue or earnings guidance. Management said cash, expected operating cash flow and available credit should meet working-capital, capital-expenditure and commitment needs for at least 12 months.
- Management highlighted dependence on release timing and title success, the transition to new console platforms, consumer demand and pricing, used-game sales, and foreign-exchange exposure. The five largest customers generated 57.7% of six-month revenue; customer and receivable concentration creates collection risk.
- The company reported $393.7 million of expenditures expected to become due as deferred revenue was expected to be recognized in the quarter ending December 31, 2013. The timing and recognition of deferred GTA V revenue and associated costs are therefore important to near-term results.
- During the period, the company issued $287.5 million principal of 1.00% convertible notes and settled nearly all $138.0 million principal of 4.375% notes, paying approximately $166.0 million cash and issuing 3.217 million shares. It recorded a $9.0 million debt-extinguishment loss. Unwinding the related hedge and warrant transactions generated $84.4 million and required a $55.7 million payment; the income statement also included a net $3.5 million gain from hedge and warrant fair-value changes.
- Foreign-currency forward contracts related primarily to GTA V receivables; the company recorded $10.3 million of losses on these contracts for the six months. It cautioned that hedging reduces, but does not eliminate, currency risk.
- The company added a risk concerning planned implementation of a new enterprise resource planning system, which could cause operational or reporting disruptions. Routine legal matters were not considered material, though losses above accrued amounts were described as reasonably possible.
Key facts for investors to verify
- How and when GTA V deferred revenue and related costs are recognized, and whether GTA Online performance supports subsequent revenue.
- The scale and timing of the $393.7 million of expenditures associated with anticipated deferred-revenue recognition.
- Whether operating cash generation is sustainable given large receivable, deferred-revenue and deferred-cost movements.
- The impact of convertible-note terms, potential share dilution, and the extinguishment and hedge-related accounting on future results.
- Customer concentration, foreign-exchange exposure, new-console transition execution and ERP implementation risks.