Take-Two Interactive Software, Inc. — Form 10-K
Reporting period: Fiscal year ended March 31, 2017. Although the request metadata says “2016 Q4,” this filing is an annual report for fiscal 2017; it also reports quarterly results, including the quarter ended March 31, 2017.
Business context
Take-Two develops, publishes and markets interactive entertainment through Rockstar Games and 2K, with products spanning console, PC and mobile platforms. Its model centers on a portfolio of franchises, including Grand Theft Auto, NBA 2K and WWE 2K, supplemented by digital sales, online services and recurrent consumer spending. On January 31, 2017, the company acquired mobile-game developer Social Point.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net revenue | $1.780 billion | $1.414 billion |
| Gross profit / gross margin | $756.8 million / 42.5% | $599.8 million / 42.4% |
| Operating income (loss) / margin | $91.3 million / 5.1% | ($10.8 million) / (0.8%) |
| Net income (loss) | $67.3 million | ($8.3 million) |
| Diluted EPS | $0.72 | ($0.10) |
| Net cash from operating activities | $331.4 million | $261.3 million |
| Cash and cash equivalents at year-end | $943.4 million | $798.7 million |
Fiscal 2017 revenue rose 25.9%. Growth was led by NBA 2K, Mafia III and Civilization VI, partly offset by lower Grand Theft Auto and Evolve revenue. Operating results improved with higher gross profit and no repeat of fiscal 2016’s $71.3 million reorganization charge; higher selling and marketing costs partly offset the improvement. Selling and marketing expense increased 43.9% to $285.5 million, including higher launch-related advertising.
Digital online channels generated $921.7 million, or 51.8% of revenue, versus 49.3% a year earlier. Console products represented 81.0% of revenue. Recurrent consumer spending increased $97.2 million and was 49.8% of digital-channel revenue. Grand Theft Auto products contributed 38.2% of total revenue; the five leading franchises together represented 89.8%.
Cash flow from investing activities was a use of $129.0 million, including the Social Point acquisition; financing activities used $49.8 million. The balance sheet reported $448.9 million of short-term investments and $337.8 million of restricted cash. Restricted cash is primarily dedicated to certain internal royalty obligations. Long-term debt was $251.9 million, consisting principally of the 1.00% convertible notes; the company had no borrowings under its revolving credit facility and reported $98.3 million available to borrow. Current liabilities were $1.686 billion and current assets were $2.195 billion, including substantial deferred revenue.
Material changes and unusual items
- Revenue increased by $366.1 million year over year. NBA 2K revenue increased $265.8 million, Mafia III contributed a $161.2 million increase, and Civilization VI contributed a $63.8 million increase; lower Grand Theft Auto and Evolve revenue partially offset these gains.
- The company extended Grand Theft Auto V’s estimated service period from 36 to 41 months. This accounting estimate reduced fiscal 2017 net revenue by $29.4 million and operating income by $27.1 million; the company expected the revenue to be recognized in fiscal 2018.
- Social Point was acquired for $175 million in cash, 1,480,168 Take-Two shares, and potential earn-out consideration of up to $25.9 million. The acquired business contributed $2.9 million revenue and an $8.8 million net loss from February 1 through March 31, 2017. Purchase accounting was preliminary.
- The $250 million 1.75% convertible notes matured in December 2016 and were settled in shares. The remaining 1.00% convertible notes had $268.1 million principal outstanding at year-end and could be converted at holders’ option through June 30, 2017 under the stated price conditions; management said it intended to settle conversions in shares.
- Price protection, sales returns and other allowances totaled $127.7 million, compared with $64.5 million in fiscal 2016.
Outlook, risks and contingencies
The filing does not provide a quantified full-year financial guidance range. Management identified Red Dead Redemption 2 as expected in spring 2018, NBA 2K18 in September 2017 and WWE 2K18 in fall 2017. Release timing and commercial performance remain uncertain, and results are seasonal and can vary substantially with title launches.
Key risks include dependence on hit franchises (especially Grand Theft Auto), customer concentration, reliance on Sony and Microsoft platforms and approvals, development delays and cost overruns, competition, digital-platform and online-service risks, cybersecurity and privacy exposures, foreign exchange movements, and potential changes in consumer demand. The five largest customers represented 65.5% of fiscal 2017 revenue; two customers represented 40.2% and 17.4% of gross receivables at year-end.
A former subsidiary executive’s lawsuit seeks at least $150 million in damages. The company disputes the claims and says it intends to defend the matter; the outcome is uncertain. The company also reported $120.2 million of gross unrecognized tax benefits, including interest and penalties, and said the IRS was examining its fiscal 2015 return. It reported no goodwill impairment for fiscal 2017. Management expects the new revenue-recognition standard, planned for adoption April 1, 2018, to materially affect reported financial statements, particularly revenue timing for online-enabled games.
The company reported effective disclosure controls and effective internal control over financial reporting as of March 31, 2017. Management and the auditor excluded Social Point from the internal-control assessment; Social Point represented 9% of consolidated total assets at year-end.
Important facts for investors to verify
- Whether franchise concentration and reliance on the performance of Grand Theft Auto and other major releases remain consistent with future revenue and earnings expectations.
- How much of reported revenue and profit reflects ongoing consumer spending, and whether digital engagement and spending persist across game lifecycles.
- The assumptions behind the extended Grand Theft Auto V service period and the timing of the related deferred revenue recognition.
- Social Point’s post-acquisition performance, integration progress, earn-out exposure and the completion of purchase accounting.
- The conversion and settlement of the 1.00% notes, including resulting share dilution and the cash and liquidity position after conversions.
- Potential financial exposure from the $150 million lawsuit, tax examinations and unrecognized tax benefits.
- The impact of the new revenue-recognition standard and the timing and commercial performance of announced releases.