Take-Two Interactive Software, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2016 (fiscal 2017 Q3). Unaudited results; comparisons are with the corresponding 2015 periods. Amounts below are in U.S. dollars.
Business context
Take-Two develops, publishes, and markets interactive entertainment through Rockstar Games and 2K. Its single reporting segment spans console, PC, mobile, and online products. Key releases during the nine-month period included NBA 2K17, Civilization VI, Mafia III, BioShock: The Collection, and Battleborn.
Financial performance
| Metric | Three months ended Dec. 31, 2016 | Nine months ended Dec. 31, 2016 |
|---|---|---|
| Revenue | $476.5 million; up 15.0% | $1,208.2 million; up 16.6% |
| Gross profit / margin | $165.4 million / 34.7%, versus 37.7% | $500.1 million / 41.4%, versus 41.7% |
| Operating loss | $28.4 million, versus $59.2 million | $20.2 million, versus $55.4 million |
| Net loss | $29.8 million, or $0.33 per diluted share | $32.0 million, or $0.37 per diluted share |
| Operating cash flow | Not separately presented for the quarter | $239.6 million, versus $188.8 million |
Quarterly revenue growth reflected Civilization VI, NBA 2K, and Battleborn, partly offset by lower Evolve revenue. For the nine months, growth was led by NBA 2K, Civilization VI, and BioShock: The Collection; lower Grand Theft Auto and Evolve revenue partly offset those increases. Selling and marketing expense rose substantially, primarily from advertising for recent and upcoming releases. The prior-year periods included $71.2 million of business reorganization expense, which did not recur.
Digital online revenue was $240.2 million (50.4% of quarterly revenue) and $643.1 million (53.2% of nine-month revenue). Recurrent consumer spending rose in dollars in both comparisons, although its share of digital online revenue declined year over year in the nine-month period. Console represented 79.6% of nine-month revenue; PC and other represented 20.4%.
Financial position and liquidity
- At December 31, 2016, cash and cash equivalents were $1,039.4 million and short-term investments were $404.5 million. Cash increased from $798.7 million at March 31, 2016.
- Current assets were $2,451.2 million and current liabilities were $1,863.8 million. Deferred revenue was $1,073.4 million, versus $582.5 million at fiscal year-end.
- Long-term debt carrying value was $258.9 million, representing the 1.00% convertible notes due 2018; their principal amount was $279.1 million. No borrowings were outstanding under the revolving credit facility, with $98.3 million available and $1.7 million of letters of credit outstanding.
- The $250 million 1.75% convertible notes due December 2016 were converted into common shares before maturity. The company reported $239.6 million of operating cash flow for the nine months; investing cash flow was positive $48.2 million and financing cash flow was negative $35.2 million.
Material changes, outlook, and risks
- Quarterly gross margin declined 3.0 percentage points, primarily due to higher amortization and impairment of capitalized software costs on recently released titles and timing of internal royalties. Nine-month gross margin declined 0.3 percentage points, primarily due to higher internal royalties as a share of revenue.
- Management stated that cash, short-term investments, projected operating cash flow, and credit availability should be sufficient for working capital, capital expenditures, and commitments. The filing provides no specific financial guidance. Announced future releases included Red Dead Redemption 2, planned for fall 2017, and NBA 2K18, planned for fall 2017.
- Revenue recognition for online-enabled games depends on estimates of service periods; revisions could materially affect reported revenue. The company deferred revenue and related costs for Mafia III because certain elements were to be delivered later and fair value evidence was unavailable. Management expects the new revenue standard, effective for the company in fiscal 2019, may materially affect the financial statements, particularly online-enabled games.
- Concentration is significant: Grand Theft Auto products generated 38.7% of nine-month revenue, and the five largest customers accounted for 65.8% of revenue. Management also identifies console-platform dependence, seasonality and release timing, foreign exchange, retailer credit, and used-game sales as risks.
- A former executive’s lawsuit seeks at least $150 million in damages. The company says it has accrued an amount it considers adequate, believes it has meritorious defenses, and intends to defend the claims; the ultimate outcome is uncertain.
- After quarter-end, on January 31, 2017, Take-Two acquired Social Point for $175 million in cash and 1,480,168 shares, with up to $25.9 million of contingent consideration.
Key facts for investors to verify
- Whether digital and recurrent consumer spending growth can offset declines in established franchises and sustain margins after elevated release-related marketing and development costs.
- How revenue deferrals, service-period estimates, and adoption of the new revenue standard affect the timing and comparability of reported results.
- The conversion and settlement status of the 1.00% notes, including potential dilution; holders could convert during the period through March 31, 2017 under the stated terms.
- Customer concentration, receivable collectability, and the potential financial effect of the Benzies litigation beyond the accrued amount.
- The purchase accounting, integration, and performance-based consideration for the Social Point acquisition, which the filing says could not yet be practicably quantified.