Take-Two Interactive Software, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, the three months ended June 30, 2012. Comparative income and cash-flow figures are for the three months ended June 30, 2011. Balance-sheet comparisons are to March 31, 2012. Amounts below are in millions unless stated otherwise.
Business context
Take-Two develops, markets, and publishes interactive entertainment through Rockstar Games and 2K. Its revenue depends substantially on the timing and commercial success of game releases. During the quarter, it released Max Payne 3 and Spec Ops: The Line.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net revenue | $226.1 | $334.4 |
| Gross profit / margin | $39.4 / 17.4% | $123.2 / 36.8% |
| Operating loss | $(100.9) | $(1.9) |
| Net loss | $(110.8) | $(8.7) |
| Loss per diluted share | $(1.30) | $(0.11) |
| Cash used in operating activities | $(52.5) | $(28.4) |
Revenue fell 32.4% year over year. Management attributed the decline principally to $240.8 million of lower sales of L.A. Noire and Duke Nukem Forever versus the prior-year quarter, partly offset by $136.8 million in revenue from Max Payne 3 and Spec Ops: The Line, and higher Grand Theft Auto sales.
Gross margin contracted as software development costs and royalties associated with the new releases rose, and product mix included a greater share of lower-priced products. Cash-flow reconciliation included $95.5 million of software-development-cost and license amortization and impairment. Selling and marketing expense was $79.0 million, up 5.8%; general and administrative expense was $43.2 million, up 41.3%; research and development expense was $15.3 million, down 7.3%.
At June 30, cash and cash equivalents were $367.1 million, down from $420.3 million at March 31. Operating cash use was primarily attributed to investment in software development. Investing activities used $3.3 million, principally for fixed assets; financing activities provided no cash. Total assets were $1,073.1 million and stockholders’ equity was $477.0 million.
Long-term debt had a carrying value of $320.9 million, representing $388.0 million principal across the 4.375% Convertible Notes due 2014 ($138 million) and 1.75% Convertible Notes due 2016 ($250 million). There were no revolver borrowings; $98.3 million was available under the credit facility, subject to borrowing-base restrictions, and $1.7 million of letters of credit was outstanding. The company reported compliance with debt covenants. Current assets were $719.1 million versus current liabilities of $257.0 million.
Material changes and unusual items
- Net loss widened to $110.8 million from $8.7 million. Interest and other expense increased to $8.0 million from $3.7 million, primarily due to interest expense on the 1.75% Convertible Notes issued in November 2011.
- General and administrative expense included a $15.0 million contractual provision triggered in June 2012. The filing text does not provide a clear explanation of the underlying contract or event.
- Foreign currency translation resulted in an $11.3 million loss in other comprehensive income. Foreign exchange movements reduced year-over-year revenue and gross profit by $5.9 million and $2.4 million, respectively.
- Accumulated deficit increased to $322.2 million from $211.3 million at March 31. The filing also reports that 900,000 market-based restricted shares granted under an earlier management arrangement were forfeited in June 2012 because performance targets were not met.
Outlook, commentary, and risks
Management stated that cash, projected operating cash flow, and credit-facility availability should be sufficient to meet working-capital, capital-expenditure, and commitment needs for at least the next 12 months. Announced future releases included Borderlands 2 and NBA 2K13 in 2012, XCOM: Enemy Unknown in 2012, BioShock Infinite in February 2013, and Grand Theft Auto V with timing and platforms to be announced. These are planned release dates, not financial guidance; the filing provides no numerical revenue or earnings forecast.
Key risks include dependence on hit-driven release timing, retailer and customer concentration, consumer demand and pricing pressure, used-game sales, platform transitions, foreign currency exposure, and development cost and title-performance uncertainty. The five largest customers generated 48.7% of revenue; they represented 52.6% of gross receivables at June 30. The company generated 53.2% of revenue outside the United States. Management reported no material change to the risk factors in its fiscal 2012 Form 10-K. Routine legal claims were described as not expected to be material, although losses above accrued amounts were considered reasonably possible. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- What contractual event drove the $15.0 million provision, and could it result in additional costs?
- Whether the upcoming release schedule and sales performance can restore margins after the sharp decline in gross margin and the quarter’s operating cash use.
- The extent and recoverability of capitalized development costs: $250.3 million related to titles not yet released at June 30.
- Customer concentration, receivables collection, and the effect of foreign-exchange movements on results and cash.
- Convertible-note maturity, conversion, and potential dilution or cash-settlement exposure, alongside continuing covenant compliance and available revolver capacity.