Take-Two Interactive Software, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended July 31, 2010. Dollar amounts below are in millions unless stated otherwise. Prior-year comparisons are as adjusted.
Business context and results
Take-Two develops and publishes interactive entertainment through its Rockstar Games and 2K labels. It sold its Jack of All Games distribution business in February 2010; that business is presented as discontinued operations. Third-quarter performance was driven primarily by the May release of Red Dead Redemption.
| Metric | Three months ended July 31, 2010 | Prior year | Nine months ended July 31, 2010 | Prior year |
|---|---|---|---|---|
| Revenue | $354.1 | $94.9 | $785.3 | $418.5 |
| Gross profit | $113.8 | $18.0 | $287.9 | $129.0 |
| Gross margin | 32.1% | 19.0% | 36.7% | 30.8% |
| Operating income (loss) | $20.7 | $(52.6) | $20.8 | $(123.2) |
| Continuing-operations income (loss) | $12.4 | $(58.3) | $(4.5) | $(122.6) |
| Net income (loss) | $5.9 | $(56.5) | $(11.2) | $(116.9) |
| Basic and diluted EPS | $0.07 | $(0.73) | $(0.14) | $(1.53) |
Third-quarter revenue rose 273% year over year, mainly on Red Dead Redemption. For the nine-month period, higher sales of Red Dead Redemption, BioShock 2 and Borderlands were partly offset by lower sales of the Grand Theft Auto and Carnival Games franchises. Console revenue increased substantially as a share of sales; PC and handheld shares declined. Selling and marketing expense rose with promotion of major releases, while general and administrative expense fell year over year.
Cash flow, debt and liquidity
- Cash and cash equivalents were $232.1 at July 31, 2010, compared with $102.1 at October 31, 2009.
- Nine-month operating cash flow was positive $95.8, versus negative $146.8 in the prior-year period. Investing activities provided $35.8, including proceeds related to divestitures; financing activities provided $0.1.
- Long-term debt had a carrying value of $102.2, representing $138.0 principal of 4.375% convertible notes due June 2014, net of unamortized discount. The company had no revolving-credit borrowings and reported $138.3 available under its $140.0 secured credit facility, with $1.7 of letters of credit outstanding.
- Management said cash, projected operating cash flow and credit availability were expected to meet working-capital, capital-expenditure and commitment needs for at least the next 12 months. The company reported compliance with its credit agreement and note covenants.
Outlook, risks and unusual items
- The filing provides no numerical financial guidance. The stated release pipeline included fiscal 2010 titles such as NBA 2K11 and Civilization V; the filing also identifies later releases including L.A. Noire and BioShock Infinite.
- Management emphasized dependence on the timing and commercial success of new releases, particularly major franchises, as well as seasonal sales patterns. Results can vary significantly by quarter; holiday-season shipments are generally higher.
- Customer concentration is material: the five largest customers represented 56.6% of nine-month revenue, and 66.2% of gross receivables at July 31. The company cited retailer credit, used-game sales, pricing pressure, platform transitions and foreign-exchange exposure as risks.
- The distribution-business sale was for approximately $44.0, including $37.25 cash and up to $6.75 subject to conditions. Discontinued operations included a $4.8 lease-related charge, with the lease extending to September 2014.
- A proposed securities class-action settlement had preliminary court approval; $20.1 was placed in escrow, funded by $15.3 from insurers and $4.8 previously accrued by the company. Final approval remained pending. A personal-injury appeal also remained pending; the complaint sought damages exceeding $600, but the company said it believed the claims were without merit.
- Nine-month interest and other expense included a $3.8 loss on sale of the Italian subsidiary. Foreign-currency forward-contract losses were $4.0 for the nine-month period. The filing also identifies possible limitations on tax-loss carryforwards if an ownership change occurs.
Important facts for investors to verify
- Whether the strong quarterly revenue and margin performance persisted beyond the release-driven results from Red Dead Redemption.
- Actual performance and timing of the fiscal 2010 and subsequent release pipeline; the filing gives no quantitative earnings or revenue forecast.
- Cash conversion, software-development spending and the composition of investing cash flows, including divestiture proceeds.
- Customer concentration, receivable collections and the effect of any retailer or foreign-market deterioration.
- Final court approval and settlement implementation, remaining litigation exposure, and any material tax or convertible-note developments.