Take-Two Interactive Software, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2011 (fiscal first quarter); filed August 9, 2011. The company develops and publishes interactive entertainment through Rockstar Games and 2K. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $334.4 million | $375.4 million |
| Gross profit / margin | $123.2 million / 36.8% | $131.3 million / 35.0% |
| Operating income (loss) / margin | ($1.9 million) / (0.6%) | $35.4 million / 9.4% |
| Net income (loss) | ($8.7 million) | $26.3 million |
| Diluted earnings (loss) per share | ($0.11) | $0.30 |
| Cash from operating activities | ($28.4 million) | $37.1 million |
Cash and cash equivalents were $248.8 million at June 30, 2011, down from $280.4 million at March 31. Cash used in investing activities was $3.9 million; financing provided $0.2 million. Total assets were $1.00 billion and stockholders’ equity was $615.3 million. Current assets were $644.6 million versus current liabilities of $260.1 million.
Long-term debt had a $109.2 million carrying amount, representing $138.0 million principal of 4.375% convertible notes due 2014. The company had no borrowings under its revolving credit facility and reported $121.6 million available, with $1.7 million of letters of credit outstanding. It was in compliance with debt covenants.
Changes versus prior-year quarter
- Revenue declined $41.0 million, or 10.9%, primarily because the prior-year quarter benefited from Red Dead Redemption and Grand Theft Auto sales were lower by approximately $40 million. L.A. Noire and Duke Nukem Forever partly offset the decline.
- Gross margin improved 1.8 percentage points, mainly due to lower internal royalty expense; increased external-title royalties and price-concession allowances partly offset the improvement.
- Operating expenses rose $29.1 million, or 30.3%, led by $24.9 million higher selling and marketing expense for L.A. Noire and Duke Nukem Forever. Operating results consequently shifted from profit to loss.
- Operating cash flow fell from $37.1 million provided to $28.4 million used. Management attributed the use primarily to the net loss and higher receivables following product releases, partly offset by increased payables and accruals.
Outlook, commentary and risks
No numerical financial guidance is provided in the supplied filing text. Management said existing cash, projected operating cash flow and credit availability should cover working capital, capital expenditures and commitments for at least the next 12 months. The filing emphasizes that results vary with release timing, title success and seasonal holiday demand. Announced pipeline dates included NBA 2K12 in October 2011, The Darkness II in February 2012, XCOM in March 2012 and BioShock Infinite in calendar 2012; dates are expectations, not guarantees. Civilization World launched on Facebook in July 2011.
- Business and customer risks: Results depend on a limited number of major releases and a concentrated customer base. The five largest customers generated 48.3% of quarterly revenue and represented 53.6% of gross receivables at June 30. Retailer financial health, used-game sales, pricing pressure and product returns may affect results.
- Foreign exchange: 52.1% of quarterly revenue was generated outside the United States. A hypothetical 10% U.S. dollar move against all currencies would change revenue by an estimated 5.2% in the opposite direction; management expected some offset from local-currency costs. The company had forward contracts to purchase $98.9 million of U.S. dollars.
- Convertible-note conversion: Following the share-price threshold being met, holders could convert notes from July 1 through September 30, 2011. The company stated its then-current intent and ability was to settle any conversion in shares.
- Contingencies and unusual items: In April 2011, the company settled sale-price adjustments for its former Jack of all Games distribution business, reducing the sale price by $1.5 million. Pending litigation includes a shareholder suit related to historical stock-option-backdating allegations; the company said it intended to defend the case and had sought dismissal. Tax examinations and uncertain tax positions are also described. The May 2011 ZelnickMedia agreement extending services through May 2015 required stockholder approval; if not approved, the existing agreement would remain in effect through October 2012.
Key facts for investors to verify
- Whether L.A. Noire and Duke Nukem Forever sales, returns and price concessions support the expected revenue and margin outlook.
- Receivables collection and cash conversion, given the quarter’s operating cash use and customer concentration.
- Timing and potential dilution or settlement implications if holders convert the $138.0 million principal amount of notes.
- Stockholder approval and terms of the proposed ZelnickMedia agreement, and developments in the pending litigation and tax examinations.