Take-Two Interactive Software, Inc. Reports First Quarter Fiscal 2008 Financial Results

Take-Two Interactive Software, Inc. (NASDAQ:TTWO) today announced financial results for its first quarter ended January 31, 2008. Net revenue for the first quarter was $240.4 million, compared to $277.3 million for the same quarter of fiscal 2007, which benefited from more new game releases in last year’s holiday season. First quarter sales were led by BioShock, Carnival Games™, NBA 2K8, Grand Theft Auto catalog titles, and the release of Grand Theft Auto: Vice City Stories in Japan. Distribution revenue rose year over year, fueled by the strength of next generation software and hardware sales, including robust demand for Wii™ products. Net loss for the first quarter was $38.0 million or $0.52 per share, compared to a net loss of $21.5 million or $0.30 per share in the first quarter of fiscal 2007. The first quarter results include $6.1 million in stock-based compensation expense ($0.08 per share); and $1.7 million in expenses related to unusual legal matters and business reorganization costs ($0.02 per share). Results for the first quarter of 2007 included $4.0 million in stock-based compensation expense ($0.06 per share); and $7.2 million in expenses related to unusual legal matters ($0.10 per share). Non-GAAP net loss was $30.3 million or $0.41 per share in the first quarter, compared to a net loss of $10.3 million or $0.14 per share in the first quarter of 2007. (Please refer to Non-GAAP Financial Measures and reconciliation tables included later in this release for additional information and details on non-GAAP items.) Business Highlights Among the significant recent business developments, Take-Two noted the following: Rockstar Games announced a worldwide release date of April 29, 2008 for the highly anticipated Grand Theft Auto IV. 2K Games said today that BioShock 2, the sequel to the wholly owned and internally developed title, is being developed by 2K Marin and is planned for release in the fourth quarter of fiscal 2009. The critically acclaimed BioShock title has sold over 2 million units worldwide since its launch in August. Carnival Games, a wholly owned and internally developed title for the Wii™, shipped over 1 million units since its debut in late August. 2K Play will be bringing this popular title to the Nintendo DS™ this summer. 2K Play announced today that Carnival Games: Mini-GolfTM, a brand extension of the Carnival Games franchise, is coming exclusively to the Wii this fall. 2K announced the acquisition of Illusion Softworks, the creator and owner of several hit video game franchises, including Mafia, Hidden & Dangerous and Vietcong. Renamed 2K Czech, the Czech Republic based studio is currently developing Mafia II for next generation consoles and Games for Windows®. Strauss Zelnick, Chairman of Take-Two, stated, "We are pleased with Take-Two’s stronger than expected top and bottom line results for the first quarter. Our performance benefited from a diverse range of hit titles in the first quarter, and we are eagerly awaiting the release of Grand Theft Auto IV in the second quarter. We believe that our extraordinary creative assets and improving operational efficiency will be sources of significant value for shareholders as the interactive entertainment industry moves further into the current growth cycle.” Ben Feder, Chief Executive Officer of Take-Two, added, "We’re excited about our robust product lineup, most of which is based on internally-owned and developed IP. With one of the strongest release schedules in the industry, Take-Two is clearly well positioned for the future. In addition to Grand Theft Auto IV, for the balance of fiscal 2008 our releases will include Midnight Club: Los Angeles, Sid Meier’s Civilization Revolution, Top Spin 3, Don King Presents: Prizefighter, Carnival Games for DS, Carnival Games: Mini-Golf for Wii, NBA® 2K9, NHL® 2K9, episodic content for Grand Theft Auto IV on Xbox 360, as well as other titles. We also have significant visibility into fiscal 2009, which includes additional episodic content for Grand Theft Auto IV, Mafia II, Borderlands™, BioShock 2, our complete sports lineup, additional Nick Jr. titles under our agreement with Nickelodeon, and several new brands.” Financial Guidance The Company is providing guidance for the second quarter ending April 30, 2008 and is raising its guidance for the fiscal year ending October 31, 2008 as detailed below. Fiscal 2008 guidance reflects the release of Borderlands for Xbox 360, PLAYSTATION 3 and Games for Windows® in fiscal 2009 instead of fiscal 2008 in order to allow additional development time for this highly anticipated game and provide a better balance in the release of Take-Two’s triple-A titles.   Revenue*   Non-GAAP EPS (a)(b) Second quarter ending 4/30/2008 $450 to $500 $1.00 to $1.10 Fiscal year ending 10/31/2008 $1,250 to $1,400 $1.35 to $1.55   * In millions (a) The Company’s non-GAAP EPS estimates for the second quarter ending April 30, 2008 and fiscal year ending October 31, 2008 exclude approximately $0.16 and $0.49 per share, respectively, of stock-based compensation expense; and approximately $0.04 and $0.08 per share, respectively, of business reorganization charges and expenses related to unusual legal matters. The Company’s stock-based compensation expense for the second quarter and fiscal 2008 reflects the cost of approximately two million stock options issued to ZelnickMedia that are subject to variable accounting. Actual expense to be recorded in connection with these options is dependent upon several factors, including future changes in Take-Two’s stock price. (b) EPS estimates reflect tax expense on international operations only. Key assumptions and dependencies underlying the Company’s guidance include continued consumer acceptance of the Xbox 360® video game and entertainment system from Microsoft, PLAYSTATION®3 computer entertainment system and Wii™ home video game system from Nintendo; the ability to develop and publish products that capture market share for these next generation systems while continuing to leverage opportunities on legacy platforms; as well as the timely delivery of the titles detailed in this release. Product Pipeline The following titles shipped during the first and second quarters of 2008: Title   Platform   Bully: Scholarship Edition Xbox 360, Wii College Hoops 2K8 Xbox 360, PS3, PS2 Deal or No Deal™: Secret Vault Games PC Dora the Explorer: Dora Saves the Mermaids™ PS2, DS Go, Diego, Go!: Safari Rescue™ Wii, PS2, DS Grand Theft Auto: Vice City Stories (Japan) PS2, PSP Major League Baseball(R) 2K8 Xbox 360, PS3, Wii, PSP, PS2 Take-Two's lineup announced to date for the remainder of fiscal 2008 includes the following titles: Title   Platform   Carnival Games™ DS Carnival Games: Mini-GolfTM Wii Don King Presents: Prizefighter Xbox 360, Wii, DS Grand Theft Auto IV Xbox 360, PS3 Grand Theft Auto IV episodic content Xbox 360 Major League Baseball® 2K8 Fantasy All-Stars DS Midnight Club: Los Angeles Xbox 360, PS3 NBA® 2K9 Multiple platforms NHL® 2K9 Multiple platforms Sid Meier's Civilization® Revolution™ Xbox 360, PS3, DS Top Spin 3 Xbox 360, PS3, Wii, DS Conference Call Take-Two will host a conference call today at 4:30 p.m. Eastern Time to review these results and discuss other topics. The call can be accessed by dialing (877) 407-0984 or (201) 689-8577. A live listen-only webcast of the call will be available by visiting http://ir.take2games.com and a replay will be available following the call at the same location. Non-GAAP Financial Measures In addition to reporting financial results in accordance with U.S. generally accepted accounting principles (GAAP), the Company uses non-GAAP measures of financial performance that exclude certain non-recurring or non-cash items. Non-GAAP gross profit, operating loss, net loss and basic and diluted loss per share are measures that exclude certain non-recurring or non-cash items and should be considered in addition to results prepared in accordance with GAAP. They are not intended to be considered in isolation from, as a substitute for, or superior to, GAAP results. These non-GAAP financial measures may be different from similarly titled measures used by other companies. The non-GAAP measures exclude the following items from the Company’s statements of operations: Business reorganization, restructuring and related expenses Stock-based compensation Professional fees and expenses associated with the Company’s stock options investigation and certain other unusual regulatory and legal matters Income tax effects of the items listed above In addition, the Company may consider whether other significant non-recurring items that arise in the future should also be excluded from the non-GAAP financial measures it uses. The Company believes that these non-GAAP financial measures, when taken into consideration with the corresponding GAAP financial measures, are important in gaining an understanding of the Company’s ongoing business. These non-GAAP financial measures also provide for comparative results from period to period. Therefore, the Company believes it is appropriate to exclude certain items as follows: Business reorganization, restructuring and related expenses In March 2007, the Company’s stockholders elected a new slate of members to Take-Two’s Board of Directors, who immediately removed the Company’s former President and Chief Executive Officer. Subsequently, the Company’s former Chief Financial Officer resigned. As a result of these actions and the implementation of a business reorganization plan, the Company incurred significant costs in the year ended October 31, 2007 to reduce headcount, relocate employees and consolidate sales and operational functions. The Company recorded additional business reorganization costs in the first quarter ended January 31, 2008, and expects that additional business reorganization, restructuring and related costs will be recorded in the remainder of the 2008 fiscal year. Such costs are expected to relate to severance, asset write-offs and associated professional fees. The Company does not engage in reorganization activities on a regular basis and therefore believes it is appropriate to exclude business reorganization expenses from its non-GAAP financial measures. Stock-based compensation The Company does not consider stock-based compensation charges when evaluating business performance and management does not contemplate stock-based compensation expense in their short and long-term operating plans. Furthermore, executive and management incentive compensation plans are generally based on measures that exclude the impact of stock-based compensation. The Company places greater emphasis on shareholder dilution than accounting charges when assessing the impact of stock-based equity awards. Professional fees and expenses associated with the Company’s stock options investigation and certain other unusual regulatory and legal matters The Company has incurred significant legal and other professional fees associated with both the investigation of stock option grants and the Company’s responses to the New York County District Attorney’s subpoenas. One of management’s primary objectives is to bring conclusion to its regulatory matters. The Company continues to incur expenses for professional fees and has accrued for legal settlements that are outside its ordinary course of business. As a result, the Company has excluded such expenses from its non-GAAP financial measures. EBITDA and Adjusted EBITDA Earnings (loss) before interest, taxes, depreciation and amortization ("EBITDA”) is a financial measure not calculated and presented in accordance with accounting principles generally accepted in the United States. Management uses EBITDA adjusted for business reorganization and related expenses ("Adjusted EBITDA”), among other measures, in evaluating the performance of the Company’s business units. Adjusted EBITDA is also a significant component of the Company’s incentive compensation plans. Adjusted EBITDA should not be considered in isolation from, or as a substitute for, net income/(loss) prepared in accordance with GAAP. About Take-Two Interactive Software Headquartered in New York City, Take-Two Interactive Software, Inc., is a global developer, marketer, distributor and publisher of interactive entertainment software games for the PC, PLAYSTATION®3 and PlayStation®2 computer entertainment systems, PSP® (PlayStation®Portable) system, Xbox 360® and Xbox® video game and entertainment systems from Microsoft, Wii™, Nintendo GameCube™, Nintendo DS™ and Game Boy® Advance. The Company publishes and develops products through its wholly owned labels Rockstar Games, 2K Games, 2K Sports and 2K Play, and distributes software, hardware and accessories in North America through its Jack of All Games subsidiary. Take-Two’s common stock is publicly traded on Nasdaq under the symbol TTWO. For more corporate and product information please visit our website at www.take2games.com. All trademarks and copyrights contained herein are the property of their respective holders. Microsoft, Windows, the Windows Vista Start button, Xbox, Xbox 360, Xbox LIVE, and the Xbox logos are trademarks of the Microsoft group of companies, and 'Games for Windows' and the Windows Vista Start button logo are used under license from Microsoft. "PlayStation”, "PLAYSTATION”, and "PS” Family logo are registered trademarks of Sony Computer Entertainment Inc. Wii and Nintendo DS are trademarks of Nintendo. © 2006 Nintendo. This press release contains forward-looking statements made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The statements contained herein which are not historical facts are considered forward-looking statements under federal securities laws. Such forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to them. The Company has no obligation to update such forward-looking statements. Actual results may vary significantly from these forward-looking statements based on a variety of factors. These risks and uncertainties include the matters relating to the Special Committee's investigation of the Company's stock option grants and the restatement of our consolidated financial statements. The investigation and conclusions of the Special Committee may result in claims and proceedings relating to such matters, including previously disclosed shareholder and derivative litigation and actions by the Securities and Exchange Commission and/or other governmental agencies and negative tax or other implications for the Company resulting from any accounting adjustments or other factors. Further risks and uncertainties associated with Electronic Arts' unsolicited proposal to acquire the Company include: the risk that key employees may pursue other employment opportunities due to concerns as to their employment security with the Company; the risk that the acquisition proposal will make it more difficult for the Company to execute its strategic plan and pursue other strategic opportunities; the risk that the future trading price of our common stock is likely to be volatile and could be subject to wide price fluctuations; and the risk that stockholder litigation in connection with Electronic Arts' unsolicited proposal, or otherwise, may result in significant costs of defense, indemnification and liability. Other important factors are described in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2007, in the section entitled "Risk Factors" as updated in the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2008, in the section entitled "Risk Factors.” All forward-looking statements are qualified by these cautionary statements and are made only as of the date they are made. TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share amounts)     Three months ended January 31, 2008   2007   Net revenue $ 240,442   $ 277,340     Cost of goods sold: Product costs 148,152 164,143 Software development costs and royalties 22,713 22,879 Internal royalties 6,145 9,478 Licenses   8,998     7,725   Total cost of goods sold   186,008     204,225     Gross profit 54,434 73,115   Selling and marketing 33,729 35,024 General and administrative 31,402 38,614 Research and development 15,810 14,150 Business reorganization and related 162 - Depreciation and amortization   6,409     6,661   Total operating expenses   87,512     94,449   Loss from operations (33,078 ) (21,334 ) Interest and other, net   (152 )   862   Loss before income taxes (33,230 ) (20,472 ) Income taxes   4,767     1,076   Net loss $ (37,997 ) $ (21,548 )   Basic and diluted loss per share $ (0.52 ) $ (0.30 )   Basic and diluted weighted average shares outstanding   73,148     71,360       Three months ended January 31, OTHER INFORMATION 2008 2007   Total revenue mix Publishing 51 % 58 % Distribution 49 % 42 %   Geographic revenue mix North America 84 % 77 % International 16 % 23 %   Publishing revenue platform mix Sony PlayStation 2 25 % 36 % Microsoft Xbox 360 21 % 15 % Nintendo Wii 19 % 0 % Sony PSP 13 % 20 % PC 10 % 12 % Sony PLAYSTATION 3 8 % 6 % Nintendo Handhelds 3 % 1 % Microsoft Xbox 1 % 4 % Accessories and other 0 % 6 % TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts)         January 31, October 31, 2008 2007 ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 54,388 $ 77,757 Accounts receivable, net of allowances of $52,778 and $63,324 at January 31, 2008 and October 31, 2007, respectively 63,337 104,937 Inventory 82,487 99,331 Software development costs and licenses 157,153 141,441 Prepaid taxes and taxes receivable 23,479 40,316 Prepaid expenses and other   34,805     34,741   Total current assets   415,649     498,523     Fixed assets, net 41,515 44,986 Software development costs and licenses, net of current portion 35,199 34,465 Goodwill 233,008 204,845 Other intangibles, net 30,170 31,264 Other assets   17,544     17,060   Total assets $ 773,085   $ 831,143     LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 68,096 $ 128,782 Accrued expenses and other current liabilities 115,647 146,835 Deferred revenue   32,527     36,544   Total current liabilities   216,270     312,161   Deferred revenue 25,000 25,000 Line of credit 36,000 18,000 Income taxes payable 28,414 - Other long-term liabilities   5,285     4,828   Total liabilities   310,969     359,989   Commitments and contingencies   Stockholders' equity: Common stock, $.01 par value, 100,000 shares authorized; 76,126 and 74,273 shares issued and outstanding at January 31, 2008 and October 31, 2007, respectively 761 743   Additional paid-in capital 549,562 513,297 Accumulated deficit (116,819 ) (77,747 ) Accumulated other comprehensive income   28,612     34,861   Total stockholders' equity   462,116     471,154         Total liabilities and stockholders' equity $ 773,085   $ 831,143   TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)         Three months ended January 31, 2008 2007 Operating activities: Net loss $ (37,997 ) $ (21,548 ) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Amortization and impairment of software development costs and licenses (1) 18,581 18,835 Depreciation and amortization of long-lived assets 6,409 6,661 Amortization and impairment of intellectual property 351 925 Stock-based compensation (2) 6,073 3,992 Benefit for deferred income taxes (107 ) (80 ) Foreign currency transaction gain and other (1,387 ) (604 ) Changes in assets and liabilities, net of effect from purchases of businesses: Accounts receivable 42,420 63,891 Inventory 16,844 13,326 Software development costs and licenses (34,023 ) (38,315 ) Prepaid expenses, other current and other non-current assets 17,551 25,431 Accounts payable, accrued expenses, deferred revenue, income taxes payable and (74,080 ) (60,391 )   other liabilities     Total adjustments   (1,368 )   33,671   Net cash (used for) provided by operating activities   (39,365 )   12,123     Investing activities: Purchase of fixed assets (1,370 ) (7,742 ) Payments for purchases of businesses, net of cash acquired   (151 )   -   Net cash used for investing activities   (1,521 )   (7,742 )   Financing activities: Proceeds from exercise of options 937 - Net borrowings on line of credit 18,000 - Payment of debt issuance costs (979 ) - Repurchase of common stock   -     (12 ) Net cash provided by (used for) financing activities   17,958     (12 ) Effects of exchange rates on cash and cash equivalents   (441 )   1,302   Net (decrease) increase in cash and cash equivalents (23,369 ) 5,671 Cash and cash equivalents, beginning of year   77,757     132,480   Cash and cash equivalents, end of period $ 54,388   $ 138,151     (1) Excludes stock-based compensation (2) Includes the net effects of capitalization and amortization of stock-based compensation TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share amounts)       Non-GAAP Reconciling Items       Non-GAAP Three Business Profess- three months reorgani- ional Stock- months ended zation fees and based ended January and legal compen- January 31, 2008 related matters sation 31, 2008   Net revenue $ 240,442   $ -   $ -   $ -   $ 240,442     Cost of goods sold: Product costs 148,152 - - - 148,152 Software development costs and royalties 22,713 - - (746 ) 21,967 Internal royalties 6,145 - - - 6,145 Licenses   8,998     -     -     -     8,998   Total cost of goods sold   186,008     -     -     (746 )   185,262     Gross profit 54,434 - - 746 55,180   Selling and marketing 33,729 - - (867 ) 32,862 General and administrative 31,402 - (1,494 ) (3,372 ) 26,536 Research and development 15,810 - - (1,088 ) 14,722 Business reorganization and related 162 (162 ) - - - Depreciation and amortization   6,409     -     -     -     6,409   Total operating expenses   87,512     (162 )   (1,494 )   (5,327 )   80,529   Loss from operations (33,078 ) 162 1,494 6,073 (25,349 ) Interest and other, net   (152 )   -     -     -     (152 ) Loss before income taxes (33,230 ) 162 1,494 6,073 (25,501 ) Income taxes   4,767     -     -     -     4,767   Net loss $ (37,997 ) $ 162   $ 1,494   $ 6,073   $ (30,268 )   Basic and diluted loss per share* $ (0.52 ) $ -   $ 0.02   $ 0.08   $ (0.41 )   Basic and diluted weighted average shares outstanding   73,148     73,148       EBITDA: Loss before income taxes $ (33,230 ) $ (25,501 ) Interest and other, net 152 152 Depreciation and amortization   6,409     6,409   EBITDA $ (26,669 ) $ (18,940 ) Add: Business reorganization and related   162     -   Adjusted EBITDA $ (26,507 ) $ (18,940 )     *Basic and diluted loss per share may not add due to rounding TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share amounts)           Non-GAAP Reconciling Items Non-GAAP Three Business Profess- three months reorgani- ional Stock- months ended zation fees and based ended January and legal compen- January 31, 2007 related matters sation 31, 2007             Net revenue $ 277,340   $ - $ -   $ -   $ 277,340     Cost of goods sold: Product costs 164,143 - - - 164,143 Software development costs and royalties 22,879 - - (545 ) 22,334 Internal royalties 9,478 - - - 9,478 Licenses   7,725     -   -     -     7,725   Total cost of goods sold   204,225     -   -     (545 )   203,680     Gross profit 73,115 - - 545 73,660   Selling and marketing 35,024 - - (307 ) 34,717 General and administrative 38,614 - (7,225 ) (1,954 ) 29,435 Research and development 14,150 - - (1,186 ) 12,964 Business reorganization and related - - - - - Depreciation and amortization   6,661     -   -     -     6,661   Total operating expenses   94,449     -   (7,225 )   (3,447 )   83,777   Loss from operations (21,334 ) - 7,225 3,992 (10,117 ) Interest and other, net   862     -   -     -     862   Loss before income taxes (20,472 ) - 7,225 3,992 (9,255 ) Income taxes   1,076     -   -     -     1,076   Net loss $ (21,548 ) $ - $ 7,225   $ 3,992   $ (10,331 )   Basic and diluted loss per share* $ (0.30 ) $ - $ 0.10   $ 0.06   $ (0.14 )   Basic and diluted weighted average shares outstanding     71,360     71,360       EBITDA: Loss before income taxes $ (20,472 ) $ (9,255 ) Interest and other, net (862 ) (862 ) Depreciation and amortization   6,661     6,661   EBITDA $ (14,673 ) $ (3,456 ) Add: Business reorganization and related   -     -   Adjusted EBITDA $ (14,673 ) $ (3,456 )     *Basic and diluted loss per share may not add due to rounding