Take-Two Interactive Software, Inc. — Q2 FY2023 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended September 30, 2022; comparisons are with the prior-year periods. Take-Two develops and publishes interactive entertainment through Rockstar Games, 2K, Private Division, and Zynga. The May 23, 2022 acquisition of Zynga materially changed the company’s scale and business mix; Zynga is included in results from the acquisition date.
Key financial results
| Metric | Three months ended Sep. 30, 2022 | Prior-year quarter | Six months ended Sep. 30, 2022 | Prior-year six months |
|---|---|---|---|---|
| Net revenue | $1,393.5 million | $858.2 million | $2,495.9 million | $1,671.5 million |
| Gross profit / margin | $679.6 million / 48.8% | $401.5 million / 46.8% | $1,346.2 million / 53.9% | $885.1 million / 53.0% |
| Operating income (loss) | $(252.5) million | $20.1 million | $(289.9) million | $190.6 million |
| Net income (loss) | $(257.0) million | $10.2 million | $(361.0) million | $162.5 million |
| Diluted EPS | $(1.54) | $0.09 | $(2.38) | $1.39 |
| Net cash from operating activities | Not presented by quarter in this filing | $155.4 million | $283.7 million |
Quarterly revenue increased 62.4%; six-month revenue rose 49.3%. Net Bookings, a company-defined operating metric, increased 52.8% to $1,504.8 million for the quarter and 47.8% to $2,507.3 million for six months. These increases were primarily acquisition-driven: Zynga contributed $639.4 million of quarterly revenue and $916.1 million for the six-month period.
Profitability weakened despite higher revenue. Operating expenses were $932.1 million for the quarter, versus $381.4 million, including higher acquired-asset amortization, marketing, personnel and acquisition/integration costs. Six-month interest and other expense was $79.8 million, versus $1.6 million. The six-month fair-value adjustment was a $37.7 million loss, mainly related to Zynga convertible notes, compared with a $2.4 million gain.
Financial position and liquidity
- At September 30, 2022, cash and cash equivalents were $956.4 million and short-term investments were $348.0 million. Restricted cash brought total cash, cash equivalents and restricted cash to $1,657.4 million.
- Debt was $350.0 million short term and $2,935.5 million long term, net, or $3,285.5 million combined on the balance sheet. The company also had $299.5 million available under its $500 million revolving credit facility.
- Six-month operating cash flow was $155.4 million. Investing activities used $2,790.6 million, primarily reflecting the Zynga acquisition; financing activities provided $2,133.5 million, including senior-note proceeds and borrowings, partly offset by convertible-note settlements.
- Total assets rose to $17,492.9 million from $6,546.3 million at March 31, largely due to the acquisition, including $6,206.0 million of preliminary Zynga goodwill and acquired intangible assets.
- Management stated that cash, investments, projected operating cash flows and credit-facility availability were expected to meet short- and long-term cash requirements. Fiscal 2023 capital expenditures were expected to be approximately $150 million; $99.4 million had been spent in the first six months.
Material changes, outlook and risks
- Business mix: Mobile revenue reached 52.4% of quarterly revenue, compared with 13.4% a year earlier, primarily from Zynga. Recurrent consumer spending was 79.1% of quarterly revenue versus 65.7%. Digital online channels represented 94.7% of quarterly revenue.
- Acquisition and financing: Zynga purchase consideration had an acquisition-date fair value of $9,513.7 million. Take-Two issued $2.7 billion of senior notes and drew $350 million on a 364-day term loan and $200 million on its revolving facility. Integration, retention of key employees, realization of synergies and acquisition-related costs remain material uncertainties.
- Release plans: For the remainder of fiscal 2023, management identified Marvel’s Midnight Suns and WWE 2K23 from 2K and Kerbal Space Program 2 early access on PC from Private Division, alongside continued franchise content. The filing does not provide a full-year financial guidance range.
- Cybersecurity: In September 2022, an intrusion accessed and downloaded confidential Rockstar information, including early development footage for the next Grand Theft Auto. A separate incident involved compromised credentials for a 2K customer-support vendor platform and malicious messages to some players. The company reported no anticipated disruption to Rockstar services or development timelines, but expected additional cybersecurity-protection costs.
- Other risks: Management cited inflation, consumer demand and discretionary-spending uncertainty, foreign-exchange volatility, interest rates, platform fees, product-release timing and dependence on a concentrated customer base. The five largest customers accounted for 79.9% of six-month revenue. Foreign-currency movements reduced six-month revenue by $20.8 million; translation losses were $179.1 million.
- Tax and contingencies: Section 174 R&D capitalization increased estimated income tax payable and deferred tax assets by approximately $70 million for the six months. Management said future cash taxes and deferred tax assets could increase if the requirement is not changed. Routine legal proceedings were not believed material, though losses above accrued amounts were reasonably possible and not expected to be material.
- Controls: Management reported disclosure controls effective at period-end and no material change in internal control during the quarter. Zynga’s controls were still being incorporated into the company’s control environment.
Important facts for investors to verify
- How much of the revenue and Net Bookings growth is sustainable and attributable to Zynga versus Take-Two’s existing titles, and how results compare with pro forma figures.
- Whether acquired mobile businesses can sustain engagement and revenue while managing player-acquisition costs, platform fees and lower mobile gross margins.
- The trajectory of acquisition-related amortization, integration costs, stock compensation and operating expenses, and their effects on margins and cash generation.
- Debt repayment needs, interest costs, covenant headroom and liquidity, particularly the $350 million term loan maturing in June 2023 and the $1 billion 2024 notes.
- Whether the cybersecurity incidents lead to further costs, service or development impacts, legal exposure, or reputational damage.
- Potential effects of customer concentration, foreign exchange, tax-law changes and the timing or commercial performance of planned releases.