Take-Two Interactive Software, Inc. — Form 10-Q
Reporting period: Quarter and six months ended September 30, 2018 (fiscal Q2 and first half of fiscal 2019). Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context
Take-Two develops and publishes interactive entertainment through Rockstar Games, 2K, Private Division, and Social Point. Its business spans console, PC, and mobile games, with revenue from full-game sales and ongoing digital spending such as virtual currency, add-on content, and in-game purchases.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net revenue | $492.7 | $443.6 | $880.6 | $861.8 |
| Gross profit / margin | $257.8 / 52.3% | $197.0 / 44.4% | $514.4 / 58.4% | $420.7 / 48.8% |
| Operating income (loss) / margin | $26.0 / 5.3% | $(11.3) / (2.6)% | $96.8 / 11.0% | $38.9 / 4.5% |
| Net income (loss) | $25.4 | $(2.7) | $97.1 | $57.5 |
| Diluted EPS | $0.22 | $(0.03) | $0.84 | $0.53 |
| Net Bookings | $583.4 | $577.0 | $871.7 | $925.3 |
Q2 revenue rose 11.1%, while six-month revenue increased 2.2%. Q2 net income improved from a loss in the prior-year quarter; six-month net income rose about 69%. Net Bookings, a company-defined operating metric, increased 1.1% in Q2 but declined 5.8% for the six-month period.
For the six months, recurrent consumer spending was $481.6 million, or 54.7% of revenue, versus $386.5 million and 44.9% a year earlier. Digital online revenue was $673.4 million, or 76.5% of revenue, compared with $571.1 million and 66.3%.
Cash flow, balance sheet, and liquidity
- Six-month operating cash flow was a use of $206.0 million, versus cash provided of $132.4 million in the prior-year period. Management attributed the current-period use primarily to investment in software development and licenses, along with working-capital movements.
- Investing activities provided $19.7 million; financing activities used $217.5 million, including $153.5 million for share repurchases and $64.0 million in tax payments on net share settlements of restricted stock awards.
- Cash, cash equivalents, and restricted cash totaled $833.1 million at September 30, down from $1,246.4 million at March 31. The balance sheet separately reported $462.3 million in cash and equivalents, $563.0 million in short-term investments, and $370.7 million in restricted cash.
- No borrowings were outstanding under the credit agreement; $98.3 million was available to borrow. The agreement permits up to $100 million of borrowings, subject to its terms. The $1.00% convertible notes matured July 1, 2018; the filing reports $5.2 million of notes settled during Q2.
- Total assets were $3.655 billion and total liabilities were $1.711 billion. Current assets were $2.192 billion and current liabilities were $1.490 billion.
Material changes and comparability
- Take-Two adopted the new revenue standard, Topic 606, on April 1, 2018 using the modified retrospective method. It recorded a $470.3 million after-tax increase to opening retained earnings; prior-year comparisons were not restated.
- Topic 606 affected reported results: for Q2 it increased revenue by $35.2 million but reduced net income by $41.4 million versus results without adoption, principally reflecting the related tax impact. For the six months, it increased revenue by $21.2 million and gross profit by $5.6 million, but reduced net income by $36.8 million versus results without adoption. These accounting effects should be considered when comparing periods.
- Management cited NBA 2K as a contributor to Q2 bookings growth and six-month revenue growth; Grand Theft Auto V and Grand Theft Auto Online contributed to results, while Grand Theft Auto V and some other titles were among the six-month revenue declines. Six-month gross-margin expansion also reflected lower internal royalties and software-cost amortization relative to revenue, including release timing.
- Operating expenses rose 11.3% in Q2 and 9.4% for the six months, with higher marketing, development, and personnel costs. Prior-year depreciation and amortization included an $11.3 million impairment charge related to acquired in-process research and development.
Outlook, risks, and unusual items
- The filing provides no quantified financial guidance. It notes that results vary with release timing, title performance, marketing and development costs, and seasonal holiday demand. Red Dead Redemption 2 was listed as released October 26, 2018, after the reporting quarter.
- Management said current cash, short-term investments, projected operating cash flows, and credit availability should meet working-capital, capital-expenditure, and commitment needs. It also noted that Topic 606 may increase cash taxes in fiscal 2019.
- Concentration is significant: the five largest customers accounted for 75.4% of six-month revenue, versus 71.7% a year earlier, and 62.8% of gross receivables at September 30. Grand Theft Auto products represented 41.8% of six-month revenue.
- Other risks include reliance on third-party console platforms, foreign-exchange exposure, customer credit and retailer concentration, changing consumer demand, and the uncertain timing and commercial success of game releases. The company uses currency hedges but says they do not eliminate currency risk.
- A former executive’s lawsuit seeks at least $150 million in damages; twelve claims have been dismissed, with several remaining. Take-Two says it has meritorious defenses and has accrued an amount it considers adequate; the filing does not clearly identify the specific accrual attributable to this case. The company reported no material changes to the risk factors in its prior annual report.
- The effective tax rate may fluctuate due to tax credits, valuation allowances, stock-based compensation, geographic earnings mix, and interpretation of the Tax Cuts and Jobs Act. The company was continuing to evaluate certain tax-law effects.
Key facts for investors to verify
- Separate underlying operating trends from Topic 606’s timing and tax effects, especially when comparing revenue, earnings, and deferred revenue with prior periods.
- Track Net Bookings against recognized revenue and assess whether the six-month bookings decline reverses in subsequent periods.
- Monitor operating cash use, software-development investment, receivables and customer concentration, and the substantial decline in cash and restricted cash.
- Assess dependence on Grand Theft Auto and NBA 2K, upcoming releases, recurring consumer spending, and the outcome and potential financial impact of the Benzies litigation.