Take-Two Interactive Software, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended March 31, 2015; the filing was signed May 21, 2015. The company develops and publishes games through Rockstar Games and 2K, including Grand Theft Auto, NBA 2K, Borderlands and Evolve. Figures below are in U.S. dollars; financial statements are audited and received an unqualified opinion.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net revenue | $1,082.9 million | $2,350.6 million |
| Gross profit / margin | $288.1 million / 26.6% | $936.2 million / 39.8% |
| Operating income (loss) / margin | ($258.5 million) / (23.9%) | $415.3 million / 17.7% |
| Net income (loss) | ($279.5 million) | $361.6 million |
| Diluted EPS | ($3.48) | $3.20 |
| Cash from operating activities | $212.8 million | $700.3 million |
| Cash and cash equivalents at year-end | $911.1 million | $935.4 million |
| Working capital at year-end | $815.0 million | $924.6 million |
| Long-term debt at year-end | $476.1 million | $454.0 million |
Cash used in investing activities was $220.1 million, including $187.6 million of short-term investment purchases and $49.5 million of fixed-asset purchases; financing activities provided $0.9 million. Cash declined $24.3 million for the year. The company also held $186.9 million in short-term investments and $169.7 million in restricted cash. It reported no revolving-credit borrowings and $98.3 million of availability under its credit facility.
Changes versus the prior year
- Revenue fell 53.9%, primarily because FY2014 included the original Grand Theft Auto V release on PS3 and Xbox 360. GTA franchise sales declined approximately $1.315 billion year over year; the franchise still represented 28% of FY2015 revenue.
- Lower GTA sales were partly offset by Borderlands: The Pre-Sequel, Evolve, Sid Meier’s Civilization: Beyond Earth and higher WWE 2K and NBA 2K sales.
- Gross margin contracted 13.2 percentage points. Management cited higher software-development costs and royalties as a share of revenue, the timing of internal royalties, and deferral of revenue and related costs for certain title sales.
- Digital online revenue rose to $455.3 million, or 42.0% of revenue, from $372.0 million, or 15.8%, in FY2014. Recurrent consumer spending accounted for 49.4% of digital online revenue, versus 40.4%.
- Deferred revenue increased to $647.4 million, from $79.3 million, including amounts associated with GTA V, Evolve and virtual currency. This is a significant source of future revenue recognition, subject to satisfying performance obligations.
- Cash from operations decreased to $212.8 million, chiefly reflecting lower earnings, partly offset by a $568.0 million increase in deferred revenue. Receivables also increased by $164.7 million.
Liquidity, debt and other items
- Outstanding convertible notes had principal of $250 million at 1.75%, due 2016, and $287.5 million at 1.00%, due 2018. Their reported carrying amounts contribute to the $476.1 million long-term-debt balance. The 1.75% notes became convertible at holders’ option from April 1 through June 30, 2015; management stated it intended and was able to settle any conversion in shares.
- The revolving credit facility allows up to $100 million, potentially expandable by $40 million, and expires in August 2019. The company reported compliance with its covenants at year-end. Credit-facility covenants restrict, among other things, debt, asset dispositions, investments and dividends.
- Management said cash, projected operating cash flow and credit-facility availability were expected to cover working capital, capital expenditures and commitments for at least 12 months. Approximately $291 million of cash was held outside the U.S.; the company intended to reinvest foreign earnings indefinitely.
- Total contractual obligations and commitments were $1.028 billion, including $537.5 million of convertible-note principal, $227.3 million of software-development and licensing commitments, and $115.1 million of operating leases. Timing of contingent acquisition payments was not fixed or determinable.
- A $17.5 million net gain on long-term investments included a $19.0 million pretax gain from the sale of Twitch preferred stock. Software-development cost and license impairment charges were $23.9 million. No goodwill impairment was recorded.
- Revenue and related cost for GTA V online updates were deferred and scheduled for ratable recognition over an estimated 24-month service period. The filing identifies this judgment, along with estimates for returns, price concessions and title-cost recoverability, as important accounting estimates.
Outlook, commentary and risks
The filing does not provide a clear numerical financial forecast or earnings guidance. The announced product pipeline included NBA 2K16, WWE 2K16 and Battleborn for fiscal 2016; it also described Civilization Online as planned for commercial launch in Korea during FY2016. Management’s strategy is to build franchises, expand digital and recurrent consumer spending, and selectively invest in new titles and platforms.
- Results are highly dependent on hit releases, release timing and franchise performance; the ten largest franchises generated approximately 97.1% of FY2015 revenue. Quarterly results are volatile and seasonal.
- Customer concentration is substantial: the five largest customers accounted for 64.6% of revenue, with GameStop at 21.0%. Five customers represented 63.9% of gross receivables. The company relies on purchase orders rather than long-term sales commitments.
- Console platforms represented 81.4% of revenue. Key risks include platform transitions, competition, development delays and overruns, product acceptance, used-game sales, returns and price concessions, and third-party platform or online-service dependence.
- International sales were 42.5% of revenue. Currency movements reduced FY2015 revenue by $14.4 million and gross profit by $8.2 million; foreign-currency translation reduced comprehensive income by $32.7 million.
- Gross unrecognized tax benefits, including interest and penalties, were $42.7 million; $29.2 million would affect the effective tax rate if realized. The company increased its deferred-tax valuation allowance by $92.7 million during FY2015.
- Routine legal claims, including intellectual-property matters, were not believed material; the company stated that losses above accrued amounts were reasonably possible but not expected to be material. Disclosure controls and internal control over financial reporting were reported effective.
Key facts for investors to verify
- Whether the FY2016 release schedule and game performance support revenue and cash flow as the exceptionally large deferred-revenue balance is recognized.
- How much of operating cash flow reflects sustainable operations versus deferred customer receipts, and how receivables, returns and price-protection allowances develop.
- Revenue and margin dependence on GTA and other leading franchises, major retail/platform customers, and console platforms.
- Convertible-note conversion, settlement and dilution implications, particularly for the 1.75% notes, alongside contractual obligations and credit-facility covenants.
- Tax-audit outcomes and the recoverability of deferred tax assets, including the valuation allowance and unrecognized tax benefits.