Take-Two Interactive Software, Inc.
Q2 2017 Earnings Call Transcript

Published: 3 Nov 2016

[Operator:]

Greetings, and welcome to the Take-Two Interactive Software's Q2 Fiscal Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. And as a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Hank Diamond. Thank you. You may begin.

[Henry A. Diamond:]

Good afternoon. Welcome, and thank you for joining Take-Two's conference call to discuss its results for the second quarter of fiscal year 2017 ended September 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 and all comparisons are year-over-year. 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 Take-Two's business continued to outperform during the second quarter, enabling us to deliver strong net revenue and better-than-expected bookings growth. Our outstanding results were driven by the launch of NBA 2K17, ongoing robust demand for Grand Theft Auto V, and increased recurrent consumer spending, including growth in bookings from Grand Theft Auto Online. NBA 2K17 launched to stellar reviews, quickly becoming the top-rated annual sports game of the current console generation and the highest-rated release in the history of our industry-leading basketball series, based on average Metacritic score. NBA 2K17 had the strongest launch in the history of the series, and has continued to grow over last year's release with sell-in to-date of more than 4.5 million units. Moreover, during the second quarter, bookings from recurrent consumer spending on NBA 2K grew by 160%, driven by both online play and the MyNBA 2K mobile companion app. Sales of virtual currency for NBA 2K have continued to grow with each new release and remained the largest contributor to recurrent consumer spending next to Grand Theft Auto Online. I'd like to congratulate the team at Visual Concepts for once again raising the bar for excellence by delivering an incredible experience that perfectly captures the authenticity of pro basketball and the passion of our audience for both the sport and its pop culture connection. Grand Theft Auto V and Grand Theft Auto Online also continued to exceed our expectations, as that happened every quarter since the release. More than three years after its initial launch, Grand Theft Auto V remains the must-have title for gamers on both console and PC, with sell-in now surpassing 70 million units. In addition, Grand Theft Auto Online once again delivered bookings growth and remained the single largest contributor to recurrent consumer spending. During the second quarter, Rockstar Games supported Grand Theft Auto Online with two significant free content updates, Bikers and Cunning Stunts, as well as numerous other content drops and events for fans. This ongoing release of rich and varied additional content continues to be a key driver of consumers sustained engagement with Grand Theft Auto Online, and Rockstar Games has much more plans going forward. The launch of the BioShock

[Karl Slatoff:]

Thanks, Strauss. Today, I'll discuss our recent releases and pipeline for the remainder of fiscal 2017. On October 7, 2K launched Mafia III, a highly immersive and action-packed addition to our popular organized crime series. Developed by 2K's newest studio, Hangar 13, Mafia III received critical praise for its deep storytelling and epic setting. For example, Forbes called Mafia III fantastic, while IDM said, its writing and performances are some of the best of this entire generation and New Bordeaux is a fantastic setting. Mafia III is the fastest-selling game in 2K's history, with week one sell-in of more than 4.5 million units and ongoing strong demand. We're also witnessing very high interest in the game beyond just sales, with more than 88 million YouTube views of Mafia III in just its first week. The team at Hangar 13 departed from traditional mobster story that Mafia fans were accustomed to and leaned into the racially-charged tensions of the time rather than shying away from them. Their creative approach has paid off with a tremendous story-driven experience that sets a new bar for storytelling in video games. 2K and Hangar 13 are only just getting started and have more content planned for Mafia III in the near future. On October 11, 2K released WWE 2K17 and brought our popular sports entertainment series to exciting new heights. WWE 2K17 received strong reviews from influential critics, including Forbes, which scored it 8.6 out of 10 and called the game easily the best wrestling release in over a decade, and IGN which scored the title 8.2 out of 10. We expect that sell-in of WWE 2K17 will be up over last year's release, continuing the trend that the series has delivered for every year since we acquired the license. WWE 2K17 is being supported with a variety of downloadable add-on content, including a Season Pass. I'd like to congratulate Yuke's and Visual Concepts for continuing to grow and enhance this annual series. On October 21, 2K launched Sid Meier's Civilization VI, the latest offering from our award-winning turn-based strategy series that has sold-in over 37 [million] units worldwide. Developed by Firaxis Games, Civilization VI marks the 25th anniversary of the series and provides the most detailed, vivid and beautiful experience ever featured in the Civilization game. The title has received outstanding reviews from critics, including 9.5 out of 10 from Game Informer, 9.4 out of 10 from IGN, 93 out of 100 from PC Gamer and 90 out of 100 from GameSpot. Civilization VI is the fastest-selling title in the history of the series and is exceeding our expectations, with sell-in already surpassing 1 million units. I would like to congratulate Firaxis on yet another stellar addition to this beloved series that has entertained gamers for a quarter of a century, a truly remarkable achievement. Last week, 2K launched Carnival Games VR, a new take on our hit franchise created by Cat Daddy Games, which has sold-in more than 9 nine million units worldwide. Our first offering for virtual reality, Carnival Games VR delivers a highly accessible entertainment experience that enables players to immerse themselves in the familiar, classic fun of our popular Carnival Games series in a virtual reality setting. The title is currently available worldwide to digital download for HTC Vive and PlayStation VR and we'll release later this year for Oculus Rift. Virtual and augmented reality are exciting emerging platforms that have the potential to enhance the way interactive entertainment is created and experienced, and we will continue to invest in this space. In relation to our diverse line of frontline titles, we will continue to deliver innovative, digitally delivered offerings designed to drive entertainment with and recurrent consumer spending on our games. We will also continue to selective release free-to-play mobile games, many of which support our core IP. During October, we launched Mafia III Rivals, a mobile battle RPG game and NHL SuperCard 2017 and NHL collectible card-battling game. Later this month, we will release WWE's SuperCard Season 3, a free update for the popular WWE collectible card-battling game that has been downloaded more than 11 million times, and is our most financially successful free-to-play mobile offering. Each of these games is available for iOS and Android devices. Turning to industry news, we're happy that 2K have the opportunity to collaborate with Nintendo on their first look video for Nintendo Switch, which was revealed last month and will launch in March 2017. While we're not confirming any specific titles at this time, we're pleased to announce our partnership with Nintendo in support of the Nintendo Switch. We look forward to reviewing specific games in details at a later date. In closing, we have an exciting long-term development pipeline, which features sequels from our renowned franchises as well as new intellectual properties that promise to further diversify our industry-leading portfolio. In addition, our creative teams continually seek innovative ways to drive engagement with our titles and growth in the current consumer spending, as well as investing in emerging platforms and business models that present entirely new opportunities for Take-Two. I'll now turn the call over to Lainie.

[Lainie Goldstein:]

Thanks, Karl, and good afternoon, everyone. Today, I'll discuss our fiscal second quarter results and financial outlook for the remainder of the year. As a reminder, we are no longer reporting non-GAAP financial measures that adjust for deferrals of net revenue and related cost of goods sold. All comparisons are year-over-year unless otherwise stated. Our press release provides a reconciliation of our GAAP to non-GAAP measurements. And we have provided additional details regarding the non-GAAP components of our cost of goods sold and operating expenses on our website. As mentioned by Strauss, we had an outstanding second quarter both from a business and financial perspective. Sales of our offerings significantly exceeded our expectations with total bookings growing 28% to $452.8 million. The upside of bookings was driven by the stronger-than-expected performance of Grand Theft Auto V and Grand Theft Auto Online, NBA 2K17 and BioShock

[Strauss H. Zelnick:]

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

[Operator:]

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

[Justin Post:]

Thank you for taking my question. Two quick ones. First congratulations on the NBA 2K ratings. People have noticed the Mafia kind of reviews that are out there, do you think that's affecting game sales and do you think those are off at all? And then secondly, just thinking about the sustainability of this year's earnings, obviously we can layer in for Red Dead for next year. But when you think about the 30%, that's Rockstar this year, and I'm assuming a lot of that's GTA. How do you think about the sustainability of that going forward? Thank you.

[Strauss H. Zelnick:]

Justin, thanks for your questions. Yeah, we're really excited about the performance of NBA 2K17. It's the strongest launch in the history of the franchise, and we had record first week sell-in and 160% increase year-over-year in virtual currency sales, so it's looking really good, and obviously, the reviews and scores are great too. On Mafia, we've got great news on the revenue side that you alluded to, first week, fastest-selling title in 2K's history with 4.5 million units sold-in. And in terms of the reviews and scores, sort of an odd anomaly, you're right, the scores are lower than we would have liked, but there are a lot of stellar reviews and I think the most prominent reviewers really loved it and recognized that what we are doing here from a story, art, character and excitement perspective is really unmatched in the marketplace. So I think we and our competitors are seeing some anomalies in the review system, we take them as they are and we don't argue with it. But I think we do have an enormous number of exceedingly favorable reviews. And most importantly, consumers love the title and they are buying it hand over fist. And that at the end of the day, that's how we're judged. In terms of sustainability of earnings, we are looking for another strong year in 2018. We're thrilled that Rockstar has announced Red Dead Redemption 2 for the fall. Obviously, we're going to give guidance in the normal course as we would, and that's a time when I think we can dig further into your questions. The truth, though, is in the history of the company for really the past that we can recall, this company has been performing across our labels regularly both in terms of new releases and in terms of catalog. And the results are directionally sound, things are good and getting better, and that's probably we're most excited about now. So we'll get into more detail about how each of the labels is doing when we give more specific information and when we give our initial guidance for the year, we're not there yet.

[Justin Post:]

Thank you.

[Operator:]

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

[Michael J. Olson:]

Hey, good afternoon. On Red Dead 2, I realize it's a long ways away, but is there anything you can share on how Rockstar will monetize the game with digital content, specifically do you anticipate some form of kind of Red Dead Online offering in order to replicate the success that you had with GTA Online? And then secondly, related to GTA Online, I just want to make sure I heard it right, did you say that it grew year-over-year in the quarter, and can you say how it compared to the June quarter, so how did it do sequentially? Thanks.

[Strauss H. Zelnick:]

Yeah. In reverse order, we are expressing year-over-year growth and we haven't said anything about quarter-over-quarter. It's not really the way we feel we ought to look at it, we're looking at it year-over-year and it continues to outperform our expectations. In terms of Red Dead 2, Rockstar has announced that there will be an online component; we're excited about that. We haven't talked about monetization schemes nor do we expect to. The approach of our company in both of our labels is delight the consumer first, and the revenue and profits will take care of themselves, and it's proven to be a very good strategy and one I expect will repeat.

[Michael J. Olson:]

Thank you.

[Operator:]

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

[Eric O. Handler:]

Yes. Thanks for taking the question. Two questions for you. First, with – at the beginning of the year, you guys spoke of elevated marketing costs in the first quarter – in the fourth quarter of fiscal 2017. And given Red Dead Redemption is going to be in the fall of 2017, are those marketing costs still going to be elevated in this year's fourth quarter ahead of potential new releases in the first quarter, are those marketing costs have now shifted out? And then secondly, wondered if you could talk about Civilization Online in Korea, I've heard that the game has actually been stopped and it's being revamped and hopefully re-launched. Just wondered if you could talk about some of the statistics around that game and how meaningful this is?

[Lainie Goldstein:]

Hi, it's Lainie. For the marketing costs, we never said that they were going to be in the fourth quarter. We did say that the full year was going to be up from the previous year to support our overall pipeline for 2017 and also for some titles for 2018. So, we still have a robust marketing expense category to this year and that hasn't changed.

[Karl Slatoff:]

And Eric, it's Karl. I'll answer your question on Civ Online. So we launched it in December of 2015 in Korea, and as you know, we partnered with XLGAMES on that initiative. We have suspended the game in Korea at this point, but we have plans to bring Civ Online to Taiwan, Hong King, Macau and China, through our publishing partnership with Game First and Qihoo 360. So, stay tuned for more results in the future.

[Eric O. Handler:]

Thank you.

[Operator:]

Our next question comes from the line of Brian Fitzgerald with Jefferies. Please state your question.

[Brian P. Fitzgerald:]

Thanks, guys. WWE launched for the Season Pass, we're wondering maybe what the traction looks like there and maybe any notable differential dynamics with respect to Season Pass adoption across titles or genres? Thanks.

[Karl Slatoff:]

Hi, Brian. It's Karl. We don't have any Season Pass information to share with you on WWE. We topically don't give specifics about that. And I'm sorry, what was the second part of your question?

[Brian P. Fitzgerald:]

Does the Season Pass adoption – do you see differential dynamics or different dynamics between Season Pass on NBA versus WWE versus other genres of games?

[Karl Slatoff:]

Yeah. I mean, I think, every game even within genres are very different in terms of Season Pass pickup. And it's really just a question of what our – ultimately what our DLC offering is going to be. And some products, we don't even do a Season Pass in. So, it really varies game-by-game, and I wouldn't say that there is anything specific genre-to-genre.

[Brian P. Fitzgerald:]

Okay. Thanks, Karl.

[Operator:]

Our next question comes from the line of Doug Creutz with Cowen and Co. Please state your question.

[Doug Creutz:]

Hi. You mentioned that you had some of the star performers with the BioShock

[Strauss H. Zelnick:]

Potentially, yes. I mean, it does inform – anytime we have something that goes well or doesn't go well, it definitely informs our decision-making. But we don't have anything specific to announce, those announcements would come from our labels. The good news is we have a rich trove of intellectual property and there definitely are more things that will be brought to the market in the future and – but nothing that we would announce on today's call.

[Doug Creutz:]

All right. Thank you.

[Operator:]

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

[Michael Hickey:]

Hey, guys, great quarter. Congratulations. Thanks for taking my questions. Just curious on, just to clarify on GTA Online. For your Q3, I think you said that you expect that to moderate and I think that's obviously a year-over-year perspective, which you clarified earlier, I'm curious why you think that is, if you're just being conservative or if that's sort of content related. And I guess that dovetails into a question on Rockstar and their ability to create content ongoing with the full development now of Red Dead Redemption 2. And I have a quick follow-up, thanks.

[Strauss H. Zelnick:]

Yeah. Thanks, Mike. It's Strauss. We've been saying for some time that we expected Grand Theft Auto Online to moderate, and so far we're able to report year-over-year growth in the quarter. The title is over three years old, it continues to delight consumers. We're thrilled with its performance over time, though the expectation remains that it will moderate, and obviously, we can't call it more specifically than that; it's not actually formulaic. And Rockstar Games has enormous bandwidth to work on multiplicity of opportunities simultaneously, and I think we all can be really proud of their ability to do so and to delight consumers while delivering experiences that critics resoundingly rate as perfect or very nearly perfect. So we've an enormous amount of confidence in that label and their performance, and we're incredibly excited about what is to come.

[Michael Hickey:]

Absolutely, I guess this is sort of a reach, but on GTA Online, I think – think it was last year it was announced that there was 8 million weekly players. I know that bookings are up. Is the player count up too or is that just a higher ARPU?

[Strauss H. Zelnick:]

A fair question. Those are not the statistics we tend to give out, and again I think the reason that we don't give them out is that we're not describing this title as the kind of title where those metrics would be all that useful to you. But we have said that it's performing great, performing great year-over-year and that we do expect the results to moderate somewhat in the coming quarters. And that's – we think that that tells investors what they ought to be looking for.

[Michael Hickey:]

Okay. Fair enough. The last one for me. Obviously, we have a little bit of a sketch of your fiscal 2018 and Red Dead Redemption 2, which obviously is seemingly a big catalyst for you guys. I am also sort of curious when we look outside of that and your – I guess your perennial games, NBA 2K and WWE, looking at your full slate, should we sort of expect something size-wise or title count-wise that we saw in fiscal 2017? And I am also wondering how you're thinking about new IP? Obviously you guys have been very forward in pushing and trying to create new franchises, and I am just curious if you still plan to do that? Thank you.

[Strauss H. Zelnick:]

All good and fair questions. This is early for us to give insight into the future, it's something we know investors have asked for and that we're trying to do. And you're right, there's plenty to come in fiscal 2018 that we'll talk about in the future. We're not going to give more specifics than that right now. It definitely would be premature. We have said that we expect bookings growth. We have said that we expect cash flow growth. And as you know, we don't say things like that without being exceedingly thoughtful about what we're saying. As far as new intellectual property, look, every year since this management team took over the company, nearly every year, we've launched successful new IP, not every year but nearly every year. And we do think that any solid entertainment company is constantly creating new hits in addition to bringing beloved franchises back to market. You're absolutely right, it's very challenging to do that, and it is risky to do that and we're not always successful at it. It remains a key part of our strategy on an ongoing basis. And when I say that though, I probably should put a very fine point on our selectivity for that to work given the amount of investment that's required and we have to be incredibly disciplined. And what that means is that our creative teams are encouraged to focus on something they're highly passionate about. And then I would say, we are all, everyone, at this company is laser-focused on quality. And again, even that doesn't always work out according to plan but more often than not, it does.

[Michael Hickey:]

Thanks, Strauss. Good luck, guys.

[Operator:]

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

[San Q. Phan:]

Hi. We saw some higher priced SKUs for NBA (36

[Strauss H. Zelnick:]

Are you talking about the limited edition launches? I assume you are.

[San Q. Phan:]

Yes.

[Strauss H. Zelnick:]

Yeah, I mean...

[San Q. Phan:]

Some of the digital content that comes...

[Strauss H. Zelnick:]

Right. If we have a point of view about delivering something to consumers is really exciting, it belongs in a limited edition. What we found is that it can be appropriate to charge a higher price point for that and we've been very excited by the demand that we've seen for it. It's not really – we don't feel that this is a trade-off, we can do all of the above. We can offer additional digital content in a limited edition, we can also offer it post-launch either free or paid. We have the ability to do all of that. And I think what you'll see is the focus of this company is over delivering to our consumers. And with Mafia III, for example, there will free content updates coming. And Rockstar Games has launched a lot of free content for GTA Online. And our focus here, as I said earlier, is not trying to extract the last nickel from our consumers to the contrary. Our focus is to deliver vastly more value than what we charge for and we think that creates extraordinary loyalty for our brands, for our labels and for our company's products. And ultimately over delivering for our consumers equilibrates with over delivering for shareholders.

[San Q. Phan:]

Great, thanks, and congrats on the quarter.

[Operator:]

At this time, I am showing no further questions. So, I will turn it back to Mr. Zelnick for closing remarks.

[Strauss H. Zelnick:]

We just like to thank you all for joining us today. Obviously, we're incredibly proud of the results this quarter. Those results are driven by over 2,000 highly creative folks at this company who every day take enormous creative risk to deliver the best entertainment properties in the business. And then they are in turn supported by nearly a 1,000 people who work on the business side, publishing side of organization to try to bring those properties to market worldwide in the best possible way. We're incredibly gratified by the results, incredibly proud of what the company has achieved. And yeah, we do believe we're just scratching the surface. Interactive entertainment is the fastest growing part of the audio visual entertainment industry, and it's going to stay that way for a long time to come. We, and our competitors, in fairness, have the wind at our collective backs. Now it's our job to execute, we're proud of what we've done today and we know we have to get up and tomorrow and do it all over again. Thanks so much for joining.

[Operator:]

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.