Take-Two Interactive Software, Inc. — Q3 FY2018 Form 10-Q
Reporting period: Three and nine months ended December 31, 2017. Dollar amounts below are in millions unless stated otherwise. The company develops and publishes games through Rockstar Games, 2K, Private Division and Social Point.
Financial results
| Metric | Three months ended Dec. 31, 2017 | Three months ended Dec. 31, 2016 | Nine months ended Dec. 31, 2017 | Nine months ended Dec. 31, 2016 |
|---|---|---|---|---|
| Revenue | $480.8 | $476.5 | $1,342.6 | $1,208.2 |
| Gross profit / margin | $212.9 / 44.3% | $165.4 / 34.7% | $633.5 / 47.2% | $500.1 / 41.4% |
| Operating income (loss) | $8.9 | $(28.4) | $47.8 | $(20.2) |
| Net income (loss) | $25.1 | $(29.8) | $82.7 | $(32.0) |
| Diluted EPS | $0.21 | $(0.33) | $0.74 | $(0.37) |
| Operating cash flow | Not presented quarterly | $204.1 | $239.6 |
For the nine-month period, revenue rose 11.1% and net income improved from a loss. Digital online revenue was 61.8% of revenue, up from 53.2%; recurrent consumer spending was 40.3% of revenue versus 26.5%. NBA 2K, Grand Theft Auto Online, Social Point and L.A. Noire contributed to growth. Lower Civilization VI and BioShock: The Collection revenue partly offset gains.
Financial position and liquidity
- At December 31, 2017, cash and cash equivalents were $774.5 and short-term investments were $547.3; restricted cash was $374.8. Cash and cash equivalents had declined from $943.4 at March 31, 2017.
- Current assets were $2,447.7 versus current liabilities of $2,072.1. Deferred revenue, current and non-current, totaled $1,163.3.
- Long-term debt was $13.8 net carrying amount; the remaining 1.00% convertible notes had $14.2 principal outstanding and mature July 1, 2018. The revolving credit facility had no borrowings and approximately $98.3 available.
- Nine-month investing cash use was $182.5 and financing cash use was $205.1, including $110.1 of share repurchases and $94.9 of tax payments related to net share settlements of awards.
Material changes, outlook and notable items
- Revenue timing estimate: The company extended Grand Theft Auto V’s estimated service period from 41 to 50 months, through December 2018. This reduced reported Q3 revenue by $78.8, operating income by $72.6 and net income by $57.2; the nine-month reductions were $183.2, $169.0 and $145.3, respectively. Management said the estimate change would materially affect fiscal 2018 results.
- Cost and expenses: Gross margin improved year over year, principally due to lower software development costs and prior-year releases. Nine-month operating expenses increased 12.6%, including higher R&D, G&A, depreciation and amortization, and $13.0 of reorganization expense. A $11.3 impairment was recorded for Social Point acquired in-process research and development.
- Tax law: The December 2017 Tax Cuts and Jobs Act led to a provisional $18.1 transition-tax expense, a $6.2 discrete tax benefit from remeasuring a deferred tax liability, and other tax adjustments. The reported income-tax benefit was $37.3 for the nine months; estimates remained under review and could change.
- Release plans: The filing listed Red Dead Redemption 2 for PS4 and Xbox One, expected October 26, 2018. It gave no numerical financial guidance. Management cited product-release timing, continued digital and recurrent-spending growth, and the importance of successful new releases; interim results may not indicate full-year results.
- Risks and contingencies: Five largest customers generated 67.1% of nine-month revenue and represented 67.2% of gross receivables at period end. Grand Theft Auto products accounted for 38.1% of nine-month revenue. The company disclosed ongoing litigation with former executive Leslie Benzies, whose complaint seeks at least $150 in damages; the company says it has accrued what it believes is adequate and intends to defend the claims. The company also highlighted foreign-exchange, platform, customer concentration and evolving tax-law risks.
- The company repurchased 1.06 million shares for $110.1 during the quarter; 7.98 million shares remained authorized for repurchase. It reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- How the extended GTA V service-period estimate affects fiscal 2018 reported revenue and earnings, and how results compare on a consistent recognition basis.
- The timing and settlement of the remaining convertible notes, including potential share dilution ahead of the July 2018 maturity.
- Whether digital and recurrent consumer spending can offset declines in older releases and sustain margins as development and operating costs rise.
- Final tax effects of the Tax Cuts and Jobs Act, including the transition-tax estimate and treatment of foreign earnings.
- Updates on the Benzies litigation, customer receivable concentration, and execution and timing of the announced product pipeline.