Take-Two Interactive Software, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2010; filed February 9, 2011. The company changed its fiscal year-end from October 31 to March 31, so the filing also presents separate two-month results for September 2010 and 2009. Nine-month comparisons should be read with this reporting-calendar change and the sale of the distribution business in mind. Unless otherwise indicated, dollar amounts below are in millions.
Financial performance
| Metric | Three months ended Dec. 31, 2010 | Prior-year quarter | Nine months ended Dec. 31, 2010 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $334.3 | $360.4 | $954.6 | $529.7 |
| Gross profit / margin | $145.6 / 43.6% | $156.6 / 43.5% | $385.3 / 40.4% | $185.2 / 35.0% |
| Operating income (loss) | $48.7 | $44.5 | $97.1 | $(76.8) |
| Continuing-operations income (loss) | $40.8 | $39.4 | $76.2 | $(98.4) |
| Net income (loss) | $40.9 | $37.9 | $70.5 | $(113.2) |
| Diluted EPS | $0.45 | $0.43 | $0.82 | $(1.46) |
- Quarterly revenue fell 7.2%, while net income increased about 7.7%. Quarterly operating expenses declined 13.6% to $96.9 million; research and development expense rose 15.4% to $18.1 million.
- For the nine-month period, revenue increased 80.2% and gross margin improved 5.4 percentage points. The company moved from a substantial prior-year loss to positive operating and net income.
- Cash flow: Nine-month operating cash flow was $155.2 million, versus cash used of $162.9 million a year earlier. Investing activities used $6.2 million; financing provided $0.1 million. Cash increased $151.3 million from March 31, 2010.
- Liquidity and debt at December 31: Cash and equivalents were $297.1 million; current assets were $618.3 million and current liabilities $230.6 million. Long-term debt carrying value was $105.3 million, representing $138.0 million principal of 4.375% convertible notes due 2014. The $140 million secured revolving facility had no borrowings and $92.0 million available; the company reported covenant compliance.
- Total assets were $976.6 million and stockholders’ equity was $619.1 million. The filing reports no dividends or material off-balance-sheet arrangements.
Material changes and business drivers
- Quarterly revenue declined mainly because sales of the Grand Theft Auto franchise were about $90 million lower and the prior-year quarter included Borderlands. Red Dead Redemption and stronger NBA 2K11 sales partly offset the decline.
- Nine-month growth primarily reflected Red Dead Redemption, Mafia II, and NBA 2K11. Gross-margin improvement reflected product/pricing mix, partly offset by higher internal royalties.
- Quarterly selling and marketing expense fell 22.8%, mainly with lower prior-year campaign spending; general and administrative expense fell 9.6%, reflecting lower professional fees, settlement costs, and salaries. For nine months, selling and marketing expense rose 26.1% as Red Dead Redemption and Mafia II were marketed.
- Cash generation was attributed by management primarily to strong sales of major titles. The five largest customers accounted for 45.0% of nine-month revenue and 61.5% of gross receivables at December 31, 2010.
- The Jack of all Games distribution business was sold in February 2010; its results are presented as discontinued operations. Nine-month 2010 discontinued-operations loss was $5.7 million, including a $4.8 million charge for a lease assumption obligation.
Outlook, risks, and unusual items
- The filing provides no numerical 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.
- Announced releases included Major League Baseball 2K11 and Top Spin 4 in March 2011, Duke Nukem Forever and L.A. Noire in May 2011, and additional titles expected during calendar 2011 and fiscal 2012. Release timing and commercial success are key uncertainties.
- Management highlighted dependence on hit releases and a limited number of major retail customers, economic and consumer-demand weakness, pricing pressure, used-game sales, platform transitions and development costs, seasonality, and international and foreign-exchange exposure. A hypothetical 10% U.S. dollar movement against all currencies would change revenue by an estimated 4.6%, with some offset expected from local-currency costs.
- Foreign-currency forward contracts generated $5.7 million of losses in the nine months ended December 31, 2010. The company does not use derivatives for trading.
- A shareholder lawsuit, Wilamowsky v. Take-Two, remained pending; defendants filed motions to dismiss in January 2011 and the company said it considered the claims without merit. The filing states that other material proceedings were appropriately accrued and, except as disclosed, potential excess losses were not expected to be material. A securities class-action settlement was finally approved in October 2010, with a $20.1 million fund, including $4.8 million contributed by the company and previously accrued.
- Leadership changed after quarter-end: Strauss Zelnick assumed the CEO role on January 1, 2011, following Ben Feder’s resignation; Karl Slatoff had become COO in October 2010.
Important facts for investors to verify
- How comparable the nine-month results are given the fiscal-year change and the discontinued distribution business.
- Whether major-title sales and the announced release schedule sustain revenue and margins, given the company’s hit-driven model.
- Customer concentration, receivables collection, and the adequacy of return, price-concession, development-cost, and tax estimates.
- Convertible-note dilution and repayment exposure, credit-facility availability and covenants, and the effect of foreign-exchange movements.
- Developments in the Wilamowsky litigation and the remaining lease liability associated with the sold distribution business.