Take-Two Interactive Software, Inc. — Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended March 31, 2011. Take-Two changed its year-end from October 31 to March 31; accordingly, the prior comparable full fiscal year ended March 31, 2010 is unaudited. The filing is therefore not a report solely for calendar 2010 Q4. The company publishes and develops games through Rockstar Games and 2K, including 2K Games, 2K Sports and 2K Play. Fiscal 2011 revenue was led by Red Dead Redemption, NBA 2K11 and Mafia II.
Key financial metrics
| Metric | FY ended March 31, 2011 | FY ended March 31, 2010 |
|---|---|---|
| Revenue | $1,136.9 million | $762.9 million |
| Gross profit / margin | $447.5 million / 39.4% | $268.4 million / 35.2% |
| Operating income (loss) | $77.1 million | $(76.1) million |
| Net income (loss) | $48.5 million | $(123.0) million |
| Diluted EPS | $0.56 | $(1.58) |
| Operating cash flow | $134.8 million | $(135.7) million |
Revenue rose 49.0%. Gross margin improved 4.2 percentage points, and operating expenses fell as a share of revenue from 45.2% to 32.5%. At March 31, 2011, cash and cash equivalents were $280.4 million, working capital was $335.7 million, total assets were $971.7 million and stockholders’ equity was $615.3 million. Total liabilities were $356.4 million.
Long-term debt carried at $107.2 million represented $138.0 million principal of 4.375% convertible notes due June 2014, net of unamortized discount. The $140 million secured revolving credit facility had no borrowings outstanding and $115.5 million available; $1.7 million of letters of credit were outstanding. Management said cash, projected operating cash flow and facility availability should cover requirements for at least the next 12 months.
Investing cash flow was $(7.6) million and financing cash flow was $0.7 million. Cash increased by $134.5 million, primarily from operating cash generated by the year’s successful releases.
Material changes versus the prior comparable period
- Revenue growth was driven principally by Red Dead Redemption, Mafia II and stronger NBA franchise sales. These gains were partly offset by lower sales of BioShock 2, Borderlands and the Grand Theft Auto franchise, which declined about $63.5 million year over year.
- Gross margin improved with a more favorable product and pricing mix; higher internal royalties, particularly associated with Red Dead Redemption, partly offset the benefit.
- Marketing expense increased $21.8 million, mainly due to advertising for Red Dead Redemption and Mafia II. General and administrative expense decreased $6.2 million, including savings from cost initiatives and a favorable legal settlement; research and development expense increased $11.7 million.
- Operating cash flow swung from $(135.7) million to $134.8 million. The prior-year comparison included substantial investment in software development and working-capital movements.
- The former Jack of All Games distribution business was sold in February 2010 and is reported as discontinued operations. The final purchase price was reduced by $1.5 million in April 2011 to a net $35.8 million.
Outlook, management commentary, risks and unusual items
The filing does not provide a clear numeric revenue or earnings forecast. Management described a pipeline that included The Darkness II for October 2011, XCOM for fiscal 2012, BioShock Infinite for calendar 2012 and Spec Ops: The Line for fiscal 2013; listed release timing is subject to change. The company emphasizes a selective, franchise-focused strategy and sees digital content and online services as longer-term growth opportunities.
- Results are hit-driven, seasonal and sensitive to release timing. The company cautions that Grand Theft Auto historically represented a substantial share of revenue; success of new titles and sequels is not assured.
- Five largest customers generated 43.8% of FY2011 revenue; GameStop represented 19.2% and Wal-Mart 10.8%. Retailer concentration, returns and price concessions create sales and collection risks. Price concessions were $59.9 million during FY2011.
- Other principal risks include rising development costs, product delays or underperformance, platform dependence and approval requirements, competition for retail shelf space and licenses, used-game sales, piracy and cybersecurity, foreign exchange exposure, and potential restrictions on mature-rated content. Revenue outside the United States was 44.1%.
- The NBA collective bargaining negotiations could affect sales of the annual basketball title if a lockout or strike occurred. The notes were eligible for holder conversion during the quarter beginning April 1, 2011 after the share-price conversion threshold was met; settlement could involve shares and dilute existing holders.
- The distribution business’s FY2011 discontinued-operations loss was $5.3 million, including a $5.5 million expense for an assumed lease obligation without economic benefit. The company reported $12.0 million of gross unrecognized tax benefits on the balance sheet; the timing of settlement was not estimable.
- A shareholder lawsuit relating to historical stock-option backdating remained pending; the company said it considered the claims without merit and would defend them. The filing states that certain legal matters are accrued and that excess losses were not expected to be material, subject to uncertainty.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Confirm that comparisons use the full, unaudited year ended March 31, 2010, rather than the separate five-month transition period.
- Assess the sustainability of FY2011 performance and the sales lifecycle of Red Dead Redemption, NBA 2K11 and Mafia II, alongside the release pipeline.
- Review customer concentration, receivable quality, return and price-concession reserves, and the effect of used-game sales on new-title demand.
- Check the convertible notes’ conversion status, potential share dilution, and refinancing or repayment needs as the 2014 maturity approaches.
- Monitor development commitments, title impairment judgments, tax examinations and the remaining lease and purchase-price obligations tied to discontinued operations.