UPDATE: Take-Two Interactive is using a revenue metric the SEC does not allow to calculate bonuses

11/13/17 07:30 AM EST

By Trey Williams and Francine McKenna, MarketWatch

Like other videogame companies, Take-Two tells analysts how to calculate a non-GAAP number that the SEC does not allow

Take-Two Interactive Software Inc. is using adjusted non-GAAP revenue to determine annual cash incentives for its executives, according to its most recent proxy statement, but the Securities and Exchange Commission has said that metric is not allowed in any filings with the regulator.

In May of last year, the SEC issued guidelines (https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm) for companies that included strict prohibitions against presenting adjusted earnings driven by non-GAAP revenue metrics that include deferred revenue that the company might not actually see until a later quarter. The SEC does not allow metrics that are calculated on an "individually tailored" accounting standard that does not comply with Generally Accepted Accounting Principles, or GAAP.

Question 100.04 of the guidelines addresses the issue. MarketWatch has been reporting on how the SEC guidelines have impacted companies earnings reports and the lengths some companies are going to get around them.

Check out:Companies are using 'ghost revenue' to calculate executive bonuses (http://www.marketwatch.com/story/companies-are-using-ghost-revenue-to-calculate-executive-bonuses-2017-11-06)

Don't miss:Valeant is providing the media with an earnings metric that the SEC told it to stop using (http://www.marketwatch.com/story/valeant-is-providing-the-media-with-an-earnings-metric-that-the-sec-told-it-to-stop-using-2017-11-09)

In Take-Two's (TTWO) July proxy statement (https://www.sec.gov/Archives/edgar/data/946581/000119312517238644/d330685ddef14a.htm) filed with the SEC, the company described how it calculates bonuses.

The company said its compensation committee "establishes the annual cash incentive fee based on performance against a budgeted adjusted EBITDA (a non-GAAP measure calculated by taking GAAP net income recorded for the company, adding back or subtracting the net effect from deferral in net revenues and related costs of goods sold, impact of business reorganization, one-time gains or losses on long-term investments, and adding back stock based compensation, interest, depreciation, amortization and tax expenses) goal set at the beginning of each fiscal year."

Take-Two declined to comment further.

And that's not all.

Because of the SEC guidelines, Take-Two no longer reports non-GAAP numbers labeled as such in its quarterly earnings reports. When Take-Two reported third-quarter earnings (http://www.marketwatch.com/story/take-two-jumps-to-record-price-levels-despite-earnings-swinging-to-a-loss-2017-11-07) earlier this week, non-GAAP metrics were nowhere to be found in the company's 8K nor in the 10Q.

The videogame maker reported GAAP revenue of $443.6 million and a loss of 3 cents per share. However, analysts reported much higher adjusted Take-Two revenue of $577.0 million and adjusted earnings of $1.09 per share.

Read:T-Mobile is not listening to SEC guidance on non-GAAP metrics (http://www.marketwatch.com/story/t-mobile-is-not-listening-to-sec-guidance-on-non-gaap-metrics-2017-10-24)

Also read:Uber believes it has SEC nod for earnings approach that mirrors business model (http://www.marketwatch.com/story/uber-an-early-adopter-of-new-revenue-recognition-rules-believes-it-has-secs-blessing-of-its-business-model-2017-10-25)

That's because deferred revenue turned a per-share loss into a substantial profit. Take-Two gave analysts the necessary number, $133.4 million or $99.5 million on a net basis, to add back in to its GAAP revenue number to get to this deferred revenue metric.Take-Two shares gained more than 10% following the earnings report after hours on Tuesday.

Don't miss: Equifax wipes away breach charges to claim an earnings beat (http://www.marketwatch.com/story/equifax-wipes-away-breach-charges-to-claim-an-earnings-beat-2017-11-09)

One analyst MarketWatch spoke to said he prefers to do the calculations Take-Two provides to get to the non-GAAP numbers, because the revenue deferrals that the SEC requires for GAAP are "extremely convoluted" and impossible to model for.

"Non-GAAP essentially takes a cash accounting approach of recognizing revenue when it is earned. That is a situation which can be modeled appropriately." the analyst wrote in an email.

Read:Which non-GAAP metrics will catch the SEC's eye? (http://www.marketwatch.com/story/which-non-gaap-metrics-will-likely-catch-secs-eye-2016-04-04)

Take-Two and other videogame software developers prefer to recognize revenue as soon as they receive cash from customers rather than defer revenue to the later date that the company actually provided the good or service.

See:This company found a unique way to skirt SEC accounting rules (http://www.marketwatch.com/story/how-activision-blizzard-is-using-the-media-to-skirt-sec-rules-2017-08-08)

Take-Two is not alone.

Activision Blizzard Inc. (ATVI) asks analysts and journalists to make side calculations to get to the adjusted revenue numbers that include deferrals.

Electronic Arts Inc. (EA) stopped providing non-GAAP guidance in 2016, but presented the adjustments needed to calculate it.

Take-Two shares have gained 135% in 2017, while the S&P 500 has gained 15% and the Dow Jones Industrial Average has gained 18.%.

-Trey Williams; 415-439-6400; AskNewswires@dowjones.com

 

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11-13-17 0730ET

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