Take-Two Interactive Software, Inc. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended June 30, 2022; comparisons are with the three months ended June 30, 2021. Take-Two completed its acquisition of Zynga on May 23, 2022, so the quarter includes only post-close Zynga results. Figures are in U.S. dollars and millions unless otherwise stated.
Financial performance
| Metric | Q1 FY2023 | Prior-year quarter |
|---|---|---|
| Net revenue | $1,102.4 | $813.3 |
| Gross profit / margin | $666.7 / 60.5% | $483.6 / 59.5% |
| Operating income (loss) / margin | $(37.4) / (3.4)% | $170.5 / 21.0% |
| Net income (loss) | $(104.0) | $152.3 |
| Diluted EPS | $(0.76) | $1.30 |
| Net cash from operating activities | $100.8 | $148.2 |
| Net bookings | $1,002.5 | $711.4 |
- Revenue increased 35.5%; net bookings increased 40.9%. The company attributed much of the increase to Zynga, alongside stronger contributions from titles including Tiny Tina’s Wonderlands, WWE 2K, and The Quarry.
- Recurrent consumer spending was $825.6, or 74.9% of revenue, versus $572.3, or 70.4%. Mobile revenue rose to $369.6 from $82.3, reflecting Zynga’s addition. Digital online revenue was $1,037.8, or 94.1% of total revenue.
- Gross margin improved by 1.0 percentage point, chiefly due to lower internal royalties, partly offset by acquired-intangible amortization and higher mobile platform fees. Operating expenses rose to $704.1 from $313.1; operating results also reflected higher marketing, personnel and acquisition-related costs.
- Interest and other expense was $29.3 versus $1.0; fair-value adjustments were a net loss of $39.6 versus a gain of $2.0. Acquired intangible amortization was $117.6 versus $15.2. The quarter also included $19.9 of software-development impairment charges related to products the company decided not to continue developing.
Financial position, debt and liquidity
- At June 30, 2022, cash and cash equivalents were $847.4 and short-term investments were $459.2. Restricted cash totaled $643.7, of which $534.8 was current and $108.9 long-term. Cash, cash equivalents and restricted cash were $1,491.1, down from $2,195.3 at March 31, 2022.
- Current liabilities were $3,286.7; current assets were $3,036.0. The balance sheet included $350.0 of short-term debt and $2,935.5 of long-term debt, net.
- Take-Two issued $2,700.0 of senior notes to help fund the Zynga acquisition. It also drew $200.0 on a five-year revolving facility and $350.0 on a 364-day term loan, the latter maturing June 21, 2023. About $297.5 remained available under the revolving facility at quarter-end.
- Investing cash outflow was $2,807.3, primarily reflecting $3,128.1 of business acquisitions. Financing cash inflow was $2,017.0, including debt proceeds and payments related to Zynga convertible notes. Capital expenditures were $42.5; management anticipated approximately $135.0 for fiscal 2023.
Material developments and outlook
- Zynga was acquired for consideration with a preliminary fair value of $9,513.7, including $3,992.4 cash and 46.3 million Take-Two shares. The preliminary purchase accounting recorded $6,556.4 of goodwill; valuation of acquired assets and liabilities was incomplete at quarter-end. Zynga contributed $276.7 of revenue and a $177.5 net loss from the acquisition date through June 30.
- Management said it expects sufficient liquidity from cash, short-term investments, operating cash flows and the revolving facility to meet short- and long-term requirements. The filing gives no specific full-year revenue, earnings or net-bookings guidance. Announced upcoming releases included NBA 2K23, Marvel’s Midnight Suns, WWE 2K23, PGA TOUR 2K23, Rollerdrome and Kerbal Space Program 2.
- Management cited integration, retention of key personnel, realization of acquisition synergies, inflation, interest rates, foreign exchange, COVID-related uncertainty, product-release timing and platform dependence as risks. Five largest customers generated 80.8% of quarterly revenue. The company noted mobile platform fees may pressure margins and reported that Grand Theft Auto products generated 18.3% of revenue.
- Other items to note: a $47.8 fair-value loss related to convertible notes was partly offset by an $8.8 capped-call gain; $140.1 was received in cash to settle capped calls in July 2022. New tax rules requiring capitalization of certain R&D costs increased estimated tax payable and deferred tax assets by approximately $70.0 in the quarter.
Investor verification priorities
- Track Zynga integration, full-period contribution, profitability, retention and progress toward expected synergies; the reported quarter contains only a brief post-acquisition period.
- Review acquisition accounting as valuations are finalized, including goodwill, intangible-asset amortization, deferred taxes and remaining contingent consideration.
- Assess debt service and refinancing needs, particularly the $350.0 term loan due in June 2023, alongside the company’s liquidity and revolving-facility availability.
- Monitor customer and platform concentration, mobile user-acquisition costs, platform fees and their effects on margins and cash generation.
- Compare subsequent release performance and net bookings with management’s stated slate; the filing provides no specific financial forecast.