Take-Two Interactive Software, Inc.
Q1 2017 Earnings Call Transcript

Published: 5 Aug 2016

[Operator:]

Greetings and welcome to the Take-Two Interactive Software First Quarter 2017 Fiscal Year Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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 first quarter of fiscal year 2017 ending June 30, 2016. 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 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 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'd also like to note that, unless otherwise stated, all numbers we will be discussing today are GAAP. Our press release provides a reconciliation of our GAAP to non-GAAP measurements and further explanation. And on our website, we've provided additional details regarding the non-GAAP components of our cost of goods sold and operating expenses. 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 fiscal 2017 is off to a solid start, with first quarter net revenue up 13% year-over-year. Our results were driven by the continued strong performance of Grand Theft Auto V and NBA 2K16, coupled with growth in recurrent consumer spending, including record bookings from Grand Theft Auto Online. Grand Theft Auto V and Grand Theft Auto Online, once again performed significantly better than we'd anticipated, and continue to generate remarkable results as they have in every quarter since their release. According to new data from the NPD Group, which combines physical sales and full game downloads Grand Theft Auto V was the number two selling game across all platforms in 2015 and is the number three selling game of 2016 year-to-date through June. In addition, Grand Theft Auto Online continues to grow with the game delivering record bookings in the first quarter. Rockstar Games has driven sustained engagement and increased recurrent consumer spending by exciting audiences with the ongoing release of a rich array of free additional content, most recently with the Further Adventures in Finance and Felony, Power Play and Cunning Stunts Updates, and has many more updates still to come. The incredible staying power of Grand Theft Auto V and Grand Theft Auto Online nearly three years after their original release, reflects that these titles remain the standard bearers for excellence in our industry and underscores consumer's tireless passion for this iconic series. In another testament to the strength of Rockstar Games creative portfolio, the highly demanded 2010 classic Red Dead Redemption was made available to play in Xbox One as part of Microsoft's backwards compatibility program on July 8. Red Dead Redemption remains one of the most critically acclaimed entertainment experiences ever launched and is Rockstar Games highest selling title aside from Grand Theft Auto. Every owner of Red Dead Redemption for Xbox 360 can now play the game directly on their Xbox One, regardless of which version of the title they own and for those who have yet to experience it, Red Dead Redemption is also currently available for purchase through digital download from the Games Store on Xbox One. Rockstar Games is also hard at work on some exciting future projects that will be revealed soon. NBA 2K16 has continued to build on our industry-leading basketball series trend of annual growth and is now our highest selling sports game ever with selling of over 8 million units. Revenue from NBA 2K has benefited from strong player engagement and sales of the game's virtual currency were once again the largest contributor to bookings from recurrent consumer spending next to Grand Theft Auto Online. During the first quarter, bookings from recurrent consumer spending on NBA 2K grew more than 50% year-over-year, driven both by online play and the free-to-play MyNBA 2K companion app. We believe we can continue to expand NBA 2K's loyal fan base as well as drive increased engagement and recurrent consumer spending for years to come. On May 3, 2K released Battleborn, a new intellectual property from Gearbox Software, the makers of our popular Borderlands Series. While the game launched to solid reviews, its performance in the market has been below our expectations. We think there remains an opportunity to grow the audience for this unique experience over time, and 2K will continue to drive engagement and recurrent consumer spending on the title through add-on content and virtual currency. Innovation and creativity are among our core tenets, and we fully support our team's vision to push the envelope in order to set new benchmarks for our company and our industry with the understanding that in a highly creative enterprise, not everything always turns out the way one might like. Given the strength and diversity of our company, we have the ability to take these risks and weather any unexpected shortfalls that may arise. During the first quarter, digitally delivered bookings exceeded our expectations. Recurrent consumer spending grew 22% year-over-year, while full game downloads declined as expected as last year's first quarter benefited from the launch of Grand Theft Auto V for PC. In addition of virtual currency for Grand Theft Auto Online and NBA 2K, recurrent consumer spending was enhanced by other offerings, including downloadable add-on content led by XCOM 2, Sid Meier's Civilization V in the Borderlands series, and free-to-play games, including WWE's SuperCard, which has now been downloaded nearly 11 million times, and NBA 2K Online in China, which now has over 32 million registered users. Looking ahead, we are excited about our upcoming holiday lineup which features eagerly anticipated new offerings from some of our most successful franchises, including Mafia III and Sid Meier's Civilization VI, as well as groundbreaking new releases from our annual sports series, NBA 2K and WWE 2K. Karl will have more to share on these titles shortly. In addition, we have a robust development pipeline that extends well beyond the fiscal year, and we expect to grow bookings and cash flow from operations in fiscal 2018. Today our company is just beginning to realize its potential from advances in technology that influence how we create, distribute and experience interactive entertainment to the expanding globalization of our audiences. There has never been a more exciting time for our industry. Take-Two is well prepared to capitalize on these positive trends, strategically, creatively, and financially. As a result, we are positioned to achieve continued success and deliver returns for our shareholders over the long-term. I will now turn the call over to Karl.

[Karl Slatoff:]

Thanks, Strauss. Today, I would like to discuss our recent releases and upcoming lineup for the holiday season. On July 7, 2K and Turtle Rock Studios launched Evolve Stage 2, a new free to play version of Evolve, exclusively for PC through Steam. Evolve Stage 2 features a completely overhauled experience, including a new game design and mechanics, as well as improved game-play balance and system performance. Players, who previously purchased Evolve on Steam, as well as any add-on content such as skins or characters, will be granted founder status, and all of their paid content will carry over into Evolve Stage 2. In addition, founders will get exclusive badges and other items at launch, as well as additional new content as the game is updated over time. Evolve Stage 2 welcomed over 1 million new players in its first week of availability and continues to attract new fans. On September 13, 2K will release BioShock

[Lainie Goldstein:]

Thanks, Karl, and good afternoon, everyone. Begin by discussing the changes to our non-GAAP financial metrics and then turn to our fiscal first-quarter results and financial outlook for the remainder of the year. As announced earlier this week, we are no longer reporting non-GAAP financial measures just for the net effect from referrals of net revenue and related cost of goods sold. We are making these changes to comply with the SEC's updated compliance and disclosure interpretation issued on May 17. These changes to our non-GAAP measures will have no effect on Take-Two's business, GAAP net revenue, GAAP earnings, cash flow, balance sheet, or how our management and Board of Directors evaluates the company's performance. In order to help investors who may wish to continue to evaluate our company's performance based on the same measures that we focus on internally, we are providing the following additional metrics

[Strauss H. Zelnick:]

Thanks, Karl and Lainie. On behalf of our entire management team, I would like to thank our colleagues for delivering a strong start to the fiscal year, and to our shareholders, I want to express our appreciation for your continued support. We will now take your questions. Operator?

[Operator:]

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

[Eric O. Handler:]

Yes. Thanks for taking my question. I've got two questions for you. First, just related to the full-year guidance – maybe, Lainie, you can help me – did you say the old guidance of $1.00 to $1.20 is equal to the new guidance of $2.00 to $2.25, and can you help me get to reconcile that? And then secondly, with regards to Mafia III, it seems like you did get some good buzz out of E3. Amazon had it as the number three most anticipated game of games that were shown at E3 and I'm just curious how that, how E3 maybe has changed or caused you to adjust maybe some of your expectations for the game?

[Lainie Goldstein:]

Eric, let me start with the guidance for next year. So the $2.00 to $2.25 is based on the new non-GAAP metrics, and that is what we will be using going forward. So that compares to the $1.00 to $1.25 that we gave out on our last call. And the sales is up slightly, and that's driven by our Q1 results and our increased recurrent consumer spending and that's offset by some additional marketing expense in the year.

[Eric O. Handler:]

Right. But how do I – and maybe I have just got to spend more time with the press release, but how do I reconcile – like what do I need to do in my model so that the $2.25 becomes $1.00 to $1.20?

[Lainie Goldstein:]

If you take a look at the press release, you will see where we broke out what the deferred revenues are, the deferred cost of goods sold, and then what that impact is on the net income and that will help you reconcile it.

[Eric O. Handler:]

Okay.

[Strauss H. Zelnick:]

And, Eric, if you have follow-up questions, you can give Hank or Lainie a call. We'll be happy to go through it, and that would be true for anyone else us on the call as well. And, this is Strauss. On Mafia III at E3, yes, we had a great show. We're really excited about it. We are really proud of the way we showed off the title, and what can I say? Something like 60 awards and -- 60 accolades and 12 awards and enormous buzz, lots of press, and that's one of the things -- one of the many things that E3 is good for. So this is a title that we've put a lot of investment in and in terms of development and marketing, both current and upcoming, and we have high hopes for it. So stay tuned.

[Eric O. Handler:]

Okay. Thanks.

[Operator:]

Our next question comes from the line of Ben Schachter of Macquarie. Please proceed with your question. Benjamin Schachter - Macquarie Capital (USA), Inc. Close enough. Congratulations, guys, on another good quarter. Few questions here. One, so Lainie, if I just heard you correctly, the no upside on EPS, is that essentially all driven by increased marketing spend, or is there just an increased level of conservatism for any other reason? And then to Strauss, post E3, any change to the way you are going to market with Mafia? Was there anything that you saw that made you say, we would want to come at it in a different way? And then, also on marketing, I just happened to notice sort of seeing these in different ways, the marketing for GTA Online on Facebook and Instagram and some other areas -- it seems to be doing a pretty good job. Do you think that's -- that marketing has been particularly successful, and do you expect you will be increasing that for GTA Online and possibly for other future additional add-on content? Thanks.

[Lainie Goldstein:]

Let me address, first, on the guidance for fiscal year 2017. So we did keep the bottom-line the same as we said, and the revenue is higher, and that is being offset by the marketing expenses. In terms of conservatism, it's still pretty early in the year. We have several titles, still to be released, including Mafia III, NBA, WWE and Civilization VI. So it's still early in the year. We are pleased with the first quarter, and we'll have to see how the rest of the year pans out for us.

[Strauss H. Zelnick:]

Yes, then in terms of Mafia III coming out of the show, I think we were highly optimistic going into the show and, if anything, more so after the show. We already have a very significant marketing budget against the title as we do for all of our AAA releases, but we do try to structure our marketing budgets flexibly. So, as we learn more, we can adjust them. But I think it's safe to say that we are really stepping up and getting behind this title because we really believe in it. To your point on GTA Online and other releases, you're obviously very expert in these matters. And you and I have talked about them. But we, like our competitors, are trying hard to be expert in reaching the consumer wherever the consumer is. And social media is a great way to do that, but you do have to be very expert in the area. And I think we are increasing that expertise at the company broadly and at both of our labels, and you're seeing that in our results. So what drives the results of any given title, GTA Online included, is how it speaks to consumers. And it's the creativity in the title and the extraordinary experience of that game and that experience that has drived record results in the quarter. We said we expected results to moderate and they haven't, we had record results again. And, certainly, marketing plays a role in that. But at the end of the day, of course, the product itself is what speaks to the consumer, and the marketing is getting that message out. It's our job to do A-plus work with both. And I think, around here, we always feel like we can do more. But, yes, I think, we have made some progress in social media marketing.

[Operator:]

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

[Timothy Larkin O'Shea:]

Yes. Hi. Thank you for taking my questions. So, obviously, you guys have had a lot of success developing new franchises over the past few years. But more recently, it seems like new IP like Battleborn are seeing greater challenges at launch. So the question is – now that you have 9 or 10 large franchises, does this start to make sense to prioritize investment towards that existing IP instead of trying to launch new franchises? I do appreciate Strauss's comments about the importance of creativity and maybe not how everything works out, but I'm just curious how you think about this and whether your thinking has evolved over time. Thank you.

[Strauss H. Zelnick:]

Tim, it's a fair question. And I think one has to be careful with the success we've had, because we've launched at least one new hit IP every year – nearly every year since 2007 – not every year but nearly every year. And, obviously, that's why we have titles like Red Dead and titles like Borderlands and BioShock and, more recently, why we were able to add WWE to the mix because of that willingness, that openness and, frankly, our risk profile. And we are capitalized now to take on that risk. So tempting as it may be to rest on our laurels, and we do have 11 franchises that have each sold over 5 million units in individual release. There is something like 60 that have sold, I think, 2 million units at least – and 60 releases that have sold at least 2 million units. It's tempting to do that. But of course, at the end of the day, you run the risk that the enterprise doesn't grow in that circumstance. So while one definitely has a reduced risk profile, when you put out a sequel versus new IP, I think, it's both our obligation and our opportunity to do both. How we do that is an open question. And there are opportunities to moderate risk in so doing. And, also, the world allows you now – the world of interactive entertainment allows you now to have more than one bite at the apple. So with regard to Battleborn, we're being very frank about where we are, because we're a transparent company. We're still delivering new content to Battleborn. Audiences love Battleborn. We still have virtual currency coming for Battleborn. We're not counting it out for a minute. We're just telling you where we're at now. And equally, we just launched Evolve Stage 2, which is another way to express the IP of Evolve. And we've had over 1 million people sign up to play Evolve Stage 2, and that's super exciting. So the world has changed. It's unforgiving in that we invest a lot of money in new IP. It's much more forgiving in that we can have consumers be part of our release. We can iterate with them. We can come back and play another day. And if your watchword is quality, there are great opportunities. Say what you will, the consumers actually really have said great things about Battleborn, as have the critics. So we're still encouraged by our approach to bringing back beloved sequels while creating new intellectual property. And we do have to be careful, of course, to balance our investment and our risk with the opportunity. And there is a little bit of science in there, a little bit of art in there, but that's one of the things we do every day.

[Timothy Larkin O'Shea:]

Thank you, Strauss. I appreciate the comments.

[Operator:]

Our next question comes from the line of Ryan Goodman of Bank of America. Please proceed with your question.

[Ryan Goodman:]

Hey there. Thank you for taking the question. I had one on the new bookings metric. So if I look at the quarter, the bookings were down quite a bit year-over-year just because of the GTA V comp, which makes sense. So, I guess, two questions. If the annual outlook implies flattish, I believe, was in the comments, what does the September outlook for $350 million to $400 million imply on a year-over-year basis? And how should we expect the year-over-year trend to change over the course of the year? What are the key drivers there?

[Lainie Goldstein:]

Can you repeat that question? I'm not sure I'm understanding.

[Ryan Goodman:]

Sure. I'm just looking – I want to make sure I'm understanding the metrics right. But I see like bookings for this quarter were $253 million, and I believe that was down 25% to 30% year-over-year because of the GTA V comps. And I thought in the prepared comments that the $1.5 billion to $1.6 billion was flattish year-over-year. So I'm just trying to understand how we get from down 30% to there. What happens between here and there over the next few quarters?

[Lainie Goldstein:]

So, yes, it is flattish from this year to last year. And it's driven by our release schedule that we have coming up for the rest of the year. We have Mafia III coming out, NBA, WWE, we have Civilization VI and some other titles. So we have a very heavily weighted fall season. That should – that would make up the difference for the year.

[Ryan Goodman:]

I guess, just for a historical perspective, for next quarter, $350 million to $400 million, if you hit the mid-point of that, can you share what the year-over-year comp would be?

[Lainie Goldstein:]

I don't have that in front of me. But if you follow up with us after the call, we could get that to you.

[Ryan Goodman:]

Okay. Great. Okay. That's all I got. Thank you.

[Operator:]

Our next question comes from the line of San Phan of Mizuho. Please proceed with your question.

[San Q. Phan:]

Hi. This is San in for Neil. I was just curious to see if you expect to see an impact to recurring digital spend in the quarter from the Olympics? And there is a gap before NBA 2K17 comes out, but do you expect any impact to that launch as well?

[Strauss H. Zelnick:]

Honestly, if the political season hasn't taken away activity, I certainly don't think the Olympics will. Consumers really love what we have to offer. And when consumers love entertainment, they consume a whole lot of it. It does not appear to be substitutable. So, no, exciting as the Olympics may be, I don't think it will affect us even in the smallest way.

[San Q. Phan:]

Great. Thank you.

[Operator:]

There are no further questions at this time during the audio portion of the conference. I would like to turn the conference back over to management for closing remarks.

[Strauss H. Zelnick:]

We would just like to thank everyone for joining us today. We had a good solid quarter and a great start for the year. We've revised our revenue outlook up. We're highly optimistic about what will be one of our strongest fall and holiday release schedules ever. And we want to thank all of our shareholders for their continued support.

[Operator:]

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