Business context and reporting period
Take-Two Interactive Software, Inc. develops, publishes and markets interactive entertainment through Rockstar Games and 2K. This unaudited Form 10-Q covers the fiscal first quarter ended June 30, 2014; comparisons are with the three months ended June 30, 2013 unless otherwise noted. Dollar amounts below are in millions.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Net revenue | $125.4 | $142.7 |
| Gross profit / margin | $71.3 / 56.8% | $48.8 / 34.2% |
| Operating loss / margin | $(33.2) / (26.5)% | $(49.6) / (34.7)% |
| Net loss | $(35.4) | $(61.9) |
| Basic and diluted loss per share | $(0.45) | $(0.71) |
| Cash from (used in) operations | $(87.5) | $7.2 |
| Cash and cash equivalents, June 30 | $822.0 | $935.4 at March 31, 2014 |
| Long-term debt carrying amount | $459.4 | $454.0 at March 31, 2014 |
Interest and other expense was $7.7 million versus $11.2 million. The quarter included a $5.5 million income tax benefit, compared with $1.1 million of tax expense in the prior-year quarter. The filing reports no outstanding borrowings under the revolving credit facility.
At June 30, cash and cash equivalents were $822.0 million, short-term investments $19.4 million, and restricted cash $61.9 million. Current assets were $1,234.4 million and current liabilities $285.3 million. The company had $57.3 million available under its credit facility, subject to borrowing-base restrictions, and $1.7 million of letters of credit outstanding. Convertible note principal totaled $537.5 million: $250.0 million of 1.75% notes due 2016 and $287.5 million of 1.00% notes due 2018; carrying amounts are lower because of unamortized discounts.
Cash used in investing activities was $27.8 million, mainly for short-term investments and fixed assets. Cash decreased by $113.4 million during the quarter. Management attributed operating cash use principally to payment of year-end accrued liabilities and investment in software development, partly offset by restricted-cash funding and higher deferred revenue, including virtual-currency sales.
Material changes versus the prior comparable period
- Revenue declined 12.1%, reflecting lower sales of older titles, partly offset by Grand Theft Auto V and Grand Theft Auto Online, NBA 2K, and Civilization V: Complete.
- Gross margin improved to 56.8% from 34.2%. Management attributed the improvement primarily to prior-year impairment charges on a 2K title in development and a greater current-quarter mix of digital sales, partly offset by higher internal royalties.
- Digital online revenue rose to 63.9% of revenue from 51.1%; physical retail and other fell to 36.1% from 48.9%. Recurrent consumer spending was 45.0% of digital online revenue, versus 42.3%.
- Operating expenses increased 6.2% to $104.5 million. General and administrative expense rose, including higher stock-based compensation, personnel and IT costs; selling and marketing expense declined, while research and development expense increased.
- Operating cash flow moved from $7.2 million provided to $87.5 million used. Restricted cash fell from $193.8 million at March 31 to $61.9 million at June 30, and accrued expenses and other current liabilities fell from $397.2 million to $175.3 million, principally reflecting lower accrued software development royalties.
- The company issued no key titles during the quarter. The prior-year comparison included $43.2 million of software development amortization and impairment, versus $7.3 million this quarter.
Outlook, commentary and risks
The filing provides no quantified revenue or earnings guidance. Management stated that cash, projected operating cash flow and credit-facility availability should be sufficient for working capital, capital expenditures and commitments for at least the next 12 months. The announced pipeline included NBA 2K15, Borderlands: The Pre-Sequel, Sid Meier’s Civilization: Beyond Earth and WWE 2K15 in October 2014; Grand Theft Auto V for PS4, Xbox One and PC in fall 2014; and Evolve in February 2015. These were expected dates as of the filing.
- Revenue depends on release timing and commercial success; Grand Theft Auto products generated approximately 34.6% of quarterly revenue.
- The five largest customers generated 66.4% of quarterly revenue and represented 81.5% of gross receivables at June 30, increasing exposure to retailer and distributor concentration.
- Other identified risks include consumer demand and pricing, used-game sales, platform transitions and development costs, foreign-exchange movements, and seasonality. A hypothetical 10% U.S. dollar strengthening would reduce revenue by 4.8%, before considering local-currency cost offsets.
- Convertible notes are unsecured obligations with conversion and potential dilution features; the revolving facility is secured and contains restrictive covenants. The company reported compliance with applicable debt covenants at quarter-end.
- Routine litigation and claims, including intellectual-property matters, were described as not expected to be material; the filing notes that losses could exceed accrued amounts. No material changes to the previously disclosed risk factors or commitments were reported.
- The board’s authorization allowed repurchase of up to 7.5 million shares; none were repurchased in the quarter, and approximately 3.283 million remained authorized.
Important facts for investors to verify
- Whether the expected release dates and subsequent commercial performance of the announced pipeline matched the assumptions investors use.
- How much recurring revenue and consumer spending Grand Theft Auto Online and other digital offerings sustain, given franchise and digital-channel concentration.
- Whether operating cash flow improves after the quarter’s substantial accrued-liability payments and software-development investment.
- Customer concentration, receivable collections and the extent to which trade credit insurance mitigates exposure.
- The notes’ maturity, conversion terms and potential dilution, alongside the credit facility’s availability and covenant conditions.