Take-Two Interactive Software, Inc.
Q3 2020 Earnings Call Transcript
Published:
- Operator:
- 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. 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.
- Hank Diamond:
- 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 31, 2019. Today’s call will be led by Strauss Zelnick, Take-Two’s Chairman and Chief Executive Officer; Karl Slatoff, our President; and Lainie 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 would 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 risks summarized in the section entitled Risk Factors. I would 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 maybe obtained from our website at www.take2games.com. And now, I will turn the call over to Strauss.
- Strauss Zelnick:
- 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, recurrent 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 & Resort update in July and The Diamond Casino Heist in December. We are now on track to deliver a new record for Grand Theft Auto Online recurrent consumer spending in fiscal 2020.
- Karl Slatoff:
- Thanks, Strauss. I will 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 3 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 game-play experiences for the vast open worlds of Grand Theft Auto Online and Red Dead Online, which continue to set engagement records for the label.
- Lainie Goldstein:
- Thanks, Karl. Good afternoon, everyone. Today, we will 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 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 are $888 million as compared to our outlook of $860 million to $910 million. Recurrent consumer spending grew 6% and accounted for 41% of total net bookings as compared to 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 was due to very strong fiscal sales of our title 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, GAAP net revenue grew to $930 million and cost of goods sold decreased $437 million. Operating expenses increased by 6% to $360 million due primarily to higher personnel and R&D costs offset by lower marketing expenses. And GAAP 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 9 months ended December 31, 2019 is $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 million to $590 million, up from $488 million in the fourth quarter last year. The largest contribution 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 3. We project recurrent 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 GAAP net revenue to range from $635 million to $685 million and cost of goods sold to range from $274 million to $286 million. Operating expenses are expected to range from $247 million to $257 million. As a 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 million 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 billion 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 expectation for Borderlands 3, are still consistent with our original high expectations for the title prior to launch. The largest contributor to net bookings, are expected to be NBA 2K20 and NBA 2K19, Grand Theft Auto Online and Grand Theft Auto V, 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 Point. And we forecast our geographic net bookings 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 higher mix of physical sales. Note that this is still above our forecast given in August of 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 our prior expectation of over $450 million. We now plan to deploy approximately $60 million for capital expenditures versus the prior expectation of $75 million. We expect GAAP net revenue to range from $2.96 billion to $3.01 billion and cost of goods sold to range from $1.42 billion to $1.43 billion. Total operating expenses are expected to range from $1.13 billion to $1.4 billion. As a 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 $387 million 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 Strauss.
- Strauss Zelnick:
- Thanks, Lainie and Karl. On behalf of our entire management team, I would 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 will 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 Todd Juenger with Sanford Bernstein. Please proceed with your question.
- Todd Juenger:
- Hi, good afternoon and thank you for taking the question. I hope you understand that I feel, I have to ask this question, I am sure you are expecting it. So you had a significant executive departure at Rockstar. Karl 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 am sure we’d appreciate? Thank you.
- Strauss Zelnick:
- 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 is President of the company and it’s an extraordinary team effort and Sam is a great player and coach. The results of 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 it’s amazingly gratifying to see Grand Theft Auto V selling at 120 million units and Red Dead Redemption 2 to be up to 29 million units with the launch of 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 6 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 where we are incredibly optimistic and excited. At the same time, we grateful to Dan for his contributions and we wish him well.
- Todd Juenger:
- Thank you. If you don’t mind, if I could ask just a follow-up then more in the business side, so Strauss, I think I’ve heard you say multiple times publicly tat Take-Two aspires to launch a AAA game every year at least 1 every year. We assume that, that includes calendar year 2020, I’m not asking for any formal announcements of anything, but with this year, should we expect a AAA release this year as well and anything you could say about – more about that would be appreciated? Thanks.
- Strauss Zelnick:
- So as we always do, you are 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 the strong frontline release schedule both iterations from beloved franchises. We have 11 franchises that have sold in at least 5 million units within 1 release as well as new intellectual property and we are working on the most robust pipeline in our history. So we are amazingly excited about it. That said, we haven’t always been able to achieve our goal of having the strong frontline release schedule in every year even in the recent past. What has been great though is we have now built a company that has these very strong underpinnings of catalog titles and ongoing titles 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 5 that are successfully in market. NBA 2K Online in China, WWE SuperCard which has been now 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 will build our business with those frontline new releases. Given that we are 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 have been able to deliver really great financial results.
- Todd Juenger:
- I will leave it there. Thank you so much.
- Operator:
- Our next question comes from the line of Doug Cruetz with Cowen & Company. Please proceed with your question.
- Doug Cruetz:
- Thanks. If I recall correctly 2 years ago, you guys had a bit of a hiccup within NBA 2K recurrent consumer spending. Obviously, last year was incredibly strong. It seems you are running into 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 in the engagement loops? Anything you can say on that would be helpful?
- Strauss Zelnick:
- Yes. First of all, I want to make sure that we distinguish between a problem and a high class problem. So the high class problem is that we have said in our revised outlook that we thought NBA 2K20 would set another record for net bookings. And then now we are realizing that to say we don’t expect to set another record despite its very strong unit sales in the grade 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 and one that we can address going forward, but it’s not only 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, on 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 is massively successful as NBA 2K20 is. It’s an incredibly profitable title for the firm. Owing 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 will be able to address those.
- Doug Cruetz:
- Okay, thank you.
- Operator:
- Our next question comes from the line of Drew Crum with Stifel. Please proceed with your question.
- Drew Crum:
- Okay, thanks. Hey, guys. Good afternoon. What has the led to the reduced view on Borderlands 3, can you comment on how the game has performed on PC to-date? And then without getting into specific numbers, what are your expectations for the game once it’s available on steam?
- Strauss Zelnick:
- Well, Borderlands is actually performing better than our original outlook. It’s sold in nearly 8 million units. We have 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 the 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.
- Lainie Goldstein:
- Right. When we went into the Christmas season, we had really seen real excitement for the title and we’ve 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 that higher expectations, but we did meet our original very high expectations for the title. So that’s why we are bringing it down slightly, but it’s very high from the beginning of the year.
- Strauss Zelnick:
- This is – again this is a massive hit by any standard. But we have always said this and 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.
- Drew Crum:
- Okay, fair enough. And just as a 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?
- Strauss Zelnick:
- We continued our very high expectations. As I said, we fully expect that Borderlands 3 will set a record for the franchise.
- Drew Crum:
- Got it. Okay. Thanks guys.
- Operator:
- Our next question comes from the line of Andrew Uerkwitz with Oppenheimer. Please proceed with your question.
- Andrew Uerkwitz:
- Thank you for letting me ask a couple of questions here. The first one just how should we think about the next kind of – 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 that’s NBA or GTA Online or what have you?
- Karl Slatoff:
- Hi, it’s Karl. We are really excited about the next generation console. I think the best part of that is I think everyone now knows that we are going to have next generation console and there is a lot of anticipation for it. I will 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 prospective is very exciting for us. And so in that regard, I think it eliminates uncertainty, because we now we are going to next console cycle and that we believe it will be very robust and a great thing for the industry. And again any time that you have these kind of advancements in tech, it creates opportunities for our great – our incredible creative teams to push the limits of those – 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 sale. So to the extent that we have got the ability to do that for all indications is that we will and we expect this will lead to growth for our company. It’s a very positive thing.
- Andrew Uerkwitz:
- Even for current ongoing live service games that you have now that were built for older generation?
- Karl Slatoff:
- Yes, I mean, look what exactly the transition is going to be from concept – for each game from console to console – between the console cycles will vary, but there is no reason to believe that the success that we are experiencing with those services would be any less than the new generation than it is in the old generation.
- Andrew Uerkwitz:
- Got it. Thank you. And then just kind of the 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?
- Strauss Zelnick:
- It’s hard to say. I think what we have said all long 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 are willing to take experimental chances when it makes sense for particular title and when the deal underlying that option also makes sense for us. And we are pleased that we have a great partnership with Microsoft and we are mostly pleased that the title is such a big hit, it’s sold in more than 2 million units and has 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 are ecumenical and we are open-minded.
- Andrew Uerkwitz:
- Got it. Thank you guys so much.
- Operator:
- Our next question comes from the line of Matthew Thornton with SunTrust. Please proceed with your question.
- Matthew Thornton:
- Hi, good afternoon and thanks for taking the question guys. Maybe two quick housekeeping or triangulation questions and then I will 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, that sales having, could recurrent actually be up year-on-year? And then just coming back Strauss to your comment around the recent departure, I just want 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 like as obviously a lot of investors are asking that question? Any color there would be helpful. Thanks guys.
- Lainie Goldstein:
- 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.
- Matthew Thornton:
- On Red Online, if that could actually be up year-on-year, even including the premium SKU kind of contribution last year?
- Lainie Goldstein:
- No, with including the special editions, it’s not up, it’s only without including the special edition.
- Matthew Thornton:
- And in terms of your question about Rockstar and I think your question – I think your questions will fall in the category of the stability of the team going forward as well as the culture of the labels. So in terms of team stability, Sam Houser who is President of Rockstar Games. He founded Rockstar Games. He is a great player coach and he leads a team of thousands of people everyday who are trying to make that, the most extraordinary entertainment experiences known to man. And that’s – those are their goals and more often than not they achieve or even exceeded 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 have only seen ongoing improvements at Rockstar frankly, I have only seen growth and engagement and innovation. And I think one of the great things about all of our labels and our company as a whole is that we are incredibly self critical and we aim to be utterly transparent. And we always try to do better. And I think that’s true 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 owing incidentally our 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 we offer great place to work at all of our labels and at Take-Two corporate as well. And to the extent that we ever fall short we always aim to do better.
- Matthew Thornton:
- Great. Thanks, guys.
- Operator:
- Our next question comes from the line of Ryan Gee with Bank of America. Please proceed with your question.
- Ryan Gee:
- Yes, hey, good afternoon. Thank you, guys for taking the question. So maybe first for Lainie, 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 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 Karl, you touched on Cloud Chamber, can you maybe get an update on the 2K Silicon Valley Studio, maybe Hangar 13, are those likely to also have content out in the next 1 to 2 years? Anything you could say there? Great.
- Lainie Goldstein:
- 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 1 year they declined and then the next year they grow and there is different content that comes out. It’s still pretty difficult to predict that as well as different – when we are making different – when we are trying different things in different games and you don’t know how that’s going to perform that can also be it in other variable. So we are 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 changed every year that can make it different from year to year. So I’d say we are 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 are getting better at.
- Strauss Zelnick:
- And in regards to your question about Hangar 13 and also Michael Condrey studio. I wish I could tell you more about what they are working on, because it’s very exciting, both the studios. We are incredibly excited to have the team 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 is very large and we are 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 the studios. I wish I could tell you more about them, but stay tuned, because they are very exciting and we are thrilled to be in business with both of those – with both of those folks in their entire teams, so stay tuned.
- Ryan Gee:
- Okay. And then if I could just follow-up on that, that last point, so BioShock, still several years out, Borderlands just came, should we assume that your characterization of a robust slate ahead also includes Rockstar content, not just 2K studios?
- Strauss Zelnick:
- Yes, we are talking about the entire company, all of our labels, Rockstar Private Division, Social Point and 2K.
- Ryan Gee:
- Great. Thank you, guys.
- Operator:
- Our next question comes from the line of Eric Sheridan with UBS. Please proceed with your question.
- Eric Sheridan:
- 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 are 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 are producing in broadcast broader over direct-to-consumer channels and how to think about either owning that or partnering and the same with respect to cloud computing as the distribution mechanism for gaming. How you are 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.
- Strauss Zelnick:
- I appreciate the question and the question points 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 are not currently represented. And so it’s sort of for a multiple choice question, it would be all of the above. We are focusing on all of them. You specifically asked on the distribution side 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 choking, Karl is 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 will continue to do all of that.
- Operator:
- Our next question comes from the line of Mario Lu with Barclays. Please proceed with the question.
- Mario Lu:
- Hi, I have a couple of questions, one on GTA and one on Red Dead. So GTA V had partnerships with PlayStation now late last year and then Xbox’s 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 GT Online bookings? And secondly, on Red Dead, glad to hear that Red Dead Online tripled year-on-year and then 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 6 years plus as well? Thanks.
- Strauss Zelnick:
- 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 will benefit the titles, they will benefit us and that they will 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 are incredibly excited about the momentum that we are seeing in the quarter. We feel really good going forward. But as I said, when asked Grand Theft Auto Online early on and I was asked a lot about it we really don’t know how high up is, we really don’t have any way of knowing where the consumer will take us. What we do know is that we are 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 are very optimistic about the future of Red Dead Online and we are excited about the momentum we see.
- Mario Lu:
- That’s helpful. Thank you.
- Operator:
- Our next question comes from the line of Eric Handler with MKM Partners. Please proceed with the question.
- Eric Handler:
- Thank you very much for the question. I actually got two. For your first, wondered if you would be willing to sort of lift the comodo 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 how many of those might be released in the next 1 to 3 years and how many might be released in the next beyond 3 years? Anything to sort of give a little bit of a roadmap there would be greatly appreciated? And secondly, with Red Dead Online, when you originally launched GTA Online, you had a couple of big content drops that really helped the development of that business, so gun runners and the first heist that you did, wondered have we seen that type of content drop yet for Red Dead Online?
- Karl Slatoff:
- Hey, Eric, it’s Karl. Just regarding the pipeline, this question obviously comes up on every single call we had and every single meeting we have with investors. And we are – like I said we are going to share more about the pipeline we do over the coming months and exact – give you some more color on exactly what constitutes that pipeline. So I will give you a little bit more idea of between what we have got going on with new IP and existing franchises, free-to-play games, different business models, casual games, core games, mid-core games. We are hoping to share a lot more information with you over the coming months regarding that.
- Strauss Zelnick:
- 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 have seen reflected in the numbers. And then I am confident that Rockstar Games will continue to deliver great content for Red Dead Online, but there is no real way to compare qualitatively to – or I suppose quantitatively to Grand Theft Auto Online content. They are just – they are 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.
- Eric Handler:
- Thank you very much.
- Operator:
- Our next question comes from the line of Mike Ng with Goldman Sachs. Please proceed with the question.
- Mike Ng:
- 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?
- Strauss Zelnick:
- I think we are – 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 are 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 is hard to imagine why you would see a lot of horizontal consolidation. Horizontal consolidation tends to occur when the 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 you expect. I think your question about vertical consolidation is interesting, even though first – your first day at business school, they explained to you the 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 jump-start that, the track record of that going well. And the linear entertainment business has been very poor, and tried over and over again. But I suppose it could be tried in the interactive entertainment business, very hard for us, 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, 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 million. 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 financially accretive, and that analysis led us to acquire Social Point several years ago. We are happy we did. And to the extent that an opportunity matches those criteria, we would hope to move forward as well.
- Mike Ng:
- Craig, thank you for your thoughts.
- Operator:
- Our next question comes from the line of Raymond Stochel with Consumer Edge Research. Please proceed with the question.
- Raymond Stochel:
- Great, thanks for taking my question. One on retaining talent and this is not really meant to involve Dan Houser, but you can certainly comment on that as well. It’s more in thinking about how you are 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.
- Strauss Zelnick:
- Yes. What we are trying always to think differently about is creativity. We know there will be a next new thing. You have not seen the final expression of what interactive entertainment or entertainment is here in 2020. You are 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 are positioned so that we ought to be able to be at the front line of that, and shame on us if we are 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 the 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 based on results versus plan and/or actual operational profitability at the divisional level.
- Raymond Stochel:
- Great, thanks very much.
- Operator:
- Our next question comes from the line of Alex Giaimo with Jefferies. Please proceed with your question.
- Alex Giaimo:
- Karl, you mentioned free-to-play as an opportunity in your remarks, you guys have a lot of valuable IP in your portfolios. So just curious if anything in your catalog could work on a free-to-play basis or if you were to launch free-to-play offering, will it more likely be based on new IP? Thanks.
- Karl Slatoff:
- Yes. I mean, I think the short answer is I am sure there are lots of things in our catalog that would work on the 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 prospective and then the business model etcetera. Free-to-play games, we tend to have the belief that you can’t really invest at the same level on 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 is our general philosophy, but that doesn’t necessarily mean that a old franchise that was AAA ownership type model could work in a free-to-play context. And certainly, new IP biggest opportunity is to pursue new business models and amongst those business models are free-to-play. So the answer it really could be both.
- Alex Giaimo:
- Got it. Thanks, Karl.
- Operator:
- Our next question comes from the line of Matthew Thornton with SunTrust. Please proceed with your question.
- Matthew Thornton:
- Hey, thanks for taking me back in. My question was actually taken. But I will ask a different one. I think it was Karl you mentioned talking about the pipeline in the next couple of months here. I am just curious number one is that just talking about the fiscal ‘21 slate or is that more of a multiyear outlook that you guys were thinking about providing? And then just kind of what venue is that on the next call, is there a certain venue or is this just kind of ad-hoc by studio, just how should we think about this information coming to us? Any color there? Thanks guys.
- Karl Slatoff:
- Yes, I mean, our goal is obviously, look, 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 the pipeline will see the light of day. That’s currently in pipeline and there will be things that are not in the pipeline that will come out, but our goal is to share as much information as we can. We could give you insight into what we see which is a multiyear pipeline. And when exactly we do that, you’ll have to wait and see, but really it will be in the coming months and when that information comes you will know it.
- Operator:
- Our final question comes from the line of Jeff Cohen with Stephens Inc. Please proceed with your question.
- Jeff Cohen:
- 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?
- Strauss Zelnick:
- Yes, they have had very strong results for the Rockstar Game Launcher and we are excited to see that in terms of how the company will pursue it broadly. That’s part of the work that we are doing now. We obviously do have essential 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 are unlikely to have only one place of any sort to buy anything. We are likely to have multiple outlets. We are likely to have direct outlets. We are likely to be worked with third-parties. And we are 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 will all work together cooperatively, so we don’t duplicate efforts. So you can see a consumer-facing approach that’s quite varied and then we have a highly efficient approach internally where we have all people working together productively in service of the same goals.
- Jeff Cohen:
- Thanks, Strauss.
- Operator:
- Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the call back over to management for any closing remarks.
- Strauss Zelnick:
- Thanks everyone for joining us today. We are very proud of the results driven by our creative teams and driven by our business teams as well. We are grateful to our colleagues all around the world. We are 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.
- 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.
Other Take-Two Interactive Software, Inc. earnings call transcripts:
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- Q2 (2024) TTWO earnings call transcript
- Q1 (2024) TTWO earnings call transcript
- Q4 (2023) TTWO earnings call transcript
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- Q2 (2023) TTWO earnings call transcript
- Q1 (2023) TTWO earnings call transcript
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- Q3 (2022) TTWO earnings call transcript