10-QPeriod: Q2 FY2014

TAKE TWO INTERACTIVE SOFTWARE INC Quarterly Report for Q2 Ended Sep 30, 2013

Filed October 30, 2013For Securities:TTWO

Summary

Take-Two Interactive Software, Inc. (TTWO) reported its fiscal second quarter 2013 financial results for the period ending September 30, 2013. The company experienced a significant decline in net revenue, down 45.5% year-over-year for the quarter, primarily driven by lower sales of titles released in the previous year, such as Borderlands 2. This revenue drop led to a substantial increase in net loss to $124.1 million, or $1.40 per share, compared to a net loss of $12.5 million, or $0.15 per share, in the prior year period. Despite the revenue challenges, the company successfully launched Grand Theft Auto V in September 2013, a major revenue driver that has had revenue deferred due to accounting policies for undelivered elements. The company also saw a significant increase in cash and cash equivalents, reaching $661.9 million, largely due to proceeds from the issuance of new convertible notes and the termination of related hedge transactions, as well as positive cash flow from operations driven by collections related to recent releases. The company's strategic shift towards digital distribution channels continues, with digital online revenue comprising a larger portion of total revenue.

Financial Highlights

47 data points
Beta

Revenue

$148.82M

37.9% Gross Margin

Net Income

-$124.12M

-83.4% Net Margin

EPS (Diluted)

$-1.40

Total Assets

$2.70B

Cash & Equivalents

$661.92M

Free Cash Flow

$120.46M

Financial Statements
Beta
Revenue$148.82M
Cost of Revenue$92.46M
Gross Profit$56.36M
Operating Expenses$174.25M
Operating Income-$117.89M
Net Income-$124.12M
EPS (Basic)$-1.40
EPS (Diluted)$-1.40
Shares Outstanding (Basic)88.82M

Key Highlights

  • 1Net revenue for the quarter decreased by 45.5% to $148.8 million, compared to $273.1 million in the prior year quarter, largely due to the cyclical nature of game releases and lower sales from prior period titles.
  • 2Net loss widened significantly to $124.1 million ($1.40 per share) from a net loss of $12.5 million ($0.15 per share) in the same period last year.
  • 3The company launched Grand Theft Auto V in September 2013, a key title for future revenue, with revenue and associated costs deferred due to accounting treatment for undelivered content.
  • 4Cash and cash equivalents increased substantially to $661.9 million from $402.5 million at the prior fiscal year-end, bolstered by new convertible note issuance and operational cash flow.
  • 5Gross profit margin decreased to 37.9% from 42.0% year-over-year, impacted by a shift in product mix and higher software development costs.
  • 6Digital online revenue now represents a larger portion of total revenue, accounting for 60.1% of net revenue in the current quarter, up from 20.3% in the prior year quarter.
  • 7Operating expenses increased significantly, driven by higher selling and marketing expenses for new game launches (Grand Theft Auto V, The Bureau: XCOM Declassified) and increased general and administrative costs, including stock-based compensation.

Frequently Asked Questions

The significant decline in net revenue is primarily attributable to the timing of major game releases. The company had lower sales from titles released in the prior year, such as Borderlands 2 and Spec Ops: The Line, which were not fully offset by new releases during the current quarter. While Grand Theft Auto V was released in September 2013, its revenue recognition is deferred due to accounting policies for undelivered elements, impacting immediate reported revenue.

The company's cash and cash equivalents increased significantly to $661.9 million as of September 30, 2013, from $402.5 million at the end of the previous fiscal year. This increase was driven by substantial cash inflow from financing activities, including the issuance of $287.5 million aggregate principal amount of 1.00% Convertible Notes, and $84.4 million from the termination of convertible note hedge transactions. Additionally, positive cash flow from operations, particularly collections related to recent game releases like Grand Theft Auto V, also contributed.

The release of Grand Theft Auto V in September 2013 is a major event. However, due to accounting rules for revenue recognition when there are undelivered elements (such as access to Grand Theft Auto Online), the revenue and associated cost of goods sold from this release were deferred and not recognized in the current quarter's income statement. This means the immediate financial impact on reported revenue and profit for this quarter is limited, but it positions the company for significant future revenue recognition.

Take-Two Interactive is increasingly focused on digital distribution. This strategy is evident in the results as net revenue from digital online channels has grown substantially, now representing 60.1% of total net revenue for the quarter, a significant increase from 20.3% in the prior year quarter. This shift reflects the industry's trend towards digital downloads, add-on content, and mobile/tablet gaming, and is expected to be a key driver for future growth.