Take-Two Interactive Software, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2012; comparative periods ended December 31, 2011. Amounts below are in millions of dollars except per-share data. The company develops, markets, and publishes interactive entertainment through Rockstar Games and 2K.
Financial performance
| Metric | Three months ended Dec. 31, 2012 | Three months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Net revenue | $415.8 | $236.3 | $915.0 | $677.7 |
| Gross profit / margin | $199.5 / 48.0% | $109.9 / 46.5% | $353.5 / 38.6% | $265.4 / 39.2% |
| Operating income (loss) | $81.0 | $20.2 | $(23.8) | $(23.1) |
| Net income (loss) | $71.4 | $14.1 | $(52.0) | $(42.0) |
| Basic / diluted EPS | $0.76 / $0.66 | $0.16 / $0.16 | $(0.61) / $(0.61) | $(0.51) / $(0.51) |
Quarterly revenue rose 75.9%, driven chiefly by Borderlands 2, XCOM: Enemy Unknown, higher NBA 2K sales, and increased Grand Theft Auto sales. Quarterly operating margin was 19.5%, versus 8.6% a year earlier. For the nine-month period, revenue rose 35.0%, but operating losses persisted and net loss widened; higher development costs and royalties weighed on gross margin.
Cash flow and liquidity: Nine-month operating cash flow was $41.5, compared with cash used of $54.6 a year earlier. Investing cash use was $12.3, primarily reflecting fixed-asset purchases; financing cash flow was zero, versus $243.4 provided in the prior-year period, which included the convertible-note issuance. Cash and cash equivalents were $448.7 at December 31, up from $420.3 at March 31, 2012. Current assets were $817.9 and current liabilities $281.2.
Debt: Reported long-term debt carrying value was $330.3, comprising the 4.375% Convertible Notes due 2014 and 1.75% Convertible Notes due 2016; their combined principal was $388.0. There were no borrowings under the revolving credit facility, with $98.3 available and $1.7 of letters of credit outstanding. The company reported compliance with applicable debt covenants.
Changes versus the prior comparable period
- Quarterly revenue and net income increased substantially; nine-month revenue grew, but the nine-month net loss increased from $42.0 to $52.0.
- Quarterly gross margin improved to 48.0%; nine-month gross margin declined to 38.6% from 39.2%, principally because of higher development costs and royalties on recent releases.
- Nine-month selling and marketing expense increased $61.9, largely from advertising for current-year releases. General and administrative expense rose $20.8, including a $15.0 contractual provision triggered in June 2012.
- PC and other platforms represented 17.5% of nine-month revenue, up from 10.2%; console share fell to 80.5% from 85.9%.
Outlook, risks, and notable items
- The filing provides no quantified financial guidance. Management cites the timing and commercial success of releases as key drivers of results, and warns that quarterly results can fluctuate and are seasonal.
- At the filing date, announced upcoming titles included BioShock Infinite, expected March 26, 2013, and Grand Theft Auto V, expected September 17, 2013. Release dates and performance are subject to uncertainty.
- Customer concentration is significant: the five largest customers generated 51.0% of nine-month revenue, versus 40.3% in the prior year. The filing also highlights retailer credit risk, used-game sales, dependence on major console platforms, foreign-exchange exposure, and the high variability of title releases.
- Grand Theft Auto generated 10.9% of nine-month revenue. The company noted that its release timing can materially affect results.
- In January 2013, the board authorized repurchases of up to 7.5 million shares. The authorization does not require purchases and may be suspended or discontinued.
- Routine litigation, including intellectual-property claims, was described as not material; losses above recorded accruals were considered reasonably possible but not expected to be material. Management said tax audits could reduce gross unrecognized tax benefits by approximately $5.3 within 12 months.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether upcoming major releases meet their announced dates and commercial expectations, and how release timing affects revenue and profitability.
- Whether the strong quarterly performance translates into improved full-year results, given the nine-month operating and net losses and lower nine-month gross margin.
- Customer concentration, receivable collections, and the adequacy of allowances for returns and other customer-related exposures.
- Convertible-note maturities, potential conversion dilution, and liquidity needs; the 2014 notes mature in June 2014.
- Whether any share repurchases occur and their effect on cash, share count, and capital allocation.