10-KPeriod: FY2017

TAKE TWO INTERACTIVE SOFTWARE INC Annual Report, Year Ended Mar 31, 2017

Filed May 24, 2017For Securities:TTWO

Summary

Take-Two Interactive Software, Inc. (TTWO) has demonstrated a strong recovery and growth trajectory in its fiscal year ending March 31, 2017, as evidenced by a significant increase in net revenue and a return to profitability. The company's net revenue grew by 25.9% to $1.78 billion, driven by robust performance from key franchises such as NBA 2K, Mafia III, and Sid Meier's Civilization VI. This top-line growth, coupled with improved gross profit margins and a decrease in certain operating expenses (excluding increases in selling and marketing), allowed TTWO to achieve a net income of $67.3 million, a substantial turnaround from the prior year's net loss. The company also saw a significant shift towards digital distribution, which now accounts for over half of its revenue, highlighting the industry's ongoing transition. The company made a strategic acquisition of Social Point, a mobile game developer, for $175 million, signaling an expansion into the mobile gaming market and a diversification of its portfolio. While the company continues to rely heavily on its flagship Grand Theft Auto franchise (contributing 38.2% of net revenue), the diversified performance across other titles suggests a strengthening of its overall product pipeline. The company's financial position remains solid, with a healthy increase in cash and cash equivalents. Investors should note the significant customer concentration, with the top five customers accounting for 65.5% of net revenue, and monitor the company's ability to continue developing successful new titles and leveraging its digital channels for sustained growth.

Financial Statements
Beta
Revenue$1.78B
Cost of Revenue$1.02B
Gross Profit$756.79M
Operating Expenses$665.48M
Operating Income$91.31M
Net Income$67.30M
EPS (Basic)$0.73
EPS (Diluted)$0.72
Shares Outstanding (Basic)91.92M
Shares Outstanding (Diluted)94.07M

Key Highlights

  • 1Net revenue increased by 25.9% year-over-year to $1.78 billion, driven by strong performance of franchises like NBA 2K, Mafia III, and Civilization VI.
  • 2The company returned to profitability, reporting a net income of $67.3 million, a significant improvement from a net loss of $8.3 million in the prior fiscal year.
  • 3Digital online channels represented 51.8% of total net revenue, indicating a continued shift towards digital distribution.
  • 4Acquisition of Social Point for $175 million expanded the company's presence in the mobile gaming market.
  • 5Grand Theft Auto franchise remains a critical revenue driver, accounting for 38.2% of net revenue, but diversification is showing positive results.
  • 6Cash and cash equivalents increased to $943.4 million from $798.7 million, reflecting strong operational cash flow.
  • 7Selling and marketing expenses increased by 43.9% primarily due to higher advertising spend for new releases.

Frequently Asked Questions

The primary drivers of Take-Two's revenue growth in fiscal year 2017 were strong sales from newly released titles such as NBA 2K17, Mafia III, and Sid Meier's Civilization VI, alongside continued strong performance from the Grand Theft Auto franchise. Specifically, NBA 2K franchise revenue increased by $265.8 million, Mafia III contributed $161.2 million, and Civilization VI added $63.8 million.

The acquisition of Social Point, a mobile game developer, for $175 million in January 2017 was a strategic move to expand Take-Two's presence in the high-growth mobile gaming market. Social Point's popular free-to-play titles like Dragon City and Monster Legends are expected to enhance the company's mobile offerings and contribute to future revenue streams.

Take-Two is actively focusing on digital distribution channels, which now account for over half of its total net revenue. The company also aims to drive incremental revenue through recurrent consumer spending, including add-on content, virtual currency, and microtransactions. For fiscal year 2017, recurrent consumer spending represented 49.8% of net revenue from digital online channels, demonstrating its importance to the company's business model.

Key risks highlighted include a heavy reliance on "hit" titles, particularly the Grand Theft Auto franchise, for a substantial portion of revenue. The company also faces risks related to product development delays, intense industry competition, dependence on a limited number of major customers (Sony and Microsoft), and the evolving landscape of digital distribution and consumer spending patterns. Additionally, risks related to intellectual property protection and cybersecurity are mentioned.