Business context and reporting period
Take-Two Interactive Software, Inc. filed this unaudited Form 10-Q for the quarter ended December 31, 2022, the third quarter of fiscal 2023. The company develops and publishes console, PC and mobile games through Rockstar Games, 2K, Private Division and Zynga. Comparisons with the prior year are substantially affected by Zynga’s acquisition on May 23, 2022; Popcore was acquired on November 16, 2022.
Key financial metrics
Amounts are in millions, except per-share data and percentages.
| Metric | Three months ended Dec. 31, 2022 | Three months ended Dec. 31, 2021 | Nine months ended Dec. 31, 2022 | Nine months ended Dec. 31, 2021 |
|---|---|---|---|---|
| Net revenue | $1,407.8 | $903.3 | $3,903.7 | $2,574.8 |
| Gross profit / margin | $715.9 / 50.9% | $552.9 / 61.2% | $2,062.1 / 52.8% | $1,438.0 / 55.8% |
| Operating income (loss) | $(172.9) | $154.1 | $(462.8) | $344.7 |
| Net income (loss) | $(153.4) | $144.6 | $(514.4) | $307.1 |
| Diluted earnings (loss) per share | $(0.91) | $1.24 | $(3.27) | $2.63 |
| Net Bookings | $1,382.8 | $866.1 | $3,890.1 | $2,562.4 |
- Quarterly revenue rose 55.9%; nine-month revenue rose 51.6%. Net Bookings increased 59.7% and 51.8%, respectively.
- For the nine months, operating cash flow was $35.8, investing cash flow was $(2,814.8), and financing cash flow was $1,904.6. Investing outflow chiefly reflected the Zynga acquisition.
- At December 31, cash and cash equivalents were $860.9, short-term investments $268.6, and restricted cash (current and long-term) $441.4. Total debt was $3,085.5 on the balance sheet, including $350.0 of short-term debt and $2,735.5 of long-term debt, net. The company also had approximately $499.5 available under its revolving credit facility.
- Deferred revenue, current and non-current combined, was $1,167.4. Contract revenue allocated to unsatisfied obligations was $1,322.8; the company expected to recognize approximately $1,219.9 over the next 12 months.
Material changes versus the prior comparable period
- Zynga contributed $631.1 of quarterly revenue and $1,547.2 for the nine-month period; its reported net losses included in Take-Two’s results were $214.0 and $666.7, respectively. Mobile represented 51.2% of quarterly revenue, compared with 11.5% a year earlier.
- Gross margin declined 10.3 percentage points for the quarter and 3.0 points for the nine months. Management attributed pressure primarily to amortization of acquired Zynga intangible assets and mobile platform fees, partly offset by lower internal royalties or prior-year software impairment effects, depending on the period.
- Operating expenses increased substantially, including higher marketing, development and administrative spending associated with Zynga, as well as acquired-intangible amortization. Nine-month intangible amortization was $740.1, versus $49.6 in the prior-year period.
- The company recorded $108.1 of interest and other expense for the nine months, compared with $7.2 a year earlier, and a $36.6 net loss on fair-value adjustments, versus a $6.1 gain. These included acquisition-related financing costs and convertible-note fair-value effects.
- The Zynga acquisition was valued at $9,521.8, including $3,992.4 cash consideration and $5,377.7 in Take-Two shares. It added $6,029.7 of goodwill. Popcore’s acquisition-date consideration was $199.2, including contingent earn-out consideration.
Outlook, management commentary, risks and unusual items
- The filing gives no clear full-year revenue, earnings or Net Bookings guidance. Management anticipated approximately $170.0 of fiscal 2023 capital expenditures; $137.7 had been spent during the first nine months. Announced remaining fiscal 2023 releases included WWE 2K23 and Kerbal Space Program 2 early access, alongside ongoing content investment.
- Management said available cash, short-term investments, expected operating cash flows and revolving-credit availability should cover working-capital, capital-expenditure and commitment needs. The $350.0 term loan matures June 21, 2023.
- In September 2022, unauthorized parties accessed and downloaded confidential company information, including early development footage from the next Grand Theft Auto installment. A separate incident involved unauthorized access to a vendor platform used for 2K customer support. The company reported no expected disruption or long-term effect on Rockstar’s current services or development timelines, but anticipated further cybersecurity-protection costs.
- Business risks include reliance on timely successful releases and major franchises, macroeconomic and foreign-exchange volatility, mobile platform fees and player-acquisition costs, and customer concentration: the five largest customers generated 79.7% of nine-month revenue. Grand Theft Auto products generated 15% of nine-month revenue.
- The company reported $70.0 of estimated tax effects from the new requirement to capitalize and amortize research and development costs; management expects cash taxes and deferred tax assets to increase if the requirement is not changed. The new corporate alternative minimum tax could also affect future tax expense.
- Other notable items include $25.0 of software-development impairment charges for the nine months, acquisition-related transaction and integration costs, and $19.8 of nine-month expense from an increase in the Nordeus contingent earn-out fair value. Management characterized routine legal matters as not expected to be material, while noting a loss above accrued amounts was reasonably possible.
Important facts for investors to verify
- How much revenue, bookings and cash generation are attributable to Zynga versus Take-Two’s legacy businesses, and how comparable-period pro forma results affect the growth picture.
- Whether the combined business can improve margins as acquired-intangible amortization and mobile platform and user-acquisition costs affect results.
- Debt repayment capacity and refinancing needs, particularly the June 2023 term-loan maturity and upcoming senior-note maturities.
- Integration progress, realization of expected Zynga benefits, and the development of acquired goodwill and intangible-asset valuations.
- Any subsequent cybersecurity costs, operational effects, or disclosure of further incidents.
- Future cash taxes under the R&D capitalization rules, tax audits and the potential corporate alternative minimum tax.