Take-Two Interactive Software, Inc.
Q2 2020 Earnings Call Transcript

Published: 7 Nov 2019

[Operator:]

Greetings. Welcome to Take-Two Interactive Software Q2 Fiscal Year 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications. Thank you, sir. You may begin.

[Henry Diamond:]

Good afternoon. Welcome and thank you for joining Take-Two's conference call to discuss its results for the second quarter of fiscal year 2020 ended September 30, 2019.

[Strauss Zelnick:]

Thanks, Hank. Good afternoon and thank you for joining us today. I'm pleased to report that Take-Two's positive momentum continued in the second quarter, enabling our Company to generate operating results that significantly exceeded our expectations. We delivered strong Net Bookings, cash flow and earnings growth, fueled by the performance of NBA 2K, Borderlands 3, Grand Theft Auto Online and Grand Theft Auto V, and Red Dead Redemption 2 and Red Dead Online. Once again, our strategy of creating the highest quality entertainment in the industry translated into outstanding results. On September 13, 2K and Gearbox Software launched Borderlands 3, the latest installment in our genre-defining shooter-looter series. The title had exceeded our expectations and sold-in more than 5 million units with the first five days of launch, making it the fastest-selling title in 2K's history and highest-selling title for the label on PC.

[Karl Slatoff:]

Thanks, Strauss. I'd like to begin by thanking our teams for delivering another strong quarter that exceeded our expectations, and I'll discuss our recent and upcoming releases. On October 22, 2K launched WWE 2K20, the latest offering in our flagship WWE franchise for PlayStation 4, Xbox One and PC. Developed by Visual Concepts, WWE 2K20 features several new gameplay modes that celebrate the WWE's thriving Women's division as well as an array of fan-favorite superstars, legends and match types. Earlier this year, 2K announced a philanthropic partnership with Leukemia & Lymphoma Society in conjunction with WWE Superstar Roman Reigns, who is a leukemia survivor that helps raise awareness and $500,000 for this important cause. While we are disappointed with the reviews and consumer feedback for WWE 2K20, last week, Visual Concepts released a patch that should address many of the concerns and they will continue to make further enhancements to the gameplay experience. The WWE brand continues to expand worldwide and we believe there remains a substantial long-term opportunity to grow our WWE 2K series by improving the quality of the game. On October 25, Private Division launched The Outer Worlds for Xbox One, PlayStation 4, and PC. Developed by Obsidian Entertainment, The Outer Worlds marks the reunion of Tim Cain and Leonard Boyarsky, the original creators of Fallout, who have introduced an entirely new single player sci-fi RPG experience. A critical and commercial success, The Outer Worlds is exceeding our expectations and reviews have been outstanding, with GameSpot giving the game 9 out of 10, Game Informer 9.25 out of 10, and EGM a perfect 5 out of 5. In early 2020, The Outer Worlds will be released for Nintendo Switch. As noted by Strauss, on November 5, Rockstar Games launched Red Dead Redemption 2 for PC, which is the first title in the Red Dead Series to be offered on PC. The release of the game also marked the debut of Rockstar Games' Launcher, a new Windows desktop application that enables consumers to quickly and easily access their Rockstar Games PC collection in a single place, across both digital and disc-based titles including purchases from other digital stores, managed cloud saves and more. Players will also be able to use the launcher to shop for new Rockstar Games PC titles. The introduction of the Rockstar Games Launcher underscores our commitment to investing to deliver great entertainment experiences in new ways to our audiences.

[Lainie Goldstein:]

Thanks, Karl, and good afternoon, everyone. Today, we'll discuss our second quarter results and then review our financial outlook for the third quarter and fiscal year 2020. Please note that additional details regarding our actual results and outlook are contained in our press release. As Strauss mentioned, our positive momentum continued in the second quarter, enabling us to generate operating results that significantly exceeded our expectations. Total net bookings grew 63% to $951 million as compared to our outlook of $860 million to $910 million. This outperformance was driven primarily by better than expected results from Grand Theft Auto V and Grand Theft Auto Online and Borderlands 3. Recurrent consumer spending grew 39% and accounted for 45% of total net bookings as compared to our outlook of over 20% growth. Recurrent consumer spending exceeded our expectations due primarily to the outperformance of Grand Theft Auto Online. Digitally delivered net bookings grew 63% and accounted for 73% of the total, as compared to our outlook of over 40% growth. This result exceeded our expectations due to the outperformance of recurrent consumer spending and higher than forecasted mix of digital sales of Borderlands 3 and Grand Theft Auto V. During the second quarter, 51% of current generation console games were delivered digitally, up from 47% last year. Turning to some details from our second quarter income statement, GAAP net revenue grew to $858 million and cost of goods sold increased to $468 million. Operating expenses increased by 36% to $315 million due primarily to higher marketing, personnel, and R&D costs. And GAAP net income was $72 million or $0.63 per share, as compared to $25 million or $0.22 per share in the second quarter of fiscal 2019. Adjusted unrestricted operating cash flow for the six months ended September 30, 2019 increased to $41 million and we ended the period with $1.5 billion in cash and short-term investments. Now I will review the highlights of our fiscal 2020 financial outlook, starting with the third quarter. We project net bookings to range from $860 million to $910 million. The largest contributor to net bookings are expected to be NBA 2K20, Grand Theft Auto Online, and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online, The Outer Worlds, Borderlands 3, and the WWE 2K-series. We project recurrent consumer spending to grow by approximately 5%. This growth is affected by the difficult comparison due to the allocation from the Red Dead Redemption 2 Premium Editions last year. Growth is expected to be driven by Grand Theft Auto Online, Red Dead Online, excluding last year's allocation and NBA 2K. We are currently projecting single-digit growth in recurrent consumer spending from NBA 2K due to the strength of the title in the third quarter last year. We expect digitally delivered net bookings to increase by about 5%. Our forecast assumes that 50% of our current generation console games will be delivered digitally, up from 31% in the same period last year. We expect GAAP net revenue to range from $915 million to $965 million, and cost of goods sold to range from $425 million to $452 million. Operating expenses are expected to range from $312 million to $322 million. At the midpoint, this represents a 6% increase over last year, driven primarily by higher R&D and personnel costs, partially offset by lower marketing expenses. And GAAP net income is expected to range from $159 million to $170 million or $1.39 to $1.49 per share. For management reporting purposes, we expect our tax rate to be 17% throughout fiscal 2020. Turning to our outlook for the full fiscal year. We are raising our operating outlook as a result of our better-than-expected second quarter operating results and improved net bookings outlook for the balance of the year. We now expect net bookings to range from $2.75 billion to $2.85 billion, up from our prior outlook of $2.6 billion to $2.7 billion. The increase beyond the second quarter beat is driven primarily by improved expectations for Grand Theft Auto Online and Grand Theft Auto V, and Borderlands 3, partially offset by the move of Karbel Space Program 2 into fiscal 2021. The largest contributor to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Borderlands 3, Red Dead Redemption 2 and Red Dead Online, The Outer Worlds, Sid Meier's Civilization VI, and the WWE 2K-series. We expect the net bookings breakdown from our label to be roughly 60% 2K, 30% Rockstar Games, and 10% Private Division, Social Point and other. And we forecast our geographic net bookings split to be about 60% United States and 40% international. We now expect recurrent consumer spending to increase by 25%, up from our prior outlook of mid-teens growth, driven primarily by higher expectations for Grand Theft Auto Online. We now expect Grand Theft Auto Online to grow in fiscal 2020 as a result of its better-than-expected performance, fiscal year-to-date and improved outlook for the balance of the year. We project digitally delivered net bookings to grow by nearly 30%. This is up from our prior outlook of high-teens growth, due primarily to our increased forecast for recurrent consumer spending and a higher mix of digital sales of Borderlands 3 and Grand Theft Auto V. Our outlook assumes that 57% of current generation console games will be delivered digitally, up from 38% last year. We expect to generate more than $450 million in adjusted unrestricted operating cash flow and we now plan to deploy approximately $75 million for capital expenditures. We expect GAAP net revenue to range from $2.93 billion to $3.03 billion, and cost of goods sold to range from $1.39 billion to $1.43 billion. Total operating expenses are expected to range from $1.12 billion to $1.14 billion. At the midpoint, this represents a 20% increase over the prior year, driven primarily by higher marketing, R&D and personnel costs. And we expect GAAP net income to range from $388 million to $460 million or $3.38 to $3.63 per share. We have not flowed through the entire second quarter management reporting EPS beat to our implied management reporting EPS outlook for fiscal 2020, due to marketing expenses that shifted from the second quarter into balance of the year, higher forecast for marketing, IT, and R&D expense and the move of Kerbal Space Program 2 into fiscal 2021. In closing, our strong performance during the second quarter has enabled us to increase further our operating outlook for fiscal 2020 which is poised to be another great year for Take-Two. Our positive momentum continues and with our industry-leading creative assets coupled with our management's focus on operational excellence and sound financial foundation, our company is perfectly positioned to deliver strong results for our shareholders over the long-term. Thank you. I will now turn the call back to Strauss.

[Strauss Zelnick:]

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

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Eric Handler with MKM Partners. Please proceed with your question.

[Eric Handler:]

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

[Strauss Zelnick:]

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

[Eric Handler:]

Okay. Thank you very much.

[Operator:]

Our next question comes from the line of Alex Giaimo with Jefferies. Please proceed with your question.

[Unidentified Analyst:]

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

[Strauss Zelnick:]

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

[Operator:]

Since there are no further questions left in the queue, I would like to turn the floor back over to management for any closing remarks.

[Strauss Zelnick:]

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

[Operator:]

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