Take-Two Interactive Software, Inc.
Q1 2013 Earnings Call Transcript

Published: 31 Jul 2012

[Operator:]

Greetings, and welcome to the Take-Two Interactive First Quarter 2013 Results. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications for Take-Two Interactive. Thank you. Mr. Diamond, you may begin.

[Henry 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 2013 ended June 30, 2012. Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer; Karl Slatoff, our Chief Operating Officer; 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'm obliged to review our Safe Harbor statement by reminding 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 annual report on Form 10-K for the fiscal year ended March 31, 2012. These documents 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. Our results for the first quarter of fiscal 2013 were below expectations, primarily due to lower-than-anticipated sales of Spec Ops

[Karl Slatoff:]

Thanks, Strauss. I'd like to begin by discussing our announced lineup of upcoming releases. Beginning this summer, 2K Play will launch a new slate of titles for smartphones and tablets. House Pest Starring Fiasco the Cat feature state-of-the-art animation and stars a mischievous cat who will turn your house upside down in no time. GridBlock is an addictive puzzle game with a unique flipping mechanism. Herd, Herd, Herd is an original physics-based game where players attempt to herd farm animals into their pens in a race against the clock. And Carnival Games MiniGolf is based on our million unit selling miniature golf title for the Wii. These titles, along with our recently launched COMEDY CENTRAL's Indecision Game, are just a few instances of Take-Two's overall mobile strategy, which I'll discuss in greater detail in a few minutes. This summer and fall, Rockstar Games will release several Max Payne 3 downloadable content packs on Xbox LIVE, PlayStation Network and PC, which will feature new multiplayer maps, modes, bursts, items, playable characters and challenges. On September 18, 2K Games will launch Borderlands 2. Developed by Gearbox Software, Borderlands 2 allows gamers to play as 1 of 4 new vault hunters in seeking treasure and mayhem on the untamed planet of Pandora. This title had an excellent showing at E3 2012, winning more than 20 awards, including Best Shooter from Game Informer. Consumer anticipation is phenomenal, and preorders are currently the third highest of any title in Take-Two's history, behind only Grand Theft Auto IV and Grand Theft Auto

[Lainie Goldstein:]

Thanks, Karl, and good afternoon, everyone. Today I'll review our results for the first quarter and then discuss our updated outlook for the full fiscal 2013 and our initial outlook for the second quarter. All of the numbers I'll be providing today are non-GAAP results from continuing operations, unless otherwise stated. Our press release provides a reconciliation of our GAAP to non-GAAP measurements. Starting with our results for the first quarter of fiscal 2013, we delivered net revenue of $226.1 million, down 32% from the prior year. The decrease is primarily due to the releases of L.A. Noire and Duke Nukem Forever in the first quarter of fiscal 2012, which had higher combined sales than our first quarter fiscal 2013 releases. The strongest contributors to revenue for the quarter were the release of Max Payne 3, catalog sales led by the Grand Theft Auto franchise and Red Dead Redemption, the release of Spec Ops

[Strauss H. Zelnick:]

Thanks, Karl and Lainie. We're exceedingly optimistic about our long-term outlook for growth and profitability. Our ability to leverage our creative expertise, expand the global audience for intellectual property and capitalize on traditional emerging platforms is more promising than ever. I'd like to thank our colleagues for their hard work and dedication and our shareholders for their valued support. We'll now take your questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from the line of Justin Post of Merrill Lynch.

[A. Justin Post:]

Great. A couple of things. First, you said you have a few unannounced titles in the second half. Obviously, maybe Rockstar's dictating when you can announce those, but when does it become a problem for retail and planning purposes when you haven't announced something? And like if you're going to have something in the March quarter, when is the latest you can announce and still get it out to retail and have a good marketing buzz around it? And the second question is obviously Max Payne was disappointing versus expectations in the quarter. What does that tell you about the industry and the opportunity for some of your titles, including GTA, just as far as how the industry's receiving titles like that?

[Strauss H. Zelnick:]

Justin, it's Strauss. They're good questions. I'll beg the first question. It's not that delaying information is a problem for retail. It's that we tailor the information we divulge to enhancing retail. So our announcement about upcoming schedules is obviously a conjunction of our desire to be transparent and our desire to do what's right for the title. But obviously, we wouldn't be in a position where we would be delaying information at the peril of the release. On the contrary, we schedule the information to enhance the quality of the release. And on Max, what does it tell us about the industry? I think what it tells us, first of all, is a 3 million unit initial ship is an excellent result by anyone's standards and certainly by the industry standards. And we don't want to imply otherwise, and we're really proud of the work the team did in the highly rated title that got amazing reviews. And we think it's a stellar game, and so did the consumers. The question that was posed was how high it was up, and we're somewhat disappointed that up wasn't higher than it's turned out to be at least so far. I think what it does tell us is consumers at this stage in the hardware cycle are more selective than ever. These are expensive propositions for consumers. And with a limited release schedule in the first half of the year, not just ours but the industry's, there's lots for traffic. And as a result, the bar is going to be higher. And I think that's true going forward. So it puts further emphasis on our stated strategy of putting out the highest quality titles in the business. And that strategy has served us well, served us well in terms of our results over the past years. It continues to serve us well. It's reflected in the fact that our catalog sells so well. It's a very high percentage of our overall revenue, and our catalog sales were up 50% in the quarter year-over-year. So clearly, consumers want the titles that we have to offer. Otherwise, our catalog wouldn't be doing as well as it is. And clearly, the bar is higher, and we're mindful of that. We think that our upcoming releases surmount that bar. The initial look on Borderlands 2 is very, very positive, and we couldn't be more excited. Also true for NBA 2K13 and the way that upcoming releases, including XCOM

[A. Justin Post:]

And maybe a follow-up. Obviously, a few disappointing quarters in a row here. When you look at the preorder data, and you've given your guidance, I mean, is there room for these titles to exceed? And what would drive that as you look forward over the next 3 quarters?

[Strauss H. Zelnick:]

We always aim to guide based on what we perceive to be the case. And so we're guiding on what we believe is realistic and achievable. We obviously don't guide to a disastrous scenario nor do we guide to a spectacular scenario. And by the way, to be clearer, you're quite right. We had a disappointing year last year, and now we've had a disappointing first quarter. And we take that on the chin. We acknowledge it. I'm frankly disappointed by it. Moreover, I take responsibility for it. That said, we have a company that is capitalized to withstand the normal ups and downs of a pure-play entertainment business. And I've said on these calls many times, at times when we were doing well, I didn't need to say it. The times aren't always going to be great. And occasionally, there are disappointments, and we've had a few in a row. And we take them all real seriously. That said, the right thing to do is to recognize our many strengths and celebrate those strengths and move forward productively to our next body of releases, which look fantastic. And as I said, if you need evidence that people show up for good titles, take a look at our catalog sales, be proactively buying our catalog titles as we speak.

[Operator:]

Our next question comes from the line of Eric Handler of MKM Partners.

[Eric O. Handler:]

So when I look at your full year guidance, you basically -- you missed the first quarter by about $0.50 of EPS, but you only took about $0.25 out of your full year number. What has changed in the last quarter? Or can you give us a sense of what the puts and takes are as to where you're more optimistic now?

[Lainie Goldstein:]

Sure, Eric. Since the last quarter, we've revised some of our expectations to some of our upcoming releases for the rest of the year. The other thing that changes the sort of timing and the dynamics between the quarters is our capitalized development costs that we had scheduled for later in the year that got pulled back into the first quarter. So even though we missed by a big amount, a lot of that were expenses that were for later on in the year.

[Eric O. Handler:]

Okay. And then as one follow-up, in terms of the second quarter, you do expect losses, and you obviously have one of your bigger games of the year with Borderlands 2 coming out. Is part of it just timing in terms of advertising and when you recognize all the shipments that you expect for the game?

[Lainie Goldstein:]

Yes, that's exactly what it is. Borderlands shipped at the end of the quarter, and all the marketing expenses related to it will be within the quarter, as well as the marketing for some of our Q3 releases. And we also have a little bit left on the MOB losses that'll hit us in that quarter. So that's what's affecting it.

[Operator:]

Our next question comes from the line of Mike Hickey of National Alliance Securities.

[Michael Hickey:]

Strauss, we've heard nothing -- next to nothing on GTA V over the last couple of months. We've seen a couple of screenshots. The game is believed by the Street to be implied by your guidance for this fiscal year, but what believability do we have at this point that this game is actually going to come out this year? And especially when you say the bar is higher, reflecting on the performance of Max, how do your teams bounce, getting that quality bar higher versus the perceived need to get the game out for the next game console?

[Strauss H. Zelnick:]

Yes, I mean, Mike, we just haven't talked about the release date. So obviously, we can't talk about the credibility of the release date that we haven't announced. In terms of the quality bar, I wasn't sending -- that remark was not intended to send some internal signal to our teams to work harder, smarter. They do the very best job they can on absolutely everything we do. And I think we have the best people in the business. And I think many, if not most, people will agree with me. I'm just saying that the standards are getting higher, and that affects us as well. Our teams are already trying to do groundbreaking work on absolutely everything they do. Sometimes we succeed. Sometimes we succeed mightily. And occasionally, we're disappointed, and we'd like that to be even more occasionally than it has been of late.

[Michael Hickey:]

Okay, fair enough. And then I'm guessing that you're consistently -- can you just walk us through the sort of communication you have with the Rockstar studio in terms of the development of GTA V? I mean, are you getting kind of consistent updates in terms of that game's pacing of development? Has anything changed in the last couple of months?

[Strauss H. Zelnick:]

Mike, we wouldn't talk publicly about the way that we communicate with our teams internally. We're blessed to be in business with the Rockstar folks, and everyone knows that I feel that way. We have the best creative teams in the business throughout our company at 2K, 2K Sports, Visual Concepts, Irrational, Firaxis, Rockstar, 2K Marin, 2K Czech. It's an incredible group of people. And how do we communicate? We have about as transparent a company as anyone has, and we encourage people to pursue their passions and to make hits. And I say it here publicly. I say it privately. I'm boringly consistent. That's what we try to do. As I said, we're not always successful. That's part of pushing the envelope. And sometimes things don't go exactly as planned or as hoped. It's the nature of an entertainment business. And while we're not remotely cavalier about it, we are capitalized to withstand the ups and downs of this business.

[Operator:]

Our next question comes from the line of Arvind Bhatia of Sterne Agee.

[Arvind Bhatia:]

I wanted to go back to Borderlands real quick. I heard you guys talk about it a couple of times. The preorders are looking pretty good. That's what we've picked up as well. Maybe if you can provide a little bit more color in light of what's happened with Max Payne. Just relative to where the market is, how you spoke to the challenges in the marketplace for AAA titles or some of the AAA titles, has your expectation for Borderlands 2 being brought down just because of the market conditions? Or do you feel even stronger given the preorders on Borderlands? And maybe -- and one thing to think about it is although they are different titles, how does it look like versus Max Payne in terms of the volumes that you expect to do?

[Karl Slatoff:]

It's Karl. I'll answer the question very directly, the last point. I think that the market conditions have not actually tempered our view on Borderlands 2. The consumer response, look, we mentioned preorders. There's others buzz factors that we look at. It's been really, really fantastic. The title is a very unique title. There's nothing else like it out there. It's a great window for us. So I would say that the momentum continues to build for that title, not in the other direction. Yes, we do think that the market conditions are relatively difficult in general, but great titles that are marketed well and are positioned well can do well in the face of that. And I think that this one is unique in that regard just considering that there's really nothing else like it. It leads a genre. It's effectively the only game in its genre.

[Arvind Bhatia:]

And I understand that. I think what I'm asking is in the context of preorders, perhaps, are indicative of certain amount of momentum. We saw that with Max Payne as well. Has the market shifted so much that preorders are maybe less of an indication? And I know you're looking at other factors as well, but I just would like a little bit more comfort that what we saw with Max Payne, maybe there were some false positives, that, that's not the case here?

[Karl Slatoff:]

Well, look, I mean, I think strong preorders don't necessarily guarantee that you're going to have a 30 million unit seller. There's no question about that. It's not a one-to-one correlation. But I can tell you, I'd rather have the momentum being built, I'd rather have a strong preorders this quarter out, have momentum going in the right direction than otherwise. So is there a change in the way that preorders are -- the way that preorders predict what's going to happen in release? I don't believe that there's a market change in that. I think it's really title by title. And look, in sports titles, also, the preorder's a very different indication of how sports titles do. I think it really depends on the title and the nature of that title, the nature of the fan base flying into that title.

[Arvind Bhatia:]

Great. And last question, is Agent still going to be in the pipeline for, I guess, in the next 12 to 18 months? Or should we not consider that as a factor? Kind of where are you on that title?

[Strauss H. Zelnick:]

Yes, we haven't announced anything about the title yet.

[Operator:]

Our next question comes from Daniel Ernst of Hudson Square Research.

[Daniel Ernst:]

Two questions, if I might. First, looking at where you've done exceptionally well as a company and putting out very creative titles that are different than what's in the market. Even, I think, GTA fits that, and something like BioShock and Red Dead was a Western that really redefined the genre where there wasn't a lot of competition; L.A. Noire, very original. Does the core performance, so something like Spec Ops, which addresses a more traditional shooter category, a military category game, does the disappointment there make you rethink kind of your title lineup overall or as you go forward looking at greenlighting new projects? Does it make you change that process at all? And then second question, the sales and marketing expense in the quarter only up nominally year-over-year. But kind of going back over, like, 10-year history even when you had a GTA, the marketing budget is a lot bigger than it has been. I think can you address what's driving that? Or in this quarter, was there an opportunity to maybe pull that back? Was it maybe the sort of overspend relative to the titles? Or was that just the level of expenses you need to make to get your voice heard in this environment?

[Karl Slatoff:]

It's Karl. I'll take the first question, which is the innovation question. Look, I would say that we will never stop trying to innovate in titles. And I think you've got it exactly right. Most of the titles that we do try to do something a little bit different. They're not plain vanilla. And Spec Ops is an interesting case because Spec Ops actually reviewed quite well. And I think most of the critics at least recognized there's variation in the Metacritic scores, of course, but most recognize that Spec Ops was something very different than any other military shooter that was out there and at least gave -- and gave the title kudos for attempting to be different. Sometimes that resonates with consumers, sometimes it doesn't. And I think in the case of Spec Ops, I think it was a -- it's a fantastic game that is extremely different with a very, very strong storyline. And it begs off the question that, that ultimately matter in the military shooter genre. So I think that in that specific case, that's an interesting case study, but I think it is the only case study. And it would never prevent us from taking risks and chances in innovating in the future because that's the only way that we're going to move our company forward creatively, and that's how, frankly, we've had success in the past. So if we let one title that where innovation didn't move, didn't create a breakout title for us, dictate the way we'll behave in the future, I think that would be a huge mistake.

[Daniel Ernst:]

And the marketing budget?

[Lainie Goldstein:]

so for the marketing, it's really on a title-by-title basis. So it can change from quarter to quarter based on what titles released. So last year, we had L.A. Noire and Duke Nukem. And this year, we have Max Payne and Spec Ops. So each title has its own marketing budget that's built up by the labels based on what they think is required for the title. So I wouldn't say it's necessarily like a trending indicator on a quarter-by-quarter basis. You have to really look at each title.

[Operator:]

Our next question comes from the line of Phil Anderson of Longbow Research.

[Phil Anderson:]

Yes. I just wanted to clarify what was the guidance for the fiscal year on gross margins?

[Lainie Goldstein:]

One second. I just want to get it right. In the low 40s.

[Operator:]

[Operator Instructions] And we will move on to our next question in the meantime. Our next question comes from the line of Kyle Brandon [ph] of Smoking Joe's [ph].

[Unknown Analyst:]

Yes. From a business standpoint, what would you say is your best-selling game and the most professional game you have out there with the clock?

[Henry Diamond:]

Yes. Can we move on to the next questioner, please?

[Operator:]

The next question comes from the line of Tom Andrews with BMO Capital Markets.

[Thomas Andrews:]

Just standing in for Edward Williams tonight. I was wondering if you could maybe elaborate a little bit, if you can, on what your business model is going to be for the Asian initiatives that you have going? Is it going to be mostly a micro-transaction type of business? Or is this a subscription business or is it going to be some sort of combination of the 2? And does it matter on geography at all?

[Strauss H. Zelnick:]

Certainly, it matters on geography because we tailor our offerings and our business models to consumers wherever they are and change shift geographically. The Asian games in the Asian market are currently thought to be free to play with the economic model being a micro-transaction model.

[Operator:]

[Operator Instructions] It appears there are no further questions at this time -- excuse me, we do have a question from the line of Ben Schachter of Macquarie.

[Thomas C. White:]

This is Tom White on for Ben. I was hoping you guys might be able to provide maybe some early comments on differences in mobile usage across the smartphones and tablets. I guess it may be around engagement monetization and maybe any demographic information that you might have opportunistic platforms.

[Karl Slatoff:]

Tom, it's Karl. Look, I think we have a lot of research out there, and I would -- you should check it out yourself. But obviously, we look at this a lot. And one thing we can say is that people -- the tablet gaming people tend to actually monetize better on tablets. And I think that's one of the most interesting facts that we've noticed to date. But if you look, it's still early. But I would encourage you to check out the research out there because it's pretty robust.

[Operator:]

There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

[Strauss H. Zelnick:]

Great. Well, thanks, all, for joining us. And we are looking forward to delivering on what we believe will be a very successful year.

[Operator:]

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