Take-Two Interactive Software, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2013. Fiscal 2014 third quarter; filed February 3, 2014. Amounts below are in U.S. dollars and rounded to millions unless stated otherwise.
Business context
Take-Two develops, publishes, and markets interactive entertainment through Rockstar Games and 2K. Its products are sold for console, PC, handheld, mobile, and online platforms. The company reports one publishing segment. Grand Theft Auto V, released in September 2013, and Grand Theft Auto Online, launched in October, drove the period’s exceptional results.
Financial results
| Metric | Three months ended Dec. 31 | Nine months ended Dec. 31 |
|---|---|---|
| Revenue, 2013 | $1,863.9 million | $2,155.4 million |
| Revenue, 2012 | $415.8 million | $915.0 million |
| Gross profit, 2013 | $744.1 million | $849.3 million |
| Gross margin, 2013 / 2012 | 39.9% / 48.0% | 39.4% / 38.6% |
| Operating income (loss), 2013 | $606.3 million | $438.8 million |
| Net income (loss), 2013 | $578.4 million | $392.4 million |
| Net income (loss), 2012 | $71.4 million | $(52.0) million |
| Basic / diluted EPS, 2013 | $5.88 / $4.69 | $4.02 / $3.29 |
| Operating cash flow, 2013 | — | $730.8 million |
Quarterly revenue rose 348.3% year over year; nine-month revenue rose 135.6%. Management attributed the increases chiefly to Grand Theft Auto V, with higher sales also from WWE 2K14 and NBA 2K. Prior-year releases Borderlands 2 and other titles partly offset growth. The quarter’s gross margin declined as internal royalties—largely tied to Grand Theft Auto—rose substantially; nine-month gross margin improved modestly, helped by product mix and lower development costs and royalties as a share of revenue.
Quarterly diluted EPS was below basic EPS, reflecting the filing’s diluted-share calculation, including convertible-note effects and participating securities. Nine-month results included a $9.0 million loss on extinguishment of debt and a $3.5 million net gain on convertible-note hedges and warrants.
Balance sheet, cash flow, and capital
- At December 31, 2013, cash and cash equivalents were $972.2 million, versus $402.5 million at March 31, 2013. The balance sheet also included $179.4 million of restricted cash within prepaid expenses and other.
- Current assets were $1,545.7 million and current liabilities $693.5 million, for working capital of approximately $852.2 million.
- Long-term debt carrying value was $448.7 million; the company had no revolving-credit borrowings and $98.3 million of availability under its credit facility. Convertible notes had $537.5 million aggregate principal outstanding, due in 2016 and 2018. The company reported compliance with debt covenants.
- Nine-month operating cash flow was $730.8 million, compared with $41.5 million in the prior-year period. Investing cash outflow was $24.5 million; financing cash outflow was $133.7 million. Operating cash flow benefited from Grand Theft Auto V sales and collection of receivables; working-capital movements also affected cash generation.
- Cash increased by $569.7 million over the nine months. Financing included $283.2 million of proceeds from the 1.00% convertible notes and $276.8 million spent on share repurchases, alongside payments related to the retired 4.375% notes and associated hedge and warrant unwinds.
Material changes and operating mix
- Grand Theft Auto franchise sales accounted for approximately 72.2% of nine-month revenue, creating significant reliance on the timing and performance of a major franchise.
- Console products generated 92.6% of nine-month revenue, up from 80.5% a year earlier. Physical retail and other channels represented 86.7%, while digital online represented 13.3% (versus 19.6% in the prior-year period). Digital revenue nevertheless increased to $287.6 million from $179.0 million.
- International sales rose to 54.4% of nine-month revenue from 42.0%. The five largest customers accounted for 42.6% of nine-month revenue and 52.1% of gross receivables at period-end.
- Accrued expenses and other current liabilities increased to $598.4 million from $228.9 million, principally reflecting software development royalties, which rose to $349.9 million from $67.0 million.
Outlook, risks, and unusual items
The filing provides no quantified financial forecast. The announced title pipeline included Evolve, expected Fall 2014, and NBA 2K15 and WWE 2K15, expected in fiscal 2015. Management said cash, projected operating cash flow, and credit-facility availability should cover working capital, capital expenditures, and commitments for at least the next 12 months.
- Key risks include dependence on hit releases and Grand Theft Auto, customer concentration, changing consumer demand, used-game sales, console transitions, foreign exchange exposure, and the uncertainty of development costs and title acceptance. The company noted that PS4 and Xbox One launched during the period.
- The company expects to implement a new ERP system in the next fiscal year and warned that implementation or data-transition problems could disrupt operations or delay financial reporting.
- Routine legal and intellectual-property claims were described as not material; the company accrued amounts for certain matters but acknowledged possible losses above accruals.
- In November 2013, the company repurchased approximately 12.0 million shares from the Icahn Group for $203.5 million, separately from its authorized buyback program. It also repurchased approximately 4.2 million shares in the open market for $73.3 million.
- Foreign-currency forward contracts produced a $17.5 million loss for the nine months. Management stated hedging reduces, but does not eliminate, currency exposure.
Investor verification priorities
- Assess how much of the exceptional revenue and earnings depends on Grand Theft Auto V and whether subsequent releases can sustain results.
- Review the composition and timing of the sharp increase in accrued royalties and other current liabilities, and the drivers of reported operating cash flow.
- Confirm the distinction between $972.2 million of cash and cash equivalents and the additional $179.4 million of restricted cash included elsewhere on the balance sheet.
- Evaluate convertible-note principal, conversion and settlement terms, and potential dilution, alongside the reported debt carrying value.
- Monitor customer concentration, foreign-exchange exposure, the ERP implementation, and the margin effects of product mix and internal royalties.