Business Context and Reporting Period
Take-Two Interactive Software, Inc. filed this unaudited Form 10-Q for its fiscal first quarter, the three months ended June 30, 2013, with comparison to the quarter ended June 30, 2012. The company develops and publishes interactive entertainment through Rockstar Games and 2K, across console, PC, mobile and online channels. Unless noted, financial amounts below are in millions of dollars.
Financial Performance and Liquidity
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net revenue | $142.7 | $226.1 |
| Gross profit / margin | $48.8 / 34.2% | $39.4 / 17.4% |
| Operating loss | $(49.6) | $(100.9) |
| Net loss | $(61.9) | $(110.8) |
| Basic and diluted loss per share | $(0.71) | $(1.30) |
| Cash provided by (used in) operating activities | $7.2 | $(52.5) |
| Cash used in investing activities | $(8.0) | $(3.3) |
| Cash provided by financing activities | $244.2 | — |
- At June 30, 2013, cash and cash equivalents were $646.3, versus $402.5 at March 31, 2013. Current assets were $1,020.2 and current liabilities $416.3.
- Cash increased $243.8 during the quarter, primarily reflecting $246.3 of proceeds from the June issuance of convertible notes and $154.4 of receivable collections, partly offset by payments on payables and accruals and software development investment. Operating cash flow benefited substantially from receivable collections; software development investment was $42.1.
- Debt carrying value totaled approximately $536.7 at June 30, including $127.8 current and $408.9 long-term. The company had no borrowings under its revolving credit facility and reported $71.9 of available borrowing capacity, subject to borrowing-base restrictions; $1.7 of letters of credit was outstanding.
- Digital online revenue was $72.9, or 51.1% of revenue, compared with $32.7, or 14.4%, a year earlier. Console revenue was $103.6; PC and other revenue was $35.5; handheld revenue was $3.6.
Material Changes Versus the Prior Comparable Period
- Revenue fell $83.5, or 36.9%, chiefly because the prior-year quarter included releases of Max Payne 3 and Spec Ops: The Line. The decline was partly offset by sales of Borderlands 2 and BioShock Infinite, and growth in the Grand Theft Auto franchise.
- Gross margin improved to 34.2% from 17.4%, reflecting lower development costs and royalties than in the prior-year launch quarter and a larger digital sales mix. Current-quarter cost of goods sold included $29.6 of software-development impairment charges related to a 2K title in development.
- Operating expenses decreased $41.9 to $98.4. Selling and marketing fell $37.4, largely because of prior-year launch advertising; general and administrative expense declined $10.3, partly because the prior period included a $15.0 contractual provision. Research and development rose $5.6, mainly due to lower capitalization of development payroll after BioShock Infinite was released.
- Net loss narrowed by $48.9. Interest and other expense increased to $11.2 from $8.0, including effects of the convertible-note hedge and warrant arrangements and the new notes.
- U.S. revenue represented 59.7% of the total, up from 46.8%; non-U.S. revenue was 40.3%, down from 53.2%. The filing attributes this mix shift partly to the U.S. performance of recent major releases.
Outlook, Commentary, Risks and Unusual Items
- No quantified earnings or revenue guidance is provided. Management said cash, projected operating cash flow and credit-facility availability were expected to meet working-capital, capital-expenditure and commitment needs for at least the next 12 months.
- At the filing date, announced planned releases included The Bureau: XCOM Declassified (August 20, 2013), Grand Theft Auto V (September 17, 2013), NBA 2K14 for existing platforms (October 1, 2013), WWE 2K14 (October 29, 2013), and NBA 2K14 for next-generation consoles during calendar 2013. Management noted that results depend heavily on release timing and commercial success; the quarter had no key title releases.
- The company issued a redemption notice for all $138.0 principal amount of its 4.375% convertible notes due 2014, with redemption scheduled for August 29, 2013. Holders could elect conversion, and the company described a cash-and-share settlement arrangement. The filing also reports hedge and warrant unwind agreements tied to the notes.
- In June, the company issued $250.0 principal amount of 1.00% convertible notes due 2018 for $246.3 of proceeds. After quarter-end, the underwriters exercised the full $37.5 overallotment option; the offering closed July 17, 2013, bringing total proceeds to $283.2.
- Customer concentration is material: the five largest customers generated 61.7% of quarterly revenue and represented 58.5% of gross receivables at June 30. Management cited risks from consumer demand, pricing, used-game sales, retailer health, foreign exchange and transitions to new hardware platforms. Grand Theft Auto generated 19.7% of quarterly revenue.
- The company disclosed routine legal and intellectual-property claims, with amounts accrued where appropriate; management did not expect unaccrued losses to be material. It also identified implementation of a new ERP system later in 2013 as a risk, including possible operating disruption or delays in financial reporting. No material changes to other previously disclosed risk factors were reported.
- Management reported effective disclosure controls as of quarter-end and no identified material change in internal control over financial reporting during the quarter. The company had not repurchased shares under its January 2013 authorization for up to 7.5 million shares.
Important Facts for Investors to Verify
- How the August 2013 redemption of the $138.0 million 4.375% notes was settled, including cash requirements, conversions and any share dilution.
- Whether announced major releases met their dates and sales expectations, especially Grand Theft Auto V, and the resulting revenue and cash-flow effects.
- Whether the digital revenue mix and improved gross margin persisted beyond a quarter with no key title releases and a $29.6 million development impairment.
- Customer concentration, receivable collections and the extent to which reported operating cash flow reflects recurring operations rather than working-capital timing.
- ERP implementation progress, the company’s liquidity and covenant position, and any impacts from the new convertible debt or foreign-exchange exposure.