Take-Two Interactive Software, Inc.
Q1 2015 Earnings Call Transcript

Published: 5 Aug 2014

[Operator:]

Greetings, and welcome to the Take-Two Interactive Software First Quarter Fiscal Year 2015 Earnings Conference Call. [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 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 2015 ended June 30, 2014. 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 annual report on Form 10-K for the fiscal year ended March 31, 2014. I'd also like to note that, unless otherwise stated, all numbers we will be discussing today are non-GAAP. Please refer to our earnings release for a GAAP to non-GAAP reconciliation and further explanation. Our earnings 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. Take-Two's fiscal year 2015 is off to a solid start, with the first quarter marking our eighth consecutive period of better-than-expected results. I'm especially pleased to report that we're able to deliver non-GAAP revenue growth without the benefit of any major new releases, driven by our expanding portfolio of digitally delivered offerings, continued growth in our NBA 2K franchise and persistent demand for Grand Theft Auto V. NBA 2K14 continues to expand its global audience and has become our first sports release to cross the 7 million unit selling mark. The title has captivated gamers on both current and next-gen platforms, surpassing both FIFA and Madden as the third highest unit selling title of any genre on PlayStation 4 and Xbox One in the United States. Over the past 5 releases, the NBA 2K franchise has grown at a compounded annual rate of 35%, reflecting the consistent ability of 2K and Visual Concepts to raise the bar for excellence and build the series into one of our company's most important and durable franchises. Last September, Grand Theft Auto V delivered the most successful launch in the history of entertainment, achieving $1 billion in retail sales in only 3 days. Nearly a year later, the title continues to attract new audiences in Xbox 360 and PlayStation 3, with worldwide selling now surpassing 34 million units. Fans can look forward to Rockstar Game's release of the PlayStation 4, Xbox One and PC versions this fall, which Karl will have more to share about shortly. During the first quarter, digitally delivered revenue grew 43% year-over-year, to $106.4 million. Nearly 90% of this growth came from recurrent consumer spending, which accounted for approximately 60% of our digitally delivered revenue during the period. The remainder came from full game downloads across console, PC and mobile platforms. The largest contributor to recurrent consumer spending was virtual currency for Grand Theft Auto Online and NBA 2K14. Grand Theft Auto Online continues to outperform our expectations and was once again the single largest contributor to digitally delivered revenue. During the first quarter, Rockstar Games released several updates, including the Capture Creator, highlight pack, I'm Not a Hipster pack and the limited time Independence Day Special, which contributed to players' ongoing strong engagement with Grand Theft Auto Online. We're highly enthusiastic about the future of Grand Theft Auto Online, including its upcoming fall launch on PlayStation 4, Xbox One and PC Recurrent consumer spending for NBA 2K also continued to grow during the first quarter, with revenues up 150% year-over-year. Online play, including multiplayer gaming, has become an important enhancement to most players' engagement with our industry-leading basketball franchise. Downloadable add-on content for our frontline titles is also a key contributor to recurrent consumer spending. During the first quarter, we broadened our offerings with the release of Borderlands 2, Headhunter 5. Recurrent consumer spending was also enhanced by our free-to-play online games in Asia. In particular, NBA 2K Online, which we launched in partnership with Tencent in China, continues to deliver growth and revenues and player engagement. Gamers in Asia can also look forward to the commercial launch of Civilization Online, our massively multiplayer online game based on our successful Sid Meier's Civilization franchise, which is being delivered -- being developed by MMO design luminary Jake Song and his team at XLGAMES in Korea. Catalog sales accounted for nearly 55% or $82.7 million of our first quarter revenue, led by the Grand Theft Auto series; Borderlands 2, which is now sold in more than 10 million units; Sid Meier's Civilization V which is now sold in over 6 million units; and BioShock Infinite, which is now sold in nearly 7 million units. Our company continues to benefit from creating the highest-quality titles that attract new audience as well after their initial launch. For the calendar year-to-date through June, Take-Two was the #1 third-party publisher in the United States in terms of catalog unit sales per SKU across Xbox One, Xbox 360, PlayStation 4 and PlayStation 3. Take-Two had phenomenal success at this year's E3 show in Los Angeles, which featured the first reveal of Rockstar Games' Grand Theft Auto V for PlayStation 4 and playable demos from 2K's extraordinary lineup. Our booth attracted thousands of attendees each day, who waited hours to experience 2K's titles, which in total won more than 100 editorial awards and honors. Evolve won more than 50, including the coveted Best of Show Award. We're incredibly proud of this achievement and believe that it bodes well for the title's February lunch, which Karl will discuss shortly. I'd like to congratulate both Rockstar Games and 2K on their stellar performance at E3. Fiscal 2015 is poised to be another strong year of revenues and profits for our organization, highlighted by a diverse array of new AAA releases and innovative digitally delivered offerings. With 16 titles we've announced to date, we've disclosed our complete frontline release schedule for the current fiscal year. There are no longer unannounced titles assumed in our guidance. The outlook for our lineup is stronger than ever, which, coupled with our better-than-expected first quarter results and current business trends, enables us to maintain our guidance for the full fiscal year. Our ability to project these strong results illustrates how our company has been transformed into a diversified interactive entertainment enterprise with numerous successful franchises and meaningful profits from recurrent consumer spending. Looking beyond the current year, Take-Two has the 4 key attributes that should enable us to maintain our positive momentum

[Karl Slatoff:]

Thanks, Strauss. Today, I'll provide an update on our release schedule for the remainder of fiscal 2015. On October 7, Visual Concepts will step onto the court to continue our NBA 2K franchise's resign as the #1 basketball game in our industry. NBA 2K15 promises, once again, to set new benchmarks for sports realism and game play on both current and next-gen consoles and PC. Oklahoma City Thunder superstar, 4-time NBA scoring champion and 2014 NBA Most Valuable Player, Kevin Durant, will make his solo debut as the game's cover athlete and this year's release will include more teams and players from the Turkish Airlines euro league. In addition, internationally renowned music artist and producer Pharrell Williams will curate the most extensive and unique soundtrack compilation in NBA 2K franchise history. 2K and Pharrell will unveil the soundtrack later this summer. On October 14, 2K will release Borderlands

[Lainie Goldstein:]

Thanks, Karl, and good afternoon, everyone. Today I'll review our results for the fiscal first quarter and then discuss our outlook for the fiscal second quarter and full year 2015. All of the numbers I'll be providing today are non-GAAP results from continuing operations and all comparisons are year-over-year unless otherwise stated. Our press release provides a reconciliation of our GAAP to non-GAAP measurements. Starting with our results for the fiscal first quarter, net revenue increased 5% to $151.6 million. This exceeded our outlook range of $120 million to $135 million, due primarily to the continued strong performance of Grand Theft Auto V and Grand Theft Auto Online. Digitally delivered revenue grew 43% to $106.4 million. The largest contributors were the Grand Theft Auto series, the NBA 2K franchise and offerings for Borderlands 2. Approximately 60% was derived from the recurrent consumer spending, including virtual currency, add-on content and online games. Catalog sales accounted for $82.7 million in net revenue, led by the Grand Theft Auto series, Borderlands 2, Sid Meier's Civilization V and BioShock Infinite. Gross margin increased 22.7 percentage points to 58.1% due to the absence of a $29 million impairment of capitalized software development costs which was recognized during the first quarter last year. Operating expenses were $95.8 million, up by $2.2 million due to higher personnel expense and depreciation. Interest and other expense was $2.3 million. And non-GAAP net loss narrowed to $11.2 million or $0.14 per share as compared to a loss of $47.1 million or $0.54 per share in fiscal first quarter 2014. This result was better than our projected loss of $0.25 to $0.35 per share. On a GAAP basis, we reported revenue of $125.4 million and a loss from continuing operations of $35.4 million or $0.45 per share. Turning to some key items from our balance sheet at June 30, 2014, as compared to March 31, 2014. Our cash and short-term investments balance decreased to $841.4 million. Our accounts receivable balance decreased to $43.2 million, primarily reflecting the collection of receivables from our fourth quarter and holiday sale. Inventory decreased to $23.1 million due primarily to continued sales of Grand Theft Auto V. And software development cost and licenses increased to $255.6 million, reflecting the development efforts around our pipeline of upcoming releases. Now I will review our financial outlook for the second quarter and fiscal year 2015, which is provided on a non-GAAP basis. Starting with the full year, we are reiterating our financial outlook including non-GAAP net revenue of $1.35 billion to $1.45 billion and non-GAAP net income per share of $0.80 to $1.05. The majority of our revenue is expected to come from new releases, including NBA 2K15; Grand Theft Auto V for PlayStation 4, Xbox One and PC; Evolve; WWE 2K15; Borderlands

[Strauss H. Zelnick:]

Thanks, Karl and Lainie. On behalf of our entire management team, I'd like to thank our colleagues for their hard work. To our shareholders, I'd like to express our appreciation for your continued support. We'll now take your questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from the line of Drew Crum with Stifel.

[Andrew E. Crum:]

So want to understand what the impact of moving Evolve from the fall to the February timeframe, it's on revenue guidance. You guys beat your first quarter guidance, but you're reiterating for the full year. So just want to understand what impact that has on how you're thinking about revenue for the year.

[Lainie Goldstein:]

We don't give out our guidance on a title-by-title basis. The title did move, but we have a lot of movement in our guidance from this quarter versus when we previously gave out our initial guidance. And we beat Q1, we also adjusted all our estimates for our titles, for our pipeline that's coming out in fiscal '15. And there were some changes to our release schedule, as we mentioned.

[Andrew E. Crum:]

Okay. Fair enough. And then some of your competitors have seen weakness on new releases on past-gen systems. Just want to get a sense as to what you're anticipating for Borderlands, which will not be available on next-gen systems.

[Strauss H. Zelnick:]

Yes. We've definitely seen others' reports, largely on catalog. And I think our view is that if you give consumers what they want, they come out for it. Our catalog sales have done very well, that's what we announced in this quarter, it's one of the key reasons that we were able to beat in the quarter. And we have a lot of faith in the Borderlands franchise. There's still a huge installed base of consumers. Borderlands is beloved, Borderlands 2 has sold something like 10 million units to date. And so we have very high hopes for the pre-sequel for current gen platforms and, PC, indeed, But. It'll be reliant on quality and every expect to deliver high-quality games.

[Karl Slatoff:]

And I think one of the differences that we may have from our competitors is this is a fresh new experience that's build for this current gen system, which has not been the case with our competitors. Particularly the weakness of the competitors have seen is on when you're coming out with both titles on current gen and next-gen and there's not necessarily a distinction between the two.

[Andrew E. Crum:]

Got it, okay. And then one last question and I apologize if I missed this in your remarks, Karl, but is there anything contemplated in the fiscal 2015 guidance with respect to DLC for Grand Theft Auto V?

[Lainie Goldstein:]

We don't have anything in there for Grand Theft Auto V. There may be some free downloadable content that's given out there in the year, but anything that brings revenue to top line hasn't been -- we've got nothing announced today.

[Operator:]

Our next question comes from the line of Edward Williams with BMO Capital Markets.

[Thomas F. Andrews:]

This is Tom Andrews standing in for Edward tonight. Just a couple of quick questions. One, can you go into a little bit of detail about the revenue breakdown in terms of what was generated from your 2K portfolio versus what was generated by the Rockstar portfolio? And then just one housekeeping item. Can you go through the individual stock option expense lines for the quarter?

[Strauss H. Zelnick:]

Yes, we wouldn't normally go through that kind of detail on the call. You can follow-up separately with Hank if you wish and Lainie can respond to the 2K versus Rockstar split in the quarter.

[Lainie Goldstein:]

Right. For Q1, Rockstar was approximately 45% and 2K was 55%.

[Operator:]

[Operator Instructions] Our next question comes from the line of Brian Fitzgerald with Jefferies.

[Brian Patrick Fitzgerald:]

When you look at the nice digital revenue you had, plus 43% year-over-year, you mentioned in the release it was driven by GTA, NBA and Borderlands. Could you maybe give us some of the mix there? I know you highlighted GTA virtual currency and NBA, but maybe some color on mix split, including Borderlands. And then Strauss, you've had great success with NBA 2K. You highlighted the 7 million benchmark. How do you think about entering additional sports categories going forward? And obviously you're doing pretty well with WWE right now.

[Strauss H. Zelnick:]

Yes. We appreciate the question. We don't break out how the titles are doing specifically. And I know people would like that kind of color, but we're still in the middle of exploiting these titles and delivering these fantastic experiences to consumers. So it's still a work in progress. However, we are very pleased with how all of it's going. Very, very pleased with the current consumer spending in general. Very pleased with virtual currency sales. Very pleased with Grand Theft Auto Online's metrics across the board and very pleased with how NBA 2K is doing. So it's an excellent story across the board. We don't break it out title by title. In terms of our sports business, thank you for the compliment disguised as a question, happy to have it. And naturally, we're trying to grow the business and we're doing so selectively. What we found is that when we're leader in a space, we do really, really well. We also ran in the space we don't do well. And one of the things we try to do around here is start from the point of delighting audiences and putting out the highest-quality products and then thinking about making money. But equally, we really, really object to losing money. The bulk of what we do around here is owned intellectual property, by definition, a sports business is a license property, so we have to be exceedingly selective in our licenses. And the company's had history around that. So, generally speaking, I think this is a very disciplined, sometimes to a fault, management team and that applies to the sports business. But I don't want that to be confused with the lack of ambition because, indeed, we're very, very ambitious to grow the enterprise.

[Operator:]

[Operator Instructions] Our next question comes from the line of Zachary Arrick with Senvest.

[Zachary Arrick:]

Could you tell us the reason for the delay, the pushback in the release date for Evolve?

[Strauss H. Zelnick:]

Yes, absolutely. We primarily decided that the title deserves and should have more time to be polished so it can reach its absolute optimal state before we release it. And historically, we've always benefited from giving the creative teams more time to polish the titles. We've never regretted it. It's not a meaningful amount of time. The title's still coming out in the fiscal year. And we're really excited about the title. Coming out of E3, where we won Best of Show, it felt like the right thing to do, to make absolutely sure this title can be its very best. At the same time, I do believe February's a pretty terrific release window. It's not at all crowded and we will benefit from the fact that there are a lot of holiday sales of consoles, so the installed base will be bigger and it should be pretty open time to release. And if you look at our history over the past 7 years, we're a company that's often released major titles outside of the holiday season. In fact, we typically are not very active in the traditional holiday season. So having such a robust release schedule for October is somewhat unusual for us. We're really excited about it. But I, for one, am glad that we have Evolve coming in February for any number of reasons.

[Operator:]

Our next question comes from the line of Justin Post with Merrill Lynch.

[Ryan Gee:]

This is Ryan calling in for Justin. Just wanted to go back to GT Online (sic) [GTA Online] real quick. If you could talk about maybe what's the content that's probably coming out in the next quarter or for the rest of the year that we should maybe keep an eye on? And if you could talk about GT Online (sic) [GTA Online] and what that could be as a piece of that 40% of revenue that'll come from Rockstar this year. And then I have one follow-up.

[Strauss H. Zelnick:]

Yes. We're not really able to give much more color on GTA Online. It's not for want of excitement. We have a great deal of excitement. But when we start getting into content and marketing announcements, that's really driven by the label. We have said though and I want to reiterate, that the release of GTA Online has been extraordinarily favorable for consumers and for us. We're immensely grateful to Rockstar for the incredible product that they delivered, the incredible consumer experience. And we remain optimistic about what GTA Online can be both for current gen and next-gen.

[Ryan Gee:]

Okay. That's fair. And then for Lainie maybe. Can you remind us what you said about the quarterly run rate for the recurring revenue in GT Online (sic) [GTA Online] and whether it's reasonable to expect that, once it comes out on next-gen, if that quarterly run rate should be a step function up or not?

[Lainie Goldstein:]

We didn't give out, specifically, for GTA Online. We did say that 60% of the overall digital came from the recurrent consumer spending. And that includes our virtual currency, add-on content and online games.

[Strauss H. Zelnick:]

So we're not making any projections about the run rate of anything that we've put out before.

[Operator:]

Mr. Zelnick, it appears we have no further questions at this time, I would now like to turn the floor back over to you for closing comments.

[Strauss H. Zelnick:]

Well, thank you so much for joining us. Obviously, we're thrilled to have beaten our projected outlook for something like 8 quarters in a row and to reiterate our financial guidance for the year. We have a lot of great things coming up. And we're grateful to the shareholders for their support. Thanks for joining us today.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.