Photographer: Krisztian Bocsi/Bloomberg

Want Take-Two Interactive's Adjusted Earnings? You Do the Math

  • Game makers’ formulas let analysts convert GAAP results
  • Latest way firms are pushing back on SEC reporting strictures

Take-Two Interactive Software Inc. seems to have found a way to please both Washington and Wall Street.

The video-game developer’s latest annual report, released early Tuesday, presented its results in the formal style preferred by U.S. regulators, with revenue and profit calculations that follow generally accepted accounting principles.

Along with its GAAP numbers, Take-Two included a table with the numbers needed to convert the report to the format the company used until last year, when regulators pushed game makers to stop making so many adjustments to the way they book revenue and expenses. The paint-by-numbers instructions: Take the official sales figures, exclude deferred revenue and then disregard these expenses. Then you’ll see how the company measures its own performance.

For the year covered by Tuesday’s report, the adjustments increased the Grant Theft Auto developer’s revenue by 7 percent to $1.9 billion. It also more than tripled income before taxes to $306 million. Take-Two declined to comment.

Earlier: Take-Two Soars as Digital Helps Offset Delay of Red Dead 2

Take-Two’s tutorials are another creative way that companies are pushing back against the Securities and Exchange Commission’s strictures on how to report earnings. Some, like Facebook Inc. and Google parent Alphabet Inc., have largely stopped adjusting their earnings in favor of GAAP. Others, like Tesla Inc., are reporting their adjusted figures but playing them down by placing them underneath their GAAP results. Still others, like Twitter Inc. and SalesForce.com Inc., continue to report adjusted earnings that don’t count stock-based pay as an expense.

Public Sphere

Take-Two and other game-makers, by showing analysts and others how to do the math, are managing to get their adjusted numbers into the public sphere while avoiding the “non-GAAP” label that can attract regulatory scrutiny.

“The SEC has made it such a pain for game publishers to report ‘non-GAAP’ numbers that they took the word off the page and said ‘You figure it out,’” says Michael Pachter, an analyst at Wedbush Securities who covers video-game makers.

Besides Take-Two Interactive, Electronic Arts Inc., which makes Madden NFL, released its quarterly and annual GAAP results this month along with a downloadable spreadsheet that presented the official numbers next to three columns of adjustments represented by letters. On the far right, a fifth column titled “Management Reporting” instructed readers to add together the four previous columns -- A+B+C+D -- to arrive at the adjusted result.

Activision Blizzard Inc., whose titles include Call of Duty and World of Warcraft, sent around a similar tutorial along with its May 4 earnings release.

Math Equations

No one is saying there’s anything improper in helping analysts calculate adjusted figures, which match the format they’ve been using for years. Although some tutorials may go out to analysts before earnings are released, they don’t include the live earnings figures.

The SEC declined to comment on how the game makers were supplementing their earnings reports. Activision also declined to comment.

EA spokesman John Reseburg said: “Investors still want to calculate measures equivalent with our historical non-GAAP reporting, not only to be able to make historical comparisons, but also because those measures more closely track to our business performance in the quarter. While we no longer calculate these measures for investors, we have explained how we calculated them from the GAAP measures we report.”

Booking Revenue

The game makers’ tutorials are the latest turn in a years-long dance between regulators and the industry. As more video games added networking features, allowing players to challenge one another online, the Financial Accounting Standards Board, which oversees GAAP accounting rules, determined in 2009 that game makers should recognize their revenue incrementally over time.

Some analysts say that approach skews the companies’ results, in part because they pay upfront for the research and development that goes into each game. To more directly match the expense with the revenue it produces, game makers prefer to record the full value of game sales upfront, those analysts say.

So the game makers began deferring their revenue but still published an adjusted metric that counted revenue as soon as they got paid. Last May, the SEC said that such “individually tailored” methods could violate agency regulations. Since then, the game makers have left the calculation of the adjusted numbers to the analysts.

Buffett’s Critique

Senior SEC officials have expressed concern in recent years that earnings adjustments in many sectors are getting out of control and misleading investors, rather than offering additional insights about companies’ financial performances, as corporate managers often argue. The billionaire Warren Buffett, in his 2016 letter to Berkshire Hathaway shareholders, characterized earnings adjustments as “baloney.”

The SEC has stopped short of banning most modifications outright. But it has written to dozens of companies in the past year asking them to justify specific adjustments, or to stop using them altogether, according to correspondence the agency has made public.

Take-Two’s adjustments usually paint a more positive picture than GAAP by accelerating the booking of revenue in a way that’s not allowed under GAAP. The company’s announcement on Monday that it would delay the release of a Red Dead sequel, however, will actually have the opposite effect for the current fiscal year -- reducing how much revenue is pulled forward by $533 million through next March. It’s a reflection of how companies that benefit from earnings adjustments can, on occasion, suffer from them as well.

— With assistance by Matt Turner

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