Take-Two Interactive Software, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2016, compared primarily with the year ended March 31, 2015. Although the request metadata says “2015 Q4,” this filing reports full-year fiscal 2016 results. The company develops and publishes games through Rockstar Games and 2K.
Financial performance
| Metric | FY2016 | FY2015 | Change or context |
|---|---|---|---|
| Net revenue | $1,413.7 million | $1,082.9 million | Up 30.5% |
| Gross profit / margin | $599.8 million / 42.4% | $288.1 million / 26.6% | Margin increased 15.8 percentage points |
| Operating income (loss) | $(10.8) million | $(258.5) million | Improved substantially, but remained negative |
| Net income (loss) | $(8.3) million | $(279.5) million | Basic and diluted loss per share: $0.10 versus $3.48 |
| Cash from operations | $261.3 million | $212.8 million | Investing cash use was $324.5 million; financing cash use was $48.0 million |
| Cash and cash equivalents | $798.7 million | $911.1 million | Down $112.4 million |
| Short-term investments | $470.8 million | $186.9 million | Highly liquid investments available for current operations |
| Long-term debt, carrying amount | $497.9 million | $473.0 million | Convertible notes; principal totals $537.5 million |
- Revenue growth was led by the Grand Theft Auto franchise, with a $467.7 million increase in franchise revenue, principally from Grand Theft Auto V and Grand Theft Auto Online. Higher Evolve revenue also contributed; lower Borderlands and NBA 2K revenue partly offset growth.
- Gross margin improved primarily due to lower internal royalties as a share of revenue, product mix and a higher digital contribution. The company recorded $71.3 million of business reorganization expense, including employee separation costs associated with reorganizing one studio and closing two. $66.3 million remained accrued at year-end.
- Digital online channels represented 49.3% of revenue, up from 42.0%; physical retail and other represented 50.7%. Recurrent consumer spending, including add-on content, microtransactions and online play, was 51.8% of digital revenue.
- Console products generated 82.6% of revenue. International markets contributed 47.4%, up from 42.5%.
- Liquidity included $798.7 million of cash, $470.8 million of short-term investments and $261.2 million of restricted cash. The company reported $98.3 million available under its revolving credit facility, no borrowings under that facility, and compliance with its covenants. Restricted cash is primarily associated with certain royalty obligations.
Material changes, outlook and risks
- Revenue recognition estimate: Take-Two extended Grand Theft Auto V’s estimated service period from 24 to 36 months. This reduced FY2016 revenue by $40.2 million and operating income by $35.8 million; management expects a material effect on FY2017 and FY2018 results but did not quantify it.
- Debt and commitments: The $250 million 1.75% convertible notes mature December 1, 2016; the $287.5 million 1.00% notes mature July 1, 2018. Both were convertible under specified conditions after the stock-price tests were met. Contractual obligations totaled $1.07 billion, including $537.5 million of convertible-note principal; $250 million of principal was scheduled for FY2017.
- Product pipeline: The filing listed NBA 2K17, Mafia III, Sid Meier’s Civilization VI and WWE 2K17 as expected FY2017 releases. Battleborn launched in May 2016, after the fiscal year-end. No numerical full-year financial guidance is provided in the supplied filing text.
- Concentration and execution: Grand Theft Auto generated 54.5% of FY2016 revenue; the five best-selling franchises together generated 93.7%. The five largest customers accounted for 58.9% of revenue, and Sony and Microsoft each represented more than 10%. Results are exposed to hit-title timing, development costs, platform transitions, retailer concentration, digital-platform partners, foreign exchange and seasonal demand.
- Legal contingency: Former Rockstar executive Leslie Benzies filed a claim seeking at least $150 million in April 2016. The company says it intends to defend the claims and had accrued a reserve; management stated it did not expect the ultimate outcome, even if above the reserve, to materially adversely affect the company. The filing does not state the reserve amount.
- Other reporting: The company reported effective disclosure controls and internal control over financial reporting. Ernst & Young issued unqualified opinions on the financial statements and internal control.
Important facts for investors to verify
- How much of future revenue and cash generation depends on continued Grand Theft Auto Online engagement and recurrent spending.
- The expected timing and financial impact of the revised Grand Theft Auto V service period on FY2017 and FY2018.
- Whether planned releases meet their schedules and commercial targets, and how the studio reorganization affects development capacity and costs.
- Cash requirements and potential dilution or settlement choices for the convertible notes, particularly the December 2016 maturity.
- Developments in the Benzies litigation, including the recorded reserve and any changes to the company’s assessment of exposure.
- Customer and franchise concentration, deferred revenue, and the extent to which reported revenue and operating results reflect timing differences in recognition.