Take-Two Interactive Software, Inc.

to Interactive Software First Quarter Fiscal Year 2020 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. I would now like to turn the conference over to your hosts, Hank Simon, SVP of Investor Relations and Corporate Communications.

Good afternoon. Welcome and thank you for joining TECU's conference call to discuss its results for the first quarter of fiscal year 2020 and the June 30, 2019. Today's call will be led by Straus-Belnick, TECU's Chairman and Chief Executive Officer, Carl Slatoff, our President and Lenny 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 filings 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 -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 .take2games.com. And now, I'll turn the call over to Straus.

Thanks, Hank. Good afternoon and thank you for joining us today. I'm pleased to report that fiscal 2020 is off to a terrific start, with first quarter operating results that exceeded our expectations. We delivered significant net bookings and cash flow growth driven by the performance of Grand Theft Auto Online and Grand Theft Auto 5, NBA 2K19, the Borderlands franchise, and Red Dead Redemption 2 and Red Dead Online. As we approach the sixth anniversary of their initial launch, sales of Grand Theft Auto 5 and recurrent consumer spending on Grand Theft Auto Online once again exceeded our expectations in the first quarter. Net bookings from Grand Theft Auto Online grew year over year, driven by the increased install base of Grand Theft Auto 5 units, as well as numerous reward bonus programs tied to game mode events and promotions. Grand Theft Auto 5 also continues its unprecedented level of success, charting in the top 10 games in five out of the past six months in the U.S. based on combined physical and digital sales, according to the MPD Group. The title is now sold in more than 110 million units and remains one of the most revered and successful entertainment experiences across all art forms of all time. Our industry-leading basketball series continues to set new benchmarks for excellence. NBA 2K19 is now our highest selling sports game ever, with selling to date of nearly 12 million units. During the first quarter, net bookings from NBA 2K19 more than doubled, driven by strong recurrent consumer spending and increased unit sales. Recurrent consumer spending on NBA 2K grew more than 140 percent, and was the single largest contributor to that part of our business. Moreover, engagement with NBA 2K19 continues to increase, with average games played and daily active users growing 12 percent and 23 percent, respectively. This was driven by a variety of factors, including an enhanced mix of game modes that appeals to a broader audience and play styles, the strong performance of recent sales promotions, new player virtual currency bundles, and engaging late-cycle MyTeam content. We expect that lifetime net bookings from NBA 2K19 will be the highest ever for a 2K sports title, including both record unit sales and recurrent consumer spending. Leading up to the eagerly anticipated September launch of Borderlands 3, which Carl will discuss shortly, we've seen a significant increase in sales of our Borderlands catalog offerings. During the quarter, 2K and Gearbox Software released the Borderlands Game of the Year Edition for PlayStation 4, Xbox One, and PC, which features all new Ultra HD visuals, numerous gameplay improvements, and all previously released add-on packs. In addition, we launched the Ultra HD Texture Pack that increases the visual fidelity of Borderlands' A Handsome collection on consoles, and provides a graphical upgrade for Borderlands 2, Borderlands the Pre-Sequel, and all of the add-ons for both titles on PC. Turning to Rockstar Games' latest creative and commercial masterpiece, Red Dead Redemption 2 continues to expand its audience, and to date has sold in approximately 25 million units worldwide. On May 14th, Red Dead Online exited its beta phase with a massive update that brought a host of new gameplay modes, including new cooperative story missions, free roam activities, and the introduction of poker, along with a range of updates and improvements that strengthen and stabilize the foundational world of the Red Dead Online experience. In addition, throughout the quarter, Rockstar Games released additional content, such as numerous new weapons, clothing, emotes, and more. Both engagement and recurring consumer spending in the game continue to gain momentum, and Rockstar plans to continue to enhance and evolve the world of Red Dead Online with ongoing updates to drive growth over time. On July 1st, Rockstar Games and Twitch announced an exciting new program through which Rockstar Games Social Club members and Twitch Prime subscribers receive free in-game rewards, bonuses, and exclusive discounts in both Grand Theft Auto Online and Red Dead Online simply by linking their Twitch Prime and Social Club accounts. Benefits continue for months to come and include special in-game benefits for both Red Dead Online and Grand Theft Auto Online. Rockstar Games plans to support both Red Dead Online and Grand Theft Auto Online with much more content moving forward, and we now expect combined results from these titles to grow in fiscal 2020. Our first quarter results were also enhanced by SocialPoint's mobile games WWE SuperCard and WWE 2K19, as well as Sid Meier's Civilization VI. One of our key strategic priorities is to continue to drive growth and engagement with our titles after their initial purchase. Our ability to achieve this goal consistently results from our firm commitment to providing consumers with opportunities that are compelling, of the highest quality, and that meaningfully add to their overall gameplay experience. To that end, during the first quarter, recurring consumer spending exceeded our expectations, growing 55% and accounting for 67% of our total netbookings. In addition to virtual currency for NBA 2K, Grand Theft Auto Online, and Red Dead Online, recurring consumer spending was enhanced by a variety of other offerings. In the -to-play category, SocialPoint remains a meaningful contributor to our results through its two biggest mobile titles, Dragon City and Monster Legends, as well as World Chef and Tasty Town. In May, our Barcelona-based studio successfully launched WordLife, a new crossword game, and continues to invest in its broad and innovative pipeline of new games planned for launch in the coming years. Recurrent consumer spending on WWE SuperCard exceeded our expectations, and the title has now been downloaded nearly 19.5 million times and remains 2K's highest-grossing mobile title. And, recurring consumer spending on NBA 2K Online in China also outperformed, growing 75% driven by the launch of NBA 2K Online 2 in August last year. Total combined registered users for NBA 2K Online 2 and its predecessor currently stand at 46 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. Lastly, add-on content grew nearly 135%, led by offerings for the Borderlands franchise and Sid Meier's Civilization VI. As a result of our -than-expected first-quarter operating results and increased forecasts for the balance of the year, we're raising our outlook for fiscal 2020, which is anticipated to be another great year for our organization. Looking ahead, we have the strongest development pipeline in our history, including sequels from our biggest franchises, as well as exciting new IP. Take-Two remains exceedingly well positioned, creatively, strategically, and financially, to capitalize on our industry's many opportunities and to deliver growth and returns for our shareholders over the long term. With the promise of new consoles, along with emerging platforms, distribution channels, business models, and markets, we have tremendous potential to engage and expand further our global audience to our development team's passion and vision for creative excellence. I'll now turn the call over to Carl.

Thanks, Russ. I'd like to begin by thanking our teams for delivering a strong start to the fiscal year, turning now for our recent and upcoming releases. On July 23rd, Rockstar Games held the grand opening of the Diamond Casino and Resort for Grant That Photo Online. The Diamond is the one-stop destination for quality entertainment, high-end living, and a range of experiences that you won't find anywhere else. Players can engage in a classic casino activity such as three-card poker, blackjack, roulette, and a variety of slot machines, or watch virtual horse racing at the Insides Rack Lounge. Guests looking for high-end fashion can choose from a variety of new clothing accessories in the casino store. Diamond also offers the most luxurious penthouse residences in all of Los Santos, and owners have the ability to customize the penthouse and enjoy VIP memberships at the resort, including exclusive lounges, high-limit tables, aircraft and limousine services, and more. This highly engaging update also features a series of new story-based cooperative missions, open world activities, and additional opportunities to earn special rewards. The Diamond Casino and Resort update was Grant That Photo Online's biggest launch ever, delivering record player engagement in daily active users, weekly active users, and monthly active users. Now that Red Dead Online has exited the beta phase, Rockstar Games will continue to add more free content to the game. Following the massive content drop in May, later this summer, the world will evolve again with the introduction of specialist roles, including tracking down wanted criminals as a bounty hunter, searching the world for treasure and other exotic items to sell as a collector, or building a business as a trader. Throughout the year, Rockstar Games will continue to support both Red Dead Online and Grant That Photo Online with many more updates in order to drive engagement and player growth. On July 23, 2K released the Rise and Fall expansion pack for Sid Meier's Civilization VI on iOS through Aspire. 2K also announced that they will bring all of the previously released add-on content for Sid Meier's Civilization VI to both iOS and Nintendo Switch later this year. Civilization VI is the fastest-selling title in the history of the series, with sell at the date of more than 5.5 million units worldwide. On August 27, Private Division will release Ancestors, the Humankind Odyssey, for digital download on PC. The title is the first release from Panache Digital Games, the studio co-founded by Patrice Desolet, the original creative director of the Assassin's Creed franchise. In Ancestors, the Humankind Odyssey, players are challenged to survive and evolve in the harsh yet beautiful land of Africa spanning from 10 million to 2 million years ago. Ancestors will also be available for digital download on PlayStation 4 and Xbox One in December. On September 6, 2K and Visual Concepts will launch NBA 2K20, the next annual offering from our industry-leading basketball simulation for PlayStation 4, Xbox One, Nintendo Switch, and PC. The title will also be available for Google Stadia when the platform launches in November 2019. The NBA 2K20 Standard and Digital Deluxe editions will feature 6-time NBA All-Star, 3-time All-NBA First Team, 3-time NBA All-Defensive Team, and 2012 Olympic Gold Medalist Anthony Davis on the cover. The NBA 2K20 Legend edition will feature a 3-time NBA Champion, 13-time NBA All-Star, 2008 Olympic Gold Medalist, and 2006 NBA Finals MVP Dwayne Wade on the cover. NBA 2K20 will feature the most expansive soundtrack in the history of the series, with 50 tracks from artists such as Drake, Neek Mill, Billie Eilish, Post Malone, and the late Niski Hussle. Additional films will be dynamically added throughout the year across genres, spanning hip-hop, R&B, electronic pop, and rock. On September 13, 2K and Gearbox Software will launch Borderlands 3 for PlayStation 4, Xbox One, and PC. The title will also be available for Google Stadia when the platform launches in November 2019. The Borderlands 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 48 million units worldwide to date. In June at E3, more than 8,000 consumers were able to experience Borderlands 3, and the reaction was phenomenal. Throughout the show, there was enormous excitement around our massive, high-energy booth, which featured -than-life statues and photo ops, 100 gameplay stations, and a 100-seat demo theater. The global media and attendance lauded Borderlands 3 with more than 50 E3 award wins and nominations, including Best in Show nods from IGN, GameSpot, Destructoid, Arts Technica, the E3 Game Critics, and more. In addition, during the month of June, 2K worked with our first-party partners to offer an array of -no-cost engagement opportunities, including the release of a new DLP campaign for Borderlands 2 entitled Commander Lilith and the Fight for Sanctuary, which provided the narrative lead-in to the events of Borderlands 3. In addition, Borderlands The Handsome Collection was added to Xbox Game Pass and was included in the PlayStation Instant Game Collection for the month. On PC, our entire Borderlands Back catalog was made available at a decent discount from our retail partners. These efforts, together with the launch of the Borderlands Game of the Year edition in April, has resulted in selling of over 6 million units of Borderlands titles and over 4 million players enjoying the critically acclaimed Commander Lilith DLC. Later this month, Borderlands 3 will be a Gamescom in Germany and past-western Seattle, where we will share details on an expansive post-launch content plan that will keep players engaged with new experiences well past September 13. The consumer excitement leading up to next month's launch of Borderlands 3 is incredibly strong, and we very much look forward to the next chapter in the highly successful Borderlands franchise. On October 22, 2K's popular WWE series will be back when WWE 2K20 launches for PlayStation 4, Xbox One, and PC. Developed by Visual Concepts, WWE 2K20 includes several franchises first, alongside streamlined gameplay and a variety of popular modes. Current Raw Women's Champion Becky Lynch and WWE Superstar Roman Reigns will serve as the game's cover superstars and ambassadors for its worldwide marketing campaign, Step Inside, which invites players to enter the world of WWE Superstars and face a variety of new and exciting challenges in the virtual ring. On October 25, Private Division will release The Outer Worlds. Developed by City and Entertainment, The Outer Worlds marks the reunion of Tim Cain and Leonard Boyarsky, the original creators of Fallout, who are introducing an entirely new single-player sci-fi RPG experience. Launching on PlayStation 4, Xbox One, and PC, The Outer Worlds is a dark and witty player-driven story set in a colony at the farthest reaches of the galaxy. In addition, the play will be coming from Nintendo Switch following the launch on the other platforms. At E3 in June, The Outer Worlds received four nominations from the Game Critics Award for Best of E3, more than any other game, and won the award for Best Original Game. Throughout fiscal year 2020, we will continue to support our titles with innovative, post-release content designed to drive engagement. In addition, SocialPoint and 2K will continue to broaden our offerings for mobile devices. Looking ahead to fiscal year 2021, Private Division announced Disintegration, a new sci-fi, first-person shooter from V1 Interactive, the studio co-founded by Marcus Leto, former creative director at Bungie, and co-creator of Halo. The title will be fully unveiled later this month at Gamescom. Private Division will have more exciting news and announcements in the coming months. Turning to eSports, the second season of the NBA 2K League, our joint venture with the NBA, concluded this past weekend. Just prior to playoffs, the League announced that Tencent would be their first distribution partner in China and stream condensed playoffs and finals games to their hundreds of millions of daily users across Tencent Sports, Tencent Video, and Tencent News. NBA 2K League content has generated more than 243 million video views across all NBA and NBA 2K League social media platforms. In addition, NBA 2K League viewership both live and on demand continues to rise, with the second season seeing a 34% increase in views over Season 1. 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. Looking ahead, we will continue to focus on delivering the highest quality entertainment and to provide new and innovative ways to enhance players' experiences with our games. To that end, we are investing heavily in opportunities to grow or scale, increase our presence in mobile, and capitalize on emerging distribution channels and business models, such as -to-play, streaming, and subscription. The successful execution of this strategy will continue to engage our customers and generate growth and profits for our company over the long term. I'm now joined by Nicole Eberleini.

Thanks, Carl, and good afternoon, everyone. Today we'll discuss our first quarter results and then review our financial outlook for the second quarter and fiscal year 2020. Please note that additional details regarding our actual results and outlook are contained in our press release. As Charles mentioned, fiscal 2020 is off to a terrific start, with first quarter operating results that exceeded our expectations. Total net bookings grew 46% to $422 million as compared to our outlook of $310 to $360 million. This app performance is driven primarily by -than-expected results from Grand Theft Auto Online and Grand Theft Auto 5, NBA 2K19, and the Borderlands franchise. Recurrent consumer spending grew 55% and accounted for 67% of total net bookings as compared to our outlook of over 20% growth. Recurrent consumer spending exceeded our expectations due primarily to the app performance of Grand Theft Auto Online and NBA 2K. Digitally delivered net bookings grew 51% and accounted for 91% of the total as compared to our outlook of over 20% growth. This result exceeded our expectations due to the app performance of recurrent consumer spending and a -than-forecasted mix of digitally delivered full game sales. During the first quarter, 75% of current generation console games were delivered digitally, up from 53% last year. Turning to some details from our first quarter income statement, GapNet revenue grew to $540 million and cost of goods sold increased to $241 million. Operating expenses increased by 33% to $247 million due primarily to higher marketing and R&D costs. And GapNet income was $46 million or 41 cents per share as compared to $72 million or 62 cents per share in the first quarter of fiscal 2019. -at-operating cash flow increased to nearly $47 million and we ended the period with $1.54 billion in cash and short-term investments. Now I will review the highlights of our fiscal 2020 financial outlook. Starting with the second quarter, we project net bookings to range from $860 to $910 million, up from $583 million in the second quarter last year. The increase is driven primarily by the release of Borderlands 3. The largest contributors to net bookings are expected to be NBA CK20, Borderlands 3, GrantsF.O Online and GrantsF.O 5, Red Dead Redemption 2 and Red Dead Online, and SocialPoint's mobile offering. We project for current consumer spending to grow by over 20%. This growth is expected to be driven by NBA 2K, Borderlands 3 and Red Dead Online, as well as modest growth of GrantsF.O Online. We expect digitally delivered net bookings to increase by more than 40%. Our forecast assumes that 48% of our current generation console games will be delivered digitally, up from 47% in the same period last year. We expect GapNet revenue to range from $855 to $905 million, and ClassSquid sold to range from $415 to $442 million. Operating expenses are expected to range from $312 to $322 million. At the midpoint, this represents a 37% increase over last year, driven primarily by higher marketing and R&D costs. And GapNet income is expected to range from $118 to $130 million, from $1.04 to $1.14 per share. For management reporting purposes, we expect our tax rates to be 17% throughout fiscal 2020. Turning to our outlook for the full fiscal year, we are raising our outlook as a result of better than expected first quarter operating results and increased forecast for the balance of the year. We now expect net bookings to range from $2.6 to $2.7 billion, up from our prior outlook of $2.5 to $2.6 billion. Compared to the prior year, we expect NBA 2K and WWE 2K to grow, offset by lower results from Red Dead Redemption 2 and Grand Theft Auto V and Grand Theft Auto Online. The largest contributors to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Borderlands 3, Red Dead Redemption 2 and Red Dead Online, 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, SocialPoint and Other. And we forecast our geographic net bookings spread to be about 65% United States and 35% international. We now expect recurrent consumer spending to increase in the mid-teens, up from our prior outlook of low single-digit growth, driven primarily by higher expectations for Grand Theft Auto Online and NBA 2K. Importantly, we now expect combined results from Grand Theft Auto Online and Red Dead Online to grow in fiscal 2020. This growth excludes the value that was allocated to recurrent consumer spending from the Red Dead Redemption 2 Premium Edition. We now project digitally delivered net bookings to grow in the high teens. This is a prior outlook of low double-digit growth, driven primarily by our increased forecast for recurrent consumer spending and a higher mix of digitally delivered full game sales. Our outlook assumes that 55% of current generation console games will be delivered digitally, up from 38% last year. We expect to generate more than $450 million in adjusted operating cash flow and we plan to deploy approximately $90 million for capital expenditures. We expect GapNet revenue to range from $2.83 to $2.93 billion and cost of the console to range from $1.3 to $1.34 billion. Total operating expenses are expected to range from $1.07 to $1.09 billion. At the midpoint, this represents a 15% increase over the prior year, driven primarily by higher marketing, R&D and personnel costs. And we expect GapNet income to range from $425 to $454 million, or $3.71 to $3.96 per share. In closing, fiscal 2020 is off to a fantastic start and is supposed to be another outstanding year for Take-Two. Driven by the talent of our creative teams and our management's unwavering commitment to operational excellence, we have a strong financial foundation that enables us to pursue a variety of opportunities to enhance our strategic positioning and increase our ability to deliver growth and margin expansion over the long term. Thank you. I'll now turn the call back to Shrapp.

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

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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 Eric Hamer with MKM Partners. Please proceed with your question.

Good afternoon and thank you for the question. Two things. First, I wondered if you could talk about Red Dead Redemption Online. And maybe you could give a few metrics about engagement or the ramp in revenue that you have seen since the game has come out of beta and gone live. And then secondly, wondered if you could give a little color about the private division. Obviously, you made a recent announcement for one game coming out in fiscal 21. But at this point, how many games have you signed up for private division? And how big of an opportunity do you see that to be over the next 12 months?

Thanks Eric. This is Chow. So on Red Dead Online, we exited the beta phase on May 14 with a huge update. And it created a lot of opportunity to enjoy the online world. We also introduced poker at that time. In addition, throughout the first quarter, Rockstar released additional content, including new weapons, clothing emotes, and others, which I mentioned earlier. We're not giving out any statistics. However, we're really thrilled with the sales of Red Dead Redemption 2 at over 25 million units. And we're excited about the continuing momentum with Red Dead Online. We've also said that we expect that Rockstar Online, which is both Red Dead Online and Grand Theft Auto Online, should be setting a new record this year. So couldn't be more excited. And Carl, we'll talk about private division. So

for private division, we've announced three titles to date. Private division has been in existence for quite some time. And we tend to only announce things when we are ready to announce things about games themselves. We have a lot of other activity that we haven't talked about with private division, but those are the three games that we've announced. Ancestors with Patrice Desolais, Panache Games. We have Outer Worlds with Obsidian. And we also have, we just announced recently, Disintegration with V1, which is Markos' studio. So that's all we have to say at the moment, but you should expect more in the future.

Thank you very much.

Our next question comes from the line of Matthew Thornton with SunTrust. Please proceed with your question.

Hey, good afternoon. Thanks for taking the question and congrats on the strong results. So maybe just first on Borderlands. Can you help us maybe, as we think about recurrent revenue on Borderlands 3, how can we think about or maybe compare and contrast Borderlands versus Red Dead this year? Yeah, obviously last year at the Utah, Red Dead having about a 17% attached rate of premium SKUs. Obviously the beta took a couple quarters, so there wasn't a lot of MTX per se. It's out there with Borderlands 3. We'll get a DLC. But just any comparing and contrasting on the recurrent revenue for the key frontline release there would be really helpful. And then just I'll throw it out there. Any high level commentary you'd be willing to offer on the out-year displays would be great as well. Thanks, guys.

Hi, it's Carl. In terms of Borderlands 3, we haven't discussed too much about our plan for recurrent concern spending, but as with most of our games, if not all of our games, we have a robust plan around delivering post-launching gate content to engage consumers. And it'll be quite a bit different than Red Dead Online for the most part. We talk about DLC content, so story driven mission based content. There'll be some cosmetics with Borderlands 3, but it is a different kind of experience. As we said before, 2K is going to be announcing more about that in the not too distant future. So you'll get a little bit more clarity on exactly what we have to offer. But it's history. And we don't really talk about engagement and the past, but I think most of the people on the call know that Borderlands has a very strong history of delivering a lot of downloadable content and having great success with that. So obviously we're very excited about that plan.

What about R&D expenses?

Yeah, in terms of our out years release schedule, we've basically disclosed everything that we've already disclosed, everything that we're talking about now. So there's nothing more to say about that. Other than the fact that we do have, and you can see it in our numbers, we have to talk about our R&D expenses going up, particularly this year, which would be indicative of investment in new titles. So that is in fact what's going on. And we've got a very robust, maybe our most robust pipeline of all time for new IP. A lot of that's through a private division, but there's new IP throughout the entire company as well. So again, you'll be hearing more about that soon in the future.

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

Hey guys, congrats on the continued great execution. A few questions. One, you raised the year by more than the beat on the quarter. So what specifically are you seeing? And then perhaps related to that, Rockstar stated that the casino expansion was the biggest effort ever. And I think they were referring to overall players on day one and during the week. Can you help translate that into how it impacts the monetization and how that influences guidance for the year? And then separately, Strauss, heading into the launch of cloud services, the new consoles next year, and obviously the continued growth of mobile, how do you think platform fees may evolve? Should we expect the platform owners to operate similarly to what we've seen in the past or do you think things are going to change? Thanks.

For the fiscal year guidance increase, it is driven primarily by the first quarter beat, but we've also updated our forecast for the remainder of the year and primary increases are GTA 5, GTA Online, and Borderlands 3.

And in terms of the new casino update, this has been our biggest ever for Grand Theft Auto Online, which is saying a lot. And what we've seen already is record player engagement in daily, weekly, and monthly active users with a lot more content coming. So it's looking just fantastic. And of course, we're up year over year in the quarter, which is great. Turning to platform fees, look, with competition, I think you have to expect that we will do much better in terms of pay grades. You're already seeing that some recently launched platforms have announced lower fees. And if you go from an oligopoly environment to a broadly competitive environment, I think that has to be your expectations. And I would just note that obviously that benefits the company directly as those fees decline. And that's not even counting. That doesn't even count, of course, the volume. So I think it's going to be sort of, you know, the food is both tasty and plentiful, which is nice.

Great. If I could sneak one more in. Just, Lainey, I think you mentioned CapEx was $90 million. Could you remind me where it was last year and what are you spending the bulk on this year?

Thanks. Last year it was $60 million for the year. This year the increase is driven by some development kits as well as some build-outs with some new office throughout the organization.

Our next question comes from the line of Drew Crum with CFO. Please proceed with your question.

Okay. Thanks. Hey, guys. Good afternoon. So Strauss, you know, I understand you guys don't provide specific guidance on individual titles. They're coming off a very strong performance for NBA 2K19. Just conceptually, what are your thoughts around perennial titles and I guess sports included and how they perform late in the hardware cycle and whether or not they're more susceptible to weaker sales as consumers look ahead to purchasing new consoles. And then I guess separately for Lainey, maybe I'll ask Ben's question a little bit differently here. You're guiding Rockstar Online to be up in fiscal 20. Does that include growth for GTA Online? Thanks.

Thanks, Drew, for your question. You know, we've been blessed by, you know, the amazing work that Visual Concepts and 2K do on NBA 2K. And, you know, we're having a record-setting year again this year with NBA 2K19, which has sold in over 12 million units. And the return, hence our spending was up 140% in the quarter. Just amazing with extraordinary growth in average games played and daily active users really across the board. And I attribute that to not only that we have the industry-leading sim game, but that you can inhabit this game and enjoy its sort of lifestyle that it offers in addition to playing the sim game itself. You know, I think six, seven years ago, basketball was a three-month experience, you know, and now it's a nine, ten-month experience, and we think it's going to grow to be a full one-year experience. To address your question particularly, you know, the last console cycle had no negative influence on us and frankly not really much on the industry because the entire platform business is diversifying. And, you know, the PC format particularly, since that's now all digital, has transformed, you know, the business. That can be 40%, 50% of a console release now if you're out on all those platforms, and that will continue to grow. So we expect that the new console generation will be significant net positive, and there's nothing about an annualized sports title that would play out differently.

For Voxer Online, for the fiscal year, 20 growth, yes, we expect the two games together to grow, but GTA Online for the full year will be down over last year. Q1 and Q2 are up over the prior year, so, you know, it's still really early in the year, so we'll see how the rest of the year plays out, but right now the two together are up.

Okay, very helpful. Thanks, Fizz.

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

Thanks for taking my questions. I have two. Just to come back to Red Dead Online, you know, another incredible quarter out of GTA Online. I was wondering if you could just talk to us all about any differences you notice in player engagement or player behavior in Red Dead Online that could change the way you think about the long-term monetization opportunity for a game like Red Dead, as opposed to a game with GTA, which just continues to surprise to the upside. And the second one, on mobile, Carl, I think last quarter you talked about there were 10 games in development at SocialPoint. Just any update there on how you think about the timing of those releases and what's the impact from those in the full year guide for this year?

Thanks. Well, thanks. You know, with a game like Red Dead where you can engage significantly with the characters in the games, we think there are wonderful opportunities for players to experience the Red Dead Online world on an ongoing basis, especially as new content is dropped. And, you know, we tend to focus on the experience first. We want to make something that consumers love and engage with, and then monetization follows. But we do feel there are and will be plenty of opportunities to create recurrent consumer spending based on the format of the Red Dead Online world.

In terms of private, sorry, not private, but in terms of SocialPoint, I know our two main titles continue to perform very, very well. And we have announced that we've had approximately 10 games in development. That hasn't really changed. Games can come in, can come out, but that sort of reflects where the capacity is for that division in terms of having things in different stages of the pipeline at any given point. We did launch KC Town in January, so a global launch, and we also launched WordLife in May. So not every game makes it, but the good news is we've got games that are actually coming out and are worthy of global launch. So we continue down that path, and like I said, you can expect to see new games coming out of SocialPoint all the time. But that number is still a good number.

Thanks, guys.

Our next question comes from the line of Todd Younger with Sanford Burnstein. Please proceed with your question.

Oh, hi, thanks. Thanks for taking the question. Notwithstanding the long list of sort of double-digit growth rates in the quarter, I did see those, but I'd love to talk a little bit about growth over the horizon. And I've got Strauss or Carl, whoever wants to take it. There's not that many examples I can think of of companies in your business of your size or bigger that are able to organically grow over time consistently. I just wonder, do you guys subscribe to a view that at a certain size it gets harder and harder for a company in your business to grow? Or do you think that's a false view? And it begs a follow on. I'll just keep it to one or two. But does it mean that you guys will have to perhaps start introducing more than one front-line title other than NBA 2K a year? Does online services sort of change that need or replace extra releases and that sort of growth algorithm? And what does that mean for your organization? Just take it over the horizon of how you keep this going. Thanks.

Well, I really appreciate it. And yes, you're right. You know, a lot of big numbers as the numbers get bigger, of course, growing at the same rate will become more challenging. But we have this wonderful situation in the marketplace, which is that the sector has extraordinary tailwinds, and we expect those to continue. And that's driven by the growth in the cohort that enjoys video games. Remember, people consume for the best of their lives the entertainment that they loved at the age of 17. The video game business is about 30 years old, 35 years old effectively. And the average player age today is around 37 or 38. So plenty of room for growth as people age. More people come into the market, but people don't stop playing video games. So for 20 or 25 years, demographics will grow, will cause the industry to grow, and industry participants who do a good job will benefit from that. We're also seeing growth from geographies that we're currently not involved in. For example, Africa and India, to a lesser extent, Russia, the Middle East, and of course, China, where we currently have a meaningful business, but we think there's a lot of growth opportunities there as well. And third, growth in new business models, new technologies such as streaming. And new kinds of games, though, just observed, you know, 10 years ago there was no mobile business, and today that's a $60 billion marketplace. And at the same time that that's sprung up and grown, the core console and PC business has continued to grow at a rapid clip. So this industry is the most rapidly growing industry in entertainment, and that's not going to change for the next 10, 20, 25 years. Now, with that backdrop, can we fail to execute? Of course we can. So what are we doing about it? First, our focus is on being the most creative, the most innovative, and the most efficient company in the business. We take that incredibly seriously, and the reflection of that are, you know, the quality of what we do most of the time, and the reflection of that is in the financial results that we're able to deliver more often than not. Right now we are increasing, to your specific question, we are increasing our investment in development. We are increasing our R&D investment. We do expect to enhance our release schedule. We launched a private division. We bought SocialPoint. And I think you can expect opportunities are both driven organically and driven inorganically. So finally, you know, we took over this company roughly 12 years ago. We had $700 million in net revenue. This year we're projecting to $2.5, $2.5, $2.6 billion in net bookings. That is primarily organic growth. We've done a few acquisitions, but primarily that's organic growth. And I'd be loathe to give you a prediction of an annual growth rate. I can't really do that. But what I can tell you is we're duty bound to deliver new IP every year and new releases of franchise IP. We're duty bound to deliver the biggest and best titles in the business, and it's our job to create hits. And more often than not, we do that. If we do that, we're going to have a great set of results. And if we can add on somehow some inorganic growth, which is also part of our current strategy, selectively and in a highly disciplined way, then we could deliver even more growth. And, you know, one of the, I like, I always like to say, you know, you can listen to the words, but it's always better to look at the actions because that's probably what will be repeated. And our actions are we deliver hits and we deliver organic growth.

Really appreciate that. Thanks a lot for the thoughts.

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

Hey, good afternoon. As you mentioned, GTA is performing better than expected. And I'm sure the majority of that all performance has to do with development of compelling content from Rockstar. But just curious, while you don't directly monetize some of the things that have been going on with modding, et cetera, how much of the strong recent interest in the title is from those types of kind of outside activities positively impacting GTA online and also helping maintain player engagement and re-engage the base?

We do think it's had a big impact along with, you know, the exposure of GTA and the popularity of GTA and Twitch, which has led to this relationship with Twitch Prime that we're super excited about. So it is, you know, we're all astonished and delighted that six years after the initial release, Grand Theft Auto 5 and Grand Theft Auto Online are even bigger cultural phenomena than ever. But as you pointed out, what's that driven by? That's driven by the content that Rockstar continues to deliver the audience and the respect that Rockstar shows its audience and the desire to keep being on the cutting edge of entertainment. You know, that's our goal around here. And Rockstar personifies the execution of that.

Yep, absolutely. And then as previously discussed on the call here, you've got some interesting private division titles coming out this year and next. I know it's really hard to say and you don't want to give specific guidance, but maybe just qualitatively, what's kind of the best way for investors to think about potential contribution from those titles? Like how additive do you think they can be versus some of your other titles?

Yeah, the structure of those titles economically are, you know, as we, if we are able to create hits that have the same pound for pound economic benefit than any of our other titles around here. So there's a great opportunity, but that opportunity would be delivered to the extent that we deliver hits and we never claim success before we have it ever. That said, our expectations are high. The buzz is very strong. The team there, led by Michael Warros, takes the quality part of our strategy exceedingly seriously. They are very disciplined and very, very selective and we're grateful that we get to work with some of the best creators on earth. Thank you.

Our next question comes from the line of Ryan G. with BAM. Please proceed with your question.

Yes, hi, good afternoon. Thanks for taking the question. So I wanted to understand the accelerating growth for NBA 2K. I know unit sales are up, but beyond that, how much has the performance there been, you know, really a function of getting more players to go online versus, you know, really growth in ARPU for the existing players? And if it is the latter, you know, what were some of the significant changes you guys have done and how much room do you think there is to push that ARPU button higher? And then, you know, follow up, I know you guys called out GT Online has performed really well since the casino update in terms of player engagement and users, but I don't recall if you said anything specifically about Red Dead coming out of the, you know, the beta. So two months on, what are you guys seeing in terms of players and engagement for that title? Thanks.

So, yeah, NBA 2K 19 is in fact vastly between our expectations. And it's really changed over the year. I don't know if you'll recall that we weren't necessarily projecting that units would be higher than they were year over iteration over iteration. Now we are significantly, we're already nearly 12 million units at this point. So it is certainly growth in units that always helps. And you've got a higher base of people playing the game that creates this virtual circle that obviously has a positive effect on RCS as well. So RCS is up 140% year over year for this quarter. That's a huge change for us. And yes, of course, the number of units and getting more players in had a lot to do with that, but also I think how we're more effectively engaging folks. Because if people are engaged and we give them more things to do, then ultimately that leads to positive things from an economic standpoint. And some of the things that we've done, because we've learned from the past, as Shrauss mentioned this before, is that we're focused on trying to keep people engaged throughout the entire year, throughout the entire season, certainly through the summer and the playoffs to the end of the season and then also through the summer. And the way that we do that is, first of all, I think the NBA 2K league has driven more interest and that engages folks. The league just ended a few weeks ago. And also just a different mix of game modes that appeals for a broader audience and play styles. There's promotional activity that we've tried over the past few months, new player virtual currency bundles, and also some late cycle miking content. So it's really a combination of a lot of things that helps drive people to the game, but also giving them more engaged in the game. And if they're more engaged in the game, they're going to spend more money ultimately. And there's a lot of dry powder there. We're still, I would say, we're still in the early innings of learning how to do this the best way.

Yeah, and with regard to Red Dead Online, you know, we said that post coming out of beta in May, the title has been performing better and better and gaining momentum. We don't have any more statistics to share except to say that it's going well, continuing to go better, and that we're very, very optimistic.

Okay, great. And if I could just sneak one more in there. Lainey, I believe that Borderlands 3, you guys feel better about it. How should we think about the opportunity for that in fiscal 20 relative to the 25 million plus that I think has sold in life to date that you guys recently disclosed? Thanks.

For Borderlands 2, we've sold into date 22 million units. And it's always our aim to grow each sequel of our franchises from iteration to iteration. And the consumer excitement is incredibly strong. So we're really excited about the title. And when we looked at our numbers for the remainder of the year, we were able to bring up the forecast based on what we've been seeing.

Our next question comes from the line of Mike Eng with Goldman Sachs. Please proceed with your question.

Great. Thank you for the question. I just have one for Carl and one for Lainey. Carl, you mentioned that the Borderlands franchise sold in about 48 million units to date. And I think that's up from 41 million as recently as February. Could you talk a little bit about how the 7 million units or so sold in the last five to six months inform your view about Borderlands 3, if at all? And has that increased your confidence about the title? And then for Lainey, I think you mentioned the combined results for RCS for GKE Online and RDR will grow this year, excluding the premium unit headwind. Including that, would it still grow? Thanks.

So for Borderlands 3, we are very excited about where things are right now from a bus perspective, but also from an economic performance perspective. We probably would have never anticipated that our catalog sales for the previous Borderland releases would have accelerated as much as they did. That didn't come without real effort and real planning, but I think the response has certainly outweighed our expectations. So I would say, if anything, the past couple months of activity, starting with the very marketing that the marketing team at UK has undertaken, but the promotional activity that we've had in the reaction for consumers where they're actually opening up their checkbooks and spending money, that bodes very, very well for Borderlands 3. So we're very excited about that.

So in terms of Rockstar Online, yes, you said it would grow with the special edition VC allocation, and it's not growing at this moment, including it, but it's still early in the year. So we'll see how the year subs us out.

Great. Thank you both.

Our next question comes from the line of Ray Stachel with Consumer Edge. Please proceed with your question.

Great. Thanks for taking my questions. So digital grew and recurrent spending grew a lot. Is there any way that we can think about the gross margin contraction in the quarter? It looks like some heavy software development costs and royalties. And then separately on the expense side, is there any timing that you're calling out around marketing either pushed or pulled forward in the period? Thanks.

So in terms of the digital and recurrent consumer spending, it is continuing to help grow the gross margin, and you'll see that on the full year. In the quarter, we have a new release coming out, and with that we have additional cap software expense and development costs, so that would be a little bit higher in the quarter. In terms of the expenses, in Q1 there was a little bit of marketing that didn't happen during the quarter that's going to get pushed out for the remainder of the year. You'll see the biggest marketing in Q2 and Q3 around our biggest releases, and then they'll come down a little bit in Q4.

Great. Thanks again.

Our next question comes from the line of Clay Griffin with Deutsche Bank. Please proceed with your question.

Hi, good afternoon. Look, I know you all like for your labels to take the lead in announcing new content, and fully appreciate all the color you guys have given on GTA Online for the year, but I guess can you just help us think about maybe the relative scale and scope of the content that's planned for this year, perhaps relative to the past couple years?

Lots more.

Okay, great. And then I guess just with Stadia, can you maybe talk about the relative ease or difficulty in taking Red Dead and even Grand Theft Auto to that platform from a technical perspective? It would seem like the single player experience at the very least could potentially be very successful there.

Yeah, technically it's relatively seamless. There are some minor challenges, nothing that we can't storm out. We are supportive of Stadia. We feel really good about that release. You know, we've always said that you want to distinguish a distribution technology from a business model. The business model that we're using is one that's tried and true, which is downloading for sale, streaming for sale. And there's not a lot of friction to make our titles available, and Google's been exceedingly helpful. We feel very good about the opportunity. It remains to be seen how the platform works. They're awfully talented and they're very, very committed. So fingers crossed that it meets and exceeds consumers' expectations.

Okay, great. Thanks.

Our next question comes from the line of Doug Grertz with Cowen & Company. Please proceed with your question.

Hey, thanks. One of the interesting things about this new console cycle is that you and your peers are going to face the need to migrate these large online gaming communities from one gen to another. And one could think there might be some challenges with that, especially for titles that don't come out on an annual basis. As far as Red Dead Online and GP Online, how are you thinking about that transition? Do you see any particular challenges or opportunities? Is separating the client for the online from the base game something you consider to kind of ease that transition for players? Anything you can say on that would be helpful. Thank you.

Hi, it's Carl. From a tech perspective, one thing to keep in mind is if you look at the releases that happen in the early part of a new generation versus the later part of a new generation, it's not necessarily a huge leap. And what you see is the releases at the end of a generation tend to look very different than the releases in the beginning of a generation. So when you're talking about putting games onto releasing games or pre-existing games or even games that existed before and you're doing a sequel, bringing them to the next, early on in a generation, there is certainly a technical challenge, but you're not necessarily going to be taking advantage of everything that those new generations have to offer. So it's not as disruptive as you may think. It also presents an opportunity to do something more with something you've got out before. Because one thing is for sure, if you just take something and try to port it over, it's not necessarily going to generate any buzz. And most of the platforms are really talking about backward compatibility this time around as well, so that certainly is not going to resonate. So there are challenges, but it's not as disruptive as you may think.

Right. And just, I mean, while it's maybe not a perfect analogy, you know, we launched NBA 2K Online 2 in China and NBA 2K Online, the first version is still in market. They're both in market simultaneously and our recurrent consumer spending is way, way up year over year. We have the highest registered user base we've ever had. So again, I'm not sure it's a perfect analogy, but when you give people something they love and then you continue to support it and then potentially offer a new version for, you know, whether it's a new version of the title itself or a new version to reflect a new distribution platform or technology or console cycle, your audience is going to expand. And your second question about would you ever consider splitting your purchase of a game from an online community, you know, when you use the word ever, you know, we'll consider anything that's good for the consumer and makes sense for us. We're not a rule-based organization. I would just observe, though, that the metrics around -to-play are very different than the metrics around, you know, a console or PC release with a subsequent online event that's ongoing. And it's nice to be in a position where we deliver something that's of such high quality that consumers are prepared happily to pay and then free price. And then we'll stay engaged with a title that on a standalone basis could look a lot like a -to-play title. But by tethering it to the initial release, we've pre-qualified the consumer and, you know, the economics are obviously vastly more powerful. So we're open-minded about any business model in the fullness of time. But I think our current business model is very receptive to the needs of consumers and also speaks to the needs of the producing organization and our creative folks. And as I've said on numerous occasions, whenever you're trying to assess whether a particular business model works in entertainment, look for that intersection of what's good first and foremost for the consumer. And then secondly, what's good for the producer and the distributor, you have to find the sweet spot that encompasses both of those things or you'll have an unstable environment, an environment that either can't support the consumer or can't support the producer or distributor.

Thanks. It's very helpful.

Our next question comes from the line of Alex Giamma with Jeffreese. Please proceed with your question.

Okay. Thanks for taking the question. Maybe just going back to the question on annualized releases. Do you see an opportunity in the future to bring forward more annualized content outside of the WWE and NBA? I know historically you said you don't necessarily believe in non-sports annualized content, but maybe on the sports side, are there any opportunities you're seeing in maybe some other under-monetized sports that might make sense to pursue? And then quickly, if you guys can just provide an update on what you're seeing from the NBA initiatives in China.

Thanks. So, you know, what we said is we wouldn't expect to annualize any titles other than sports titles. We have represented other sports in the past. We've had baseball, we've had boxing, we've had hockey, we currently have golf, and we're excited about expanding that business to the extent it makes sense for us and for the consumer. But there really aren't that many powerful sports, and right now the rights are spoken for by some of our competitors. So I don't think you should expect that, you know, you're going to see a big array of new titles in the sports environment for us. But we are ambitious and we are open-minded, and if rights became available, I believe we would be at the front of the line given the quality of our development. In terms of the NBA in China, look, NBA is beloved in China, and NBA 2K online in China reflects that, and we think there's a lot of opportunity for growth, particularly in mobile. And as I've said before, I'm of the view, and this has got to be a particularly unpopular view today, that the Chinese market will soften, will open up, will be more congenial to all forms of Western entertainment. And while that won't happen overnight, you know, we're good participants in the market. We have great local partners, including Tencent. We comply with government restrictions, and we think that it is possible that that market will open up, and we intend to be, you know, first in line to the extent that it does. We also would love to see some engagement with regard to the NBA 2K league in China. We think there is some potential opportunity there with Tencent.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to management for closing remarks.

We'd like to thank you all for your interest and for joining the call. And I think it bears repeating that all of these results are a reflection of the work done by some 5,000 people in our organization worldwide. First and foremost, our extraordinary creative folks across all four of our label groups. And then, of course, our business folks who, you know, distribute and market the products and account the numbers and, you know, provide legal services and keep all the trains running on time. We have an amazing culture here. We have an amazing array of colleagues. We're all aligned. We're all heading in the same direction. We love what we do. We do so with a smile on our faces. And, you know, all of us here are so grateful for the work of all of our colleagues around the world, and I hope that comes across. I just want to also say, if it's not clear from this call, we're immensely optimistic about our prospects for the remainder of this year and for the years ahead. It's a challenge every day, but it's a challenge that we relish. And, you know, we're proud of what we've been able to do so far. And we all firmly believe this is just the beginning. So thanks for joining us today.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.