Take-Two Interactive Software, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2011; comparisons are to the same periods in 2010. Financial amounts below are in millions of U.S. dollars, except per-share data.
Business context
Take-Two develops, markets, and publishes interactive entertainment through Rockstar Games and 2K. Its business depends heavily on the timing and commercial success of individual game releases. During the six-month period, releases included L.A. Noire and Duke Nukem Forever; the company also launched its first Facebook social game, Sid Meier’s Civilization World.
Financial results
| Metric | Three months ended Sep. 30, 2011 | Three months ended Sep. 30, 2010 | Six months ended Sep. 30, 2011 | Six months ended Sep. 30, 2010 |
|---|---|---|---|---|
| Net revenue | $107.0 | $245.0 | $441.4 | $620.4 |
| Gross profit / margin | $32.3 / 30.2% | $108.3 / 44.2% | $155.5 / 35.2% | $239.7 / 38.6% |
| Operating income (loss) | $(41.5) | $13.0 | $(43.4) | $48.4 |
| Net income (loss) | $(47.4) | $3.3 | $(56.1) | $29.7 |
| Diluted EPS | $(0.57) | $0.04 | $(0.68) | $0.35 |
- Revenue fell 56.3% year over year in the quarter and 28.8% for the six-month period. Quarterly decline primarily reflected the prior-year releases of Red Dead Redemption, Mafia II, and Civilization V. For the six months, those prior-year titles and lower Grand Theft Auto sales were partly offset by L.A. Noire and Duke Nukem Forever.
- Lower revenue and less favorable product mix reduced gross margin. For the six months, higher royalties associated with externally developed releases also weighed on margin.
- Six-month operating expenses increased 4.0% to $198.9 million despite lower revenue; selling and marketing rose 7.3%, partly due to advertising for new releases. Operating expenses were 45.0% of revenue versus 30.8% a year earlier.
- Six-month interest and other expense was $8.0 million, compared with $6.4 million. The company recorded income tax expense of $4.5 million despite its pretax loss.
Cash, debt, and liquidity
- Cash and cash equivalents were $269.7 million at September 30, 2011, down from $280.4 million at March 31, 2011. The company also reported $28.5 million of restricted cash within prepaid expenses and other assets.
- Operating cash flow was negative $10.2 million for the six months, compared with positive $65.2 million a year earlier. Investing cash outflow was $6.3 million; financing cash inflow was $0.2 million. Cash used in operations reflected the net loss and inventory purchases, partly offset by receivables collections.
- Current assets were $545.9 million and current liabilities were $235.5 million. Accounts receivable declined to $19.6 million from $84.2 million at March 31, while inventory increased to $45.1 million from $24.6 million.
- Convertible Notes had $138.0 million principal outstanding, 4.375% coupon interest, and a $111.3 million net carrying amount; they mature in June 2014. No borrowings were outstanding under the credit facility at quarter-end; $62.2 million was available, with $1.7 million of letters of credit outstanding. The company reported compliance with debt covenants.
- After quarter-end, in October 2011, Take-Two entered a new secured revolving credit agreement with a $100 million commitment, potentially expandable by $40 million, expiring October 17, 2016. Management said cash, projected operating cash flow, and facility availability were expected to cover requirements for at least the next 12 months.
Outlook, risks, and notable items
- The filing provides no specific revenue or earnings guidance. It identifies announced releases including The Darkness II (February 2012), Max Payne 3 (March 2012), and BioShock Infinite (calendar 2012); release timing and performance remain important uncertainties.
- Management cited title-release timing, consumer demand, product pricing, platform transitions, foreign exchange, and seasonality as factors affecting results. Holiday-quarter shipments are typically higher.
- Customer concentration is significant: the five largest customers represented 49.5% of six-month revenue, and 61.5% of gross receivables at September 30. Sony, Microsoft, and Nintendo platforms accounted for 90.4% of six-month revenue by platform.
- The NBA owners’ lockout was identified as a risk to sales of the annually released 2K basketball game, depending on the length of the lockout and any reduction or cancellation of the 2011–12 season.
- Foreign subsidiaries held approximately $159.3 million of cash. The company intended to indefinitely reinvest undistributed foreign earnings; repatriation could have tax consequences.
- A shareholder lawsuit related to alleged stock-option backdating was dismissed with prejudice on September 30, 2011. The filing notes other proceedings and states that, apart from amounts accrued, reasonably possible excess losses were not expected to be material unless otherwise disclosed.
- The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether upcoming releases meet announced schedules and commercial expectations, given the substantial year-over-year revenue decline and dependence on hit titles.
- Whether operating cash flow recovers as inventory is sold and receivables are collected, and whether cash and credit availability remain adequate.
- The terms, borrowing availability, and covenant implications of the October 2011 credit agreement, alongside the 2014 Convertible Notes maturity and potential dilution.
- Exposure to major customers, console platforms, foreign currency movements, and the NBA lockout’s potential effect on 2K Sports sales.
- Developments in tax audits and other legal matters, and any changes in the company’s stated 12-month liquidity outlook.