Business Context and Reporting Period
Company: Take-Two Interactive Software, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 31, 2009 (Third Quarter of Fiscal Year 2009)
Business Overview: A global publisher, developer, and distributor of interactive entertainment software, hardware, and accessories. Key publishing labels include Rockstar Games and 2K (2K Games, 2K Sports, 2K Play). The company distributes products primarily in North America through its Jack of All Games subsidiary.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended July 31, 2009 | Nine Months Ended July 31, 2009 |
|---|---|---|
| Net Revenue | $138,564 | $625,096 |
| Gross Profit | $23,655 | $147,684 |
| Gross Margin | 17.1% | 23.6% |
| Operating Income (Loss) | $(49,606) | $(114,145) |
| Net Income (Loss) | $(55,473) | $(115,940) |
| Diluted EPS | $(0.72) | $(1.51) |
| Cash and Cash Equivalents | $174,789 | $174,789 (Ending Balance) |
| Long-Term Debt | $138,000 | $138,000 |
| Operating Cash Flow | N/A | $(146,760) |
Material Changes vs. Prior Period
- Revenue Decline: Net revenue decreased 68.1% for the three months ended July 31, 2009, compared to the same period in 2008. This was primarily driven by the absence of Grand Theft Auto IV sales, which launched in April 2008 and generated record-breaking revenue.
- Profitability Shift: The company reported a net loss of $55.5 million for the quarter, a reversal from a net income of $51.8 million in the prior year quarter. Operating expenses as a percentage of revenue increased significantly due to the revenue contraction.
- Debt Structure: In June 2009, the company issued $138 million in 4.375% Convertible Senior Notes due 2014. Concurrently, the company repaid all outstanding borrowings ($70 million) on its Wells Fargo credit line, resulting in zero outstanding borrowings on the credit facility as of July 31, 2009.
- Segment Performance: Publishing revenue dropped 75.0% year-over-year, while Distribution revenue declined 18.1%. Gross margins in the publishing segment compressed from 45.0% in 2008 to 18.8% in 2009.
Guidance, Outlook, and Risks
- Product Pipeline: Management highlighted upcoming releases for the fourth quarter of 2009, including Borderlands, Grand Theft Auto: Chinatown Wars, Grand Theft Auto: Episodes from Liberty City, and the NBA 2K10 series. Future titles such as BioShock 2 and Mafia II are targeted for Fiscal Year 2010.
- Liquidity: Management stated that current cash, projected operating cash flows, the credit agreement, and proceeds from the Convertible Notes provide sufficient liquidity for the next 12 months.
- Legal Proceedings:
- Securities Class Action: Entered into a memorandum of understanding to settle claims regarding Grand Theft Auto: San Andreas and option backdating. The settlement involves a $20.1 million fund ($15.2 million covered by insurance; $4.9 million previously accrued).
- Personal Injury: Won summary judgment in the Strickland et al. wrongful death action, though the plaintiff has appealed.
- Risk Factors: Key risks include the timing of product releases (reliance on Grand Theft Auto franchise), the impact of used game sales on new software demand, and potential impairment of goodwill due to stock price declines.
Investor Verification Checklist
- Revenue Concentration: Verify the impact of the Grand Theft Auto franchise on future quarters, given the 75% revenue drop in Q3 2009.
- Convertible Note Terms: Review the conversion price ($10.675) and the potential dilution of approximately 12.9 million shares upon conversion of the new $138 million debt.
- Legal Settlement Finality: Monitor the court approval status of the $20.1 million securities class action settlement.
- Inventory Levels: Assess the reduction in inventory ($63.6 million vs. $104.2 million prior year) and the company's ability to manage stock levels without write-downs.
- Foreign Exchange Impact: Note that foreign exchange rates reduced net revenue by approximately $6.0 million in the quarter and $32.9 million for the nine-month period.