Take-Two Interactive Software, Inc.

Greetings. Welcome to Take Two interactive software Q2 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. Please note this conference is being recorded. I would now like to turn the conference over to your host, Mr. 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 second quarter of fiscal year 2020 and it's September 30th 2019. Today's call will be led by Straus-Delnick, Take Two's Chairman and Chief Executive Officer, Carl Sladoff our President and Lainey 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 FCC including the company's most recent annual 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 gapped 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 gapped 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 Mr. Crowley.

Thanks, Hank. Good afternoon and thank you for joining us today. I'm pleased to report that Take-Two's positive momentum continued in the second quarter enabling our company to generate operating results that significantly exceeded our expectations. We delivered strong net bookings, cash flow, and earnings growth fueled by the performance of NBA 2K, Borderlands 3, Grand Theft Auto Online, and Grand Theft Auto 5, and Red Dead Redemption 2, and Red Dead Online. Once again, our strategy of generating the highest quality entertainment in the industry translated into outstanding results. On September 13th, 2K and Gearbox Software launched Borderlands 3, the latest installment in our genre-defining Shooter Looter series. The title has exceeded our expectations and sold more than 5 million units within its first five days of launch, making it the fastest selling title in 2K's history and the highest selling title for the label on PC. Within its first five days in market, retail sell through Borderlands 3 was up more than 50% compared to its predecessor and 70% of units were purchased digitally, setting a new record for a 2K cross-platform title. Borderlands 3 received resoundingly positive critical acclaim with Forbes, IGN, Shacknews, Destructoid, and Maristation all scoring the title 9 out of 10. To date, Borderlands 3 has sold in nearly 7 million units worldwide. I'd like to congratulate the teams at Gearbox and 2K on a stellar launch and taking this beloved series to new heights. Karl will share details about our post-launch content plan that will keep players engaged in the world of Borderlands 3. Our industry-leading basketball series continued to grow during the second quarter, with net bookings up approximately 9% despite a difficult comparison driven by the successful September 6 launch of NBA 2K20. According to the MPD Group, NBA 2K20 is the best selling game of 2019 to date, delivered the highest launch month sales for any sports game in history, and the NBA 2K series is now the sixth largest video game franchise in the industry based on dollar sales. Consumer demand for NBA 2K20 remains strong and the title has sold in nearly 6 million units to date, generating growth over the prior year's release. During the second quarter, recurrent consumer spending on NBA 2K grew 32% to a new record and remained the single largest contributor to that category of our business. Engagement with NBA 2K20 also increased, driven by a consistent new content schedule with daily active users up almost 20% compared to NBA 2K19 and my career and my team growing by more than 30% and 150% respectively. We expect lifetime net bookings from NBA 2K20 to set a new record for the series. In addition, 2K recently announced the NBA 2K20 and Nike Gamer Exclusive Program, an innovative first of its kind gaming and sneaker partnership. This program provides players with the opportunity to unlock virtual Nike Gamer Exclusive sneakers for their My Player to wear in-game and to purchase real-life versions of the same shoes from Nike. I'd like to congratulate 2K and Visual Concepts for once again redefining what is possible in sports gaming and capturing superbly every nuance of the NBA and the pop culture that envelops it. Grand Theft Auto Online and Grand Theft Auto 5 once again exceeded our expectations, delivering the best quarter yet with respect to daily, weekly, and monthly active users and our best summer ever in terms of new online users and new users overall. Recurrent consumer spending on Grand Theft Auto Online grew 23% to a new record driven by the July release of the Diamond Casino and Resort update. This update was Grand Theft Auto Online's biggest content launch ever, delivering record player engagement across daily, weekly, and monthly active users in July and then again in August. As a result of the title's better than expected performance, fiscal -to-date and improved outlook for the balance of the year, we now expect Grand Theft Auto Online to grow in fiscal 2020. Grand Theft Auto 5 remains the standard bearer for excellence in our industry and one of the most revered and successful entertainment experiences of all time. The title continues to expand its audience around the world and has now sold in more than 115 million units. Red Dead Online continues to gain momentum and grew sequentially during the second quarter. Following the massive content drop in May when the title exited its beta phase, on September 10th, the world of Red Dead Online evolved further with the release of the Frontier Pursuits update. This update introduced three 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, and building a business as a trader. Rockstar Games intends to add more new roles in the future, enabling players fully to inhabit their characters as they carve out a life on the frontier. Rockstar Games also introduced the popular Outlaw Pass, a way for Red Dead Online players to pay to access a wide array of ongoing upgrades, items and perks at a discounted value. Throughout the year, Rockstar Games will continue to support both Red Dead Online and Grand Theft Auto Online with many more updates in order to drive engagement and player growth. We remain as excited as ever about the long-term opportunity for Red Dead Online to be a meaningful driver of recurrent consumer spending. In addition, Red Dead Redemption 2 continues to grow its audience and to date has sold in almost 26.5 million units worldwide. Earlier this week, the title launched on PC with an array of features designed specifically for that audience, including numerous graphical enhancements, a fully featured photo mode, new content additions for the game's story mode, and more. On August 27th, Private Division launched 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 Desolais, the original creative director of the Assassin's Creed franchise. Ancestors, the humankind Odyssey was lauded by the media for its sophistication and unique approach to the survival category and will be available for digital download on PlayStation 4 and Xbox One on December 6. Our second quarter results were also enhanced by SocialPoint's mobile games, the WWE 2K franchise, and Sid Meier's Civilization 6. One of our key strategic priorities is to find new and innovative ways to drive growth and engagement with our titles after their initial purchase. From -to-play open worlds to additional chapters and content, we aim to provide consumers with the highest quality offerings that meaningfully add to their overall gameplay experience. To that end, during the second quarter, recurrent consumer spending significantly exceeded our expectations, growing 39% and accounting for 45% of our total net bookings. In addition to virtual currency for NBA 2K, Grand Theft Auto Online, and Red Dead Online, recurrent consumer spending was enhanced by a variety of other offerings, including sales of the Borderlands 3 premium editions, which include additional content that is allocated to recurrent consumer spending. In the -to-play category, SocialPoint remains a meaningful contributor to our results through its mobile titles, Dragon City, Monster Legends, World Chef, Tasty Town, and Word Life. During the quarter, SocialPoint added new content, challenges, and updates to these games. Our Barcelona-based studio continues to invest in its broad pipeline of new games planned for launch in the coming years. WWE SuperCard has now been downloaded nearly 20 million times and remains 2K's highest-grossing mobile title. And recurrent consumer spending on the NBA 2K Online in China outperformed our expectations, growing 27% in the second quarter. The title remains the number one PC Online sports game in China, with more than 47 million registered users. Lastly, add-on content grew in more than 60% led by offerings for Sid Meyer's Civilization VI and the Borderlands franchise. As a result of our -than-expected second-quarter operating results, we're once again raising our operating outlook for fiscal 2020. Looking ahead, we have the strongest development pipeline in our history. We're continuing to grow our portfolio with the highest quality entertainment experiences, including sequels from our biggest franchises, as well as exciting new IP. In addition, we're actively investing in emerging markets, platforms, and business models, such as mobile, streaming, -to-consumer, and subscription, in order to expand our audience around the world. With the promise of new consoles and continuous technological advances, our creative teams have an increasingly robust canvas on which to achieve their vision and set new benchmarks for excellence. Take-Two is exceedingly well-positioned to generate growth and margin expansion for our shareholders over the long term. I'll now turn the call over to Carl.

Thanks, Rous. I'd like to begin by thanking our teams for delivering another strong quarter that exceeded our expectations. I'll now discuss our recent and upcoming releases. On October 22nd, 2K launched WWE 2K20, the latest offering in our flagship WWE franchise for PlayStation 4, Xbox One, and PC. Developed by Visual Concepts, WWE 2K20 features several new gameplay modes that celebrate the WWE's thriving women's division, as well as an array of fan-favorite superstars, legends, and match types. Earlier this year, 2K announced a philanthropic partnership with Leukemia and Lymphoma Society in conjunction with WWE superstar Roman Reigns, who is a leukemia survivor, that helped raise awareness and $500,000 for this important cause. While we are disappointed with the reviews and consumer feedback for WWE 2K20, last week, Visual Concepts released a patch that should address many of the concerns and they will continue to make further enhancements to the gameplay experience. The WWE brand continues to expand worldwide and we believe there remains a substantial long-term opportunity to grow our WWE 2K series by improving the quality of the game. On October 25th, Private Division launched the Outer Worlds for Xbox One, PlayStation 4, and PC. Developed by Obsidian Entertainment, the Outer Worlds marks the reunion of Tim Kaine and Leonard Boyarsky, the original creators of Fallout, who have introduced an entirely new single-player sci-fi RPG experience. A critical and commercial success, the Outer Worlds is exceeding our expectations and reviews have been outstanding, with GameSpot giving the game 9 out of 10, Game Informer 9.25 out of 10, and EGM a perfect 5 out of 5. In early 2020, the Outer Worlds will be released for Nintendo Switch. As noted by Strauss, on November 5th, Rockstar Games launched Red Dead Redemption 2 for PC, which is the first title in the Red Dead series to be offered on PC. The release of the game also marked the debut of Rockstar Games Launcher, a new Windows desktop application that enables consumers to quickly and easily access their Rockstar Games PC collection in a single place across both digital and disc-based titles, including purchases from other digital stores, managed cloud saves, and more. Players will also be able to use the launcher to shop for new Rockstar Games PC titles. The introduction of the Rockstar Games Launcher underscores our commitment to investing to deliver great entertainment experiences in new ways to our audiences. Later this month, Borderlands 3, NBA 2K20, and Red Dead Redemption 2 will be available as part of Google Stadia's initial offerings as full-priced games. Streaming represents an exciting opportunity and has the potential to become a compelling distribution channel for our industry that could expand our market and increase our margins. On November 22nd, Sid Meier's Civilization 6 will come to PlayStation 4 and Xbox One, marking the first time since 2008 that a Civilization game has been available for PlayStation or Xbox consoles. In addition, 2K and 4X games will launch the separate Civilization 6 expansion bundle, which includes all content from the Rise and Fall and Gathering Storm expansion packs. Civilization 6 is the fastest-selling title in the history of the series, with sell-in to date of nearly 6 million units worldwide. Rounding out our holiday lineup will be Private Division's December 6th release of Ancestors, the Humankind Odyssey for digital download on PlayStation 4 and Xbox One. Throughout fiscal 2020, we will continue to support our titles with innovative post-launch content designed to drive engagement and player growth, including many more updates from Rockstar Games for both Red Dead Online and Grand Theft Auto Online. On October 24th, 2K and Gearbox Software launched the Bloody Harvest free seasonal event for Borderlands 3, the first offering in the robust post-launch content plans for the title. We will continue to support Borderlands 3 with free seasonal content updates and raid-like events called takedowns. In addition, 2K and Gearbox plan to release four major downloadable campaign expansions available collectively with the purchase of a season pass or individually upon release. The first of these DLC packs is scheduled to launch this winter. In December, Private Division will launch the Kerbal Space Program Breaking Ground expansion, PlayStation 4 and Xbox One, which was previously released for PC in May, and throughout the year, 2K will continue to release additional content for WWE 2K20 and other titles. We will also continue to broaden our slate for mobile devices, including the November 13th launch of Season 6 of our popular WWE Supercard series. Looking ahead to fiscal year 2021, Private Division announced that Disintegration, a new sci-fi first-person shooter, will launch in calendar 2020. In Disintegration, players command their troops as they battle through a thrilling single-player campaign and compete in frenetic multiplayer against other pilots and their crews. Disintegration is being developed by V1 Interactive, a new independent studio co-founded by Marcus Leto, former creative director at Bungie and co-creator of Halo. Also from Private Division, Kerbal Space Program 2, the sequel to the beloved original Space Sim, is now planned for launch on PC, PlayStation 4 and Xbox One in fiscal 2021, in order to allow more time to make the experience as terrific as possible. The original Kerbal Space Program has sold in over 3.5 million units and earned a Metacritic rating of 88 and a Steam user score of 91%. Private Division will have more exciting news and announcements in the coming months. Turning to esports, qualifying rounds for season 3 of the NBA 2K League, our joint venture with the NBA, will conclude this week, followed by the combine that will end in December and the official player draft and start of the season in the spring. The NBA 2K League announced that Gen.G, the global esports organization, will launch a new franchise from Shanghai that will join the league for the upcoming season, marking the first team from outside of North America. The team will join the previously announced Charlotte Hornets Venom GT as the two new teams for season 3, bringing the league total to 23 franchises. 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. In closing, we remain focused on delivering the highest quality entertainment and providing new and innovative ways for our consumers to stay immersed and engaged with their favorite experiences. We are investing heavily in opportunities to grow our scale, increase our presence in mobile, and capitalize on emerging distribution channels and business models. The successful execution of this strategy will provide value to our customers and generate strong returns for our shareholders. And now I'll turn the call over to Lainey. Thanks,

Carl, and good afternoon, everyone. Today, we'll discuss our second quarter results and then review our financial outlets for the third quarter and fiscal year 2020. Please note that additional details regarding our actual results and outlook are contained in our press release. As Strauss mentioned, our positive momentum continued in the second quarter, enabling us to generate operating results that significantly exceeded our expectations. Total net bookings grew 63% to $951 million, as compared to our outlook of $860 to $910 million. This app performance is driven primarily by better than expected results from Grand Theft Auto 5 and Grand Theft Auto Online and Borderlands 3. Recurrent consumer spending grew 39% and accounted for 45% 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. Digitally delivered net bookings grew 63% and accounted for 73% of the total, as compared to our outlook of over 40% growth. This result exceeded our expectations due to the app performance of our current consumer spending and the higher than forecasted mix of digital sales of Borderlands 3 and Grand Theft Auto 5. During the second quarter, 51% of current generation console games were delivered digitally, up from 47% last year. Turning to some details from our second quarter income see, gap net revenue grew to $858 million and costs that sold increased to $368 million. Operating expenses increased by 36% to $315 million, due primarily to higher marketing, personnel, and R&D costs. And gap net income was $72 million or 63 cents per share, as compared to $25 million or 22 cents per share in the second quarter fiscal 2019. Adjusted unrestricted operating cash flow for the six months ended September 30th, 2019, increased to $41 million and we ended the period with $1.5 billion in cash into our term investment. Now I will review the highlights of our fiscal 2020 financial outlook, starting with the third quarter. We project net bookings to range from $860 to $910 million. The largest contributors to net bookings are expected to be MBA 2K20, Grand Theft Auto Online, and Grand Theft Auto 5, Red Dead Redemption 2, and Red Dead Online, the Outer Worlds, Borderlands 3, and the WWE 2K series. We project recurrent consumer spending to grow by approximately 5%. This growth is affected by the difficult comparison due to the allocation from the Red Dead Redemption 2 premium editions last year. Growth is expected to be driven by Grand Theft Auto Online, Red Dead Online, excluding last year's allocation, and MBA 2K. We are currently projecting single digit growth in recurrent consumer spending from MBA 2K due to the strength of the title in the third quarter last year. We expect digitally delivered net bookings to increase by about 5%. Our forecast assumes that 50% of our current generation console games will be delivered digitally, up from 31% in the same period last year. We expect GAT net revenue to range from $915 to $965 million, and cost of goods sold to range from $425 to $452 million. Operating expenses are expected to range from $312 to $322 million. At the midpoint, this represents a 6% increase over last year, driven primarily by higher R&D and personnel costs, partially offset by lower marketing expense. And GAT net income is expected to range from $159 to $170 million, or $1.39 to $1.49 per share. For management reporting purposes, we expect our tax rate to be 17% throughout fiscal 2020. Turning to our outlooks for the full fiscal year. We are raising our operating outlook as a result of our better than expected second quarter operating results, and improved net bookings outlooks to the balance of the year. We now expect net bookings to range from $2.75 to $2.85 billion, up from our prior outlook of $2.6 to $2.7 billion. The increase beyond the second quarter beat is driven primarily by improved expectations for Grand Theft Auto Online and Grand Theft Auto 5 and Borderlands 3, partially offset by the move of Kerbal Space Program 2 into fiscal 2021. The largest contributors to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto 5, Borderlands 3, Red Dead Redemption 2 and Red Dead Online, The Outer Worlds, Sid Meier's Civilization VI and the WWE 2K series. 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 bookings split to be about 60% United States and 40% International. We now expect the current consumer spending to increase by 25% up from our prior outlook of mid-teen school, driven primarily by higher expectations for Grand Theft Auto Online. We now expect Grand Theft Auto Online to grow in fiscal 2020 as a result of its better than expected performance fiscal year to date and improved outlook for the balance of the year. We project digitally delivered net bookings to grow by nearly 30%. This is up from our prior outlook of high teens growth, due primarily to our increased forecast for recurrent consumer spending and a higher mix of digital sales of Borderlands 3 and Grand Theft Auto 5. Our outlook assumes that 57% of current generation console games will be delivered digitally up from 38% last year. We expect to generate more than $450 million in adjusted unrestricted operating cash flow and we now plan to deploy approximately $75 million for capital expenditures. We expect GapNet revenue to range from $2.93 to $3.03 billion and cost of goods sold to range from $1.39 to $1.43 billion. Total operating expenses are expected to range from $1.12 to $1.14 billion. At the midpoint, this represents a 20% increase over the prior year driven primarily by higher marketing, R&D and personnel costs. And we expect GapNet income to range from $388 to $416 million or $3.38 to $3.63 per share. We have not flowed through the entire second quarter management reporting EPS beat to our implied management reporting EPS outlook for fiscal 2020 due to marketing expenses that shifted from the second quarter into balance of the year, a higher forecast for marketing, IC and R&D expense and the move of Purple Space Program 2 into fiscal 2021. In closing, our strong performance during the second quarter has enabled us to increase further our operating outlook for fiscal 2020, which is poised to be another great year for TIC II. Our positive momentum continues and with our industry leading creative assets, coupled with our management's focus on operational excellence and sound financial foundation, our company is in a perfect position to deliver strong results for shareholders over the long term. Thank you. I'll now turn the call back to Straus.

Thanks, Lainey and Carl. On behalf of our entire management team, I'd like to thank our colleagues for their dedication, their hard work, their commitment to excellence and to our shareholders, I'd like to express our appreciation for your continued support. We'll now take your questions. Operator.

Thank you. 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 that 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 key. Our first question comes to the line of Eric Handler with MKM Partners. Please see with your question.

Good evening and thank you for the questions. Two quick things. First, with Outer Worlds, I believe you said it was selling ahead of expectations. Wonder if you might be able to put some actual numbers to that if you don't mind. And then secondly, with Red Dead Online, wondered, obviously you don't talk about revenue for that game, but wondered if you might be able to at least talk about some of the trajectory, how it compares to RCS for other games or how you have found that game to be tracking.

Hey, Eric. It's Strauss. On Outer Worlds, we're not releasing any specific numbers yet. It's outperforming our expectations handily. Got amazing reviews. We're super excited about it, but it's very, very early. So as we learn more, we'll disclose more. And on Red Dead Online, we did say that we're up sequentially in the quarter. We have a lot of momentum. The new content is definitely performing. People really like it. They're engaged with it. We feel great about it and that's pretty much, you know, where we're at at the moment.

Okay. Thank you very much.

Our next question comes to the line of Alex Giamo with Jeffreys. Please see with the question.

Hey, this is David Arndt for Alex. Thanks for taking the question. Hoping to get a little bit of color on Social Blu. Last quarter, you said that you had 10 number of games in development. Is that still the number we should be thinking about or that change at all?

Thanks. Yeah. Thanks for your question. I think a couple notes about Social Point. First of all, there are five live games that are doing well in the market. So Dragon City and Monster Legends, but also World Chef, Tasty Town and Wordlife. So that's super exciting. And at any given time, we have eight to 10 new titles in development at Social Point. So yes, that's roughly correct. We're really excited about what is coming to us in the future.

Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Once again, if you would like to ask a question, please press star 1 on your telephone keypad. One moment, please, as we pull for more questions. Since there are no further questions left in the queue, I would like to turn the floor back over to management for any closing remarks.

Obviously, we've had a great quarter. We raised our outlook for the year. We're really excited about how the company is doing. This company is all about creativity, innovation and efficiency. Our goal is to make the highest quality entertainment in the business and in fact, in the entertainment business. More often than not, our creative team succeeded that. We couldn't be more grateful to them than we are. So thank you so much for joining us today. We're looking forward to the rest of our fiscal year and then beyond that as well.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.