TAKE TWO INTERACTIVE SOFTWARE INC quarterly report, Q2 FY2020

Business context and reporting period

Take-Two Interactive Software, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2019, the second quarter of fiscal 2020. The company develops and publishes games through Rockstar Games, 2K, Private Division and Social Point. Key releases during the period included Borderlands 3 and NBA 2K20.

Financial performance

Unless stated otherwise, amounts are in U.S. dollars; financial statement figures below are converted from thousands to millions.

Quarterly revenue rose 74.1% year over year and six-month revenue rose 58.8%. Net bookings increased 62.9% and 57.5%, respectively. Management attributed growth mainly to Borderlands 3, Red Dead Redemption 2 and the NBA 2K franchise. Gross margin declined from 52.3% to 45.4% for the quarter and from 58.4% to 49.2% for the half, primarily because royalties and amortization of capitalized software costs were higher relative to revenue, reflecting release timing.

For the six months, operating cash flow was $144.2 million, compared with cash used of $206.0 million a year earlier. Investing activities used $36.2 million and financing activities used $61.5 million; cash, cash equivalents and restricted cash increased $38.4 million. Working-capital movements included a $463.0 million accounts-receivable outflow, partly offset by changes in accrued expenses and other liabilities.

At September 30, 2019, cash and cash equivalents were $762.0 million, short-term investments were $742.6 million, and restricted cash was $668.4 million. Total current assets were $3.388 billion and current liabilities were $2.290 billion. The company had no borrowings under its $200 million revolving credit facility, with $198.3 million available and $1.7 million of letters of credit outstanding. Lease liabilities totaled $141.1 million, including $22.3 million current.

Material changes versus the prior comparable period

• Quarterly net income increased to $71.8 million from $25.4 million; diluted EPS rose to $0.63 from $0.22. Six-month net income was $118.1 million versus $97.1 million, and diluted EPS was $1.04 versus $0.84.
• Six-month full-game and other revenue grew to $765.0 million from $399.0 million, while recurrent consumer spending revenue rose to $633.3 million from $481.6 million. Recurrent spending represented 45.3% of revenue versus 54.7% a year earlier.
• Digital online sales were $1.044 billion, or 74.6% of six-month revenue, compared with 76.5% a year earlier. Console revenue represented 77.7%, versus 75.7%.
• The six-month effective tax rate was 18.6%, compared with 10.5% in the prior-year period. The current period included a $19.8 million discrete tax expense following a Ninth Circuit decision in the Altera case, partly offset by tax benefits including audit settlements and credits.
• Adoption of lease accounting effective April 1, 2019 added right-of-use assets and lease liabilities to the balance sheet; the company reported no impact on operating results or cash flows from adoption.

Outlook, commentary and risks

The filing does not provide a clear consolidated financial forecast or quantified guidance. It lists expected releases including Sid Meier’s Civilization VI for consoles in November 2019 and titles planned for fiscal 2021, including Kerbal Space Program 2 and Disintegration. The filing also notes that WWE 2K20, The Outer Worlds and the PC version of Red Dead Redemption 2 were released after quarter-end.

Management emphasizes that results can vary materially with release timing, title reception, development and marketing costs, platform transitions and seasonality; peak shipments typically occur in the fourth calendar quarter. Revenue remains concentrated in major franchises: Grand Theft Auto products generated 23% and Red Dead Redemption products 13% of six-month revenue. The five largest customers contributed 74.8% of six-month revenue and 66.0% of gross receivables at quarter-end. Management cited customer credit and collection exposure, foreign exchange, international operations and competition as risks. The company uses currency hedges but says these do not eliminate foreign-exchange risk.

Routine legal and intellectual-property claims are disclosed; management does not believe the proceedings are material, though losses above recorded accruals are reasonably possible. The Altera tax matter remained uncertain following a rehearing request. The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.

Important facts for investors to verify

• Whether releases and ongoing engagement in major franchises sustain bookings, and how much revenue continues to depend on a limited number of titles and customers.
• Whether gross-margin pressure from royalties and software-cost amortization changes as the release mix shifts.
• How receivables, deferred revenue and working-capital timing affect cash conversion; $991.3 million of the $1.074 billion in unsatisfied performance obligations was expected to be recognized over the next 12 months.
• Potential future tax effects of the Altera litigation and tax audits, including the impact of the $19.8 million discrete expense.
• Exposure to foreign exchange, console-platform transitions, customer concentration, and lease and other contractual commitments.