Business context and reporting period
Take-Two Interactive Software, Inc. filed this unaudited Form 10-Q for the quarter and six months ended September 30, 2012. The company develops, markets, and publishes games through Rockstar Games and 2K, primarily for console, PC, and other platforms. Its results are highly dependent on release timing and the commercial success of individual titles.
Financial performance and liquidity
| Metric | Three months ended September 30, 2012 | Six months ended September 30, 2012 |
|---|---|---|
| Net revenue | $273.1 million, up 155.1% year over year | $499.2 million, up 13.1% |
| Gross profit / margin | $114.6 million / 42.0%, versus 30.2% | $154.0 million / 30.8%, versus 35.2% |
| Operating loss | $3.9 million | $104.8 million |
| Net loss / diluted loss per share | $12.5 million / $0.15 | $123.3 million / $1.45 |
| Operating cash flow | Six-month use of $82.3 million, versus $10.2 million used in the prior-year period |
Quarterly revenue growth chiefly reflected Borderlands 2, Max Payne 3, and Spec Ops: The Line. For the six-month period, lower sales of prior-year releases, including L.A. Noire and Duke Nukem Forever, partly offset new-title revenue. Six-month gross margin declined as software development costs and royalties increased, particularly for new releases. Quarterly margin improved with product mix and lower license and internal royalty costs.
At September 30, cash and cash equivalents were $328.3 million, down from $420.3 million at March 31, 2012. Current assets were $797.9 million and current liabilities $336.9 million. Long-term debt was $325.5 million carrying value; it primarily comprises convertible notes with $388.0 million aggregate principal due in 2014 and 2016. There were no revolver borrowings; $68.1 million was available under the credit facility, subject to borrowing-base restrictions, and $1.7 million of letters of credit was outstanding. The company reported compliance with debt covenants. It attributed cash use mainly to investment in software development.
Material changes versus prior comparable periods
- Quarterly revenue rose sharply, while six-month revenue increased more moderately; the release slate materially affected both comparisons.
- Six-month net loss more than doubled year over year, and gross margin contracted 4.4 percentage points. Selling and marketing expense rose $41.4 million and general and administrative expense rose $17.6 million.
- General and administrative expense included a $15.0 million contractual provision triggered in June 2012; the provided filing text does not clearly identify its nature.
- Operating cash use increased substantially. Accounts receivable rose to $155.0 million from $45.0 million at March 31, while inventory increased to $60.6 million from $22.5 million.
- Cash declined by $92.0 million over the six months. The company reported no financing cash inflows during the period.
Outlook, commentary, risks, and unusual items
The filing provides no numerical revenue or earnings guidance. Management said cash, projected operating cash flow, and credit-facility availability should meet working-capital, capital-expenditure, and commitment needs for at least 12 months. Announced releases included BioShock Infinite, expected February 2013; XCOM for fiscal 2014; and Grand Theft Auto V, with timing and platform not announced in the filing. NBA 2K13 and XCOM: Enemy Unknown had been released by the filing date.
- Results may fluctuate with release schedules, consumer demand, pricing, platform transitions, returns, and holiday seasonality. Grand Theft Auto represented about 11.1% of six-month revenue.
- The five largest customers generated 57.3% of six-month revenue and represented 62.3% of gross receivables at September 30. Retailer concentration and customer credit quality are risks.
- Convertible notes are senior unsecured obligations; conversion, repurchase, or maturity could affect cash needs or shareholder dilution. The credit facility is secured and includes restrictive covenants.
- Foreign exchange affects results: international operations contributed 48.1% of six-month revenue. Management said hedges reduce, but do not eliminate, currency exposure.
- Tax authorities were examining certain domestic and foreign returns; management said the amount of possible adjustments over the next 12 months was not practicable to estimate.
- Routine litigation, including intellectual-property claims, was described as not material; the company noted losses could exceed accrued amounts but did not expect such excess losses to be material.
- About $142.9 million of cash was held outside the United States and intended to be indefinitely reinvested; repatriation could have tax consequences.
Important facts for investors to verify
- The drivers, payment terms, and any continuing obligations related to the $15.0 million contractual provision.
- Post-quarter performance and sell-through for Borderlands 2 and other recent releases, and the assumptions behind the future release pipeline.
- Receivables collection, customer concentration, and working-capital trends given the large increase in receivables and inventory.
- Cash-flow expectations and availability under the borrowing-base-limited credit facility, including compliance with covenants.
- Convertible-note principal, conversion conditions, maturity dates, and potential cash or dilution effects.