Take-Two Interactive Software, Inc.

Greetings and welcome to Take-Two first quarter fiscal year 2021 earnings conference call. At this time, all participants are on 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 host, Mr. Hank Diamond. Thank you. You may begin.

Good afternoon. Welcome and thank you for joining Take-Two's conference call to discuss its results for the first quarter of fiscal year 2021, ended June 30th, 2020. Today's call will be led by Strauss-Zelnick, 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 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. Our press release also contains a reconciliation of any non-GAAP financial measure to the most comparable GAAP measure. In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and findings with the SEC may be obtained from our website at www.take2games.com. And now I'll turn the call over to Strauss.

Thanks, Hank. Good afternoon, and thank you for joining us today. I'd like to start by expressing on behalf of our entire management team our deepest sympathies for those who've been and continue to be affected by this pandemic. We're immensely grateful to everyone who serves on the front lines caring for people in need and helping the world navigate this crisis. Turning to our business, fiscal 2021 is off to a terrific start with first quarter operating results that significantly exceeded our expectations, including fiscal first quarter records for GAAP net revenue and net bookings. Our outstanding results were driven by the outperformance of MBA 2K20, Grand Theft Auto V and Grand Theft Auto Online, and Red Dead Redemption 2 and Red Dead Online, and Social Point's mobile games. I remain incredibly proud of our entire organization, which exemplifies our core tenets of creativity, innovation, and efficiency, and continues to deliver industry-leading entertainment experiences to our audiences during these challenging times. In the first quarter, NBA 2K20 significantly outperformed expectations and recently achieved a franchise milestone of $1 billion in netbooking since launch. Consumer engagement with MBA2K continues to increase, with daily active users growing 82%, my career users growing 78%, and my team users up a remarkable 108% as compared to the first quarter last year. Recurrent consumer spending at MBA2K grew 126% to a new record and remained the largest contributor to that part of our business. To date, NBA 2K20 has sold in over 14 million units, up over 18% compared with NBA 2K19 in the same timeframe. We expect that lifetime units, recurrent consumer spending, and net bookings for NBA 2K20 will be the highest ever for a 2K sports title. Nearly seven years after its initial release, sales of Grand Theft Auto V continue to exceed expectations. The title is now sold in nearly 135 million units, and remains the standard bearer of the current console generation. In addition, recurring consumer spending on Grand Theft Auto Online outperformed our forecast, growing 155% to a new record. In April, Rockstar Games released Gerald's Last Play, a series of six new contact missions for Grand Theft Auto Online. The first quarter was the second best period ever for new player acquisition since the title's launch in 2013. The unprecedented player volume trends that started with the superlative performance of the Diamond Casino and Resort update in July 2019 and drove record average multiplayer MAUs through August 2019 persisted with sequential records in average multiplayer MAUs from December 2019 through May 2020. We now expect Grand Theft Auto Online to establish a new net bookings record in fiscal 2021. In addition, the partnership with Epic Games Store, where Grand Theft Auto V was offered free for a week in mid-May, was a contributing factor to the strong performance of Grand Theft Auto Online and did not come at the expense of paid sales of the title. In fact, Grand Theft Auto V sold through more units in the period than any first quarter since the title's launch in 2013. And in the six weeks following the Epic Store promotion, Grand Theft Auto V sold more units than in the same period in any previous year. Red Dead Redemption 2 also outperformed and to date has sold in more than 32 million units worldwide. The title sold through twice as many units compared to last year. Engagement with and recurrent consumer spending on Red Dead Online continues to increase. The title acquired nearly twice as many users year over year, and average multiplayer MAUs grew 50%. Net bookings from Red Dead Online surpassed expectations, growing 118%, excluding digital content bundled with the Red Dead Redemption 2 Premium Editions. During the first quarter, Rockstar Games added new content to Red Dead Online, including six new maps to Showdown mode. Through the coming year, Rockstar Games will continue to support both Red Dead Online and Grand Theft Auto Online with more content updates to keep new and returning players excited and engaged. Borderlands 3 continues to expand its audience, and to date has sold in over 10.5 million units worldwide, up 69% over Borderlands 2 in the same period. During the first quarter, 2K and Gearbox launched Bounty of Blood, the third of four announced paid campaigns that are included in the Borderlands 3 Super Deluxe Edition and the Season Pass, or are available for purchase separately upon release. The Season Pass attach rate for Borderlands 3 continues to be the highest in 2K's history, and there's more content coming. In the period, MAUs grew as sales continued at a steady pace with the consistent release of free and paid content. We attribute this ongoing success in part to 2K's and Gearbox Software's continued efforts to support Borderlands 3 as a live service game, which should continue to benefit the title and series over the long term. Private Division's critical and commercial success, The Outer Worlds, outperformed expectations in the first quarter and is now sold in 2.8 million units. On June 5th, the title was released for Nintendo Switch. In addition, Private Division launched Disintegration, a new sci-fi first-person shooter experience that blends real-time tactical elements for PlayStation 4, Xbox One, and PC. During the first quarter, 2K released Mafia II Definitive Edition and Mafia III Definitive Edition as part of the Mafia Trilogy, which combines all three previously released Mafia titles into a single package for PlayStation 4, Xbox One, and PC, curated by 2K's Hangar 13 studio. Mafia 1 Definitive Edition will become available on September 25th, as Carl will discuss shortly. 2K also bolstered our offerings for Nintendo Switch with some of our most beloved and successful franchises, including Bioshock the Collection, the Borderlands Legendary Collection, and the XCOM 2 Collection. In addition, 2K and Firaxis Games released XCOM Chimera Squad, an all-new standalone title in the award-winning turn-based XCOM series for PC. Our first quarter results were also enhanced by a variety of other offerings led by SocialPoint, Sid Meier's Civilization VI, and the WWE Series. During the first quarter, recurrent consumer spending exceeded expectations, growing 127% to a new record and accounted for 65% of net bookings. In addition to virtual currency for NBA 2K, Grand Theft Auto Online, and Red Dead Online, recurrent consumer spending was enhanced by the following offerings. In the free-to-play category, Social Point outperformed expectations, growing 54% to a fiscal first quarter record, driven primarily by the exceptional performance of its two biggest games, Dragon City and Monster Legends. The studio continues to invest in its broad and innovative pipeline of more than 10 new games planned for launch in the coming years. WWE Supercard also outperformed during the first quarter, growing 54%. The title has now been downloaded more than 21 million times and remains 2K's highest grossing mobile title. And NBA 2K Online in China remains a significant contributor to our results. The title is the number one PC online sports game in China with nearly 50 million registered users. Add-on content grew 135% and outperformed expectations led by offerings for the Borderlands franchise, Sid Meier's Civilization VI, and XCOM 2. As a result of our outperformance in the first quarter, along with a higher forecast for the balance of the year, We're raising our outlook for fiscal 2021, which is well underway to be another great year for Take-Two. Looking ahead, our company has the strongest development pipeline in its history, including sequels from our biggest franchises, as well as exciting new IP. We've made great strides to increase the scale of our enterprise, and our current pipeline is more than double what it was five years ago in terms of number of games, including 54% internally developed titles and 46% externally developed titles. In closing, we continue to prepare for our industry's forthcoming transition to a new console cycle, which will provide our world-class development teams with a better platform on which to captivate and engage our audiences. Our company remains superbly positioned, creatively, operationally, and financially, to capitalize on the many positive trends in our industry and to deliver returns for our shareholders over the long term. I'll now turn the call over to Carl.

Thanks, Josh. I'd like to begin by thanking our teams for delivering an excellent start to the year. The work being accomplished across our company is a shining example of what can be achieved through our culture of collaboration, which is more important than ever during these challenging times. I'll now discuss our recent and upcoming releases. On July 1st, Private Division, in partnership with the European Space Agency, launched a new update for Kerbal Space Program for PC entitled Shared Horizons. The update, which will also be available later this year on consoles, celebrates ESA's outstanding contribution to space exploration and is free for all players of the critically acclaimed physics-based space simulation game. In addition, Private Division's new development studio, Intercept Games, remains hard at work on Kerbal Space Program 2, which is expected to launch in the fall of 2021. On July 23rd, Paraxis Games released Ethiopia Pack, as part of their bi-monthly release of six downloadable content packs for the all-new Sid Meier Civilization VI New Frontier Pass for PlayStation 4, Xbox One, Nintendo Switch, and PC. Later this year, the New Frontier Pass will come to mobile platforms, and each pack will also be available for individual purchase. On July 28th, Rockstar Games released The Naturalist, a massive new update to Red Dead Online featuring a new frontier pursuit that will introduce players to the secrets of naturalism as part of an all-new role, plus a new Outlaw Pass, tons of community-requested features and fixes, and much more to play and discover in months to come. Launch Day for The Naturalist was Red Dead Online's best day ever outside of the holiday period, and the update continues to perform very well. On August 21st, 2K will release PGA Tour 2K21 for PlayStation 4, Xbox One, Nintendo Switch, PC, and Stadia. Developed by HB Studios, PGA Tour 2K21 will feature PGA professional Justin Thomas on the cover, officially licensed pro players, courses, and gear, realistic course scanning, play-by-play commentary by Luke Elvey and Rich Beam, a new PGA Tour career mold, online and local multiplayer, course and player customization, and online societies. On September 24th, 2K will release the next annual offering from our flagship NBA 2K series for PlayStation 4, Xbox One, Nintendo Switch, PC, and Stadia. With extensive improvements, best-in-class graphics and gameplay, competitive and community online features, and deep, varied game modes, NBA 2K21 will offer a one-of-a-kind immersion into all facets of NBA 2K. basketball, and culture. In addition, NBA 2K21 will launch this holiday season for next-generation platforms, providing unparalleled graphics and loading speeds, and will once again redefine the standards for sports simulations. Five-time NBA All-Star and Portland Trailblazers standout Damian Lillard will be on the cover for the current generation versions of NBA 2K21 and the 2019 first overall pick and consensus National College Player of the Year, Zion Williamson of the New Orleans Pelicans will be on the cover for the PlayStation 5 and Xbox Series X releases. NBA 2K21 will introduce several initiatives to bridge the two console generations of the game, including My Team cross-progression and a shared VC wallet within the same console families. In addition, NBA legend Kobe Bryant's lifetime achievement of basketball excellence will be celebrated with the NBA 2K21 Mamba Forever edition. which will provide players with seamless access to both current and next generation versions of the game. On September 9th, Private Division will release Peril on Gorgon, the first narrative expansion for their award-winning RPG, The Outer Worlds, from Obsidian Entertainment. In this expansion, players will discover a lawless den of monsters and marauders on the Gorgon asteroid and uncover a mystery that will change the Halcyon colony forever. Peril on Gorgon is the first of two narrative expansions that can be purchased individually or bundled at a discount in the Outer Worlds Expansion Pass. On September 18th, 2K will release WWE 2K Battlegrounds, a completely new WWE gaming experience that will feature arcade-style brawling action for PlayStation 4, Xbox One, Nintendo Switch, PC, and Stadia. Featuring a roster of more than 70 WWE superstars and legends at launch, with additional superstars to be released thereafter. WWE 2K Battlegrounds is now available for pre-order in digital formats and at participating retailers. On September 25th, 2K will release Mafia 1 Definitive Edition for PlayStation 4, Xbox One, and PC in the Mafia Trilogy Collection, which features all three previously released Mafia titles. For the trilogy, Mafia 1 is being completely remade from the ground up, including new technology, voice acting, game mechanics, and more. In the coming weeks, 2K and Gearbox will have more to share on their upcoming content releases to support and further expand the audience for Borderlands 3. Rockstar also announced an upcoming summer update to Grand Theft Auto Online, and both Grand Theft Auto Online and Red Dead Online will receive major updates later this fiscal year, featuring an extension to existing Frontier pursuits for Red Dead Online, as well as Grand Theft Auto Online's biggest update ever, featuring a new take on heists in a new location. Throughout fiscal 2021, we will continue to support our titles with innovative post-launch content that derives engagement and recurring consumer spending. In addition, SocialPoint and 2K will continue to broaden our offerings for mobile devices. Looking ahead to fiscal year 2022, Rockstar Games also announced that they will bring their beloved and iconic Grand Theft Auto V to the next generation of consoles in the second half of calendar 2021. The new generation versions of the game will feature a range of technical improvements, visual upgrades, and performance enhancements to take full advantage of the latest hardware, making the game more beautiful and more responsive than ever. For the community of Grand Theft Auto Online, the journey through this ever-evolving world will continue on the next generation consoles with more new updates, including additional content exclusive to the new consoles and PC. There will also be a new standalone version of Grand Theft Auto Online coming in the second half of calendar 2021, which will be available for free exclusively for PlayStation 5 players during the first three months. Rockstar Games will share more details on the new versions of Grand Theft Auto 5 in the month ahead. Last week, Private Division announced the signing of three new publishing agreements with top independent developers Moon Studios, League of Geeks, and Roll7. These partnerships will expand the label's portfolio of titles that includes Kerbal Space Program franchise, The Outer Worlds, Ancestors, The Humankind Odyssey, and Disintegration. Moon Studios, founded in 2010 by Thomas Mahler and Gennady Korol, is a BAFTA award-winning studio best known for developing the critically acclaimed Ori and the Blind Forest and Ori and the Will of the Wisps. Moon Studios is working on creating a compelling new action RPG. League of Geeks, founded in 2011 by Trent Custers, Blake Mitzi, and Ty Carey, are renowned for developing the PC game Armello, which combines deep tactical card play, rich tabletop strategy, and RPG elements. Located in Melbourne, League of Geeks is looking to expand upon its initial success with an ambitious new intellectual property. Roll7 is a BAFTA multi-award winning independent studio founded in London in 2008 by Simon Bennett, John Ribbons, and Tom Hagerty. Roll7 created the Olly Olly series, Not a Hero, and Laser League. They are working with Private Division on the next jump forward in their mission to create awesome flow state games. The first of these titles is expected to launch in fiscal 2022. Also last week, 2K announced a partnership with One Team Partners and the National Football League Players Association that will allow the label to include the names, numbers, images, and likenesses for over 2,000 current NFL players in multiple non-simulation football games that are currently in development and set to launch starting in calendar year 2021 during fiscal 2022. We are thrilled to be back in the business with NFL. which is one of the most successful sport brands in the world. We are confident that our forthcoming NFL offerings will be extremely fun, highly engaging, and deeply social experiences. Turning to esports, we are very excited about the continued progress and growth of the NBA 2K League, which is currently in its third season. League playoffs will run between August 19th and 22nd, prior to the finals on August 29th. The league has been steadily building its portfolio of high-profile partnerships and sponsorships, including Anheuser-Busch, AT&T, Champion Athletic Wear, GameStop, HyperX, Jostens, Panera Bread, Rainer Gaming, SAP, Scuff Gaming, Snickers, Stance, and Tissot. The NBA 2K League airs live on the league's Twitch channel, in addition to select matches airing live on ESPN2, ESPN's digital platforms, and the NBA 2K League's YouTube channel. as well as on delay on EGG Network in Southeast Asia. Furthermore, in June, as part of a multi-year agreement, live streams of league games began airing on Dash Radio's Nothing But Net channel, the digital network that has more than 12 million subscribers. We are very excited about the continued success and growth of the NBA 2K League, which has the long-term potential to enhance engagement and to be a driver of profits for our company. As Strauss mentioned, we have the strongest development pipeline in Take-Two's history, as well as significant potential to increase engagement and recurrent consumer spending. In addition, we are investing in a number of emerging opportunities that have the potential to enhance our growth rate. We remain focused on delivering the highest quality entertainment that captivates and engages audiences throughout the world. Whether expanding our offerings onto new platforms, capitalizing on new business models and distribution channels, or increasing our presence in emerging markets, take to as exceedingly well positions to generate value to consumers as well as growth for our shareholders. And I'll send the call over to Lainey.

Thanks, Carl, and good afternoon, everyone. Today I'll discuss our first quarter results and then review our financial outlooks for the second quarter and fiscal year 2021. Please note that additional details regarding our actual results and outlooks are contained in our press release. As Strauss mentioned, fiscal 2021 is off to a great start. their first quarter operating results significantly beating our expectations. Net bookings grew 136% to $996 million, which was a physical first quarter record. This result exceeded our outlook of $800 to $850 million, driven by the exceptional performance throughout our portfolio led by NBA 2K20, Grand Theft Auto V, and Grand Theft Auto Online, Red Dead Redemption 2, and Red Dead Online, and Social Points Mobile Games, partially offset by the underperformance of disintegration. Digitally delivered net bookings grew 139% as compared to our outlook of 100% growth and accounted for 92% of the total. This result exceeded our outlook primarily due to the outperformance of our current consumer spending. During the first quarter, 77% of sales of current generation console games were delivered digitally, up from 75% last year. Recurrent consumer spending grew 127% as compared to our outlook of 75% growth and accounted for 65% of total net booking. This growth was driven primarily by NBA 2K20, Grand Theft Auto Online, and SocialPoint's mobile games. Gap net revenue grew 54% to $831 million, which is the fiscal first quarter record, and cost of goods sold increased to $477 million. Operating expenses increased by 10% to $272 million, due primarily to our COVID-19 charitable initiative, headcount expansion, and higher incentive compensation as a result of the company's performance. And gap net income grew to $89 million, or 77 cents per share, as compared to $46 million, or 41 cents per share, in the first quarter last year. Now to our guidance, starting with the fiscal second quarter. We project net bookings to range from $775 to $825 million, compared to $951 million in the second quarter last year, which benefited from the launch of Borderlands 3. The largest contributors to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto 5, Red Dead Redemption 2 and Red Dead Online, Borderlands 3, Social Points Mobile Games, Sid Meier's Civilization 6, and The Outer Worlds. We expect digitally delivered net bookings to be flat, driven by growth in recurrent consumer spending offset by lower digitally delivered sales of Borderlands 3, which launched last year. Our forecast assumes that 63% for current generation console game sales will be delivered digitally, up from 51% last year. We project recurrent consumer spending to grow by approximately 10%. We expect gap net revenue to range from $750 to $800 million this year. and cost of goods sold to range from $355 to $381 million. Operating expenses are expected to range from $285 to $295 million. At the midpoint, this represents an 8% decrease over last year, driven primarily by lower marketing expense. And gap net income is expected to range from $98 to $110 million, or $0.85 to $0.95 per share. For management reporting purposes, we expect our tax rate to be 16% throughout fiscal 2021. Turning to our outlook for the full fiscal year, we are increasing our net bookings outlook range to $2.8 to $2.9 billion, from $2.55 to $2.65 billion, driven by our outperformance in the first quarter, along with an updated forecast for the balance of the year. We are continuing to see elevated engagement in sales from people sheltering at home and which we have included in the second quarter but have not yet factored into the back half of the year. We expect growth from NBA 2K, Grand Theft Auto Online, and Social Points mobile games to be offset by lower results from Borderlands 3, Red Dead Redemption 2, and Grand Theft Auto 5. Red Dead Online, excluding digital content bundled with the Premium Edition, is projected to be approximately flat versus fiscal 2020. The largest contributors to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto 5, Red Dead Redemption 2 and Red Dead Online, Borderlands 3, Social Points Mobile Games, Sid Meier's Civilization VI, and The Outer Worlds. We expect the net bookings breakdown from our labels 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 now project digitally delivered net bookings increased by approximately 3% as compared to our prior outlook of an 8% decline. This growth is being driven by recurrent consumer spending and digitally delivered sales. As a percentage of our business, digital is projected to represent 87% from 82% last year. Our forecast assumes that 68% of current generation console game sales will be delivered digitally, up from 55% last year. We now expect recurrent consumer spending to grow by 16% as compared to our prior outlook of flat versus fiscal 2020, and to represent 61% of net bookings as compared to 51% last year. This growth is being driven by MBA2K, Grand Theft Auto Online, and SocialPoints. We are increasing our non-GAAP-adjusted, unrestricted operating cash flow outlook to more than $500 million, up from our prior outlook of more than $350 million. We plan to deploy approximately $75 million for capital expenditures. We expect GAAP net revenue to range from $2.8 to $2.9 billion, and cost of goods sold to range from $1.28 to $1.32 billion. Total operating expenses are expected to range from $1.15 to $1.17 billion. At the midpoint, this represents a 3% increase over the prior year, driven by higher headcount, R&D expense, and charitable contributions, partially offset by lower marketing and stock compensation expenses. And we expect gap net income to range from $350 to $380 million, or $3.05 to $3.30 per share. In closing, Fiscal 2021 is off to a strong start and is poised to be another terrific year for our organization. We remain well positioned both to navigate the uncertainties of these times and to capitalize on the positive trends within our industry. Over the long term, our industry-leading creative assets, firm commitment to operational excellence, and strong financial foundation position our company to deliver significant growth and margin expansion for our shareholders. Thank you. I'll now turn the call back to Shaft.

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

Thank you. At this time, we'll be conducting a question and answer session. If you'd 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'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before asking questions. One moment, please, while we poll for questions. Our first question comes from Mario Liu with Barclays. Please proceed with your question.

Great. Thanks for taking the questions. Amazing quarters. So the first question is on the $70 price point announced for NBA 2K21. Any color behind making that decision? And was that decision bra-based or title-specific since NBA 2K21 will span two NBA seasons, this time instead of one? So in other words, is the higher price point embedded in guidance for all AAA new-gen titles going forward or just NBA 2K? And have a follow-up.

Yeah, we're definitely announcing pricing on a title-by-title basis. I would just observe there hasn't been a frontline price increase for a very long time, although costs have increased significantly. But most importantly, we believe we're delivering the highest quality titles in the business, and consumers are staying more engaged than ever. Games have extraordinary playability and replayability, and they offer many, many hours of entertainment. We think it's a great value. It does rely on our continuing to deliver – amazing experiences, and that's our strategy and our goal. Got it.

And the second question is on GTA Online. Anything you can share in terms of the normalized growth rate for GTA Online this quarter, so excluding the Epic Store? Or similarly, can you share what percentage of the bookings came from new versus existing players in fiscal 1Q?

Thank you. No, we don't give that kind of granular detail Okay, no worries.

Our next question comes from Mike Ng with Goldman Sachs. Please proceed with your question.

Hey, thanks for the question. I was just wondering if you could expand on the GTA V Enhanced Edition for next holiday. It feels a little inappropriate to call it a typical remaster, and I was just wondering if you could talk a little bit about whether or not there's an opportunity for a GTA, I'll call it a replacement cycle, if you will. Thank you.

Well, it's a great question, and I appreciate the sentiment with which it's asked because we've now sold in over 135 million units. And, of course, GTA V was created for the last console generation, is the standard bearer in this generation, and now we've announced that it will be available for the next generation of consoles, which is just amazing. Historically, Rockstar always delivers a great new experience with new content and new opportunities to excite, engage, and surprise players. And that's true of everything that Rockstar Games releases. Any more details, I think, will properly come from the label in due time, but we couldn't be more excited that the title will be available for the next generation of consoles. Great. Thank you, Strauss.

Our next question comes from Brian Fitzgerald with Wells Fargo. Please proceed with your question.

Thanks, guys. At Xbox 2020 a couple weeks ago, two weeks ago, we saw Outer Worlds, Grounded, Avowed. They look great. These are all private division titles. So our question was around this. Strauss, when you mentioned, like you said, the Outer Worlds on the Switch was 2.8 million units already. How do you see private division aggregating up volumes over time and Laney, I think you said near term it's going to hit 10%. That's private division and social points. So how should we think about that metering out? Can it be longer down the road? Can it be a bigger percentage? And then the second part to that question was these titles seem to appeal maybe especially to the expanding demographic of gamers that are being pulled in the ecosystem. Can you give us any color or dynamics in terms of how types of players that are engaging with private label versus some of your other studios?

Well, thanks for your question. Just to clarify, Outer Worlds has sold in 2.8 million units across all platforms so far. It was recently made available for Switch. And we're very excited about it. Outer Worlds also has more content coming, and that's a very exciting opportunity. We think the opportunity for private division to be a greater percentage of our overall net bookings is strong. And to state the obvious, it will all depend on the quality of the releases. But they continue to sign up and announce great publishing arrangements with first-class independent developers. And – And so far, their track record is pretty extraordinary, which is amazing. In terms of the demographic to which they appeal, I think that's title by title. I don't think there's anything in particular in their strategy that would either limit or expand the scope of their potential audience, except that their titles are created by developers who live outside of the big company system. And does that give them an opportunity to be perhaps more innovative and take more risk? Possibly, although we pride ourselves on being the most innovative company across everything we do. So it's a really good start. We're incredibly proud of what the team has achieved so far at Private Division and very optimistic about the future.

Great. Thank you, Strauss.

Our next question is from Colin Sebastian with Robert W. Baird. Please proceed with your question.

Thanks. Congrats on the quarter. I have a couple of questions as well. First off, with the start of the NBA season in Orlando, I'm curious if you've seen any change positively or negatively with respect to NBA 2K and broadly where markets have reopened, if you've seen any interesting changes or observations with respect to usage trends. And then a bigger picture question on digital distribution. Strauss, I know you guys support platforms where your users are or where they want to access games. There are an increasing number of platforms, which seems to add some complexity to the industry. And I'm curious if you have any updated thoughts on a direct-to-consumer offering, if you think that makes more sense now or maybe less sense. But just curious on your thoughts on distribution. Thank you.

So for NBA 2K, obviously this has been an incredible year for us, and we've had a really, really nice run, obviously much better than our expectations. We were originally projecting that it wasn't going to be a record year, and now it's going to be a record year across the board. We obviously have some tailwind with that behind the shelter at home. But generally speaking, the game has been improving since the day it came out, and it's really generated a huge amount of interest across the board. In terms of has that interest changed with the new seasons, et cetera, There's really nothing to report there at this point. It is – certainly we're excited that basketball is back at it. It's always a good thing when people are engaged with the NBA. It's an incredible brand, and having players on the court is obviously a good thing for us. But there's nothing really that we have to report about the results itself specifically related to that.

And with regard to distribution, yes, I think you captured it well. We said we want to be where the consumer is. We need to find that intersection there. of what's great for the consumer and what makes sense for us as a producer and distributor. And there are a lot of opportunities. We tend to be very supportive of new launches. We were supportive early of Google Stadia. We certainly support what Microsoft and Sony and Nintendo do when they bring out new platforms. And I think that will continue. In terms of direct-to-consumer opportunities, naturally we have the ability to go direct-to-consumer. Rockstar is goes direct to consumer through their launcher. 2K goes direct to consumer. We have the ability for consumers to buy goods directly from our company, and I expect that to continue. It's still a relatively small portion of our business, and I think our expectation over time is that, you know, our goal is not to drive consumers to any particular destination, including one of our own. Our goal is to be where the consumer is.

Okay, thank you. Our next question is from Eric Handler with MKM Partners. Please proceed with your question.

Yes, good afternoon. Thanks for the question. I wondered if you could talk a little bit about how you're balancing, you know, concerns in the back half of the year about how the economy is going to fare versus what you're seeing in engagement in July. Are you seeing much of a fall off versus the months in the first quarter? How is that shaping up?

Oh, shit.

So in our Q2 guidance, we have included the fact that we're seeing some benefits continue on our business, some of the similar tailwinds that we've had since starting in the first quarter, actually the end of the fourth quarter as well. So we do see some of that in our Q2 guidance. In terms of the back half of the year, we really haven't factored anything in related to that or to take into account any sort of recessionary possibilities.

So you're feeling good about the consumer right now, but basically you don't have a crystal ball for the back half a year, so too challenging to predict at this point.

That's right.

Okay. Thank you very much.

Our next question is from Drew Crum with Stiefel. Please proceed with your question.

Okay. Thanks. Hey, guys. Good afternoon. Carl, I think you and I have talked about this in the past, but I want to revisit the software development cost balance and reconcile the total against your commentary around the game pipeline. It's considerably lower versus recent years, and with more than 90 games in development, does that suggest these are smaller titles or you're just not as far along, and hence the pipeline is very back-end loaded? Thanks.

Can you just clarify what you mean, what's considerably lower? Well, you know, if you look at... The balance sheet? Yeah, if you... Yeah. Correct, yeah. Current plus non-current. Capital? Okay, got it. Yeah, I think, as we said, our pipeline is twice the size as it was, more than double the size it was five years ago, and we're really excited about what that is. Some of these titles are early on in development. Some of those titles are much further along in development. Some of these titles are very, very big titles, and some of these titles are very, very, very small titles. So there is a big mix there. And in terms of – so you can't really say, well, there's just more titles or they're less expensive because there is such a play between those two elements. But you identified those two elements. Those two things will certainly play into how large that capitalized balance sheet moves going forward. It's relative to the scale and where we are in development. Okay. Okay.

Thanks. Our next question is from Matthew Thornton with SunTrust. Please proceed with your question.

Hey, good afternoon, everyone. Thanks for taking the question. Maybe first, Strauss, be interested to get your thoughts, you know, three months later since the last call, you know, given the COVID environment, just be interested to hear your thoughts on the lasting impact of all this, whether it's take-to, kind of operation-specific, whether it's consumer and kind of what you think you can kind of hold on to once things kind of normalize. I'd just be very interested to hear your latest thinking about the lasting impact of this environment longer term. And then just secondly, quickly, you talked about, obviously, GTA moving to next-gen consoles. Curious if there's any other, you know, non-recurring franchises that could also see a similar upgrade path. Thanks, everyone.

Yes, in terms of the lasting impact of this period of time, it's so hard to predict because most humans tend to believe that whatever is going on right now is what will always continue. And of course, that's not the case. Everything, in fact, generally changes. So we've seen certain companies announce that from their point of view, everyone should just always work from home. And I know there are people I know who believe they'll never go to the movies again or they'll they'll never fly in an airplane again or stay in a hotel again or eat inside a restaurant again. And I don't see the world that way. So from our point of view, you know, this tragedy will pass and the world will go back to looking an awful lot like it did before. However, it does feel like this has been a period of time where previously existing trends have been accelerated. And I do think that we – appreciate the possibility of remote work as needed, where we understand in a disaster scenario how we can continue to be productive. I think, frankly, it's created a great benefit in our morale as an organization. As any tragedy does, I think tragedy will either pull people together or push them apart. I think we had a strong enough culture that it pulled people even more together. It's just my point of view, but I think it's borne out in a level of productivity and the quality of our games and the quality of our operations. I'm hopeful that that continues. In terms of the consumer, I do think that this has intensified a shift from old analog entertainment to new interactive entertainment. And I do think that people have come back to video games and tried video games when they hadn't tried them previously. And I think you're going to see a long-lasting increase in demand. Again, that's not reflected in our numbers because we don't build our guidance based on my opinion about things, luckily. But I do believe that's the case. And I think you're seeing a systemic shift in favor of interactive entertainment. And there are only a handful of companies on Earth who aim to do what we do, never mind are able to do what we do. So it puts us in a very good position indeed. In terms of your question about other older titles being brought to next-gen consoles, You know, we always leave those announcements to our labels, but I'm sure there'll be more in the future.

Our next question comes from Brian Nowak with Morgan Stanley. Please proceed with your question.

Hi, guys. It's Matt on for Brian. Thanks for taking the question, too, if I could. So on GTA on the next gen, Can you walk us through the decision to split it into, you know, in the back half of next year, split it into a separate online mode and then like the upgraded version of GTA V? Obviously, you had tremendous success kind of just packaging those two together when you went from the last generation to the current generation. So what was the opportunity that you saw, you know, on next gen to maybe separate those two games? And then just separately thinking about pipeline now that we're kind of three months into the work-from-home environment. Are you seeing more of an impact on games maybe that are a little farther out in the development cycle, or do you feel that the pipeline is more or less kind of on track that you would have expected it to be three months ago? Thanks.

Yeah, I mean, the decision regarding GTA for Next Gen is a marketing decision and a production decision by Rockstar Games. And I'm sure they'll have more to say about that, you know, in the coming months, but I'll leave it to them as I prefer to do. In terms of the pipeline, we've been very fortunate. As I just said, our workforce has been exceedingly productive, and I think we only have announced one delay since this whole tragedy started, and that was a delay of Kerbal Space Program 2 to fiscal 22. But apart from that, everything is looking really good and is on track and on target, no issues whatsoever. Thank you.

Our next question comes from Mike Hickey with the Benchmark Company. Please proceed with your question.

Hey, Strauss, Carl, Lainey, Hank. Thanks for taking my questions, guys, and congrats on another solid quarter. Just two questions for me. I guess I'm curious the response you've gotten from your player community on the naturalist experience, latest upgrade or update for Red Dead Online, and I'm also curious about future cadence of I think it was December last year when we got the moonshiner update. So it seemed like it was sort of an extended period of time before we got an update. I'm just curious if that was maybe because of the work from home or if there was something else going on that sort of led to that sort of lengthy time in between updates. And then, Strauss, I know you talked on pricing. I'm just curious on how you think about the economy and With a $70 price point, obviously a lot of people without jobs, how do you think about, you know, how it could impact reoccurrence spend within the game? And if you've done any sort of survey work or what gives you, I guess, the confidence that demand won't slip at that price point? Thanks, guys. Best of luck.

Yeah, productivity has been strong across the board and across all of our labels. And as you know, Rockstar Games decides on the cadence of updates, and it's driven by great ideas and the ability to deliver those great ideas into superb experiences. And all of our labels wait to distribute new content until it's nearly as perfect as it can possibly be. There is more content coming for both Red Dead Online and Grand Theft Auto Online this fiscal year. So stay tuned. I think it's going to be awesome. In terms of the price point, this is a very modest price increase. You know, the pricing has been going down on a real dollar basis for the better part of 15 years. And we're applying this price point in the case where we think the quality is not only supports it, but demands it. Our production costs have gone up greatly. But most importantly, the consumer experience is more robust than ever before. And I'm utterly convinced that NBA 2K21 will be nothing short of extraordinary. So I don't expect that there will be any concerns. Thank you.

Our next question comes from Eric Sheridan with UBS. Please proceed with your question.

Thanks so much for taking the question with me, too, if I can, following up on some of the themes earlier in the call. Based on what you've seen from player behavior through COVID-19, what might some of the key learnings have been around remarketing to older content and sort of reinvigorating players' desire to sort of go back and revisit content and games from a prior generation to continue to sort of draw out lifetime value in that content? And secondly, what have you learned about marketing efficiency as a result of the current environment and how might that carry forward into the next console cycle as well? Thanks so much.

Yeah, I don't think this period of time has led us to look at our catalog any differently than before. We're bringing out the Mafia trilogy. You know, we always bring out legacy content, usually in an enhanced format for new consoles on a regular basis or even in the absence of new distribution opportunities. And I'm sure that will continue. Of course, it's driven by the demand for our properties. And if I'm not mistaken, we still have the highest sales per SKU of catalog of any of our competitors based on the quality of what we have historically done. We aim to keep doing that. In terms of marketing efficiency, I haven't really seen a change. At any given time, we're trying to be more and more efficient with our marketing. Undoubtedly, in the mobile business, there's going to be a meaningful change in marketing based on changes that have been announced by Apple and other changes that are driven by privacy legislation and privacy concerns. But I don't know that that will enhance efficiency. In fact, it may go in the other direction. So it's always a challenge to create the best marketing. And I wouldn't say it's becoming more or less efficient than before.

Our next question comes from Todd Junger with Sanford Bernstein. Please proceed with your question.

Hi. Thanks a ton for taking the questions. I also have two, if you don't mind, for whoever wants to field them. The first, at the risk of being shot down again and just waiting for more from Rockstar, I'd love to explore the topic of the relationship with PlayStation around GTA Online and just at a higher level, without the specifics, What sorts of factors go into the decision to make such a partnership with a company like Sony? And in particular, what sorts of things would we expect you would get in return from them in order to offer them the things you've done, including the exclusivity? That's question number one. The second one is, it wasn't too long ago, every night we turned on the TV, we saw a NBA celebrities playing against each other on NBA 2K on television. I'm really curious as to what's about what that did in terms of licensing revenues or engagement in the quarter, although that's interesting. I'm more interested in whether that's opened your mind or any of your development team's mind into how to keep things like that going well into the future and what that can do in terms of bringing together celebrity and culture groups and your games in a social and engaging way, and sort of driving that whole experience to a whole new level. Thanks.

Yeah, I mean, without going into too much detail on confidential arrangements, typically we have great relationships with all of our platform partners, and we will sometimes announce a particular situation. In many instances, it's driven by marketing support. and other benefits that both parties obtain from such an arrangement. And Carl will take the question on basketball.

Yeah, in the case of the NBA, the player tournament that we did, obviously that was an exciting event. And it was an unplanned event, as you could probably tell. It's something that would probably not have happened, but it were not for the COVID situation. So in a lot of ways, there are some interesting things that come out of these situations when you're dealt with them. This particular one, I wouldn't really think about it as a specific money-making opportunity in the moment, but like any marketing or anything that engages an audience or even creates new audience, it has the benefit of creating interest and engagement with the game. So we really look at that kind of thing like we would as any other marketing opportunity. You know, is there a big, huge learning from it? Is it something we can keep going? I mean, it was definitely something different than what we've done before, although we have done player-based things in the past. And we've done tournaments in the past. This was just kind of marrying them together. So that's not to say we can do it every day or that this is something that is going to set some kind of precedent for us. But it certainly is interesting. It was a lot of fun to do. And, you know, it undoubtedly increased interest and engagement with the game. And, you know, our financial results ultimately reflect all of these things happening for us at once.

Fair enough.

Our next question comes from Doug Krutz with Cowan & Company. Please proceed with your question.

Hey, thank you. A little bit along the lines of the last question. In the last couple of years, you've really extended the lifespan of NBA 2K very deep into the annual cycle, far beyond where it used to be sort of falling off. Do you think the NBA 2K League has been an important part of that? If so, is there anything you can point to specifically that where the league has really helped engage with the overall game, or do you think the two are incidental to each other? Thanks.

Very hard to point to it, but I think the NBA 2K League is not only an interesting opportunity as a standalone, but also forms part of building the brand and building overall engagement. I think you're 100% right. It used to be a three-month experience, then it became a six-month experience. Now it's very close to a year-long experience, and that's very much our goal. And that's really a reflection of NBA 2K morphing from being the highest quality sim in the market to one of the highest quality interactive entertainment experiences of any kind. And it's both a sim and a lifestyle in a world you can inhabit that's constantly evolving and changing. That's very much the goal of Visual Concepts, and you're seeing that goal being realized and I believe you'll see it be more and more realized. Does the league form a part of that? Unquestionably. We also expect it to be very successful on a standalone basis.

Okay, thank you. Our next question comes from Alex Giamma with Jefferies. Please proceed with your question.

Thanks for taking the question. Carl, a follow-up to a previous question, but the upcoming game pipeline, the 93 new titles that you mentioned last quarter that will launch by, I think it was fiscal 25, should we expect a similar cadence as we've seen in the past of maybe one, you know, non-sports AAA title per year? And I think it's 11 franchises in your portfolio now that have sold in at least 5 million units. Is it also fair to assume that the content slate will include TQL for most of those bigger franchises? Thanks.

The development pipeline certainly does include sequels to the bigger franchises, and in some cases could include sequels from new franchises to the extent they actually work. So there's no doubt that that's the case. I'm sorry, what was the first part of the question?

In the past, I think the goal has been one non-sports AAA title per year. Is that the cadence we should still think about?

Yeah, I mean, look, it's again, it's like, look, one, two, whatever it may be, that is our goal, to come up with more than one, more than what we have now, and to be more consistent with the number of AAA releases that come out every year in addition to our annualized title. So whether that number is one to three, that certainly would be the goal.

Okay, thanks, Mark.

Our next question is from Ryan G. with Bank of America. Please proceed with your questions.

Yep. Hey, good afternoon. Thanks for taking the question. So the 100% plus growth in my team players, certainly consistent with the demand we're seeing for expression, personalization in games right now. So does this speak to the opportunity for a non-SIM game from the NFL and why 2021 is the right time and place to deliver that game? And then on a related matter, the doubling of the NBA players, I think it was last quarter. Can you speak to how much you've seen in growth and, you know, players brand new to the franchise so that as you look forward, even if you lost some of these kind of fringe casual guys, you'll still be net ahead? Thanks.

Yeah, I would just observe, as I did previously, that the game already offers numerous opportunities that are, you know, in addition to the core sim game. And we'll leave to visual concepts how that will be expressed going forward. But right now, we think NBA 2K offers something for everyone. You want the best sim game? It's there. You want an opportunity to experience great music? It's there. Great characters? It's there. Play outside of the sim game? It's there. Or just experience the world. That's a possibility, too. So... I'm sure there will be much more to talk about, and we'll let Visual Concepts and 2K talk about it. In terms of data around players, we don't tend to go into that much detail. But with 14 million units sold, 18% greater than last year, wonderful engagement, and enormous growth in recurrent consumer spending, I think you can safely assume that the audience is expanding.

And also, to answer your question about football, look, we obviously think that there's a significant opportunity for non-simulation gameplay with the NFL, the football business. Otherwise, we wouldn't have done that partnership and wouldn't be so excited about it. The fact, the success of my team isn't necessarily a barometer for that. There are so many different kinds of non-simulation play, and whether the my team phenomenon is relevant or not remains to be seen. But irrespective of that, the non-sim market is very exciting for us, and that's why we're going forward with NFL with that.

That's helpful, Culler. Thank you, guys.

Ladies and gentlemen, we've reached the end of the question and answer session. At this time, I'd like to turn the call back over to Strauss Zelnick for closing comments.

Thank you so much for joining us today. On behalf of everyone at Take-Two, we appreciate your interest, we appreciate your support, and we'd like to wish you all a happy, healthy, and most of all, safe summer. Thank you for joining us.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.