Take-Two Interactive Software, Inc. — Form 10-K
Reporting period: Fiscal year ended March 31, 2018. The filing is an annual report, not a standalone quarterly filing; it also reports fourth-quarter results. Amounts are in U.S. dollars.
Business context
Take-Two develops and publishes interactive entertainment through Rockstar Games, 2K, Private Division and Social Point. Its business relies on a portfolio of game franchises, including Grand Theft Auto, NBA 2K and WWE 2K, with revenue from game sales, digital distribution and ongoing player spending.
Financial results and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net revenue | $1,792.9 million | $1,779.7 million |
| Gross profit / gross margin | $894.6 million / 49.9% | $756.8 million / 42.5% |
| Operating income / margin | $135.6 million / 7.6% | $91.3 million / 5.1% |
| Net income | $173.5 million | $67.3 million |
| Diluted EPS | $1.54 | $0.72 |
| Cash from operations | $393.9 million | $331.4 million |
- Revenue increased 0.7%; gross profit rose 18.2%. Gross-margin improvement reflected lower software development and product costs, partly offset by higher internal royalties.
- Digital online revenue was $1,130.9 million, or 63.1% of revenue, versus 51.8% a year earlier. Recurrent consumer spending reached 41.6% of revenue, up from 25.8%.
- Cash and cash equivalents were $809.0 million and short-term investments were $615.4 million at year-end. Restricted cash was an additional $437.4 million and was primarily tied to internal royalty payments.
- Operating cash flow was $393.9 million; investing cash outflow was $271.8 million and financing cash outflow was $281.5 million. Cash declined $134.4 million during the year, including substantial share repurchases and employee tax-withholding payments.
- Long-term debt was $8.1 million at year-end, representing remaining 1.00% convertible notes; there were no borrowings under the credit facility and $98.3 million was available to borrow. The facility expires August 2019.
- Current assets were $2,409.2 million and current liabilities $1,726.9 million. Total contractual obligations and commitments were $540.5 million.
Material changes versus the prior year
- Revenue was nearly flat as NBA 2K franchise revenue increased $159.4 million and Grand Theft Auto franchise revenue increased $32.0 million, largely offset by a $134.9 million decline in Mafia III revenue.
- Digital revenue grew $209.2 million while physical retail and other revenue fell $196.1 million. U.S. revenue rose to 58.7% of total; international revenue declined to 41.3%.
- Operating expenses increased 14.1% to $759.0 million, including higher research and development and general and administrative costs, plus $14.7 million of reorganization expense. Selling and marketing expense declined.
- The income tax line shifted from $9.7 million of expense to a $36.9 million benefit. The FY 2018 benefit included $53.2 million of excess tax benefits from employee stock compensation and provisional Tax Cuts and Jobs Act effects.
- Cash declined from $943.4 million. The company repurchased $154.8 million of shares during FY 2018 and a further $153.5 million after year-end through the filing date.
Outlook, commentary and risks
- No numeric full-year financial guidance is provided in the filing. Announced upcoming releases included Red Dead Redemption 2, expected October 26, 2018, and NBA 2K19 and WWE 2K19, expected in fall 2018.
- Management expects digital delivery and recurrent consumer spending to remain important growth drivers. It also cautions that results depend on hit releases, release timing and seasonal demand.
- Grand Theft Auto products generated 39.7% of FY 2018 revenue; the five best-selling franchises collectively generated 90.6%. The five largest customers represented 70.7% of revenue, including two customers individually above 10%.
- Management changed Grand Theft Auto V’s estimated service period through December 2019. The filing says this estimate change reduced FY 2018 revenue by $271.7 million, operating income by $250.6 million, net income by $212.9 million, and basic and diluted EPS by $1.93 and $1.81, respectively.
- Revenue standard Topic 606 became effective for the company on April 1, 2018. Management expected a $360–$440 million cumulative adjustment to retained earnings and a shift in timing of revenue recognition, particularly for online-enabled games and virtual currency. This is an accounting transition estimate, not a cash-flow forecast.
- The Tax Cuts and Jobs Act effects were provisional; management had not yet determined its accounting policy for GILTI and said actual tax effects could differ materially. The company reported $128.5 million of gross unrecognized tax benefits, including interest and penalties.
- Other principal risks include platform and distribution dependence, product-development delays or cost overruns, cybersecurity and privacy exposures, foreign-exchange and international risks, and uncertain consumer demand. A former executive’s lawsuit seeks at least $150 million; six claims remained, and the company said it intended to defend the case.
Important facts for investors to verify
- How much of reported earnings and future comparisons reflects the GTA V service-period estimate change and the Topic 606 transition.
- Whether NBA 2K and Grand Theft Auto Online spending, along with Social Point, can sustain digital growth as individual title sales fluctuate.
- Whether franchise and customer concentration, deferred revenue and the large accrued software-royalty balance affect revenue quality, cash conversion or bargaining leverage.
- How the tax-law estimates, unrecognized tax positions and pending tax examinations affect the effective tax rate and cash taxes.
- Progress and potential exposure in the Benzies litigation, and the remaining convertible-note settlement and maturity obligations.