Take-Two Interactive Software, Inc.

Greetings, and welcome to Take-Two Interactive Software's Q3 2020 Earnings Conference 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. Thank you. You may begin.

Good afternoon. Welcome and thank you for joining Take-Two's conference call to discuss its results for the third quarter of fiscal year 2020, ended December 31st, 2019. Today's call will be led by Strauss Delnick, Take-Two's chairman and chief executive officer, Carl Sladoff, our president, and Laney 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 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 Stroud.

Thanks Hank. Good afternoon and thank you for joining us today. Throughout the 2019 holiday season, we experienced robust demand for our offerings that drove third quarter operating results solidly within our increased outlook. Our net bookings were substantially higher than what we included for the third quarter when we gave our original fiscal 2020 outlook last May, as well as when we increased our outlook last August. Highlights are the performance of Grand Theft Auto Online and Grand Theft Auto V, NBA 2K20, Red Dead Redemption 2, and Red Dead Online, The Outer Worlds, and Borderlands 3, reflecting our ability to deliver some of the most captivating experiences in the entertainment industry. Grand Theft Auto Online once again exceeded our expectations, delivering its best holiday quarter ever for both audience size and net bookings. During the third quarter, recurring consumer spending on Grand Theft Auto Online grew 54%, driven by Rockstar Games' continued release of engaging new content. Grand Theft Auto Online had its biggest series of back-to-back updates ever in terms of player numbers. with records in audience size in December and the third quarter following the release of the Diamond Casino and Resort update in July and the Diamond Casino Heist in December. We're now on track to deliver a new record for Grand Theft Auto Online recurrent consumer spending in fiscal 2020. Sales of Grand Theft Auto V also exceeded our expectations, and the title is now sold in more than 120 million units. According to the NPD Group, Grand Theft Auto V was the best-selling game of the decade in the U.S., based on both unit and dollar sales. Red Dead Online continues to gain momentum, both in terms of engagement and recurrent consumer spending. Net bookings from Red Dead Online outperformed our expectations during the third quarter, almost tripling both year-over-year and sequentially, excluding digital content bundled with the Red Dead Redemption 2 Premium Editions. Red Dead Online hit a new peak in player numbers in December following the release of the latest update, Moonshiners, and then exceeded those numbers and set a new record in January. We remain as excited as ever about the long-term opportunity for Red Dead Online to be a significant driver of our current consumer spending. In November, Red Dead Redemption 2 launched for the PC and Google Stadia and to date has sold in over 29 million units. According to the MPD group, Red Dead Redemption 2 was the top title of the last four years based on U.S. dollar sales. It bears noting that the collective lifetime sell-in of Grand Theft Auto V and Red Dead Redemption 2 is now more than 150 million units worldwide, with over 250 million lifetime game accounts created across both titles. Rockstar Games' total online audience is also its biggest to date, having recorded record numbers in the third quarter. On October 25th, Private Division launched The Outer Worlds for Xbox One, PlayStation 4, and PC. Developed by Obsidian Entertainment, The Outer Worlds has significantly exceeded our expectations and has sold in more than 2 million units to date. Critical response to the game has been outstanding, and The Outer Worlds has won more than 75 awards, including Game of the Year from the New York Video Game Critics Circle and Destructoid, and Best RPG of the Year from IGN, Shaq News, Gameranx, and others. The title is also a finalist for the DICE Awards Outstanding Achievement in Story and the RPG of the Year. We're confident that The Outer Worlds will continue to expand its audience, including through its release on the Nintendo Switch, which is now planned for fiscal 2021. Unit sales of NBA 2K20, the latest installment in our industry-leading basketball series, have outperformed our expectations. and the titles have sold in over 8 million units to date, up slightly over NBA 2K19 in the same period. In November, the title was released for Google Stadia. In addition, engagement with NBA 2K20 is reaching all-time highs, with average daily active users growing and my team users up more than 35%. In addition, NBA 2K20 has generated more than 276 million views on YouTube and and over 8 million hours of content watched on Twitch across hundreds of channels. While this increased engagement led to strong growth in recurring consumer spending in certain modes of NBA 2K20, we've not experienced the same positive benefits across the entire game due to some specific design changes, which we plan to address in future versions of NBA 2K. Because of this, we no longer expect lifetime net bookings for NBA 2K20 to be a record for the series, However, we continue to expect recurrent consumer spending for the NBA 2K franchise to grow in the strong double digits for fiscal 2020. Taking creative risk is part of Take-Two's DNA as we constantly strive to improve the gameplay experience for our audiences. More often than not, this results in enhancing our growth, which is reflected in the substantial long-term outperformance of NBA 2K. Turning to Borderlands 3, the latest installment in our genre-defining shooter-looter series continues to expand its audience since its record-breaking launch in September, with more than 50% user growth in comparison to Borderlands 2 at the same time in its lifecycle. 2K and Gearbox are supporting the game with free content, as well as four downloadable campaign expansions, which are included with the Borderlands 3 Super Deluxe Edition and the Season Pass, or can be purchased separately upon release. The first of these expansions, Moxie's Heist and the Handsome Jackpot, was released during the third quarter and was positively received by critics and consumers alike, helping to drive a season-pass attach rate for Borderlands 3 that was a record both for the series and for 2K at the same point in the title's lifecycle. In December, Borderlands 3 was released for Google Stadia and will be available on Steam in the coming months. To date, Borderlands 3 has sold nearly 8 million units, and we expect lifetime unit sales to be a record for the series. Earlier in the quarter, 2K launched WWE 2K20 for PlayStation 4, Xbox One, and PC. 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. While we're disappointed that WWE 2K20 did not meet our expectations, both in terms of sales and quality, 2K is actively working with visual concepts to ensure that these issues are addressed in the future, and they'll have more to share on their plans soon. The WWE brand continues to expand worldwide, and there remains a substantial long-term opportunity to grow our WWE 2K series by improving the quality of the game. Among Take-Two's core tenets is our aim to be the most creative and the most innovative company in the entertainment industry. Today, in addition to delivering the highest quality standalone entertainment experiences, we measure our success by our ability to captivate and engage audiences well beyond a title's initial release. To that end, during the third quarter, recurrent consumer spending grew 6% and accounted for 41% 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, In the free-to-play category, Social Point continues to be a meaningful contributor to our results through its mobile titles Dragon City, Monster Legends, World Chef, Tasty Town, and Word Life. During the quarter, Social Point added new content, special events, and updates to these games. Our Barcelona-based studio continues to invest in its broad and innovative pipeline of new games planned for launch in the coming years. 2K launched Season 6 of WWE Supercard, featuring all-new card tiers and upgraded features. The title has now been downloaded more than 20 million times and remains 2K's highest grossing mobile title. NBA 2K Online in China remains the number one PC online sports game in China with more than 48 million registered users. Add-on content grew 135% led by offerings for Borderlands 3, Sid Meier's Civilization VI, and WWE 2K20. Finally, sales of Borderlands 3 Premium Editions, which include additional content that is allocated to recurrent consumer spending, also contributed during the period. As a result of our solid third quarter results and outlook for the fourth quarter, we're increasing the low end of our fiscal 2020 operating outlook while maintaining the high end. Fiscal 2020 is shaping up to be another terrific year for Take-Two. Looking ahead, our company has the strongest development pipeline in its history, and we're committed to supporting our titles with offerings designed to drive ongoing engagement. In addition, we're actively investing in emerging markets, platforms, and business models that have significant potential to enhance our growth. Take-Two is exceedingly well-positioned to capitalize on the many positive trends in our industry and to generate returns for our shareholders over the long term. I'll now turn the call over to Carl.

Thanks, Russ. I'll begin by discussing our upcoming releases. Throughout the coming months, 2K and Gearbox Software will continue to support Borderlands 3 with a robust post-launch content strategy, including all new in-game mini-events and three additional downloadable campaign expansions. Later this month, at PAX East in Boston, 2K will unveil details about their future content offerings, Borderlands 3's upcoming release on Steam, and more. In addition, Rockstar Games will continue to provide an array of content and gameplay experiences for the vast open worlds of Grand Theft Auto Online and Red Dead Online, which continue to set engagement records for the label. In fiscal 2021, Private Division will expand our offerings for the Nintendo Switch with the release of the Outer Worlds. As Strauss noted earlier, the title was incredibly well received by critics and consumers alike on its original launch platforms, and we are confident that it will continue to thrill audiences as they immerse themselves in this player choice-driven RPG on the Switch. One of our organization's key priorities is building scale by growing the size of our development pipeline. Investing in our world-class creative resources and partnering with the best independent studios in the industry enables Take-Two to enhance our industry-leading portfolio of intellectual property, which is the foundation of our strategy to grow our business and expand profitability. In December, 2K announced the formation of Cloud Chamber, which will be working on the next iteration of the globally acclaimed Bioshock franchise for the next several years. Cloud Chamber is a collective of storytellers eager to push the limits of interactive entertainment by making unique, captivating, and thoughtful experiences set in a rich, immersive world. The team will be based in two locations, 2K's headquarters in Novato, California, as well as in Montreal, Quebec, which marks the first ever 2K studio in Canada. Private Division is another example of our growing investment in new intellectual property. This year, we benefited from the exceptional performance of the Outer Worlds. Our new label is taking a strategic approach to working with some of the industry's best creative talent and is quickly amassing an impressive pipeline for the future. During fiscal year 2021, Private Division plans to release Kerbal Space Program 2 and Disintegration, which just completed a successful technical beta. Private Division will have more announcements about their growing portfolio over time. Mobile, which continues to be the highest-grossing and fastest-growing segment in the interactive entertainment, is an important opportunity for Take-Two. Social Point currently has five games active in the market, including Dragon City, Monster's Legends, World Chef, Tasty Town, and Word Life. And they have more than 10 new games in the various stages of development. In addition, we continue to pursue new mobile offerings and extensions of our existing franchises, such as WWE Supercard and NBA 2K Mobile. The global proliferation of smart mobile devices and high-speed data networks represents an exciting entry point into emerging markets, particularly in China, Latin America, Africa, and India. Take-Two's development pipeline over the next five years is the largest and most diverse in our company's history, including releases from our biggest franchises, exciting new IP, free-to-play offerings, and a diverse mix of casual, mid-core, and core gaming experiences. We will have much more to share on this exciting slate of titles in the months to come. In addition to our focus on growing existing and building new franchises, we have a number of emerging opportunities that have the potential to contribute to our growth and margin expansion. Streaming may become a compelling distribution platform for our industry that could expand our market and increase margins. Whether frontline or catalog offerings, the highest quality content drives consumer adoption, and Take-Two's portfolio is a must-have for any new platform. During the holiday season, we released Red Dead Redemption 2, NBA 2K20, and Borderlands 3 for purchase on Google Stadia. Esports remains an exciting new segment for our industry and company. The NBA 2K League, our first foray into competitive gaming in partnership with the NBA, is gearing up for its third season that will begin at the end of this month. The league continues to expand with new teams joining this year, bringing the count to 23, including the first international and non-NBA team, the Gen.G Tigers of Shanghai. The launch of the Gen.G Tigers is the first step in the long-term effort to build a stronger global presence for the league. In January, the NBA 2K League hosted its Global Invitation Match, a series of exhibition matches featuring APAC invitational players, and the 2019 NBA 2K League Finals MVP, playing against top representatives from NBA 2K Online 2. The games were live-streamed in China on Tencent's Penguin Esports, Gen.G streaming partner, Douyu, and Huya, as well as on the NBA 2K League's Twitch and YouTube channels. 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, as we begin a new decade, we enter an incredibly exciting period for our industry and company, which should bring technological advancement as well as compelling new platforms and business models. We remain steadfast in our commitment to deliver the highest quality entertainment experiences to captivate and engage our audiences throughout the world and to generate growth and margin expansion. I'll now turn the call over to Lainey.

Thanks, Carl. Good afternoon, everyone. Today, we'll discuss our third quarter results and then review our financial outlook for the fourth 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, we experienced robust demand for our offerings throughout the 2019 holiday season that enabled us to deliver third quarter operating results solidly within our increased outlook. Total net bookings were $888 million as compared to our outlook of $860 to $910 million. Current consumer spending grew 6% and accounted for 41% of total net bookings as compared to our outlook of 5% growth. Digitally delivered net bookings decreased slightly by 2% and accounted for 78% of the total as compared to our outlook of 5% growth. The decrease is due to very strong physical sales of our titles over the holidays. During the third quarter, 44% of current generation console games were delivered digitally, up from 31% last year. Turning to some details from our third quarter income statement, gap net revenue grew to $930 million and cost of goods sold decreased to $437 million. Operating expenses increased by 6% to $316 million, due primarily to higher personnel and R&D costs, offset by lower marketing expenses. And gap net income was $164 million, or $1.43 per share, as compared to $180 million, or $1.57 per share, in the third quarter of fiscal 2019. Adjusted unrestricted operating cash flow for the nine months ended December 31, 2019, with $548 million, and we ended the period with approximately $2 billion in cash and short-term investments. Now I will review the highlights of our fiscal 2020 financial outlook, starting with the fourth quarter. We project net bookings to range from $540 to $590 million, up from $488 million in the fourth quarter last year. The largest contributors to net bookings are expected to be Grand Theft Auto Online and Grand Theft Auto V, NBA 2K20, Red Dead Redemption 2, and Red Dead Online, Sid Meier's Civilization VI, and Borderlands III. We project our current consumer spending to grow by approximately 10%, driven primarily by growth in Grand Theft Auto Online and Red Dead Online. We expect digitally delivered net bookings to increase by over 20%. Our forecast assumes that 66% of our current generation console games will be delivered digitally, up from 57% in the same period last year. We expect gap net revenue to range from $635 to $685 million, and cost of goods sold to range from $274 to $286 million. Operating expenses are expected to range from $247 to $257 million. At the midpoint, this represents a 13% increase over last year, driven primarily by higher personnel costs and marketing expenses. and GAAP net income is expected to range from $105 to $128 million, or $0.92 to $1.12 per share. For management reporting purposes, we expect our tax rate to be 17% throughout fiscal 2020. Turning to our outlook for the full fiscal year, we are raising the low end of our net bookings outlook by $50 million and maintaining the high end. We now expect net bookings to range from $2.8 to $2.85 billion, The increase is driven by higher expectations for Grand Theft Auto Online, including record recurrent consumer spending on the title, Grand Theft Auto V, and The Outer Worlds, partially offset by reduced expectations for Borderlands 3 and recurrent consumer spending on NBA 2K. The reduced expectations for Borderlands 3 are still consistent with our original high expectations for the title prior to launch. The largest contributors to net bookings are expected to be NBA 2K20, and NBA 2K19, Grand Theft Auto Online and Grand Theft Auto 5, Borderlands 3, Red Dead Redemption 2, and Red Dead Online, The Outer Worlds, and Sid Meier's Civilization VI. We expect the net bookings breakdown from our label to be roughly 55% 2K, 35% Rockstar Games, and 10% private division and social points. And we forecast our geographic net booking split to be about 60% United States and 40% international. We are maintaining our forecast for recurrent consumer spending to increase by approximately 25%. We now project digitally delivered net bookings to grow by approximately 25% versus our prior expectation of nearly 30% growth due to our higher mix of physical sales. Note that this is still above our forecast given in August of a high teens growth. Our outlook assumes that 55% of current generation console games will be delivered digitally, up from 38% last year. We are increasing our outlook for adjusted unrestricted operating cash flow to over $500 million versus a prior expectation of over $450 million. We now plan to deploy approximately $60 million for capital expenditures versus a prior expectation of $75 million. We expect gap net revenue to range from $2.96 to $3.01 billion and cost of goods sold to range from $1.42 to $1.43 billion. Total operating expenses are expected to range from $1.13 to $1.4 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 gap net income to range from $387 to $409 million, or $3.38 to $3.58 per share. In closing, our focus on producing the highest quality entertainment, delivered strong third-quarter results and reaffirmed that Take-Two remains on pace to deliver another terrific year. Looking ahead with our world-class creative teams, firm commitment to operational excellence, and solid financial foundation, our company is exceptionally well-positioned to deliver value to our customers and returns to our shareholders. Thank you. I will 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 commitment to excellence. To our shareholders, I want 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 sign 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. One moment, please, as we pull for questions. Our first question comes from the line of Todd Younger with Sanford and Bernstein. Please proceed with your question.

Hi. Good afternoon. Thank you for taking the question. I hope you understand that I feel I have to ask this question. I'm sure you were expecting it. So you had a significant executive departure at Rockstar. Carl or Strauss, anything you can tell us about succession planning, impact on operations in the pipeline, culture, future plans and competition, whatever you can say on that matter, I'm sure we'd appreciate. Thank you.

Todd, thanks for your question. This is Strauss. So Dan Houser had been on an extended leave since early spring 2019. The company has been led since its founding by Sam Houser, who's president of the company, and it's an extraordinary team effort, and Sam's a great player and coach. You know, the results at Rockstar Games continue to be extraordinary with the launch of the new content for both Grand Theft Auto Online and for Red Dead Online. And, you know, it's amazingly gratifying to see Grand Theft Auto 5 sell in 120 million units and Red Dead Redemption 2 be up to 29 million units with the launch on PC and Stadia. as well as the really extraordinary results of Grand Theft Auto Online, which we now expect to have another record year, more than six years after its initial launch. And, of course, Red Dead Online itself was up something like 3x year over year and sequentially in the last quarter. So the label has really never been stronger. We're incredibly optimistic and excited. At the same time, we're grateful to Dan for his contributions, and we wish him well.

Thank you. If you don't mind, if I could ask just a follow-up, then more on the business side. So, Stas, I think I've heard you say multiple times publicly that Take-Two aspires to launch a AAA game every year, at least one every year. Should we assume that that includes the calendar year 2020? I'm not asking for any formal announcements of anything, but... Should we expect a AAA release this year as well? And anything you could say more about that would be appreciated. Thanks.

So as we always do, you're going to hear our initial outlook for fiscal 21 in May. And our labels, of course, always make our product releases. We have set our strategy, as you correctly pointed out, is to have a strong frontline release schedule, both iterations from beloved franchises. We have 11 franchises that have sold in at least 5 million units within one release. as well as new intellectual property, and we are working on the most robust pipeline in our history. So we're amazingly excited about it. That said, we haven't always been able to achieve our goal of having a strong frontline release schedule in every year, even in the recent past. What has been great, though, is we've now built a company that has these very strong underpinnings of catalog titles and ongoing titles that that live on in the hearts and minds of our consumers, generating engagement and generating net bookings and profits. So right now we have titles like Grand Theft Auto Online, Red Dead Online, all the social point titles, and there are five that are successfully in market, NBA 2K Online in China, WWE Supercard, which has been downloaded more than 20 million times, and the list goes on. And in this past quarter, for example, catalog sales represented about 40% of our net bookings. So we now have a company that season in and season out, we feel confident, can generate plenty of net bookings, can engage with consumers, and can generate a great deal of profitability. And of course, at the same time, we'll build our business with those frontline new releases. Given that we're a company that depends on our creative teams to make as close to perfect products as possible, we have to be willing to live with the vagaries of product deliveries. And that means sometimes we will have thin frontline years. But even in those frontline years, we've been able to deliver really great financial results.

I'll leave it there. Thank you so much.

Our next question comes from the line of Doug Kurtz with Cowan & Company. Please deal with the question.

Thanks. If I recall correctly, two years ago, you guys had a bit of a hiccup with NBA 2K recurrent consumer spending. Obviously, last year was incredibly strong. It seems you're running into a little bit of an air pocket again this year. Could you talk about what's going on? Is that just sort of growing pains as you continue to sort of try to find new frontiers for the franchise to get consumers to spend money? Is it something with the process? Is it something with sort of the engagement loops? Anything you can say on that would be helpful.

Yeah, first of all, I want to make sure that we distinguish between a problem and a high-class problem. So, you know, the high-class problem is that we had said in our revised outlook that we thought NBA 2020 would set another record for net bookings. And now we're realizing that to say we don't expect it to set another record, despite its very strong unit sales and the great engagement. And that's because one of the parts of the online version has recurrent consumer spending coming in somewhat lower than we had expected. And that's related to a design feature, one that we can address going forward. But it's not really a hiccup because, Our goal is first and foremost to captivate and engage consumers, and our engagement is up, and our unit sales are up, and the title quality is just phenomenal. It's also true that as a company that doesn't lead with monetization, we lead with entertainment and engagement. Now and then, our monetization may not be exactly what we think it will be. So let me take responsibility for the decision to focus first and foremost on the entertainment experience and the consumer, and only secondarily on what the monetization is, And that means now and then we may fall short of setting a record. But failing to set a record isn't exactly a problem when you have a title that's as massively successful as MBA 2K20 is. It's an incredibly profitable title for the firm. Oh, and incidentally, recurrent consumer spending for the franchise will actually be up in the fiscal year in solid double digits. So the engagement is strong. The spending is strong. And at the same time, there were some design changes that didn't optimize specific recurrent consumer spending in certain modes, and we are confident we'll be able to address those. Okay, thank you.

Our next question comes from the line of Drew Crump for Stiefel. Please see what the question is.

Okay, thanks. Hey, guys. Good afternoon. What has led to the reduced view on Borderlands 3? Can you comment on how the game has performed on PC to date? And without getting into specific numbers, what are your expectations for the game once it's available on Steam?

Well, Borderlands is actually performing better than our original Outlook. It's sold in nearly 8 million units. We've launched one of the downloadable content packs. We have three more expected at the moment. And, in fact, the season pass attach rate is a record for the series and a record for 2K at this point in the title's lifecycle. And we expect that Borderlands 3 will set a record in terms of net bookings for the franchise. So our expectations remain solid and very strong. It's a great big hit for us.

Right. When we went into the Christmas season, we had really seen real excitement for the title, and we lifted our expectations a little bit higher than we had it at the very beginning of the year, which was very high to begin with. So we didn't meet those higher expectations, but we did meet our original very high expectations for the title. So that's why we're bringing it down slightly, but it's, you know, very high from the beginning of the year.

Again, this is a massive hit by any standard. But, you know, we've always said this. When we guide and when we revise, we aim to be accurate. And sometimes the vagaries of the entertainment business will be that we don't exactly get it right.

Okay, fair enough. And just to follow up, I think in the initial press release, you indicated that the sell-through on PC was quite strong. Again, what are your expectations for the game once it launches on Steam?

We continue to have very high expectations. As I said, we fully expect that Borderlands 3 will set a record for the franchise.

Got it. Okay, thanks, guys.

Our next question comes from the line of Andrew Urquitz with Oppenheimer. Please see what the question is.

Thank you for letting me ask a couple questions here. The first one, just how should we think about the next generation console? Does it add more uncertainty or does it actually alleviate uncertainty as we think about the transition to the new console in terms of live service games, whether it's NBA or GTA Online or what have you?

Hi, it's Carl. We're really excited about the next generation of console. I think the best part about it is that I think everyone now knows that we are going to have the next generation of console, and there's a lot of anticipation for it. I'll leave the details about what the expectations are to our partners, Microsoft and Sony, but I think so far the buzz about what the consoles are going to be able to do from a technological perspective is very exciting for us. And so in that regard, I think it eliminates uncertainty because we know we're going to the next console cycle and that we believe it will be very robust and a great thing for the industry. And again, anytime that you have these kind of advancements in tech, it creates opportunities for our great, incredible creative teams to push the limits of that technology and create the experiences that we know consumers are going to want to engage with for very long periods of time, even after the initial sales. So to the extent that we've got the ability to do that, and all indications is that we will, and we expect this will lead to growth for our company. It's a very positive thing.

Even for current ongoing live service games that you have now that were built for older gen?

Yeah, I mean, look, what exactly the transition is going to be for each game between the console cycles is will vary, but there's no reason to believe that the success that we're experiencing with those services would be any less than the new generation than it is in the old generation. Got it. Thank you.

And then just another higher-level question. I think Outer Worlds was on Microsoft, Xbox, Game Pass. Do you think that helped or hurt the success of that franchise? Yes.

You know, it's hard to say. I think what we've said all along is that, generally speaking, we want to be where the consumer is. Generally speaking, we think subscription offerings, to the extent they exist, are probably better suited to catalog, but we're willing to take experimental chances when it makes sense for a particular title and when the deal underlying that option also makes sense for us. And we're pleased that we have a great partnership with Microsoft And we're mostly pleased that the title is such a big hit. It sold in more than 2 million units, and it's won 75 game awards. So it's early days for all of these platforms. It's obviously early days for many technologies, including streaming technology. Our goal is to be where the consumer is. We're ecumenical, and we're open-minded. Got it. Thank you guys so much.

Our next question comes in line of Matthew Thorne with SunTrust. Please see what your question is.

Hey, good afternoon. Thanks for taking the question, guys. Maybe two quick housekeeping or triangulation questions, and then I'll come back to an earlier question. GTA versus NBA 2K in the back half of the year, I mean, could GTA Online actually be bigger than the NBA? Was it in December? Could it be in the fourth quarter? Similarly, Red Dead, I think the initial expectation this year was recurrent, would be down year on year when you include some of the premium SKUs from last year's launch. Is that still the case, given the success that titles have and could recur and actually be up year on year? And then just coming back, Strauss, to your comment around the recent departure, I just wanted to paraphrase and make sure that we had the message right. It sounds like this was a fairly isolated departure, no other plans for departure. The culture is still kind of as it has been. The pipeline is as it has been. The progress is kind of where it has been. But I just want to make sure that we have that messaging right, because obviously a lot of investors are asking that question. Any color there would be helpful. Thanks, guys.

So in the first one, we have said that the NBA 2K is the highest contributor in recurrent consumer spending for all titles. So we have said that. What is your second question? Sorry, I missed that one.

On Red Dead Online, if that could actually be up year-on-year, even including the premium SKU kind of contribution last year?

No, with including the special editions, it's not up. It's only without including the special edition.

And in terms of your question about Rockstar, and I think your question sort of fell in the category of the stability of the team going forward, as well as the culture of the label. So, In terms of team stability, Sam Houser is president of Rockstar Games. He founded Rockstar Games. He's a great player coach, and he leads a team of thousands of people every day who are trying to make the most extraordinary entertainment experiences known to man. Those are their goals, and more often than not, they achieve or even exceed those goals, which is just amazing. It doesn't... I don't typically speak for other people, but I confidently can speak and say that Sam is highly committed to the organization, and Sam and I work very closely together, and it's an enormous pleasure to be able to be in business with Sam and the entire team at Rockstar. Culturally, I've only seen ongoing improvements at Rockstar, frankly. I've only seen growth and engagement and innovation and growth. And I think one of the great things about all of our labels and our company as a whole is that we're incredibly self-critical, and we aim to be utterly transparent, and we always try to do better. And I think that's true of everywhere that take two touches, and Rockstar Games sets a standard for always trying to improve the quality of its operations, the quality of the way that they work, and the quality of their culture. I frankly couldn't be more proud of how effectively that label is operating I think this year has been one of amazing strength. I mean, dropping content on the same day for both Red Dead Online and Grand Theft Auto Online and delivering content that set records in terms of engagement and player excitement, oh, and incidentally, revenue and profitability. So things couldn't be better. And to be very specific, no, we certainly don't expect other departures. As an organization as a whole, we have an extraordinarily low rate of attrition. vastly lower than the industry average. And I think that's because, you know, we offer a great place to work at all of our labels and to take to corporate as well. And to the extent that we ever fall short, we always aim to do better.

Great. Thanks, guys.

Our next question comes from Ryan Gee with Bank of America. Please see what their question.

Yeah, hey, good afternoon. Thanks, you guys, for taking the question. So maybe first for Laney, I guess, With over 60% of the business now coming from recurrent consumer spend, how has that impacted your ability to provide us guidance one quarter, one year out, especially as you consider NBA 2K and Borderlands coming in a bit lower? Should we have greater confidence now than in the past in your guidance, or does this present other challenges for you? That's the first question. And then for Carl, You touched on Cloud Chamber. Can we maybe get an update on the 2K Silicon Valley Studio, maybe Hangar 13? Are those likely to also have content out in the next one to two years? Anything you can say there? Great.

Well, in terms of forecasting with recurrent consumer spending, there are some things that I think are easier to predict, but it does present other challenges as well, especially when you have titles that are out in the market for such a long time. and you would expect them to decline, and then one year they decline, and then the next year they grow, and there's different content that comes out, it's still pretty difficult to predict that, as well as when we're trying different things in different games, and you don't know how that's going to perform, that can also be another variable. So we're definitely getting better at it, and we have a lot more information and analytics that we can use to be more predictive, but there are different things that change every year that can make it different from year to year. So I'd say we're getting better at it, but there are different things that we have in recurrent consumer spending each year. So I wouldn't say that it's a slam dunk, but it's definitely something that we're getting better at.

And in regards to your question about Hangar 13 and also Michael Condry's studio, I wish I could tell you more about what they're working on because it's very exciting, both the studios. We're incredibly excited to have the teams at Hangar 13 led by Hayden and also Michael's yet-to-be-named studio as well, working on new and exciting projects. As I said before, our pipeline is very diverse and it's very large, and we're going to share with you more about that in the coming months. And these two projects are obviously part of that. So you can certainly expect that there will be games coming out of those studios. I wish I could tell you more about them, but stay tuned because they're very exciting. And we're thrilled to be in business with both of those folks and their entire teams. So stay tuned.

Okay. And then if I could just follow up on that last point. So, you know, Bioshock is still several years out. Borderlands just came out. Should we assume that your characterization of a robust slate ahead also includes Rockstar content, not just 2K Studios?

Yeah, we're talking about the entire company, all of our labels, Rockstar, Private Division, Social Point, and 2K.

Great. Thanks, you guys.

Our next question comes from the line of Eric Sheridan with UBS. Please see with your questions.

Thanks so much for taking the question. Maybe a bigger picture one. You saw another player in the industry make a larger announcement with Google in the last couple of weeks. Curious how you're thinking about a couple of the large secular themes that are playing out in the industry with respect to either owning or outsourcing your own technology infrastructure, how you think about the content you're producing being broadcast broader over direct-to-consumer channels, and how to think about either owning that or partnering with And the same with respect to cloud computing as a distribution mechanism for gaming. How are you thinking about wrapping what you've been very good at over the years in terms of content creation and thinking about maybe amplifying that either through your own efforts or through partnerships and relationships? Thanks so much.

I appreciate the question. And the question points, you know, sort of points up our focus on expanding the company in this industry that has these extraordinary tailwinds. through a focus on new technologies, new business models, new types of entertainment, and new geographies, or geographies where we're not currently represented. And so it's sort of, you know, for a multiple choice question, it would be all of the above. We're focusing on all of them. You specifically asked on the distribution side, you know, how are we looking at that? And the answer is we are very engaged in looking at options that do include direct-to-consumer options. Our strategy... Excuse me. Our strategy has been to be where the consumer is. If I keep joking, Carl's going to have to take over. Our strategy has been, apologies, to be where the consumer is and to be ecumenical about various distribution opportunities and to work with all of the players in the space, and I expect we'll continue to do all of that.

Our next question comes from the line of Mario Lu with Barclays. Please see with your question.

Hi, I have a couple questions, one on GTA and one on Red Dead. So GTA V had partnerships with PlayStation Now late last year and then Xbox Game Pass starting in January, which I suspect it added millions of players. So any color you can provide regarding these types of partnerships and specifically how much of an uplift they provided to GTA Online bookings? And secondly, on Red Dead, glad to hear that Red Dead Online tripled year on year. So I know you mentioned before that GTA Online is in a world of its own, but how confident are you that Red Dead Online engagement can maintain or grow for six years plus as well? Thanks.

You know, in terms of how specific arrangements with specific titles pan out, We typically don't go into that level of detail except to say we enter into those arrangements with a view that they'll benefit the titles, they'll benefit us, and that they'll benefit our partners. And more often than not, we are able to do all three of those things. In terms of the success of Red Dead Online, we're incredibly excited about the momentum that we're seeing in the quarter. We feel really good going forward. But as I said, when asked about Grand Theft Auto Online early on, and I was asked a lot about it, We really don't know how high up it is. We really don't have any way of knowing where the consumer will take us. What we do know is that we're going to deliver a lot more great content. And so far, it does look like when we deliver great content into these beloved franchises, consumers show up and stay engaged. So we're very optimistic about the future of Red Dead Online, and we're excited about the momentum we see.

That's awful. Thank you.

Our next question comes from the line of Eric Handler with MKM Partners. Please see what your question is.

Thank you very much for the question. I actually got two for you. First, I wondered if you'd be willing to sort of lift the kimono on the development pipeline a little bit and talk about how many AAA console games are currently in development and to the extent that maybe you could say, you know, how many of those might be released in the next one to three years and how many might be released in the next, you know, beyond three years. Anything to sort of give us a little bit of a roadmap there would be greatly appreciated. And secondly, with Red Dead Online, you know, when you originally launched GT Online, you had a couple big content drops that really helped the development of that business, like Gunrunners and the first heist that you did. I wondered, have we seen that type of content drop yet for Red Dead Online?

Hey, Eric, it's Carl. Just regarding the pipeline, this question obviously comes up on every single call we have and every single meeting we have with investors. And we are, like I said, we are going to share more about the pipeline with you over the coming months. give you some more color on exactly what constitutes that pipeline. So it'll give you a little bit more idea of, you know, between what we've got going on with new IP and existing franchises, free-to-play games, different business models, casual games, core games, mid-core games. We're hoping to share a lot more information with you over the coming months regarding that.

And in terms of Red Dead, I don't think you can compare content to content. The last content drops on Red Dead have... been fantastically successful. And the latest update, Moonshiners did great and generated all of this excitement that we've seen reflected in the numbers. And I'm confident Rockstar Games will continue to deliver great content for Red Dead Online. But there's no real way to compare qualitatively to, or I suppose quantitatively, to Grand Theft Auto Online content. They're different games and they have different types of content that's dropped. But the goal is to create content that consumers love and engage in and spend against. Thank you very much.

Our next question comes from the line of Mike Ink with Goldman Sachs. Please begin with your question.

Hi, thank you very much for the question. I just have one on M&A for Strauss. As a group, it seems like video game publishers have been pretty resistant to making their frontline content available day and date on subscription products. Do you think that could eventually catalyze vertical consolidation to get that content in the future, and I'd also appreciate hearing your thoughts on the prospect of AAA horizontal consolidation as well. Thank you.

You know, I think we're... I'm proud of my crystal ball most of the time. Where I really had a very bad crystal ball is when I've been predicting consolidation in the industry. I think I predicted meaningful consolidation in the industry about 10 years ago, and we're still waiting. So... It seems that in an industry where you have these extraordinary tailwinds and weak players get washed out and really get sold for scrap, essentially, and strong players only get stronger, it's hard to imagine why you'd see a lot of horizontal consolidation. Horizontal consolidation tends to occur when industries are under pressure or companies are under pressure, typically. Certainly in the entertainment industry, that's historically been the case. So I'm not sure what to expect. I think your question about vertical consolidation is interesting, even though, you know, your first day at business school, they explained to you that vertical consolidation doesn't create value. One could imagine a powerful distributor that's anxious to build an audience could imagine that acquiring exclusive rights to key product would jumpstart that. The track record of that going well in the linear entertainment business has been very poor, and it's been tried over and over again. But I suppose it could be tried in the interactive entertainment business. Very hard for us to say. What we do every day is get up and try to do the best job we can, both from a creative point of view and a business point of view, and we try to be of service to our customers every our colleagues, and our investors, and that's served us well. And in terms of our own approach to M&A, we have a significant cash balance, just shy of $2 billion. We don't have any debt, and we have a lot of cash flow. In fact, we've revised upward our expectations about adjusted operating cash flow for the year to $500 million, up from $450. Our CapEx is down a little bit as well. So we certainly are in a position to pursue transactions. Our lens is Is it strategically powerful, and is it financially accretive? And, you know, that analysis led us to acquire SocialPoint several years ago. We're happy we did. And to the extent that an opportunity matches those criteria, we would hope to move forward as well. Great. Thank you for your thoughts.

Our next question comes from the line of Raymond Stachel with Consumer Edge Research. Please see what your question is.

Great. Thanks for taking my question. One on retaining talent, and this isn't really meant to involve Dan Houser, but you can certainly comment on that as well. It's more in thinking about how you're opening up these new studios and even your equity investment in Proletariat. Can you talk about how the changing business models and the changing pipeline that you have as far as bringing new ideas to market is making you think differently about the way that you're incentivizing your employees? I know you think deeply about these matters. Thanks.

Yeah, what we're trying always to think differently about is creativity. You know, we know there will be a next new thing. You haven't seen the final expression of what interactive entertainment or entertainment is here in 2020. You're going to see big innovations, hopefully from us, but certainly from the industry in the next 1, 2, 3, 5, 10, 20 years. And we're positioned so that we ought to be able to be at the front line of that, and shame on us if we're not. So the creative expression of what we do must evolve, will evolve. But the culture that underlies that here remains unchanged because it works. And part of a culture is compensation. In a for-profit enterprise, you can outline your culture verbally, but your compensation programs either will or will not drive that culture. And our culture is one of sharing, and our compensation programs are one of sharing. We emotionally share success. We all take responsibility for failure. And equally, our compensation programs align incentives with our shareholders by making sure that essentially we have profit shares, essentially. If we miss our goals, then incentive comp for the team is disappointing or zero. If we exceed our goals, it's good. If we massively exceed our goals, it's very good. But it's self-liquidating because it's driven by an increase in profits. And at the label level, we essentially, although we call it different things, have profit-sharing arrangements. So the better the labels do, the better the human beings do, the better the shareholders do. That's our goal, and it's all formulaic because we don't believe in discretionary comp programs. We think they lead to politicking and other bad things. Our comp programs are almost entirely formulaic. They're based on results versus plan and or actual operational profitability at the divisional level.

Great. Thanks very much.

Our next question comes from the line of Alex Giammo with Jefferies. Please see what the question is.

Carl, you mentioned free-to-play as an opportunity in your remarks. You guys have a lot of valuable IP in your portfolio, so just curious if anything in your catalog could work on a free-to-play basis, or if you were to launch a free-to-play offering, would it more likely be based on new IP? Thanks.

Yeah, I think the short answer is I'm sure there are lots of things in our catalog that would work on a free-to-play basis, and that doesn't necessarily mean that we pursue that. It really has to be the right mix of the creative goal and what the development team is trying to achieve from a creative perspective. and then the business model, et cetera. Free-to-play games, we tend to have the belief that you can't really invest at the same level in a free-to-play experience that you do in a standard ownership AAA-type title. There are probably going to be examples in the future where that's not the case, but that's our general philosophy. But that doesn't necessarily mean that an old franchise that was a AAA ownership-type model couldn't work in a free-to-play context. And certainly new IP gets opportunities to pursue new business models, and amongst those business models are free-to-play. So the answer really could be both. Got it. Thanks, Carl.

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

Hey, thanks for seeking me back in. My question was actually taken, but I'll ask a different one. I think it was, Carl, you mentioned talking about the pipeline in the next couple of months here. I'm just curious, number one, is that just talking about the fiscal 21 slate, or is that more of a multi-year outlook that you guys are thinking about providing? And then just kind of what venue is that on the next call? Is there a certain venue, or is this kind of ad hoc by studio? Just how should we think about this information coming to us? Any color there. Thanks, guys.

Yeah, I mean, our goal is obviously, we have insight into many years into the future what the pipeline is. And one thing we know for sure is that it will change. And not everything in a pipeline will see the light of day. That's currently the pipeline. And there'll be things that are not in the pipeline that will come out. But our goal is to share as much information as we can to give you insight into what we see, which is a multi-year pipeline. And when exactly we do that, you know, you'll have to wait and see. But really, it'll be in the coming months. And, you know, when that information comes, you'll know it.

Our final question comes online of Jeff Cohn with Stevens Inc. Please do with your question.

Hey, guys. Thanks for taking the question. Can you talk about engagement with the Rockstar Games Launcher since it went live back in September? And then could you eventually see adding games from other Take-Two studios or even games from third-party publishers?

Yeah, they've had very strong results with the Rockstar Game Launcher, and we're excited about to see that. In terms of how the company will pursue it broadly, that's part of the work that we're doing now. We obviously do have a central site where you can buy games, and I would hope that our company would work together effectively to pursue various direct-to-consumer offerings. But equally, our labels are highly independent. So I think your expectations are probably that we're unlikely to have only one place of any sort to buy anything. We're likely to have multiple outlets. We're likely to have direct outlets. We're likely to work with third parties. And we're likely to have multiple opportunities throughout the organization. But the underpinnings within the organization, the technical underpinnings and the business underpinnings, will be centralized. We'll all work together cooperatively so we don't duplicate efforts. So you can see a consumer-facing approach that's quite varied here. And then we have a highly efficient approach internally where, you know, we have all people working together productively in service of the same goals.

Thanks, Josh.

Ladies and gentlemen, we have reached the end of our question and answer session, and I would like to turn it back over to management for any closing remarks.

Thanks, everyone, for joining us today. We're very proud of the results driven by our creative teams and and driven by our business teams as well. We're grateful to our colleagues all around the world. We're very grateful to our shareholders for their support and grateful to all of you who attended and took the time to be thoughtful and ask questions.

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