TAKE-TWO INTERACTIVE SOFTWARE, INC. — Form 10-Q
Reporting period: Three months ended June 30, 2020 (the first quarter of fiscal 2021); comparisons are with the three months ended June 30, 2019 unless otherwise noted. The filing is unaudited.
Business context
Take-Two develops and publishes interactive entertainment through Rockstar Games, 2K, Private Division and Social Point. Revenue comes from full-game sales and ongoing consumer spending, including virtual currency, add-on content and in-game purchases. Management said COVID-19-related restrictions coincided with increased consumer engagement and benefited results, but the duration and longer-term effects were uncertain.
Financial performance
| Metric | Q1 FY2021 | Prior-year quarter | Change |
|---|---|---|---|
| Net revenue | $831.3 million | $540.5 million | +53.8% |
| Gross profit / margin | $354.6 million / 42.7% | $299.0 million / 55.3% | Margin down 12.6 percentage points |
| Operating income / margin | $82.1 million / 9.9% | $51.7 million / 9.6% | Income +58.8% |
| Net income | $88.5 million | $46.3 million | +91.2% |
| Diluted EPS | $0.77 | $0.41 | +$0.36 |
| Net bookings | $996.2 million | $422.2 million | +135.9% |
| Operating cash flow | $445.4 million | $108.5 million | +$336.9 million |
Revenue growth reflected higher sales and engagement in Grand Theft Auto Online and Grand Theft Auto V, the NBA 2K franchise, Borderlands 3, Civilization VI and Red Dead Online. Digital online revenue was $726.2 million, or 87.4% of revenue, versus 79.2% a year earlier. Recurrent consumer spending contributed 57.7% of revenue. Grand Theft Auto products accounted for 31.6% of revenue.
Gross margin declined primarily because royalties were higher as a share of revenue, largely due to timing; lower software-cost amortization partly offset the effect. Cost of goods sold included a $19.7 million impairment charge for capitalized development costs on a title whose costs were expected to exceed its net realizable value. Operating expenses rose 10.2% to $272.5 million: general and administrative expense increased, including COVID-19 relief contributions, personnel and bad debt expense, while selling and marketing expense fell.
Cash, liquidity and debt
At June 30, 2020, cash and cash equivalents were $1.404 billion, short-term investments were $880.8 million, and restricted cash was $757.1 million. Cash, cash equivalents and restricted cash totaled $2.161 billion, up from $1.993 billion at March 31, 2020. Investing activities used $247.5 million, principally reflecting changes in bank time deposits and net purchases of available-for-sale securities; financing activities used $32.0 million, mainly for tax payments on net share settlements of restricted awards.
The company had no borrowings under its $200 million revolving credit facility and reported $198.3 million available, with $1.7 million of letters of credit outstanding. Current liabilities were $2.149 billion and current assets were $3.687 billion. The filing reports no material change in commitments from March 31, 2020.
Material changes, outlook and risks
- Deferred revenue, current and non-current, rose to $961.0 million from $806.1 million at March 31. Contract revenue allocated to unsatisfied performance obligations was $1.071 billion; approximately $980.7 million was expected to be recognized over the next 12 months. These amounts include deferred balances and amounts to be invoiced.
- The effective tax rate was 2.1%, versus 25.5% a year earlier. Current-quarter taxes benefited primarily from $7.9 million of excess stock-compensation tax benefits and $4.9 million of tax credits. The prior-year period included a $19.8 million discrete tax expense related to the Altera case. Management cautioned that the tax rate may vary by quarter.
- Management did not provide a quantified financial forecast in the supplied filing text. It listed expected releases including PGA Tour 2K21 and NBA 2K21 in 2020, NBA 2K21 for next-generation consoles in holiday 2020, and Grand Theft Auto V for next-generation consoles in fiscal 2022; release plans remain subject to execution and other risks.
- COVID-19 could affect consumer demand, discretionary spending, delivery schedules, employees, partners and counterparties. Management reported minimal disruption from its work-from-home transition to date, but said the pandemic’s ultimate effect could not be predicted.
- Revenue and receivables were concentrated: the five largest customers generated 81.6% of quarterly revenue and represented 76.0% of gross receivables at June 30. Two customers represented 47.2% and 19.8% of gross receivables. Management cited trade-credit insurance on most customers but noted collection and customer-concentration risks.
- Other key risks include dependence on hit titles and release timing, transition to new console platforms, foreign-exchange exposure, and the effect of used-game sales. A hypothetical 10% U.S. dollar appreciation against all currencies would reduce revenue by an estimated 4.3%, with some offset expected from local-currency costs.
- The company reported routine legal claims that it did not believe would be material, while acknowledging possible losses above accrued amounts. It reported no material changes to the risk factors in its fiscal 2020 Form 10-K.
Important facts for investors to verify
- Whether the unusually strong bookings and revenue growth persist after pandemic-related engagement effects and the timing of major franchise sales are considered.
- Whether gross margin recovers as royalty timing changes, and whether the $19.7 million title-development impairment signals further cost or title risks.
- Customer concentration, receivable collectability and the extent to which deferred revenue and unsatisfied performance obligations convert to recognized revenue.
- Upcoming release timing and performance, particularly during the transition to new console platforms.
- The sustainability of the unusually low 2.1% effective tax rate and the sensitivity of future results to stock-based compensation tax benefits and tax audits.