Take-Two Interactive Software, Inc. — Form 10-Q
Reporting period: Fiscal second quarter and first six months ended September 30, 2020. Dollar amounts below are in millions unless otherwise stated. Comparisons are with the corresponding 2019 periods.
Business context and reporting period
Take-Two develops and publishes interactive entertainment through Rockstar Games, 2K, Private Division, Social Point and, following its September acquisition, Playdots. Its business includes console, PC and mobile games, with revenue from full-game sales and ongoing player spending. The company reported unaudited results; interim performance may not indicate full-year results.
Financial performance and liquidity
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Net revenue | $841.1; down 1.9% | $1,672.5; up 19.6% |
| Gross profit / margin | $408.6 / 48.6% (45.4% prior year) | $763.3 / 45.6% (49.2% prior year) |
| Operating income / margin | $115.4 / 13.7% (8.7% prior year) | $197.5 / 11.8% (9.1% prior year) |
| Net income | $99.3, up from $71.8 | $187.8, up from $118.1 |
| Diluted EPS | $0.86, versus $0.63 | $1.63, versus $1.04 |
| Net bookings | $957.5; up 0.7% | $1,953.8; up 42.3% |
For the six months, operating cash flow was $626.7, compared with $144.2 in the prior-year period. Investing cash outflow was $502.6, including purchases of investments and the Playdots acquisition; financing cash outflow was $41.7. Cash, cash equivalents and restricted cash totaled $2,084.8 at September 30. Separately, the balance sheet reported $1,345.1 of cash and cash equivalents and $1,040.8 of short-term investments; restricted cash is not necessarily available for general use.
Total liabilities were $2,934.9 and stockholders’ equity was $2,901.3. The company had no borrowings under its unsecured revolving credit facility, with $198.3 available to borrow and $1.7 of letters of credit outstanding. Current liabilities included $1,063.1 of deferred revenue.
Material changes versus the prior comparable periods
- Quarterly revenue edged down as the prior-year release of Borderlands 3 fell out of comparison; gains in NBA 2K, Grand Theft Auto, PGA TOUR 2K21 and other titles partly offset the decline. Six-month revenue rose, led by Grand Theft Auto, NBA 2K and other franchises.
- Digital online revenue rose to 84.6% of quarterly revenue and 86.0% for the six months, versus 71.8% and 74.6%, respectively. Recurrent consumer spending represented 58.9% of quarterly revenue and 58.3% for the six months.
- Quarterly gross margin improved, partly from lower development royalties as a share of revenue. Six-month gross margin declined, reflecting higher internal and license royalties; the comparison also included a $19.7 software-development impairment charge in the current six-month period.
- Operating expenses fell 6.8% in the quarter, mainly as selling and marketing costs declined, but rose 0.7% for the six months. General and administrative expense increased, including Playdots-related professional fees and COVID-19 relief contributions.
- Interest and other income declined year over year, primarily because lower interest rates reduced interest income. The six-month effective tax rate was 9.6%, affected by tax credits and excess stock-compensation tax benefits; the period also included a $19.8 tax expense associated with the Altera matter.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no clear numerical full-year financial guidance. Management noted that PS5 and Xbox Series X were expected to launch in November 2020 and identified announced releases including next-generation NBA 2K21 and Borderlands 3, Grand Theft Auto V for next-generation consoles in fiscal 2022, and Kerbal Space Program 2 in fiscal 2023.
- COVID-19: Management said increased consumer engagement during pandemic-related closures and restrictions had positively affected results, while warning that the duration and offsetting effects of economic weakness and reduced discretionary spending were uncertain. Work-from-home measures had caused minimal disruption to date, according to management.
- Concentration and platform risks: The five largest customers generated 77.7% of six-month revenue and represented 75.1% of gross receivables at period-end. Console platforms accounted for 74.9% of six-month revenue; the transition to new consoles, their availability and consumer adoption could affect demand.
- Acquisition: Playdots was acquired on September 4 for consideration valued at $195.5, comprising $97.8 cash and $97.6 in stock. Preliminary goodwill was $119.1. Playdots contributed $1.2 of revenue and a $6.0 net loss through September 30; purchase accounting remained preliminary.
- Other items: The filing reports routine legal matters that management does not believe are material, while acknowledging losses above recorded accruals are reasonably possible. No material risk-factor changes from the prior Form 10-K were reported. The company made no open-market share repurchases during the quarter.
Most important facts for investors to verify
- Whether recurring consumer spending and digital sales sustain their growth, and how much recent engagement reflects temporary pandemic conditions.
- How the release cadence, major franchise performance and next-generation console transition affect revenue, margins and cash generation.
- Customer and receivables concentration, including collection exposure and the extent of trade credit insurance.
- Playdots’ ongoing results, final purchase-price allocation and integration; also monitor the $19.7 software impairment and tax-rate variability.
- Availability of cash and investments, including restrictions on cash, and compliance with credit-facility covenants and contractual commitments.