Take-Two Interactive Software, Inc.
Q2 2018 Earnings Call Transcript

Published: 8 Nov 2017

[Operator:]

Greetings and welcome to the Take-Two Second Quarter Fiscal Year 2018 Earnings Call. 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, Mr. Diamond. You may begin.

[Henry A. Diamond:]

Good afternoon. Welcome and thank you for joining Take-Two's conference call to discuss its results for the second quarter fiscal year 2018 ended September 30, 2017. 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'd like to note that as previously announced we've changed the name of our operational metric from net sales to net bookings. Our definition of net bookings is identical to our previous definition of net sales. I'd also like to remind everyone that the 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've no obligation to update these forward-looking statements. Actual operating results may vary significantly from the 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'd also like to note that, all numbers we will be discussing today are GAAP. And unless otherwise stated, all comparisons are year-over-year. Our press release and filings with the SEC may be obtained from our website at www.take2games.com. And now, I'll turn the call over to Strauss.

[Strauss H. Zelnick:]

Thanks, Hank. Good afternoon and thank you for joining us today. I'm pleased to report that our positive momentum continued in the second quarter, enabling Take-Two to deliver another period of better than expected operating results. The extraordinary performance of our business is driven by growth from both Grand Theft Auto Online and Grand Theft Auto V along with the successful launch of NBA 2K18. Grand Theft Auto Online delivered another record quarter, exceeding our net bookings expectations and remains the single largest contributor to recurrent consumer spending. Rockstar Games has continued to sustain an increased engagement through the ongoing release of a rich array of free additional content. Most recently, the Smuggler's Run update and subsequent themed content drops including the Motor Wars and Stockpile Modes, Transform Races and multiple new vehicles. Rockstar Games will support Grand Theft Auto Online with additional new content going forward. The second quarter marked the fourth anniversary of the initial launch of Grand Theft Auto V and net bookings from the game grew during the period, confirming the Grand Theft Auto V remains the must have title especially as the installed base of current generation consoles continues to expand. Grand Theft Auto V is now sold in more than 85 million units and according to The NPD Group, the title has achieved 42 top 10 chart appearances during the 50 months since its release, the most by any single title in reported history. Grand Theft Auto V is now the all-time bestselling video game, both in revenues and units, based on combined U.S. digital and physical sales across PC, console and portable. As a result of these titles better than expected performance in the quarter and increased outlook for the remainder of the year, we now expect combined net bookings from Grand Theft Auto Online and Grand Theft Auto V to grow during fiscal 2018. On September 15, Visual Concepts and 2K successfully launched NBA 2K18 cementing further the series dominant position as the premier basketball simulation. NBA 2K18 received positive reviews from influential critics including 91 out of 100 from Forbes, 9 out of 10 from Game Informer, and 4.5 out of 5 from Digital Trends. Visual Concepts was lauded for the title's exciting new features including this year's edition of the neighborhood, which for the first time enables gamers to explore and play in an immersive live world NBA environment. Today, NBA 2K18 is sold in over six million units and both sell-in and sell-through of the title have grown more than 20% over the prior year's release, including a significant increase in digitally-delivered sales. In addition to versions for X-Box, PlayStation, and PC, NBA 2K18 is our debut offering for the Nintendo Switch. So far, we're very pleased with the title's performance on this new platform and we anticipate continued strong demand across all platforms heading into the holiday season. Along with growth in game sales, our NBA 2K series continues to benefit from increasing engagement and recurrent consumer spending. To-date, total users and average daily users of NBA 2K18 on current generation platforms is up nearly 30% over last year's release. And during the second quarter, recurrent consumer spending on NBA 2K grew 57% once again exceeding our expectations. We believe that NBA 2K18 will become our most successful sports title ever both in terms of units sold and recurrent consumer spending. I'd like to congratulate Visual Concepts for their unparalleled skill in delivering consistently the authenticity of the NBA and all of its pop culture influences to our passionate community of fans. Our second quarter results also benefited from a number of other titles, including NBA 2K17, Social Point mobile games and downloadable add-on content for and sales of XCOM 2. We continue to drive increased engagement with our games. During the second quarter, net bookings from our current consumer spending, which are almost entirely digitally delivered grew 84% to their highest level ever and accounted for 42% of total net bookings. In addition to virtual currency for Grand Theft Auto Online and NBA 2K, recurrent consumer spending was enhanced by a variety of other offerings. In the free-to-play category, Social Point continued to outperform our expectations with combined net bookings from its two biggest games, Dragon City and Monster Legends growing both sequentially and year-over-year in the second quarter. We view Social Point as an important long-term growth opportunity for Take-Two. WWE SuperCard also continued to grow with net bookings from a current consumer spending on the game up 40%. WWE SuperCard is 2K's highest grossing mobile game and has been downloaded more than 15 million times. And NBA 2K Online remains the number one PC online sports game in China with over 36 million registered users. In addition, net bookings from add-on content more than doubled led by XCOM 2

[Karl Slatoff:]

Thanks, Strauss. Today, I'll discuss our recent releases and then review our lineup for the remainder of this fiscal year. On October 13, 2K successfully launched WWE 2K18, the latest installment in our popular simulation-based WWE series. Co-developed by Yuke's and Visual Concepts, WWE 2K18 received positive review scores including an 84 out of 100 from COGconnected, and an 8.3 out of 10 from Forbes. Critics are praising the title for its brand new graphics engine, the largest roster of playable superstars in the series' history and a host of gameplay additions and improvements. According to Forbes, quote, WWE 2K18 is now the standard bearer in visual excellence in sports-themed video games. WWE 2K18 already is off to a solid start and later this fall 2K will release the title for Nintendo Switch, marking the first time in five years that a WWE game has been available on the Nintendo platform. In keeping with our focus on driving engagement and recurrent consumer spending, WWE 2K18 is being supported with a series of post-launch downloadable content, including a Season Pass. The worldwide popularity of WWE is as vibrant as ever and we believe that there remains a substantial long-term opportunity to grow our WWE 2K series by leveraging further the development and marketing expertise of 2K and Visual Concepts. On October 19, 2K and Firaxis Games released Sid Meier's Civilization VI

[Lainie Goldstein:]

Thanks, Karl. Good afternoon, everyone. Today, I'll discuss our second quarter results and then review our financial outlook for the third quarter and fiscal year 2018. Please note that additional details regarding our actual results and financial 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. I'd also like to note that as we announced last week, we changed the name of our operational metric from net sales to net bookings. We have made this change to avoid confusion with the net sales caption used by some companies in their GAAP financial statements, and to be consistent with operational metrics provided by our peers. The definition of net bookings is identical to our previous definition of net sales. As mentioned by Strauss, we had an outstanding second quarter from an operating perspective driven by the continued outperformance of Grand Theft Auto Online and Grand Theft Auto V, as well as the stronger than expected launch of NBA 2K18. Total net bookings grew 20% to $577 million. Of this amount 62% were digitally-delivered net booking, which grew 52% to $356 million. Our digitally-delivered net bookings were driven by record recurrent consumer spending, along with growth and full game downloads. While the operating performance of our business exceeded our expectation, this outperformance is not fully reflected in our GAAP results for three reasons. First, our better than expected net bookings were driven by titles that we are required to defer and therefore our GAAP revenues and profits will not fully benefit from these sales until future – period. Second, because of the better than expected performance of Grand Theft Auto V and Grand Theft Auto Online, we recorded higher than forecasted internal royalties, which are calculated using results that are adjusted to exclude the impact of deferrals, and unlike certain other costs of goods sold are not deferred. And third, we recorded higher stock-based compensation expense primarily due to the increase in our share price. Turning to some details from our second quarter income statement, GAAP net revenue exceeded our outlook and grew by 6% to $444 million. Cost of goods sold increased by 20% to $247 million. Operating expenses increased by 24% to $208 million, due primarily to the inclusion of Social Point as well as higher stock-based compensation, bonus and head count expenses, which were partially offset by lower marketing expense. Our GAAP results reflect $12 million tax benefit, which is driven primarily by tax deductions related to stock compensation expense. These additional tax deductions are due to the increase in our stock price from the date that stock was granted to the date that has vested. This benefit had no effect on the management reporting tax rate, which is 22%. And we reported GAAP net loss of $3 million, or $0.03 per share versus net income of $36 million or $0.39 per share in the prior-year period. Now, I will review the highlights of our fiscal 2018 financial outlook. Starting with the fiscal third quarter, we expect net bookings to range from $610 million to $660 million. The largest contributor to net bookings are expected to be Grand Theft Auto Online and Grand Theft Auto V, NBA 2K18 and WWE 2K18. We expect GAAP net revenue to range from $440 million to $490 million and cost of goods sold to range from $262 million to $291 million. Operating expenses are expected to range from $220 million to $230 million. At the midpoint, this represents the 16% increase over last year, driven by the inclusion of Social Point as well as the higher R&D and stock compensation expense. We expect GAAP net loss to range from $29 million to $40 million or $0.25 to $0.35 per share. Turning to our outlook for the full fiscal year. As a result of our better than expected second quarter operating results and improved forecast for the remainder of the year, we are increasing our outlook for net bookings and net cash provided by operating activity. We now expect net bookings to range from $1.93 billion to $2.03 billion up from our prior outlook of $1.65 billion to $1.75 billion and up from $1.9 billion last year. Net bookings are expected to increase in fiscal 2018 driven by growth from NBA 2K, Grand Theft Auto, as well as inclusion of our full year net bookings with Social Point, partially offset by our lighter release slate. We now expect net bookings from current consumer spending to increase approximately 50%, and we expect digitally-delivered net bookings to grow around 25%. The largest contributor to net bookings are expected to be Grand Theft Auto Online, Grand Theft Auto V, NBA 2K and WWE 2K18. We expect the net bookings breakdown from our labels to be roughly 50% 2K, 45% Rockstar Games, and 5% Social Point and other. We expect our geographic net bookings split to be about 60% United States, 40% International. We now expect to generate approximately $300 million in net cash provided by operating activities up from our prior outlook of $200 million and we plan to deploy approximately $60 million to capital expenditures. Turning to our income statement, we expect GAAP net revenues to range from $1.74 billion to $1.84 billion and cost of goods sold to range from $893 million to $944 million. Total operating expenses are expected to range from $805 million to $825 million, and the midpoint this represents a 22% increase over the prior year, driven by the inclusion of Social Point, higher R&D expense and higher stock-based compensation expense. Although our operating performance is exceeding expectations, we are increasing our fiscal 2018 outlook for net bookings and net cash provided by operating activities. We are reducing our forecast for GAAP net income. This is due to two factors – first, because of the strong ongoing performance of Grand Theft Auto, we expect to record higher internal royalties, which unlike certain other cost of goods sold are not deferred. And second, we now expect higher stock-based compensation due primarily to the increase in our share price. As a result, we now expect GAAP net income to range from $63 million to $91 million or $0.55 to $0.80 per share. In closing, we are very pleased with our operating results for the first half of fiscal 2018, which is poised to be another year of net bookings growth and strong cash flow for our organization. However, we believe that fiscal 2019 will be a record year for both net bookings and net cash provided by operating activities, which are expected to exceed $2.5 billion and $700 million respectively. With an industry-leading creative assets, commitment to operational excellence, and strong financial foundation, Take-Two is well-positioned to generate growth and margin expansion over the long term. Thank you. I'll now turn the call back to Strauss

[Strauss H. Zelnick:]

Thanks, Karl and Lainie. On behalf of our entire management team, I'd like to thank our colleagues for delivering another strong quarter for our organization. And to our shareholders, I want to express our appreciation for your continued support. We'll now take your questions. Operator?

[Operator:]

Thank you. Our first question comes from the line of Justin Post of Merrill Lynch. Please proceed with your question.

[Justin Post:]

Thank you for taking my question. I guess – I guess two. Strauss, one industry question, there were some concerns about NBA and we hear with other games about maybe too much monetization opportunities for MTX taking away from the game. It clearly doesn't seem to be happening in NBA but just give me your high-level thoughts on that. And then second, on Take-Two specifically, you haven't raised your outlook for 2019. Clearly all your digital trends are way above where you thought six months ago when you gave that guidance. How do you think about next year given the strength in digital this year? Thank you.

[Strauss H. Zelnick:]

Thanks. Thanks, Justin. Look, we take consumer feedback very, very seriously indeed. And you're right. There's been some pushback about monetization in the industry. The good news is the title was reviewed extraordinarily well. People love it. And the other news is, entertainment is a want-to-have business, not a must-have business and people vote ultimately with the usage and the usage on the title is up 30% in terms of average daily users. The title itself, say, unit sales were up 20% year-over-year. So, people clearly are voting that they love NBA 2K18 and the reviews reflect that as well. That said, we are concerned about any perception, any negative feedback. And we're focused on it and we're taking it really seriously. And Lainie will talk about next year.

[Lainie Goldstein:]

Sure. For 2019, we are reiterating the guidance that we've given so far on that year. We continue to look at it. We said that we're going to exceed $2.5 billion and exceed $700 million in operating cash flow. So, in terms of giving out more detailed guidance and updating that information, I think we would probably look to do that on our May call with our year-end earnings.

[Justin Post:]

Okay. Thank you and good quarter.

[Operator:]

Our next question comes from the line of Tim O'Shea of Jefferies. Please proceed with your question. Mr. O'Shea. Your line is open. Please proceed with your question.

[Timothy O'Shea:]

Yes, hi. So, thank you for taking my question. GTA Online continues to impress. It's another record breaking quarter and as you mentioned, it's the fourth anniversary of GTA V. On prior calls, we've heard a bunch of questions asking when GTA Online would start to tail off. But given the continued record breaking quarters, I'm just curious how many more years of GTA Online, how many more years GTA Online might continue to thrive and how does the upcoming launch of Red Dead influence your thinking here. And then just secondly, you're obviously taking up your full-year EPS outlook substantially. I was just hoping you might help us understand what's behind that optimism, how much of this is coming from GTA Online and how much from NBA? Thanks.

[Strauss H. Zelnick:]

Yeah. Well, thank you. Look, GTA Online continues to delight consumers and therefore our results are also excellent. And Rockstar Games have said, they'll continue to support Grand Theft Auto Online with content going forward. Then undoubtedly, it's this ongoing robust content creation that continues to delight consumers. There's clearly a community of people who love Grand Theft Auto Online and once again we're having a record year. We can't say much more than that except that we're so extraordinarily pleased and to look further into the future is impossible at this time. With regard to your question on Red Dead, though I have a strong point of view, which is look, entertainment competes with every activity and no activity. And to the extent that we are competitive, we compete with all of our own titles and everyone else's titles too. So, I don't think the launch of any new title specifically has a direct effect on an existing title any more than someone else launching a competitive title would affect for example how one of our titles is doing. If we have something great in the market and we continue to support it with great content, people will continue to show up. That's historically the case and certainly that's our aim. So, we think Red Dead stands alone. Naturally we're incredibly excited. I think the whole market is. And, but it will stand alone and succeed on its own merits.

[Lainie Goldstein:]

So, for the full year, when we looked at raising our guidance, we looked at how much we beat the second quarter by and then we also looked at the remainder of the year and it's reflecting higher expectations for Grand Theft Auto Online, Grand Theft Auto V as well as NBA 2K18.

[Timothy O'Shea:]

Great. Thanks so much and congrats again on the quarter.

[Operator:]

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

[Eric O. Handler:]

Yes, two questions. First, I wonder if you'd be willing to dig in on NBA 2K a little bit in terms of for last year's game as you look back the last 12 months, what percentage of revenue was attributable to the full game sale, be it retail and full game downloads, and what percentage of revenue was related to micro transactions? And then secondly, wondered if you could talk a little bit about Social Point. It looks like internationally, I don't know if it's beta or what type of test you're running for a game, League of Dragons, and at what point do you think of going global with that launch and sort of how do you think about that progressing over the next year?

[Strauss H. Zelnick:]

I've got it. Sorry, okay. Hi, Eric. We'll start with Social Point. So, yes, we did actually launch. We had a soft launch of the title called League of Dragons and it was a very limited soft launch, just like a market. That's typically how you do these things before we take a global launch, I think you're familiar with that strategy. Based on what we've seen and the KPIs associated with title, we decided that it didn't make sense to move forward. So, that title will not be getting a worldwide release. That being said, the two games that Social Point has right now in the market, Monster Legends and Dragon City are both performing above our expectations and are growing quarter-over-quarter and also year-over-year. So, they're very positive for us and as we said in our opening remarks, Social Point has a number of games that are getting ready for release over the next couple of years. We're very excited about this opportunity. And in terms of the NBA 2K, the percentages of – that you wanted to hear about, we don't give that kind of detail by title in terms of micro transactions, full games downloads et cetera.

[Eric O. Handler:]

Okay. Thanks a lot. Appreciate the color.

[Operator:]

Our next question comes from the line of Evan Wingren of Pacific Crest Securities. Please proceed with your question.

[Evan Wingren:]

Thanks. Following up with the NBA a little bit, I was wondering if you could share what percentage of the unit sales that you did disclose came from digital this quarter. And then, secondarily you mentioned the growth in recurrent spending in the NBA and I just wondered if you could break apart the – whether you're seeing growth in the component – in all components or if it's just from new players?

[Strauss H. Zelnick:]

Go ahead.

[Lainie Goldstein:]

Evan, for full game downloads on new consoles, we're seeing about 35%. We're not giving it specifically by title, but overall that's what we're seeing in Q2 for the business and that's what we would expect to see for the full year.

[Karl Slatoff:]

And in terms of the components on NBA, like we said before, we are seeing growth in our users – our daily active users and – so that is up and our unit growth is up in general. We haven't broken it down anymore specifically than that.

[Evan Wingren:]

Thanks.

[Operator:]

Our next question comes from the line of Chris Merwin of Goldman Sachs. Please proceed with your question.

[Christopher David Merwin:]

All right. Great. Thank you. Just a couple questions. First for GTA Online, last quarter, I think you guided to a moderation in the back of the year. Of course, you posted another record quarter in the fiscal 2Q. So, do you continue to expect to see a moderation for that title in the back half or do you expect to see growth? Just secondly, Lainie, I know you just mentioned I think 35% was the expectation for digital download for the year. I think last quarter you talked about a 30% expectation, so can you just talk about what sort of changed that? I mean and how if at all, you started to really try to incentivize the gamers to download more? Thank you.

[Strauss H. Zelnick:]

Thanks, Chris. No, we do not expect moderation in Grand Theft Auto Online in the back half of the year. Looks like it's very strong and as we said, it will be another record year, which is obviously very gratifying. And on the digital download side for full games, we are continuing to see growth in that area, obviously for PC titles it's over 90% and for non-PC titles, surrounding around 35%, as Lainie said across the board.

[Lainie Goldstein:]

And our catalogue is also running at about 50%. And there is a big mix of our catalogue business throughout the remainder of the year.

[Strauss H. Zelnick:]

Right. So, and it's a good thing for us naturally. We do have – make more dollars per unit sold digitally and we have a higher percentage margin. That said, we are where the consumer is and physical distribution still is the lion's share of our business.

[Christopher David Merwin:]

Got it. Thank you.

[Operator:]

Our next question comes from the line of Mike Olson of Piper Jaffray. Please proceed with your question.

[Michael J. Olson:]

Hey, good afternoon. As far as the NBA 2K League, do you have any plans for broadcast, will it be primarily online or could there be also broadcast TV viewing opportunities? And will there be marketing for the league during traditional NBA games or how will you kind of tie those two together? Thanks.

[Strauss H. Zelnick:]

So, we haven't given that detail yet. There will be a media rights associated with the NBA 2K League and that will be announced in due time. Our crew over there led by Brendan Donahue is doing a phenomenal job. Karl talked a little bit about what's coming in 2018. We're super excited to have teams, have a draft of teams and to have a season with 17 teams participating. More details to come, but obviously there will be media available and not much more detail to give out right now.

[Michael J. Olson:]

All right. Thanks.

[Operator:]

Our next question comes from the line of Ray Stochel of Consumer Edge Research. Please proceed with your question.

[Raymond L. Stochel:]

Hi guys, thanks for taking the call. With the success of Grand Theft Auto Online, are you thinking about adding any talent to increase the cadence of GTA Online updates over the coming year or two?

[Strauss H. Zelnick:]

We're always adding talent across the company. Our head count grows but our head count grows only on the side of creating great games and great content and that's everywhere in our business. So, we – across the board, we are a growth enterprise and we are always looking for the best and brightest talent. Right now we're really happy with the content that we're putting out across the board and we have wonderful people who are responsible for doing that every day.

[Raymond L. Stochel:]

Got it. That's great. And also a quick follow up on talent. There has been some studio closures in the space, one public and some layoffs at a private competitor today. Longer term, I guess, where are you seeing talent availability? And do you see anything specific regarding domestic or within your current studios or whether that be in international new markets and new studios? Thanks.

[Strauss H. Zelnick:]

We, as I said, we're in growth mode on and we're blessed we get to work with the best and the brightest around the world. It's no secret that hiring phenomenal engineering and artistic talent in the United States is exceedingly challenging. And so, we're open-minded about where we may open studios going forward. But we will go where the talent is. This is a worldwide business and we have a worldwide footprint. So, we're – as I said, we're in growth mode and I suspect we will be broadening our physical presence to make sure that we are where the talent is.

[Operator:]

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

[Mike Hickey:]

Hey guys, congrats on an awesome quarter. Becoming a habit for you here. I guess, it's always, I think hard for you to add too much color to the Rockstar team, but it looks like the – as it relates to GTA Online, the marketing efforts from the team there as it relates to incremental content coming in seems to have intensified. Curious if that's true and how impactful you think that's been for the ongoing success of that game? I have a quick follow up.

[Strauss H. Zelnick:]

Sorry, Mike, I'm sorry, I missed the marketing part of that question.

[Mike Hickey:]

Yeah, that was the question. Just curious the – it looks like the marketing of additional content for GTA Online is intensified. Just in terms of some of the trailers and maybe the energy put behind it, I'm curious, if that was true, and if that's at all impactful to the success of that game?

[Strauss H. Zelnick:]

Yeah, sorry, it took me – I'm extremely slow on the uptake today, Mike. The answer is that the marketing is related to the content drops. So, as content drops come out as they're significant and meaningful, it's important that we let people know about them. I think, I think the marketing is informative than entertaining, and certainly, we wouldn't do it, if we didn't think it had a beneficial impact. But what drives consumption and delight is obviously the content itself.

[Mike Hickey:]

Yeah. Fair enough. Good. I guess, under the theme of extending your player base, Rockstar is obviously preparing to launch L.A. Noire for the Switch. Curious how you think about the opportunity for other Rockstar content on that platform? And then also thinking about China, I think you've obviously been seemingly more optimistic over time in terms of getting content into that region. Curious your thoughts on the potential opportunity of Red Dead being a commercial opportunity in China, especially as that pay-to-play model seems to be working with other games?

[Strauss H. Zelnick:]

Yeah. So, in terms of our other titles for the Switch from Rockstar. Rockstar hasn't made any announcements yet. And of course, as you know, our labels make announcements about what's coming out. We don't intend to do that on these calls. But clearly, the installed base for Switch has grown rapidly and it's potentially an exciting platform. We've already put out a title for basketball. So, we are supportive of the platform corporately. And in terms of China, look, this is a massive market, as you know. It's also a market that is constrained in any number of ways. I'm hopeful that over time those constraints will lessen. Intellectual property is a particularly challenging area in China and we think there's great opportunity. We're thrilled to work with local partners. We're working with Tencent for a long time. They're a wonderful partner on NBA 2K Online and we've had phenomenal results. So, we're happy to work with local partners. I do think it is very important that we have reciprocity in markets and our markets are wide open. And I think it's important that foreign markets become open. And America's second biggest export category after aerospace is entertainment. We're not alone in these interests. I will say that we are ready when China is ready and we think that providing the best quality entertainment on earth is always a benefit to a population, but of course we feel that way.

[Mike Hickey:]

All right. Thanks, guys.

[Operator:]

Our next question comes from the line of Ben Schachter of Macquarie Group. Please proceed with your question. Benjamin Schachter - Macquarie Capital (USA), Inc. Hey, guys. A few questions for you. So, what do you think are really the key lessons from GTA that you expect to bring to other titles in the future? And should we expect you to continue to move down the price curve on the full game in order to drive more players to GTA Online? And separately on NBA 2K, should we expect any meaningful revenue from the online tryouts this year? And then finally, on mobile beyond Social Point, should we expect intellectual property from other undertake to areas to come to mobile in any meaningful way in FY 2019 and beyond? Thanks.

[Strauss H. Zelnick:]

Thanks, Ben. Look, I think the key lesson from GTA Online, remember we launched that title four years ago, so we certainly have learned a lot from what we knew four years ago. And one of the things that we learned is, if we create a robust opportunity and a robust world in which people can play delightfully in a bigger and bigger way that they will keep coming back and they will engage and if there is an opportunity to monetize that engagement. And we've announced that there will be an online component to Red Dead. And furthermore we've said that we aim to have recurrent consumer spending options for every title that we put out at this company. It may not always be an online model. It may not, probably won't always be a virtual currency model, but there'll be some ability to engage on an ongoing basis with our titles after release across the board. And that's a sea change in our business, and recurrent consumer spending is 42% of our net bookings in the quarter. It's been transformative for us and the only reason it's transformative for us is because it's transformative to our consumers. The business that once upon a time was a big chunky opportunity to engage for tens of hours or perhaps 100 hours has turned into ongoing engagement, day-after-day, week-after-week. You fall in love with these titles and they become part of your daily life. And that's immensely exciting and it's the beginning of the maturation of interactive entertainment as a part of the audio-visual entertainment industry. I just saw a study, the American media day, average media day is about 22 hours. Obviously, people are sleeping and eating. What it means is they're parallel processing and they're consuming a lot of different kinds of media. But within that 22-hour day, only about an hour-and-a-half is interactive entertainment. There's a lot of room for growth. This is just the beginning. In terms of price curve on Grand Theft Auto, we really haven't talked about that but this has been largely a full price business, which is super exciting. In terms of revenues with regard to the NBA 2K League, we're going to let the league's management talk about that when the time comes. We have said that we have not modeled in or guided against revenues or profits coming from the NBA 2K League. That's not what this is about. This is about creating a brand new business, brand new sport, and continuing to grow our footprint in our basketball business and to interact with consumers in that way. Do I think there is a revenue and profit opportunity? Unquestionably. Are we prepared to say more about it at this time? We are not. And finally, on mobile and free-to-play, yes, selectively beyond Social Point, there will be opportunities at the rest of our enterprise. As you can see, our success has been driven when we're very selective. We've done very well with the NBA 2K app. We've done phenomenally well with WWE SuperCard. We think there will continue to be opportunities that are driven by existing core intellectual property. So, we think we sort of have the one-two punch now. Standalone new intellectual property brought to you by Social Point, intellectual property that is known and beloved brought to you by the rest of our company and that's super exciting to us. Benjamin Schachter - Macquarie Capital (USA), Inc. Excellent. Good luck going forward.

[Operator:]

Our next question comes from the line of Ryan Gee of Barclays. Please proceed with your question.

[Ryan Gee:]

Yes, hi guys. Thanks for taking my question. So, I guess taking a step back from the quarter for a second, clearly you're on a trajectory for much higher profitability and you have been for quite some time. So, what do you feel has been the biggest difference for Take-Two achieving and then maybe sustaining the margins of your peers' let's call it 30% plus range. And along those lines, what do you see over the next two to three years changing for Take-Two specifically? Does that could get you guys there and more importantly keep you guys in that 30% plus range? Thanks.

[Strauss H. Zelnick:]

Right. So, let's distinguish gross margins from operating margins. I assume you're referring to operating margins. On the gross margin side we're highly competitive. And our gross margins continue to go up and they're phenomenal. A couple of our competitors account slightly differently. And so, it's not necessarily apples-to-apples. But on an apples-to-apples basis our gross margins are as high as of now, higher than anyone else's. On an operating level, you're absolutely right. Our margin – our operating margins are a bit lower than our two biggest competitors and they need to grow and it's a matter of scale, but obviously you can't gain scale and sacrifice success. You have to have successful scale. We can't improve our margins with loss properties. So, it's not as simple as just doing more. We have to do better and do more and what we're focused on here entirely is, do better and that served us incredibly well. The good news is, we're in a growth business. You've seen that with our net bookings this year. Lainie talked about our expectations for next year. We have to continue to grow. We have incredibly ambitious people here both at the corporate level and emphatically at the labor level. Everyone's pulling in the same direction, what will cause us to grow. It's continuing to build our collection of the best intellectual property, continuing to attract, retain and lead the best creative talent and continue to focus first and foremost on making the consumers happy and meeting consumers' needs, all good things will come from that path.

[Ryan Gee:]

Great. And then maybe just one more follow-up on an earlier question. So when you think about the long-lived success of GTA Online and the high margin recurrent nature of that; has that changed Rockstar's view in any way in terms of when they want to release another product into franchise or in other words do they still believe a standalone release makes sense versus continuing to support GTA Online with extra content? Thanks.

[Strauss H. Zelnick:]

We, as you know, we don' speak for labels. We're thrilled to have a set up here where our labels speak to consumers when they're ready. And I think all we can express here is enormous gratitude for the success of Grand Theft Auto Online and a belief in – enormous belief from Rockstar's ongoing success.

[Ryan Gee:]

Okay. Great and congratulations on the quarter.

[Operator:]

Our next question comes from the line of Scott Krasik of Buckingham Research Group. Please proceed with your question.

[Scott D. Krasik:]

Yeah. Hey, everyone. Let me add my congratulations. Two questions. I guess first, can you just remind us what the last L.A. Noire did and if that's a good guide for what's in the guidance for this year. And then I know you don't talk about the GTA Online attach rates or how many people are playing it, but as you've added new users, as – from GTA 5 what has been the behavior of those, have they transferred at the same rate as is historically? And what's the opportunity for people maybe that you've lost over, over the last three or four years?

[Strauss H. Zelnick:]

So, I'm sorry maybe somewhat unsatisfying. L.A. Noire is sold in about 7.5 million units over the course of the franchise across – across the various SKUs, which is terrific. We haven't singled it out going forward from the guidance point of view. We don't typically do that with our titles. And on Grand Theft Auto Online we don't – we don't have any info – we don't share information on specific data around users or attach rates. So, we, perhaps at this point pretty much shared the data that we're going to be sharing on Grand Theft Auto Online today.

[Scott D. Krasik:]

Well, less looking for data, more about behavior. Have people shifted? Are there opportunities to re-engage people who may have dropped off?

[Strauss H. Zelnick:]

There's unquestionably opportunity to re-engage people based on content drops. And when we drop new content, we see results in terms of engagement. And engagement typically does drive revenue.

[Scott D. Krasik:]

Okay. Thanks.

[Operator:]

Our next question comes from the line of Doug Creutz of Cowen & Company. Please proceed with your question.

[Doug Creutz:]

Yeah, thanks. As Grand Theft Auto Online has inflected higher, can you maybe talk about whether you've been able to do that using the same resource base as you've sort of had working on for the last few years or have you been allocating more resources to it to drive the growth? Thanks.

[Strauss H. Zelnick:]

Rockstar is growing, 2K is growing, Social Point is growing to support the existing opportunities and the new opportunities. And, I think, we're having success across all of our label groups. We are definitely in growth mode. I probably am not going to get more granular than that.

[Doug Creutz:]

Okay. Thanks.

[Operator:]

There are no further questions over the audio portion in the conference. I now like to turn the conference back over the Take-Two management for closing remarks.

[Strauss H. Zelnick:]

Well, first of all, I just like to thank everyone for joining us today. I want to take a moment to thank our colleagues across the company, who delivered these phenomenal results. And I want to thank our consumers who support us and are absolutely passionate about what we do and that drives us and excites us and makes us want to come to work every day. On behalf of the company, I'd like to wish all of you a happy and healthy holiday season and a great New Year.

[Operator:]

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.