10-QPeriod: Q3 FY2019

TAKE TWO INTERACTIVE SOFTWARE INC Quarterly Report for Q3 Ended Dec 31, 2018

Filed February 6, 2019For Securities:TTWO

Summary

Take-Two Interactive Software, Inc. reported strong financial results for the nine months and three months ended December 31, 2018, driven significantly by the successful launch of "Red Dead Redemption 2" and the adoption of new revenue recognition standards (Topic 606). Net revenue for the nine months more than doubled year-over-year to $2.13 billion, with a substantial portion attributed to the new accounting standard which accelerated revenue recognition. The company demonstrated robust profitability, with net income reaching $277 million for the nine-month period, a significant increase from $82.7 million in the prior year. Key financial metrics show substantial growth, with Net Bookings surging 140% in the quarter and 54.5% for the nine-month period. The company also saw a significant improvement in its balance sheet, with cash and cash equivalents increasing to $1.3 billion. The company's strategic product releases and continued investment in game development, coupled with the favorable impact of Topic 606, position it well for continued growth, though investors should remain mindful of the industry's inherent cyclicality and dependence on major title releases.

Financial Highlights

53 data points
Beta

Revenue

$1.25B

28.0% Gross Margin

Net Income

$179.95M

14.4% Net Margin

EPS (Diluted)

$1.57

Total Assets

$4.39B

Cash & Equivalents

$1.05B

Free Cash Flow

$581.73M

Financial Statements
Beta
Revenue$1.25B
Cost of Revenue$898.48M
Gross Profit$350.25M
Operating Expenses$298.48M
Operating Income$51.78M
Net Income$179.95M
EPS (Basic)$1.59
EPS (Diluted)$1.57
Shares Outstanding (Basic)113.43M
Shares Outstanding (Diluted)114.74M

Key Highlights

  • 1Net revenue for the nine months ended December 31, 2018, reached $2.13 billion, a significant increase from $1.34 billion in the prior year, largely due to the launch of "Red Dead Redemption 2" and the adoption of new revenue recognition standards (Topic 606).
  • 2Net income for the nine months surged to $277 million, up from $82.7 million in the prior year, indicating strong profitability.
  • 3Net Bookings showed substantial growth, increasing by 139.9% for the three months and 54.5% for the nine months ended December 31, 2018, driven by major title releases.
  • 4The company's cash and cash equivalents, including restricted cash, increased to $1.3 billion as of December 31, 2018, up from approximately $1.25 billion at the end of the prior fiscal year.
  • 5Operating expenses increased, but as a percentage of net revenue, they generally decreased, demonstrating operating leverage, particularly with the revenue boost from Topic 606.
  • 6The company continued its share repurchase program, buying back $262.4 million worth of stock in the nine months ended December 31, 2018.
  • 7Gross profit margin decreased to 40.6% for the nine months (from 47.2% prior year), but this was primarily due to the revenue acceleration from Topic 606, which impacted margins; the underlying operational performance remains strong.

Frequently Asked Questions

The substantial increase in revenue and net income was primarily driven by the successful launch of "Red Dead Redemption 2" in October 2018 and the adoption of new accounting standard Topic 606 (Revenue from Contracts with Customers). Topic 606 accelerated revenue recognition, significantly boosting reported revenues and profits for the period.

The adoption of Topic 606 on April 1, 2018, led to a more accelerated recognition of revenue, particularly for titles with both offline and online/service components, and for sales recognized over an estimated service period. This resulted in a significant increase in reported net revenue and net income for the current period, as well as a change in gross profit margins. The company recorded a cumulative-effect adjustment of $470.3 million to retained earnings upon adoption.

As of December 31, 2018, Take-Two Interactive had $1.3 billion in cash, cash equivalents, and restricted cash. The company stated that its current cash, short-term investments, cash flow from operations, and its Credit Agreement provide sufficient liquidity to meet its working capital, capital expenditures, and commitment needs.

The company is involved in ongoing litigation with Leslie Benzies, a former executive. While twelve of his claims have been dismissed, remaining claims include breach of contract and tortious interference. Take-Two believes it has meritorious defenses and has accrued an adequate amount for this matter, stating it does not expect an outcome to have a material adverse effect on its business, financial condition, or results of operations.