10-QPeriod: Q1 FY2014

TAKE TWO INTERACTIVE SOFTWARE INC Quarterly Report for Q1 Ended Jun 30, 2013

Filed July 31, 2013For Securities:TTWO

Summary

Take-Two Interactive Software, Inc. (TTWO) reported its first-quarter fiscal year 2014 results, ending June 30, 2013. The company experienced a significant year-over-year decrease in net revenue, falling to $142.7 million from $226.1 million in the same period last year. This decline was primarily attributed to lower sales of titles released in the prior year, such as 'Max Payne 3' and 'Spec Ops: The Line.' Despite the revenue drop, gross profit margin improved substantially to 34.2% from 17.4%, driven by a shift towards higher-margin digital sales and a more favorable product mix, even with impairment charges on a 2K title. The company managed operating expenses effectively, with a notable reduction in selling and marketing costs. A major development during the quarter was the company's strategic financial maneuvering, including the redemption of its 4.375% Convertible Notes due 2014 and the issuance of $250 million in 1.00% Convertible Notes due 2018, with an overallotment option exercised subsequently. This led to a substantial increase in cash and cash equivalents, which grew to $646.3 million from $402.5 million at the prior quarter's end. Despite the net loss reported for the quarter, the improved gross margins and strong cash position indicate a focus on financial restructuring and positioning for future product releases.

Financial Highlights

48 data points
Beta

Revenue

$142.67M

34.2% Gross Margin

Net Income

-$61.91M

-43.4% Net Margin

EPS (Diluted)

$-0.71

Total Assets

$1.45B

Cash & Equivalents

$646.32M

Free Cash Flow

-$793K

Financial Statements
Beta
Revenue$142.67M
Cost of Revenue$93.84M
Gross Profit$48.83M
Operating Expenses$98.39M
Operating Income-$49.56M
Net Income-$61.91M
EPS (Basic)$-0.71
EPS (Diluted)$-0.71
Shares Outstanding (Basic)86.99M

Key Highlights

  • 1Net revenue decreased significantly by 36.9% to $142.7 million compared to $226.1 million in the prior year's quarter, primarily due to lower sales of previously released major titles.
  • 2Gross profit margin improved dramatically to 34.2% from 17.4% year-over-year, driven by a shift towards digital distribution channels (51.1% of revenue) and a more favorable product mix.
  • 3Operating expenses were reduced by 29.9% to $98.4 million, with selling and marketing expenses down 47.3% and general and administrative expenses down 23.9%, partially offset by an increase in R&D.
  • 4The company reported a net loss of $61.9 million, or $0.71 per share, compared to a net loss of $110.8 million, or $1.30 per share, in the same period last year.
  • 5Cash and cash equivalents increased substantially to $646.3 million from $402.5 million, largely due to the net proceeds from the issuance of new convertible notes.
  • 6The company redeemed its 4.375% Convertible Notes due 2014 and issued $250 million in new 1.00% Convertible Notes due 2018 during the quarter.
  • 7Geographic revenue shifted, with the US representing 59.7% of net revenue in the current quarter compared to 46.8% in the prior year, indicating a stronger domestic performance relative to international markets.

Frequently Asked Questions

The primary driver for the 36.9% decrease in net revenue to $142.7 million was the lower sales of titles released in the prior year, specifically 'Max Payne 3' and 'Spec Ops: The Line,' which had significant revenue contributions in the prior year's comparable quarter.

The gross profit margin significantly improved from 17.4% to 34.2% due to a strategic shift towards digital online distribution channels, which now represent 51.1% of net revenue. Digital sales typically have lower cost of goods sold compared to physical retail, leading to higher margins. Additionally, the product mix in the current quarter, along with the impact of software development impairment charges in the prior year, contributed to this margin expansion.

During the quarter, Take-Two redeemed its 4.375% Convertible Notes due 2014 and issued $250 million in new 1.00% Convertible Notes due 2018. These actions, along with the subsequent exercise of an overallotment option on the new notes, significantly increased the company's cash position to $646.3 million. This restructuring of debt aims to lower interest expenses and improve liquidity, providing financial flexibility for future development and operations.

Operating expenses were reduced overall due to decreased selling and marketing efforts related to past releases and lower general and administrative costs. However, research and development expenses increased by 36.3% year-over-year. This increase is attributed to a recalibration of payroll capitalization rates at development studios as efforts shifted towards new projects following the March 2013 release of 'BioShock Infinite,' indicating continued investment in future product pipeline.