Take-Two Interactive Form 10-Q: Q2 FY2017

Key insights

7 takeaways

01
Take-Two's 1.00% Convertible Notes became eligible for holder conversion as of October 1, 2016, after the company's common stock price exceeded 130% of the conversion price for at least 20 of the 30 trading days ending September 30, 2016.
02
Selling and marketing expenses rose by $25.3 million for the three months ended September 30, 2016, and by $50.9 million for the six months ended September 30, 2016, driven primarily by advertising spend for titles including Mafia III, BioShock: The Collection, XCOM 2, and NBA 2K17.
03
The company is preparing for upcoming accounting changes, specifically FASB ASU 2016-09 regarding stock compensation (effective April 1, 2017) and ASU 2016-02 regarding lease accounting (effective April 1, 2019).
04
As of September 30, 2016, Take-Two reported 898,526 unvested restricted stock units held by ZelnickMedia, down from 1,145,081 at the start of the fiscal year, with 591,912 units vesting during the six-month period.
05
Take-Two continues to prioritize growth in Asia through partnerships, specifically citing the commercial launch of the free-to-play NBA 2K Online with Tencent in China and Civilization Online with XLGAMES in South Korea.
06
Foreign currency exchange rate fluctuations negatively impacted financial performance for the three months ended September 30, 2016, decreasing net revenue by $2.6 million and gross profit by $0.8 million compared to the prior year.
07
The company's credit agreement requires the maintenance of an interest coverage ratio of more than one to one if average liquidity levels fall below $30 million.

Summary

Take-Two Interactive’s financial performance for the second quarter of fiscal year 2017 reflects a strategic pivot toward digital distribution and recurrent consumer spending. During the six-month period ending September 30, 2016, digital channels accounted for 55.1% of net revenue, underscoring the company’s transition away from traditional retail models. Financial growth was primarily driven by the success of the NBA 2K franchise and new releases such as BioShock: The Collection and XCOM 2, which helped offset revenue declines in older titles like Evolve. Despite the heavy reliance on the Grand Theft Auto franchise, which contributed 38.9% of total revenue, the company successfully reduced its net loss to $2.1 million, down from $12.3 million in the prior year.

The company maintains a robust liquidity position, supported by $404.6 million in short-term investments and an undrawn $100 million credit facility. This financial stability is managed alongside a conservative approach to risk, utilizing non-speculative forward contracts to mitigate foreign currency exposure across its international operations, which represent approximately 39% of total revenue. Management continues to prioritize high-quality, internally owned franchises across console and PC platforms while actively pursuing growth in Asian markets through expanded online gaming initiatives.

Operational oversight remains focused on long-term stability, including the management of convertible notes that became eligible for conversion in October 2016 and the ongoing defense of a $150 million lawsuit filed by former executive Leslie Benzies. While the company has accrued funds for this litigation, it maintains that it possesses meritorious defenses and does not anticipate a material adverse impact on its financial condition. By balancing aggressive marketing investments with a disciplined approach to debt and operational expenses, the company remains positioned to meet its long-term requirements while navigating the evolving landscape of digital interactive entertainment.