Business Context and Reporting Period
Company: Take-Two Interactive Software, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 30, 2009 (Second 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, 2K Games, 2K Sports, and 2K Play. The company operates two reportable segments: Publishing and Distribution.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Apr 30, 2009 |
Three Months Ended Apr 30, 2008 |
Six Months Ended Apr 30, 2009 |
Six Months Ended Apr 30, 2008 |
|---|---|---|---|---|
| Net Revenue | $229,722 | $539,810 | $486,532 | $780,252 |
| Gross Profit | $68,120 | $221,551 | $124,028 | $275,985 |
| Gross Margin % | 29.7% | 41.0% | 25.5% | 35.4% |
| Operating Income (Loss) | $(13,875) | $103,997 | $(64,540) | $69,400 |
| Net Income (Loss) | $(10,080) | $98,222 | $(60,468) | $60,225 |
| Diluted EPS | $(0.13) | $1.29 | $(0.79) | $0.80 |
| Cash and Equivalents (End of Period) | $179,616 | $280,277 | $179,616 | $72,918 |
| Line of Credit Outstanding | $70,000 | $70,000 | $70,000 | $70,000 |
Material Changes vs. Prior Period
- Revenue Decline: Net revenue decreased 57.4% year-over-year for the quarter and 37.7% for the six-month period. The primary driver was the absence of Grand Theft Auto IV sales, which launched in April 2008 and generated record-breaking revenue. Sales of the Grand Theft Auto franchise decreased by $288.1 million in the quarter.
- Profitability: The company reported a net loss of $10.1 million for the quarter, compared to net income of $98.2 million in the prior year. Operating expenses decreased 30.2% year-over-year due to reduced marketing spend (specifically for GTA IV) and lower personnel costs following restructuring.
- Segment Performance:
- Publishing: Revenue dropped 64.0% year-over-year. Current generation platform revenue share fell to 66.7% from 88.9% in the prior year.
- Distribution: Revenue remained relatively flat, decreasing only 1.4% year-over-year, driven by increased Wii software sales offsetting declines in hardware and prior-generation software.
- Cash Flow: Net cash used in operating activities was $92.7 million for the six months ended April 30, 2009, compared to $13.7 million in the prior year. Total cash and cash equivalents decreased by $100.7 million during the period.
Guidance, Outlook, and Risks
- Product Pipeline: Management highlighted upcoming releases for the remainder of fiscal 2009, including BioShock 2, Borderlands, Grand Theft Auto: Episodes from Liberty City, and NBA 2K10 in Q4. Mafia II and Red Dead Redemption are targeted for fiscal 2010.
- Capital Structure Update: In May 2009 (subsequent to the period end), the company issued $138 million of 4.375% convertible senior notes due 2014. Additionally, on May 28, 2009, the company paid down all outstanding borrowings on its $140 million credit facility.
- Legal Proceedings:
- SEC Settlement: On April 1, 2009, the company settled an SEC investigation regarding stock option backdating, agreeing to pay a $3.0 million civil penalty without admitting or denying allegations.
- Grand Jury Subpoenas: Settled with the New York County District Attorney regarding "Hot Coffee" content and option backdating, agreeing to pay $0.3 million in costs and implement governance reforms.
- Consumer Litigation: Pending appeals regarding the Grand Theft Auto: San Andreas "hidden content" class action.
- Risk Factors: Risks include the cyclical nature of game releases, reliance on a limited number of major retailers (top 5 customers accounted for 47.4% of revenue), potential impairment of goodwill, and the impact of used game sales on new software demand.
Investor Verification Checklist
- Revenue Concentration: Verify the impact of the Grand Theft Auto franchise on future quarters given the significant year-over-year revenue drop.
- Liquidity Position: Confirm the status of the $138 million convertible note issuance and the repayment of the credit line to assess current debt obligations.
- Legal Reserves: Review the adequacy of reserves for ongoing litigation, specifically the San Andreas consumer class action and potential derivative suits.
- Inventory Levels: Monitor inventory turnover and potential write-downs, as the company is actively reducing SKU counts and selling older inventory at lower margins.
- Foreign Exchange Impact: Assess the sensitivity of future earnings to currency fluctuations, as a strengthening U.S. dollar reduced revenue by approximately $26.9 million in the first six months of 2009.