TAKE-TWO INTERACTIVE SOFTWARE, INC. — Q3 FY2015 Form 10-Q
Reporting period: Three and nine months ended December 31, 2014; filed February 6, 2015. Financial statements are unaudited. Dollar amounts below are in millions unless otherwise noted. Take-Two develops and publishes interactive entertainment through Rockstar Games and 2K.
Financial performance and position
- Quarter revenue: $531.1, down 71.5% from $1,863.9 a year earlier. Gross profit was $253.1; gross margin improved to 47.7% from 39.9%. Operating income was $65.6, versus $606.3; net income was $40.1, versus $578.4. Diluted EPS was $0.42, versus $4.69.
- Nine-month results: Revenue was $782.8, down 63.7% from $2,155.4. Gross profit was $398.7 and gross margin 50.9%, compared with $849.3 and 39.4%. Operating loss was $16.1, versus operating income of $438.8. Net loss was $36.7, versus net income of $392.4; diluted loss per share was $0.46, versus earnings per share of $3.29.
- Cash flow: Nine-month operating cash flow was $60.5, compared with $730.8 in the prior-year period. Investing used $99.3; financing provided $10.4. Cash and cash equivalents declined $37.9 from fiscal year-end.
- Liquidity: At December 31, cash and cash equivalents were $897.5, short-term investments $79.1, and restricted cash $31.3. Management said these resources, projected operating cash flow, and credit availability should cover requirements for at least 12 months. Cash held by foreign subsidiaries was approximately $249.0.
- Debt: Long-term debt carrying value was $470.4, comprising convertible notes due 2016 and 2018. No credit-facility borrowings were outstanding; $98.3 was available under the facility, with $1.7 of letters of credit outstanding. The company reported compliance with debt covenants.
- Balance sheet: Total assets were $2,253.8, up from $1,799.6 at March 31, 2014; total liabilities were $1,438.4, versus $997.8. Accounts receivable rose to $435.7 from $53.1, and current and non-current deferred revenue together rose to $535.9 from $79.3.
Material changes versus the prior comparable period
- The sharp year-over-year revenue and profit decline primarily reflects the prior-year release of Grand Theft Auto V on PS3 and Xbox 360. In the current quarter, the PS4 and Xbox One release and growth in Grand Theft Auto Online partly offset that comparison; Borderlands: The Pre-Sequel, Civilization: Beyond Earth, and WWE 2K also contributed.
- Digital online revenue was 28.2% of quarterly revenue and 39.7% of nine-month revenue, versus 6.7% and 13.3%, respectively, a year earlier. Recurrent consumer spending represented 39.5% of quarterly and 44.8% of nine-month digital online revenue.
- Higher quarterly selling and marketing costs reflected advertising for current-period releases. General and administrative expense increased, mainly from stock-based compensation tied to ZelnickMedia awards; nine-month G&A also included higher legal professional fees.
- Nine-month results included a $17.5 net gain on long-term investments, primarily the sale of the company’s Twitch preferred-stock investment, which generated an approximately $19.0 pretax gain.
Outlook, commentary, risks, and unusual items
- Revenue recognition: The company concluded that ongoing Grand Theft Auto V updates constitute a more-than-inconsequential deliverable. It will recognize related deferred revenue and costs ratably over the game’s estimated 24-month service period from release. This affects the timing of reported revenue and profit.
- Product pipeline: Announced expected releases included Evolve (February 10, 2015), Grand Theft Auto V and Grand Theft Auto Online for PC (March 24, 2015), Sid Meier’s Starships (spring 2015), and Battleborn (fiscal 2016). The filing provides no clear numeric financial guidance.
- Key risks: Results depend on release timing and title success; Grand Theft Auto generated approximately 23% of nine-month revenue. The five largest customers accounted for 60.8% of nine-month revenue. The company also cited platform-transition exposure, used-game competition, foreign-exchange movements, and receivable concentration.
- Currency and contingencies: Foreign-currency translation reduced other comprehensive income by $19.5 over nine months. Management’s sensitivity analysis estimated that a hypothetical 10% U.S. dollar appreciation would reduce revenue by 4.1%, with some offset expected from local-currency costs. Routine litigation and claims were not considered material; the company noted possible losses beyond accrued amounts but expected them not to be material unless otherwise disclosed.
- Convertible-note conversion: Because the share-price threshold was met, holders of the 1.75% notes could convert them from January 1 through March 31, 2015. The company said it currently intended and was able to settle any conversion in shares.
Investor verification priorities
- Check how Grand Theft Auto V’s deferred revenue and costs are recognized over the estimated service period, and the related deferred-revenue balance.
- Assess whether cash generation can recover from the year-over-year decline and monitor the substantial working-capital movements, especially receivables and deferred revenue.
- Review exposure to major customers and the concentration of revenue in Grand Theft Auto and console platforms.
- Monitor conversion activity and potential dilution from the 1.75% convertible notes, alongside the terms and maturity profile of both note issues.
- Evaluate whether announced product releases perform as expected and whether digital and recurrent consumer spending continue to grow.