Business context and reporting period
Take-Two Interactive Software, Inc. filed this unaudited Form 10-Q for its fiscal first quarter ended June 30, 2015, comparing results with the three months ended June 30, 2014. The company develops, publishes and markets interactive entertainment through Rockstar Games and 2K; it reports one operating segment.
Financial results and liquidity
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $275.3 | $125.4 |
| Gross profit / margin | $72.7 / 26.4% | $71.3 / 56.8% |
| Operating expenses | $135.3 | $104.5 |
| Operating loss | $(62.6) | $(33.2) |
| Net loss | $(67.0) | $(35.4) |
| Basic and diluted loss per share | $(0.81) | $(0.45) |
| Cash from operating activities | $105.5 | $(87.5) |
Revenue rose 119.5%, while gross profit increased only 2.0%. Gross margin contracted largely because internal royalties were higher as a proportion of revenue, reflecting the timing of when royalties are earned. Operating expenses rose 29.5%; higher development costs, marketing, stock-based compensation and other costs contributed.
Cash and cash equivalents were $815.8 million at June 30, down from $911.1 million at March 31, 2015. Short-term investments were $375.0 million and restricted cash was $230.0 million. Operating cash flow was positive, primarily due to cash generated from Grand Theft Auto V for PC, partly offset by software-development investment. Investing cash use was $206.3 million, including $187.5 million of short-term investment purchases and $18.8 million of fixed-asset purchases.
Current assets were $1.908 billion versus current liabilities of $1.106 billion. Long-term debt carrying value was $481.8 million; principal on the two convertible note issues totaled $537.5 million. The company had no borrowings under its revolving credit facility and reported $98.3 million available, subject to borrowing-base restrictions. It stated that cash, investments, projected operating cash flow and credit availability should meet requirements for at least 12 months.
Material changes versus the prior comparable period
- Revenue increased by $149.9 million, primarily from approximately $127.3 million of higher Grand Theft Auto franchise sales, including recognition of deferred revenue on console versions of Grand Theft Auto V and Grand Theft Auto Online and the April 2015 PC release. Evolve and WWE 2K also contributed; lower BioShock sales partly offset growth.
- Console revenue grew to 80.8% of total revenue from 66.8%. Digital online revenue was 55.9% of total, down from 63.9%, as recognition of deferred console revenue increased the physical-retail-and-other mix. Recurrent consumer spending was 53.7% of digital online revenue, compared with 45.0%.
- Net loss increased to $67.0 million from $35.4 million despite the sharp increase in revenue; loss per share widened to $0.81 from $0.45. Weighted-average shares increased to 82.8 million, principally due to vesting of restricted stock awards.
- Operating cash flow improved by $193.0 million year over year. Cash nevertheless declined during the quarter, principally because of investment purchases and capital expenditures.
Outlook, management commentary, risks and unusual items
The filing provides no quantified financial guidance. The announced release pipeline included NBA 2K16 (September 29, 2015), WWE 2K16 (October 27, 2015), XCOM 2 (November 2015), Battleborn (February 9, 2016) and Mafia III (fiscal 2017). Management cautioned that quarterly results can fluctuate with title timing, product success, development and promotional spending, platform transitions, customer orders and seasonality; shipments typically peak in the fourth calendar quarter.
- Grand Theft Auto products generated approximately 62% of quarterly revenue, creating material dependence on that franchise and the timing of releases and deferred-revenue recognition.
- The five largest customers accounted for 60.1% of revenue and 61.0% of gross receivables. Management cited customer concentration, retailer creditworthiness, used-game sales and economic conditions as risks; trade credit insurance covers a majority of customers.
- Foreign currency movements reduced year-over-year revenue by $8.6 million and gross profit by $6.2 million. The company uses short-dated currency forwards but said hedging does not eliminate exposure. Approximately 47.9% of revenue was generated outside the United States.
- The $250 million 1.75% convertible notes due 2016 became convertible at holders’ option from July 1 through September 30, 2015 after the share-price conversion condition was met. The company said its current intent and ability was to settle any conversion in shares, presenting potential dilution. The $287.5 million 1.00% notes mature in 2018.
- Software development costs and licenses included $245.9 million for unreleased titles; the quarter included $1.7 million of software-development impairment charges. General and administrative expense included restructuring costs related to a studio closure.
- Routine legal and intellectual-property claims were reported; the company had accrued amounts for certain matters and said any reasonably possible excess losses were not expected to be material. It reported no material changes to previously disclosed risk factors and compliance with debt covenants.
- The board expanded the repurchase authorization, but no shares were repurchased during the quarter; 10.0 million shares remained authorized for repurchase at June 30.
Important facts for investors to verify
- How much of future revenue and cash generation depends on Grand Theft Auto and on recognition of previously deferred revenue.
- Whether gross margin recovers after the quarter’s royalty-timing effect and how development spending and impairment risk evolve.
- Customer concentration, receivable collection and the adequacy and scope of trade credit insurance.
- The possible conversion and share dilution from the 2016 notes, alongside scheduled debt maturities and covenant requirements.
- Whether the announced title schedule is achieved and whether management issues subsequent quantified financial guidance.
- Liquidity available for operations after considering restricted cash, working-capital needs, title-development commitments and foreign cash repatriation considerations.