Take-Two Interactive Software, Inc.

Greetings and welcome to the Take-Two Interactive Software fourth quarter fiscal year 2019 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications. Thank you, sir. You may begin.

Good afternoon. Welcome and thank you for joining Take-Two's conference call to discuss its results for the fourth quarter and fiscal year 2019, ended March 31st, 2019. Today's call will be led by Strauss-Zelnick, Take-Two's chairman and chief executive officer, Carl Slater, our president, and Leni Goldstein, our chief financial officer. We will be available to answer your questions during the Q&A session following our prepared remarks. Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors. These important factors are described in our findings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risk summarized in the section entitled Risk Factors. I'd also like to note that, unless otherwise stated, all numbers we will be discussing today are GAAP, and all comparisons are year over year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at www.take2games.com. And now I'll turn the call over to Stuart.

Thanks Hank. Good afternoon. Thank you for joining us today. Take-Two finished a stellar year with strong fourth quarter operating results highlighted by the outperformance of Grand Theft Auto and NBA 2K19. and significant ongoing sales of our blockbuster hit, Red Dead Redemption 2. For the full fiscal year, we generated record net bookings and adjusted operating cash flow, which exceeded our outlook at the start of the year, along with strong earnings growth driven by the record-breaking launch of Red Dead Redemption 2, the outstanding performance of NBA 2K, and better-than-expected results from Grand Theft Auto Online and Grand Theft Auto 5. Our industry-leading basketball series continues to expand its audience, and underscores that NBA 2K has been the perennial favorite among both basketball and pop culture fans for more than a decade. During the fourth quarter, net bookings growth from NBA 2K19 exceeded our expectations, driven primarily by strong recurrent consumer spending. To date, NBA 2K19 has sold in more than 9 million units. During the fourth quarter, recurrent consumer spending on NBA 2K grew 79%, and for the full fiscal year, it grew 45%. In both periods, recurrent consumer spending on NBA 2K reached a new record and was the single largest contributor to that part of our business. Over the past year, we've seen a substantial increase in average games played, with NBA 2K19 outperforming its predecessor by over 20%. In addition, during the fourth quarter, daily active users outpaced NBA 2K18 by 13%, due largely to a consistent and robust content schedule. We expect that lifetime net bookings from NBA 2K19 will be the highest ever for a 2K sports title, driven by record recurrent consumer spending. The NBA 2K brand continues to expand across a myriad of offerings, and we believe there remains a substantial worldwide growth opportunity for the series. Turning to Rockstar Games' phenomenal hit, Red Dead Redemption 2 continues to generate significant sales and, to date, has sold in more than 24 million units worldwide. The title remains tied with Grand Theft Auto V as the highest rated game on PlayStation 4 and Xbox One with a 97 Metacritic score. Furthermore, Red Dead Online is poised for success and net bookings grew sequentially in the fourth quarter. Rockstar Games continues to update the beta with a wide array of new content as well as gameplay balancing and bug fixes. We expect Red Dead Online to exit the beta period during the current quarter with significant new content to follow. were as excited as ever about the long-term opportunity for Red Dead Online. Nearly six years after their launch, both Grand Theft Auto Online and Grand Theft Auto 5 continue to be significant contributors to our results. During the fourth quarter, net bookings from Grand Theft Auto Online grew sequentially and exceeded our expectations. Sales of Grand Theft Auto 5 also outperformed, and the title is now sold in almost 110 million units. cementing further its standing as the must-have title of the current console generation. Throughout fiscal 2019, Rockstar Games supported Grand Theft Auto Online with an array of new content, highlighted by the After Hours and Arena War updates. It bears noting that Rockstar's flagship games continue to drive exceptional engagement and results. Grand Theft Auto V and Red Dead Redemption 2, including their online games, had almost 90 million unique player accounts in fiscal 2019 alone. Life to date, more than 200 million unique players' accounts have registered in Rockstar Games' social club platform as having played these games. Rockstar Games will continue to support both immersive online worlds with innovative content to keep players engaged and drive player growth over time. Our fiscal 2019 results were also enhanced by a variety of other offerings led by WWE 2K and WWE Supercard, Social Points Mobile Games, NBA 2K18, and Sid Meier's Civilization VI. In particular, Civilization VI significantly outperformed our expectations due to the popularity of the Nintendo Switch SKU and the title's expansion packs. Take-Two's core tenets are to be the most creative, innovative, and efficient enterprise in the entertainment industry. With respect to the first two, one of the key drivers of success is our proven ability to sustain long-term engagement with our titles well after their initial launch. As a result, we've generated strong growth in recurrent consumer spending over the past several years. In fiscal year 2019, recurrent consumer spending exceeded our expectations, growing 20% to a new record and accounting for 39% of total net bookings. In addition to virtual currency for MBA2K, Grand Theft Auto Online, and Red Dead Online, but current consumer spending was enhanced by a variety of other offerings. In the free-to-play category, Social Point remains a meaningful contributor to our results through its two biggest mobile titles, Dragon City and Monster Legends. During the fourth quarter, our Barcelona-based studio launched Tasty Town, a new game within the popular restaurant category, and just last week they launched Word Life, which Carl will discuss. Net bookings from SocialPoint grew sequentially in the fourth quarter. The studio is working hard on its exciting development pipeline, including more than 10 new games, and is focused on driving growth and expanding its audience. Recurrent consumer spending on WWE Supercard grew 13% and out of platform fees. During the past fiscal year, 2K released the fifth season of its popular card battle game and several content updates. WWE Supercard has now been downloaded more than 19 million times and remains 2K's highest-grossing mobile title. And recurrent consumer spending on NBA 2K Online in China exceeded our expectations, growing 74% driven by the launch of NBA 2K Online 2 last August. Total combined registered users for NBA 2K Online 2 and its predecessor currently stand at 45 million, and the franchise remains the number one PC online sports game in China. Asia, and China in particular, continues to be a significant long-term growth opportunity for our business. In fact, NBA 2K19 for PlayStation 4 was just approved for release in China. Lastly, add-on content was a meaningful contributor, led by offerings for Sid Meier's Civilization, XCOM 2, and WWE 2K19. During the fourth quarter, Firaxis Games released Sid Meier's Civilization VI, Gathering Storm, which is the largest and most successful add-on content in the history of the Sid Meier Civilization series. As we close one of our best years to date and look to the horizon, I'm extremely proud that Take-Two remains the home for our industry's most creative and passionate talent. Their vision and ability to captivate and engage audiences around the world across an array of platforms and offerings both redefines the possibilities of interactive entertainment, and forms the foundation for our continued success. This is an incredibly exciting time for our industry, with new technologies that enable our teams to advance interactive entertainment, emerging distribution and business models that expand our audience, and the proliferation of communities that participate in or watch connected play. Take-Two is exceedingly well-positioned creatively, strategically, and financially to capitalize on its vast opportunities and to continue to deliver growth and returns for our shareholders over the long term. I'll now turn the call over to Carl.

Thanks, Charles. I'd like to begin by thanking our teams for delivering an incredible year marked by creative excellence, significant growth in consumer engagement, and superb financial results for our organization. It takes a well-coordinated effort and an insatiable drive for success across our entire organization to achieve these results. I'm immensely proud of and grateful for thousands of colleagues around the world who each played a role in our company's outstanding performance. turning to our recent and upcoming releases. On April 3rd, to celebrate the announcement of Borderlands 3, 2K and Gearbox Software released the Borderlands Game of the Year Edition for PlayStation 4, Xbox One, and PC. Borderlands Game of the Year Edition features all new Ultra HD visuals, significant gameplay improvements, and all four originally released add-on packs. Players who previously enjoyed Borderlands can import their saved progress and pick up exactly where they left off, all in stunning HD. Players should also keep an eye out for new loot drops that include rare weapons and vault hunter heads. In addition, Gearbox and 2K released the Borderlands Ultra HD texture pack that increases the visual fidelity of Borderlands The Handsome Collection on consoles and provides a visual upgrade for Borderlands 2, Borderlands the pre-sequel, and all the add-ons for both titles on PC. On April 17th, 2K and Cat Daddy Studios launched NBA 2K Mobile for Android devices. Downloadable for free, NBA 2K Mobile was released for iOS last fall and delivers console-quality graphics and lifelike NBA 2K action on the go. NBA 2K Mobile lets gamers experience their favorite NBA moments, collect player cards to build dream teams, and step onto the court in five-on-five matchups. On May 9th, Social Point launched WordLife, our latest free-to-play mobile offering for iOS and Android devices. Word Life is an easy-to-play game that is filled with thousands of levels and many innovative game modes. World Life brings a new dimension to traditional word puzzle games, boasting a multiplayer mode through which players can battle with words in exciting match-offs. On September 13th, 2K and Gearbox Software will launch Borderlands 3 globally for PlayStation 4, Xbox One, and PC. Borderlands 3 is a hilarious, story-driven, non-stop galactic thrill ride filled with colorful characters, epic enemies, and literally billions of guns. The franchise, which combines the exhilarating action of a first-person shooter with the rich progression and loot systems of a role-playing game, has sold in more than 43 million units worldwide to date. Borderlands 2 has sold in 20 million units to date, and more than six years after release, still draws in over 1 million unique monthly users. The two-day event in Los Angeles on April 30th and May 1st 2K and Gearbox Software hosted more than 600 global media and live streamers at the Borderlands 3 worldwide gameplay reveal. The event resulted in an overwhelmingly positive reception, with media praising the game for its over-the-top action and gameplay, amazing loot, stunning art style, compelling characters, and evolved approach to progression. IGN wrote, Borderlands 3 has not lost its unique sense of style or humor over the last five years since the pre-sequel. It's funny and silly in a cartoonish sort of way, which is a breath of fresh air in a genre that typically takes itself perhaps a little too seriously. Additionally, Destructoid wrote, Gearbox amplifying what made Borderlands special a decade ago seems to have molded Borderlands 3 into a game that will be worth playing all these years later. During the live stream event of the presentation, Borderlands 3 was the number one game on Twitch. amassing nearly 12 million unique views and over 1 million hours watched in a single day. Next month at E3 in Los Angeles, Borderlands 3 will have a massive presence at our booth, including a 100-seat demo theater and 100 game play stations, showing new content and giving thousands of fans, media, and live streamers the opportunity to experience the game firsthand. Also this fall, 2K will launch new installments of our highly successful annual sports franchises with the releases of NBA 2K20 and WWE 2K20. As always, the development teams behind these games are hard at work to deliver our trademark array of exciting new features and innovations that keep players coming back year after year. 2K will have more to share about these titles in the coming months. Later this calendar year, Private Division will launch two new IPs for PlayStation 4, Xbox One, and PC. The Outer Worlds and Ancestors of the Humankind Odyssey. Developed by Obsidian Entertainment, The Outer Worlds marks the reunion of Tim Kaine and Leonard Boyarsky, the original creators of Fallout, who are introducing an entirely new single-player sci-fi RPG experience. The Outer Worlds will be showcased behind closed doors at E3 for select media and influencers, and more details about the game will be revealed over time. Last month, Private Division hosted press events for Ancestors of the Humankind Odyssey, where attendees got to play the game and meet its creators at Panache Digital Games, including the studio's co-founder, Patrice Besselet, who was the original creative director of Assassin's Creed. The press's initial reaction was extremely positive. According to IGN, Ancestors is an intriguing mixture of raw survival and community shaping that I find fascinating. And Germany's GameStar said, If Ancestors The Humankind Odyssey is able to maintain this strong atmosphere in the final game over its entire duration, A remarkable journey back to our origins awaits us. In addition, Private Division recently announced that Kerbal Space Program, Breaking Ground, the second expansion pack in the DC version of Kerbal Space Program, will launch on May 30th. We're pleased to expand our offerings for Kerbal Franchise, which has a vibrant and dedicated community. Throughout fiscal year 2020, we will continue to support our titles with innovative post-launch content that drives engagement and recurring consumer spending, including many more updates for Red Dead Online and Grand Theft Auto Online. Turning to esports, the second season of the NBA 2K League, our joint venture with the NBA, is currently underway with 21 teams participating, up from 17 in Season 1. On March 5th, the 2019 draft was held at the Barclays Center in Brooklyn, New York. 75 players were selected by the 21 teams, including the first woman ever to be drafted into the league. The 198 players in the draft pool included 22 international players from nine countries. On April 2nd, season two kicked off with a roster of new sponsors such as AT&T, Champion Athletic Wear, Rainer Gaming, and Stance, as well as returning brands including Dell and Intel. In addition, the league announced that YouTube will join Twitch as a live stream partner for all of the games this season, including more than 230 regular season, tournament, playoff, and finals games combined. Last week, the league held its second tournament of the season, The Turn, powered by AT&T, at the HyperX Esports Arena in Las Vegas at the Luxor Hotel and Casino, marking the first time games were held outside of New York. We are very excited about the continued progress and growth of the league, which has the long-term potential to enhance engagement and to be a driver of profits for our company. Take-Two will have an expanded presence at E3 next month. In addition to showing Borderlands 3, we will hold business, development, investor relations, media, and sales meetings throughout the conference. Looking ahead, we are investing heavily in opportunities to expand our creative teams and grow our scale, increase our presence in mobile, and exploring emerging distribution channels and business models such as streaming and free to play. We will continue to focus on delivering the highest quality interactive entertainment and to seek new and innovative ways to enhance players' experience, with our games, and drive long-term engagement. The execution of this strategy will provide value to our customers and generate growth and profits over the long term. I'll now turn the call over to Lainey.

Thanks, Carl, and good afternoon, everyone. Today I'll discuss our fourth quarter and fiscal 2019 results and then review our financial outlook for the first quarter and fiscal year 2020. Please note that additional details regarding our actual results and outlook are contained in our press release. Strauss mentioned we finished an outstanding year with strong fourth quarter operating results. For the full fiscal year, we generated record net bookings and adjusted operating cash flow, which exceeded our outlook at the start of the year, along with strong earnings growth. Starting with the fourth quarter, total net bookings grew 19% to $488 million, as compared to our outlook of $450 to $500 million. Current consumer spending grew 27%, and accounted for 62% of total net bookings as compared to our outlook for 10% growth. Recurrent consumer spending exceeded our outlook due primarily to the outperformance of Grand Theft Auto Online and NBA 2K. Digitally delivered net bookings grew 26% and accounted for 86% of the total as compared to our outlook of 10% growth. This result exceeded our outlook due to the outperformance of recurrent consumer spending and a higher than expected mix of digitally delivered full game sales. During the fourth quarter, 57% of sales of current generation console games were delivered digitally, up from 44% last year. Turning to some details from our fourth quarter income statement. Gap net revenue grew to $539 million and cost of goods sold increased to $259 million. Operating expenses increased by 28% to $222 million, due primarily to higher marketing spend, personal expense, and stock-based compensation. and GAAP net income was $57 million, or 50 cents per share, as compared to $91 million, or 77 cents per share, in the fourth quarter of fiscal 2018. Turn to our fiscal 2019 results. Total net bookings grew 47% to a new record of $2.93 billion. This extraordinary result was driven by the record-breaking launch of Red Dead Redemption 2, coupled with strong growth from NBA 2K. but current consumer spending grew 20% to a new record and accounted for 39% of total net bookings. Digitally delivered net bookings grew 33% to a new record of $1.8 billion and counted for 62% of the total. During fiscal 2019, 38% of sales of current generation console games were delivered digitally, up from 34% last year. Adjusted operating cash flow increased 82% to a new record of $715 million. This metric fell short of our outlook by about $25 million due to the timing of tax payments. During fiscal 2019, we spent $67 million on capital expenditures and deployed $362 million to repurchase 3.7 million shares of our stock, including $100 million to repurchase 1.1 million shares in the fourth quarter. At fiscal year end, our cash and short-term investments balance was over $1.57 billion. Turning to some details from our fiscal 2019 income statement, GAAP net revenue grew to $2.67 billion and cost of goods sold increased to $1.5 billion. Operating expenses increased by 24% to $938 million due primarily to higher marketing, personnel, and R&D costs. And GAAP net income increased to $334 million, or $2.90 per share, GAAP net income included $107 million tax benefit resulting from the release of certain valuation allowances on the company's deferred tax assets. This had no effect on our management reporting tax rate, which was 20%. Today we gave a strong initial outlook for fiscal 2020 with operating results currently expected to be lower than fiscal 2019 due to the record-breaking launch of Red Dead Redemption 2 and growing as compared to fiscal 2018. Fourthly, fiscal 2020 will be a year of significant investment in R&D that should enable us to scale further our long-term release late. Starting with the fiscal first quarter, we project net bookings to range $310 to $360 million, up from $288 million in the first quarter last year. This increase is being driven primarily by expected growth from MBA 2K and ongoing sales of Red Dead Redemption 2. The largest contributors to netbookings are expected to be NBH2K19, Grand Theft Auto Online and Grand Theft Auto 5, Red Dead Redemption 2 and Red Dead Online, the Borderlands franchise and Social Points mobile offerings. We project recurrent consumer spending to grow by more than 20%. This growth is expected to be driven by NBH2K and Red Dead Online, partially offset by lower results from Grand Theft Auto Online. We also expect digitally delivered netbooking to increase by more than 20%. Our forecast assumes that 70% of our current generation console game sales will be delivered digitally, up from 53% in the same period last year. We expect gap net revenue to range from $485 to $535 million, and cost of goods sold to range from $165 to $191 million. Operating expenses are expected to range from $246 to $256 million. At the midpoint, this represents a 35% increase over last year, driven primarily by higher marketing expense and R&D costs. And gap net income is expected to range from $74 to $86 million, or 65 to 75 cents per share. For management reporting purposes, we expect our tax rate to be 17% throughout fiscal 2020. This is lower than our prior management reporting tax rate of 20% as a result of completing our analysis of the Tax Cuts and Jobs Act of 2017, as well as incremental R&D tax credits. Turning to our outlook for the full fiscal year, we project net bookings to range from $2.5 to $2.6 billion. We expect Red Dead Online, NBA 2K, and WWE 2K to grow, offset by lower results from Red Dead Redemption 2 and Grand Theft Auto Online and Grand Theft Auto V. The largest contributors to net bookings are expected to be NBA 2K, Red Dead Redemption 2, and Red Dead Online, Borderlands 3, Grand Theft Auto Online, and Grand Theft Auto 5, The Outer Worlds, and WWE 2K. We expect the net bookings breakdown from our labels to be roughly 60% 2K, 30% Rockstar Games, and 10% Private Division, Social Point, and other. And we forecast our geographic net booking split to be about 65% United States and 35% International. We expect the current consumer spending to increase in the low single digits, driven primarily by growth from NBA 2K, Borderlands 3, and Red Dead Online, partially offset by lower expected results from Grand Theft Auto Online. We project digitally delivered net bookings to grow in the low double digits. Our forecast assumes that 49% of current generation console game sales will be delivered digitally, up from 38% last year. We expect to generate more than $450 million and adjusted operating cash flow, and we plan to deploy approximately $90 million for capital expenditures. This increase is primarily due to spending on new studio and office build-outs, network security, and IT. We expect GapNet revenue to range from $2.7 to $2.8 billion, and cost of goods sold to range from $1.24 to $1.29 billion. Total operating expenses are expected to range from $1.06 to $1.08 billion, At the midpoint, this represents a 14% increase over the prior year, driven primarily by higher marketing expense and R&D costs. And we expect GapNet income to range from $389 to $418 million, or $3.39 to $3.65 per share. In closing, fiscal 2019 was an incredible year for Take-Two. Our ability to deliver consistently the highest quality entertainment experiences that drive mass consumer engagement was reflected in our achievement of a record operating result. We have the strongest development pipeline in our history, including sequels from our biggest franchises, along with exciting new IP. In addition, we are actively investing in emerging opportunities, such as private division, mobile games, esports, and geographic expansion that have the potential to be enormous drivers of growth. We are extremely well positioned to generate significant growth and margin expansion over the long term. Thank you. I'll now turn the call back to Jeff.

Thanks, Lainey and Carl. On behalf of our entire management team, I'd like to thank our colleagues for their hard work and for delivering an outstanding year. To our shareholders, I want to express our appreciation for your continued support. We'll now take your questions. Operator?

Thank you. Ladies and gentlemen, at this time, we will be conducting the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Tim O'Shea with Jefferies. Please proceed with your question.

Yes, so thank you for taking my question. My question is about how you think about the free-to-play model. You've obviously had Great success selling games for full price. I mean, I think Strauss mentioned 110 million units of GTA V, 24 million units of Red Dead. But for services like Red Dead Online, it seems like a large audience is key. I'm curious if there's a point where these services could be decoupled from the full price version of the game so a player could still purchase Red Dead for $60 but could play Red Dead Online for free. Just love to hear any thoughts on free-to-play. Thank you.

Well, I think it's a great question. And clearly, when you have the right title, like a Fortnite or Apex Legends, free-to-play can be a powerful model. We also have some great free-to-play games, NBA 2K online in China with 45 million registered users and recurring consumer spending was up over 70% in the fiscal year. So, you know, we've... And WWE Supercard's been downloaded over 19 million times, and that's up net of platform fees, I think, 13% in the fiscal year. So... We have numerous games here that are free-to-play. Social Point's entire business is a free-to-play business. That said, I don't really see the business transitioning to a free-to-play model, primarily because the hit ratios are so very low. And the hit ratios for our core business are exceedingly high because of our attention to quality, or at least that's what we attribute it to, something like 80-plus percent hit ratios. It's pretty unheard of in the entertainment business broadly. In terms of your broader question, which is could you imagine a situation where in maturity you decouple one experience from another, I think the answer is we tend to be very flexible about business models over time, and we want to be where the consumer is. Those business model decisions when they're with regard to a particular title are driven by our labels, although we all have a pretty tight-knit group and consult with one another. But you'd want to look to our labels for any updates on how business models might shift I think the answer is we're open-minded. We want to deliver to the consumer on an ongoing basis. Thanks.

Thank you. Our next question comes from the line of Mike Olson with Piper Jaffray. Please proceed with your question.

Hey, good afternoon. I realize you let Rockstar speak for itself related to new content, but just conceptually, can you say if it would make sense to see a content drop of some sort that's coincident with the timing of Red Dead Online coming out of beta, or should we, I guess, not assume that that's the case? And then second, industry chatter suggests that next-gen consoles are coming late next year. Do you think about timing of release of titles, at least the non-annual release titles at all, related to the timing of console releases, or is that just not a consideration relative to your new release schedule?

Yeah, thanks for your questions. Rockstar has said that Red Dead Online will be coming out of beta in the current quarter and that there's content to come on an ongoing basis, including when it comes out of beta. So I think we have very high expectations for that title going forward. And I would observe that if you compare how Red Dead Online is doing at this stage of the game, in terms of the initial release and the movement into beta, Red Dead Online is performing better than Grand Theft Auto Online did at the same stage of the game. So we have terrific expectations, as does everyone in the company, and of course the folks at Rockstar feel great about the upcoming content drops. In terms of next-gen consoles, we certainly pay attention to when new hardware offerings are coming, new business model offerings are coming, and that would inform our decision-making around releases. We don't really see the next generation as being particularly disruptive because technology is pretty fluent, or we're pretty fluent with technology at this point. So the last time we had a cycle that was challenging, I think, for us and for the industry was not this past one. It was one before where a couple of companies really landed in trouble. And that historically had been the case for the interactive entertainment business. That didn't happen in this past cycle. console shift, and I don't expect it will happen here. So the answer is, of course, we'll be mindful of the change, but it wouldn't be determinative of what we would do. Thank you.

Thank you. Our next question is from the line of Evan Wingren with KeyBank. Please proceed with your question.

Thank you. Just wondering if you could provide some context on your Borderlands expectations that you've initially embedded within guidance and perhaps versus the prior game or however you'd like. And second, if you could just remind us how the margins of a license title like that might compare to some of your internally developed titles, that would be helpful.

We're not providing sales estimates for Borderlands 3, but it's always our goal to grow sales with each new release from our popular series. Borderlands 2 launched in September of 2012, and by the end of October of 2012, we announced that we had sold in more than 5 million units. And then on October 29, 2013, a year later, we announced we had sold in more than 7.5 million units. And to date, Borderlands 2 has sold in nearly 20 million units. So for Borderlands 3, we have really high expectations, and we're really excited about the title. In terms of the margins on Borderlands 3 compared to our other titles, it's in line with our internally developed titles.

Just to clarify, is that on an EBIT basis, or is that a gross margin basis, or how would you characterize it?

It's on both. It's on both basis.

Great. Thank you.

Thank you. Our next question is from the line of Mike Ng with Goldman Sachs. Please proceed with your question.

Thanks. I have a few. Strauss, could you just talk about your view and willingness to participate in third-party video game subscription products? And then separately, what's your philosophy for Dell developing for streaming products like Google Stadia? It seems like there's a long-term opportunity there to create larger and more powerful games, but it seems like it could still be early days. And I have a quick follow-up.

Yeah, on subscription services, we're open-minded. We want to be where the consumer is. We also have to be in a place where it makes sense for our creative folks and for our shareholders. So you need to find that intersection in business models that serve the customer successfully and also serve everyone else who participates in the value chain. And that may prove to be a little challenging for subscriptions in this space because I think people will consume... people do consume video games differently than they consume linear entertainment. Just to put it in context, American households consume on average about five hours a day of linear programming, about 150 hours a month, and about an hour and a half a day of interactive entertainment, so 45 hours a month. And if you watch a half-hour show or an hour show or a two-hour movie, you tend to watch it once, unless you're a kid who may watch things multiple times. which implies a whole lot of products consumed in a month. So you could imagine an all-you-could-eat offering or offerings would be appealing to consumers. In the case of video games, it's possible that an average user in those 45 hours might be playing one, two, maybe three titles, certainly not 70 titles. And so in that event, if you play one, two, or three titles and you play them for months in a row, which often happens in our world, then a subscription model may not be such a great deal for the customer. So this all remains to be seen. And again, we're open-minded. We want to be where the customer is. But I don't think it's a foregone conclusion that subscription will be as massive for interactive entertainment as it has proven to be for music and motion pictures and television. But we'll see. With regard to streaming technology and what it could mean for us, we're very optimistic about the notion of streaming technology bringing our titles to consumers who currently don't have access to them. The promise of being able to sign on to a service with virtually no barriers, without a box in between, and being able to play our games on any device whatsoever around the world and to do it with low latency, well, that's very compelling if that can be delivered. And the folks at Google minimally have said it will be delivered and will be delivered in relatively short order. conceptually we want to be where the consumer is and we'll support new entrants, and we are a believer in streaming services. Again, you know, we need to have business models that make sense for us. So far we're pretty optimistic.

Great. Thank you. And I just had a housekeeping question around RCS. So a 20% growth outlook for the first quarter, low single digits for the year. What can you tell us about the comps in the rest of the year that gets us to low single digits? What's slowing? Thank you.

Yeah, so as we mentioned, Grand Theft Auto Online is going to be lower throughout the year, and we have growth for NBA 2K and for Red Dead Online, and then we'll also have recurring consumer spending for Borderlands towards the end of the year.

Thank you.

Thank you. Our next question is from the line of Eric Hamlin with MKM Partners. Please proceed with your question.

Yes, thank you very much. So you talked about significant increase in R&D costs as you continue to invest in your pipeline. I wondered if you could maybe talk directionally about releases in terms of are we at the point where we might be seeing two 2K releases a year, a couple private label or private business releases a year, and a rock star company release, you know, once every other year, but maybe you can get a little bit of color around that.

Hi, it's Carl. So, yeah, our R&D expense spending is definitely up, and we've said it many times before, one of our biggest priorities is building scale in the organization, and we specifically want to do that through organic initiatives. And all of that is reflected on higher R&D. In terms of what you're going to see in the pipeline, it really is all over the entire company. We've got new investments at SocialPoint. We've got new investments at Private Division. You're already seeing two new titles coming out in this coming fiscal year in Private Division. So obviously, the pace is starting to pick up there. There is also a lot of investment at the 2K level. Michael Condry is coming on board. We haven't said much about that game yet because it's very early. But it stands to reason that, you know, we're not just investing to invest for years and years and years without actually getting the releases coming out. You will expect to see these investments coming to fruition over the next few years. So I think you will, in fact, see the velocity pick up on this. Exactly what that means, I can't tell you right now, but I can tell you that there's certainly a lot of titles in the pipeline.

Okay, great. Thank you very much.

Thank you. Our next question comes from the line of Drew Crum with Stefo. Please proceed with your question.

Okay, thanks. Good afternoon, guys. Maybe I could start by talking about the company's decision to do a timed exclusive on Epic's Game Store with Borderlands 3 in addition to the private division games. And then separately, Lainey, I just want to make sure I'm interpreting your commentary on guidance correctly. You're suggesting that recurrent consumer spending will be up low single digits. GTA Online will be down. Can we assume then that Rockstar Online will be down for the fiscal year versus 2019? Thanks.

So Rockstar Online, the two games together, will be slightly down over this year, but the plan is for the two together to be growing over the long term. Okay. Got it.

And in terms of supporting the Epic Game Store, look, we think, as I said earlier, more distribution is a good thing. And while it's rare that we'll do exclusives for any period of time, we'll continue to support Steam with our title, with catalog, and these titles will be going to Steam relatively quickly after their initial availability exclusively on the Epic Game Store. Thanks, guys.

Thank you. Our next question comes from the line of Ben Schachter with Macquarie Group. Please proceed with your question.

Hey, guys, a few if I could. First, I noticed in the prepared comments when you're talking about investing in mobile, you're using the word mobile and not just social point. So beyond the usual non-social point stuff like WWE, are you broadening investment in mobile at Rockstar and 2K? And then separately, Strauss, any thoughts on what's going on in Washington as it relates to China trade talks and how that might impact video games? And then, Lainey, too, for you, anything in the guidance for new platforms from Google or for others? And then just to clarify, when you talk about ramping the R&D spend, I'm a little confused on how that works relative to R&D spend being capitalized versus flowing through. Can you help me understand that? Thanks.

Hey, Paul. In terms of mobile strategy, yes, obviously we are investing in SocialPoint and new IP in SocialPoint and also around their existing games. So that is one component of our mobile strategy. We continue to invest outside of SocialPoint. Obviously, SocialPoint is a significant part of our strategy going forward. But we have been investing in other parts of the company at Rockstar and at 2K all along. Certainly with 2K, with WWE SuperCard, the idea is to bring our current franchises into mobile environments. And we really do that by coming up with new games. SuperCard is one example of that. Bringing our existing titles onto platforms for those titles that can actually be played on those platforms from a technological perspective. And also companion apps. We've had a number of titles that have companion offerings that can be played alongside of our our main games. So we've been doing that all along, and I think you can expect us to continue to do that and invest towards that, but a huge part of our strategy, obviously, is SocialPoint.

Yes, and turning to your question about China, you know, without regard to the most recent news about tariffs, we remain very optimistic about the opportunities in China. We obviously have a big title there with NBA 2K Online 2 in China with 45 million registered users. We just received approval for the NBA title in China on PS4. It's great news. The approvals have restarted. We have a great partner in Tencent. We have other partners there as well, and we think it's a big and growing market. I think like everyone else, we feel it's important to have an appropriate resolution on trade with China. I think it's right that our government is taking it seriously. I probably won't make any other comments about tactics. It's not really what I do for a living. But I do think it is a serious matter. And for the entertainment business broadly, a very serious matter. Entertainment is America's second largest export after aerospace. So we do think it's important that we have appropriate reciprocal trade policies around the world. And we do believe that the issues that we're currently facing will be sorted out. Can't call the timing.

So in terms of Google Stadia, as Strauss mentioned, it presents some new and exciting opportunities. And as with all platforms, our development teams are hard at work to maximize our product performance, take advantage of USP's deliverable world-class IP, and create unique engagement opportunities through each platform we're offering. But with that said, we have not formally announced any titles for the platform at this time. And in terms of R&D expense and capitalization, since we have a lot more titles, projects that we're starting up in our early stages, there'll be more going to the R&D expense versus starting to be capitalized at this time for this year.

Great. Thanks.

Thank you. Our next question is from the line of Todd Younger with Sanford Bernstein. Please proceed with your question.

Oh, hi. Thanks. If I could just focus my attention, if you don't mind, on NBA 2K. Clearly, having a very strong year this year, you've talked about it growing in your guidance for next year. You also mentioned the big opportunity globally for that franchise and talked a little bit about China. I guess I just loved it. Relative to the global population of basketball and the NBA in particular, relative to the size of that game for you, you know, How should we think about your pursuit of what seems like a lot of people interested in basketball, not just in Asia, in Europe, in other places around the world? And how do you unlock that? Is it a marketing effort? Is it a distribution effort? I'm sure you're on it. We'd love to hear your thoughts on how you're trying to capture what seems like a big interest in the sport and opportunity for that franchise. Thanks.

Hi, it's Carl. I agree. I mean, the NBA, generally speaking, is just growing leaps and bounds, I guess, in that regard. And it's really exciting for us. And, you know, we like to think that we're part of that because what we do at 2K does with the NBA game is they really are part of the fabric and the culture of that organization and of the fan base. And it's been a very symbiotic relationship between our two organizations. And I think we feed off each other and it's been a terrific partnership. And it is exciting when you've got expansion and interest in Europe and in Asia. We try to follow that expansion. And from a marketing perspective, a distribution perspective, and also at times in the development perspective, if we think that there's a certain category or a certain area or a certain player that resonates in a specific area, then we will try to market towards that player. or towards that particular organization, like the European leagues, et cetera. So there's a lot that we can do, not to mention all the localization work that we do as well. So it is really exciting. It still is a predominantly North American business for us, as you would expect, but our international component is growing, and I think that we have an opportunity to over-index internationally.

Okay, thank you.

Thank you. Our next question is from the line of Justin Post with Merrill Lynch. Please proceed with your question.

Thank you. Strauss, first on the 24 million units of Red Dead sold, can you tell us anything about how those are converting to online players, anything on MAUs or how you're seeing the activity levels for those buyers? And then secondly, when you said you're in development for sequels for some of your biggest franchises, just wondering if that includes Rockstar. Thank you.

So we haven't given out statistics, particularly on conversion from people who purchase Red Dead Redemption 2 into Red Dead Online. But we did say that more than 90 million people were engaged with Rockstar Games titles in the last fiscal year, which is nothing short of extraordinary. And the progress looks terrific. So our expectations are high, and we feel really good about how things are going. And in terms of our labels being hard at work, on ongoing titles, including new IP and sequels. We're talking about everyone who works around here. Yes. Thank you.

Thank you. Our next question is from the line of Ray Stotchel with Consumer Edge. Please proceed with your question.

Great. Thanks for taking my question. Can you discuss how players have engaged with the role-play mod within Grand Theft Auto Online and how that may have impacted results if that's something that's monetizable for you all? And then my second question would be, is it fair to say that the outer world has higher booking expectations within fiscal 20 than WWE since you mentioned it first in your prepared remarks? Thanks.

Could you ask your first question just one more time to make sure that we're going to answer it correctly?

Sure. So we've noticed some buzz specifically within Twitch viewership around sort of a role-playing mod within Grand Theft Auto Online. And I was wondering if that in any way impacted results in GTA Online during the quarter.

So we don't monetize that. Sorry, was your second question?

Sure. And the second question was whether or not the Outer Worlds had higher booking expectations than wwe since it was mentioned first in prepared remarks yeah in my prepared remarks the titles are listed in order of contribution so yes great thanks again thank you the next question is in the line of ryan g with barclays please proceed with your question yes hi good afternoon thanks for taking the questions a quick one on nba and then on red dead so

A soccer game from one of your peers is seeing online revenue per payer north of $100 and in-game payer conversion kind of in this 30% to 40% range. And so I'm not sure if you agree that soccer is a good proxy for your NBA business, but assuming that it is, could you comment maybe on how close you guys are to seeing similar levels of monetization and conversion? Because I think it's a really good gauge of how much runway that franchise has left to grow for you guys. And then real quick on Red Dead, Rockstar for the last three games, they've had a PC version out of each one of them, albeit at a later date. So are you guys reserving the right to launch Red Dead 2 on PC, you know, maybe later in fiscal 20? Thanks.

So in terms of comparing ourselves to other games in the sport business, specifically the soccer, We don't really give out that kind of data, that kind of comparison, but I can tell you this, is that we believe that we have a lot of room there to go in terms of our specific opportunity around MBA 2K and our recurring consumer spending model. And it's important to note that our recurring consumer spending model is also pretty broad. It's not just one specific thing. It's not just card battle, for example. It's other things as well. And we do believe that that broad monetization strategy gives us a lot of upside in the future. But in terms of comparing ourselves to FIFA, for example, we just haven't done that.

And in terms of upcoming releases, we do let our labels talk about what's coming next. We leave those announcements to them.

Thank you. Our next question comes from the line of Brian Nowak with Morgan Stanley. Please proceed with your question.

Thanks for taking my questions. First of all, on NBA 2K, you've had a lot of success driving the in-game monetization. Could you just give us a couple examples of different types of content drops, different types of experiences that the team has found that have been particularly helpful in driving that business? Where is the team really succeeding? And then the second one, I think you mentioned, Carl, I think you said 10 new games in development on the mobile side or maybe from just one of the mobile businesses or the mobile side. Just talk to us a little bit about how you think about the types of mobile genres that you think are sort of best in the portfolio. Thank you.

Yeah, the reference of the 10 games was social points specifically. So that's what that was referring to. So there is a broad pipeline there and a lot of games that are coming out to release. In terms of the recurrent consumer spending model around MBAs, if it does monetize, there are a lot of things that you can do to drive content. The most important is to drive engagement. And the most important thing is that you want the players engaged. If people are engaged and they're engaged with the game, then the monetization takes care of itself. And whether that's buying cosmetics or training modes for the Road to 99 or something around mode-on-one matchups, it's pretty, it's well diverse, or the card battles. All of these things monetize well and they monetize differently, but that's not really the point. I think the point is As long as people are playing the games, and our philosophy is we want them to play the entire game, not just one mode. Specifically, that may happen to monetize better than another mode. Our focus, though, is to have people play as much of the game as they possibly can, and we worry about the monetization piece later. Okay. Thanks.

Thank you. Our next question comes from the line of Brandon Ross with BTIG. Pleased to see what your question is.

Hi, thanks for taking the questions. First, how do you think the lag between the release of RDR2 and Red Dead Online coming out of beta will affect the success of the online mode? In the world we're in now, do your titles need to have a strong backlog of new content ready to go before they launch? And then I think you spoke to growth in marketing expenditure. Curious why this would be the case when you're comping against RDR2 from fiscal 2019. Thanks.

Yeah, I think your question was regarding the initial launch of Red Dead Redemption 2 and then the beta of Red Dead Online and then ultimately coming out of beta and how that timing looks. And the answer is we think it looks just fine. They'll be marketing around the coming out of beta. They'll be marketing around the new content. And as I said earlier, if you compare it to how Grand Theft Auto Online developed, we're ahead of where we were with that title, and that's turned out to be a great success. So we feel really good about it. Your second question was, you know, are we putting together a backlog of content to release later after an initial release? And the answer is sometimes we do, often we don't. It depends on the title, the nature of the content, and which label it's coming from. So it all depends. But generally speaking, when we put out a title initially, we are putting out the full release. That is a well-thought-out, complete, entire start-to-finish title. We're not holding something back in hopes of monetizing it later in a different way. We're driven by delivering the best experiences known to man. Carl said this earlier. We believe if we focus on engaging the consumer and giving them way, way, way more than they expected and way more value than they paid for, then good things will follow, including monetization.

In terms of the marketing expense, we have a greater number of titles releasing this year, which is why the marketing expense is higher. So even with Red Dead Redemption marketing coming down from last year, we have marketing for Borderlands 3, Outer Worlds, Ancestors, ongoing marketing for Red Dead Online, MDA and WWE. So that's why marketing expense is higher this year.

Thank you.

Thank you. Our next question comes from the line of Mike Hickey with the Benchmark Company. Please proceed with your questions.

Hey, it's John Salini, Carl Hank. Congrats on the quarter, guys. Thanks for taking my questions. Just I guess first, Josh, you made some comments that RDR Online is performing better than GTA Online on a similar time period. Just hopefully you could maybe expand on that tidbit for us. And I was also curious if you played the planned content for RDR Online, any impressions maybe that you had and how you expect it will monetize out of beta versus GTA Online. Obviously, you have a lower player base, but I'm curious if it will monetize at the same level. I have a follow-up.

Yeah, I was referring to the nature of the engagement and where we are technically in the process. Obviously, we have vastly more experience today than we did when we launched Grand Theft Auto Online and a much more sophisticated infrastructure. So that's what I was really referring to. And on the rest, we don't have any specific information to give. You know, we're very enthusiastic and optimistic. And the next thing we'll be talking about is how it's doing.

All right, last question from me on your announced fiscal 20 pipeline. Is this your full slate as it relates to your guidance or should we or could we expect another major release or platform expansion coming over the coming quarters? And then on RDR Online, should we expect a similar cadence of content as what we've seen for Grand Theft Auto Online? And then for Grand Theft Auto Online and Fiscal 20, should we kind of expect the same, again, cadence of content that we've seen from that online experience historically?

So just on the content side, there is more to come for, obviously, for Red Dead Online and for Grand Theft Auto Online. And Rockstar will make those announcements in the fullness of time. But there is more to come for both, and we feel very good about it. We do have titles coming in the fiscal year that have not been announced yet. They are part of our guidance, however.

Okay. Thanks, guys. Best of luck.

Thank you. Our next question comes from the line of Matthew Harrigan with Buckingham Research Group. Please proceed with your question.

Thank you. Down to a couple, I guess, obscure questions. People over in Europe are concerned about the implications for Twitch off Article 13, I guess rechristened 17, on copyright for the Internet. Do you see any second-order effects for the video game industry that would affect you over there? And then secondly, would you have any further comment on Senator Josh Hawley's comments proposal, him particularly being a Republican, that would seem to raise the risk. I know you're much less dependent on loot boxes than some of your peers, but just I guess interlacing those two questions into your general posture on regulatory developments both stateside and overseas. Thanks.

Hello? Sorry. Just in terms of Article 17, we haven't heard that it reflects on the video game space at all. So as far as we know, there's no impact whatsoever. On the loot boxes question, just to put it in context, that mechanic is responsible for less than 3% of our net bookings in the past fiscal year. So it's not material to us. We have used the mechanic in the past. So it is something we've we've seen, and we think it's just fine. There has been some noise around it, particularly internationally. As I said, we think it's a perfectly reasonable mechanic. However, it forms a very small part of our business.

Thanks, Charles.

Thank you. We have reached the end of our question and answer session, so I would like to turn the floor back over to management for any additional concluding comments.

Well, I just want to say thank you very much for joining us today. We're proud of the year that just finished. We are incredibly optimistic about the year to come. We have a great lineup and wonderful titles in development, and all that's driven by a phenomenal creative and business team, nearly 5,000 people strong all around the world, and those are the people that we want to thank. We're grateful to all of our colleagues for these terrific results. Thank you so much for joining us today.

Ladies and gentlemen, this does conclude today's conference. Again, we thank you for your participation, and you may disconnect your lines at this time.