10-QPeriod: Q2 FY2019

TAKE TWO INTERACTIVE SOFTWARE INC Quarterly Report for Q2 Ended Sep 30, 2018

Filed November 8, 2018For Securities:TTWO

Summary

Take-Two Interactive Software, Inc. (TTWO) reported its financial results for the fiscal second quarter ended September 30, 2018. The company demonstrated significant year-over-year growth in net revenue and a notable shift from a net loss to net income, reflecting improved operational performance. Revenue benefited from strong performance in recurrent consumer spending and digital online sales channels, indicating a successful transition towards these digital delivery models. The company's strategic focus on key franchises like Grand Theft Auto and NBA 2K continues to drive results, with continued strong performance from Grand Theft Auto Online and the NBA 2K franchise contributing to revenue growth. The adoption of the new revenue recognition standard (Topic 606) had a notable impact, accelerating revenue recognition and impacting gross profit margins, but is expected to better reflect the economic substance of the company's revenue streams over time. Management's commentary highlights continued investment in product development and marketing, supporting future growth prospects.

Financial Highlights

52 data points
Beta

Revenue

$492.67M

52.3% Gross Margin

Net Income

$25.37M

5.1% Net Margin

EPS (Diluted)

$0.22

Total Assets

$3.66B

Cash & Equivalents

$462.35M

Free Cash Flow

-$209.71M

Financial Statements
Beta
Revenue$492.67M
Cost of Revenue$234.88M
Gross Profit$257.79M
Operating Expenses$231.80M
Operating Income$25.99M
Net Income$25.37M
EPS (Basic)$0.22
EPS (Diluted)$0.22
Shares Outstanding (Basic)113.73M
Shares Outstanding (Diluted)116.09M

Key Highlights

  • 1Net revenue increased by 11.1% to $492.7 million for the three months ended September 30, 2018, compared to $443.6 million in the prior year period.
  • 2The company reported a net income of $25.4 million for the quarter, a significant improvement from a net loss of $2.7 million in the same period last year.
  • 3Gross profit margin improved substantially to 52.3% from 44.4% year-over-year, driven by revenue recognition changes and lower royalties.
  • 4Recurrent consumer spending revenue, comprising virtual currency, add-on content, and in-game purchases, increased by 12.2% to $240.6 million, representing 48.8% of net revenue.
  • 5Digital online revenue channels continued to grow, accounting for 72.7% of net revenue, up from 68.3% in the prior year period.
  • 6The company repurchased approximately $153.5 million of its common stock during the six months ended September 30, 2018, demonstrating a commitment to returning capital to shareholders.
  • 7The adoption of ASC 606, Revenue from Contracts with Customers, had a significant impact, accelerating revenue recognition and impacting reported figures.

Frequently Asked Questions

The increase in net revenue and the transition from a net loss to net income were driven by several factors, including strong performance from key franchises like Grand Theft Auto and NBA 2K, growth in recurrent consumer spending and digital online sales channels, and the adoption of the new revenue recognition standard (ASC 606) which accelerated revenue recognition. The improvement in gross profit margin also contributed significantly to the return to profitability.

The adoption of ASC 606, Revenue from Contracts with Customers, led to accelerated revenue recognition, particularly for titles with offline gameplay and associated services, and altered the estimated service period for revenue recognition to 'user life.' This resulted in a reported increase in net revenue and deferred revenue reduction, but also impacted gross profit margins. The company notes that this change better reflects the economic substance of its revenue streams over time.

Take-Two Interactive is strategically focusing on growing recurrent consumer spending (RCS), which includes revenue from virtual currency, add-on content, and in-game purchases. This is closely tied to their emphasis on digital online channels for distribution. The increasing contribution of RCS to overall revenue highlights the company's successful shift towards a more consistent and ongoing revenue model beyond initial game sales.

The company's Board of Directors has authorized a significant share repurchase program. During the six months ended September 30, 2018, Take-Two repurchased approximately $153.5 million of its common stock in the open market. This indicates a commitment to returning value to shareholders and managing its capital structure effectively.