Take-Two Interactive Software, Inc.
Q3 2015 Earnings Call Transcript

Published: 4 Feb 2015

[Operator:]

Greetings. And welcome to the Take-Two Interactive Software Third Quarter Fiscal Year 2015 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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.

[Hank Diamond:]

Good afternoon. Welcome and thank you for joining Take-Two's conference call to discuss its results for the third quarter of fiscal year 2015 ended December 31, 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, including the risk summarized in the section entitled Risk Factors and the company's quarterly report on Form 10-Q for the fiscal quarter ended September 30, 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 Zelnick:]

Thanks, Hank. Good afternoon and thank you for joining us today. I'm pleased to report that Take-Two built on its positive momentum in the third quarter delivering exceptional results that exceeded non-GAAP expectations for the 10th period in a row. As a result of our strong earnings at quarter’s end we had nearly $1 billion in cash and short-term investments. This outstanding performance was driven by one of the most diverse holiday lineups in the company’s history led by Grand Theft Auto V for PlayStation 4 and Xbox One, NBA 2K15, WWE 2K15, Borderlands

[Karl Slatoff:]

Thanks, Strauss. I’d like to begin by congratulating our worldwide teams for delivering an outstanding third quarter, from development to marketing to distribution, every facet of our company worked in lockstep to achieve these results which have enhanced our outlook for the year and also strengthened Take-Two for the long term. On the heels of an enormously successful holiday season, we kicked up the fourth quarter with the release of downloadable content offerings for WWE 2K15, including the New Moves Pack and the Showcase

[Lainie Goldstein:]

Thanks, Karl and good afternoon everyone. Today, I'll review our results for the third quarter and then discuss our outlook for the fourth quarter and fiscal year 2015. All of the numbers I'll be providing today are non-GAAP results 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 third quarter, non-GAAP net revenue increased 24% to $954 million versus $767.7 million from last year’s third quarter. This result exceeded our outlook range of $745 million to $760 million, due primarily to the outstanding launch of Grand Theft Auto V for the PlayStation 4 and Xbox One, as well as continued strong engagement with Grand Theft Auto online and robust holiday sales of WWE’s 2K15. Digitally-delivered revenue grew 64% to $217.2 million, up from a $132.8 million last year. Revenue from recurrent consumer spending, including virtual currency downloadable add-on content and online games, grew 23% and accounted for 36% of digitally-delivered revenue. The largest contributors to digitally-delivered revenues were offerings for the Grand Theft Auto series, NBA 2K15, the Borderlands franchise and Sid Meier’s Civilization

[Strauss Zelnick:]

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

[Operator:]

[Operator Instructions] Thank you. Our first question comes from the line of Eric Handler with MKM Partners. Please proceed.

[Eric Handler:]

Yes. Thanks for taking my question. So at the beginning of the year, you guys sound a little bit cautious with what you’re going to do with your cash because you’re at start-up in your cycle and you thought at that time you were going to be using a modest amount of cash. Now that it looks like you are going to be nicely cash flow positive this year, you should be cash flow positive next year. Your unencumbered cash is on $1 billion, obviously a lot more than you really need. Can we talk about some updated thoughts about potential returns of capital to investors? And then secondly, how do we think about GTA Online going forward in terms of content updates on a long-term basis?

[Strauss Zelnick:]

Yes. Thanks for your questions. In terms of use of cash, obviously it’s good to be in the position that we’re in, that’s a reflection of the team’s great work and the results that we’ve had. So now we have, as we said, nearly $1 billion on the balance sheet. We’ve said over and over again that the cash here is used for potentially three purposes, supporting organic growth and the company story has largely been an organic growth story and one of which we are very proud, supporting return of capital for shareholders. And we’ve done that in a big way as well, relatively recent times we purchased almost $280 million worth of stock back. And we have the opportunity also to support our growth with inorganic acquisitions. We have a very tight honorable, very disciplined folks who are focused on building our core business. And if we were to do any kind of acquisition, it would have to be strategically powerful and accretive. And that’s I think the appropriate lens through which to look at any potential inorganic opportunity and that remains unchanged. So this is a -- it’s a high class problem, one that we take seriously, but those options certainly remain -- sort of remain our landscape. In terms of GTA Online, the GTA Online continues to exceed our expectations and delight us, and that’s because it delights consumers and we are thrilled with what the team of Rockstar has done and continues to do. There is more content coming. The Heists are coming. I’ll let Rockstar talk more about that, it’s not for this call. But I do think it is for this call just to acknowledge the extraordinary work that the team has done and the results that it’s delivered. This is a living breathing entity that continues to delight consumers day after day, week after week, month after month.

[Eric Handler:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Michael Olson with Piper Jaffray. Please proceed.

[Michael Olson:]

Hey, good afternoon. How would you describe the trends for legacy gen software in the December quarter and so far in the March quarter? Specifically, is the decline in legacy gen easing to some degree as we push farther into the next gen cycle? So that's one question. And then the second one would be for Sid Meier's Starships, is that included or not included in the March quarter guidance? In other words, by a spring launch, do you mean after March? Thanks.

[Karl Slatoff:]

Hi, Mike, It’s Karl. In terms of legacy or old gen products, we are still seeing very robust demand for our current gen -- our legacy gen product. We have heard a lot of rumors, not rumors but of anecdotes that people having very difficulty selling through. We are not experiencing that. I think it speaks to the quality of our products. That being said, without a doubt, as we go forward and the next generation continues to grow, and we expect it to, and we are excited about it. It’s inevitable that sales of legacy gen are going to decline over time. How quickly that happens, remains to be seen. I can tell you right now, we still see a robust market for legacy gen products and we’ll continue to put them out as far as long as we make -- as it makes sense. Can you repeat your question on Starships again? I didn’t quite pick up the whole thing.

[Michael Olson:]

Yeah, I mean, it’s basically by -- I think said spring launch in the press release, does that mean in the March quarter or after the March quarter? In other words, is it factored into the March quarter guidance or not?

[Karl Slatoff:]

Yeah, we just said spring at this point.

[Michael Olson:]

Okay. All right. Thanks very much.

[Operator:]

Thank you. Our next question comes from the line of Drew Crum with Stifel. Please proceed.

[Drew Crum:]

Okay. Thanks. Good afternoon, every one. Could you comment on your channel inventory given you sold in nearly 10 million units of Grand Theft Auto V for next gen as well as the NBA 2K15 update you provided nearly 5.5 million units sold in to-date? That’s my first question. And then a second question for Karl, you mentioned Borderlands with Gearbox, is that a fiscal '16 launch, or is that yet to be determined? Thanks.

[Karl Slatoff:]

It’s Karl. In terms of the channel inventory, right now I think you specifically asked about GTA and NBA. We were very pleased obviously with our selling and also sell-through. So we don’t see any of those channel inventory issues at all on any of our products. So that’s not a concern of ours. And I think our retailers are very happy with our sell-through in general and again speak to the quality of our titles and the strong season we had over the holidays. And in terms of the new Borderlands title, we have not announced the date for that.

[Drew Crum:]

Okay. Thanks, guys.

[Operator:]

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

[Justin Post:]

Thank you. Congrats on a good holiday versus expectations. Can you talk about next year you obviously have a really tough holiday comp? Do you need a big blockbuster title in the second half of next year to kind of -- to grow? How are you thinking about that? Or can you make it up with a lot of small titles? And then can you talk a little about digital download percentage of games for the full game? Is that growing for you? And how will that affect your margins over time? Thank you.

[Strauss Zelnick:]

Yeah, I mean, mathematically, as you said, it’s tough comp. We had a very big holiday lineup, five titles and we’re thrilled that they did so well. So math is math, and this year is penciling out very well. And naturally, if you look at it as a comp -- as a comp problem, it’s challenge, but it’s not really how we look at it. We have a desire to bring consumers the best in interactive entertainment. We have 10 franchises that each sold more than 5 million units and an individual release 40 multi-million unit franchises and we have labels with 2,000 creative folks who are actively working on a number of projects. So we believe, can and will be the highest quality projects in the business. So we don’t tend to measure ourselves based on annual growth, although it would be very nice to deliver that year in year out. We measure ourselves on doing the very best work that we can over the long-term and that’s work out really well for us over the past seven years. So you’re right, it is the tough comp. We have a lot of wood to chop. We feel very, very confident and we’re confident enough to say that we expect company to be profitable next year and for the forcible future. We’re certainly talking about some titles already. So we feel great about it. But we don’t see our mission as necessarily delivering quarter-over-quarter year-over-year topline and to our bottomline growth. That isn’t the mission. The mission is to delight audiences and then good things, including good economic things will flow from that. In terms of your question about our digital downloads as a percent of revenue, Lainie will take that.

[Lainie Goldstein:]

Yeah. For the digital business, we do continue to see it growing quarter-over-quarter. It depends on what the mix of the overall business is, but we do see the digital business in general growing. And as we focus more on recurrent consumer spending, we’re seeing higher margins come from that business, so that continues to grow. We expect our digital margin as a whole to continue to grow as well.

[Strauss Zelnick:]

But generally speaking, consumers are migrating to digital distribution of entertainment products and we’re part of that.

[Justin Post:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Daniel Ernst with Hudson Square. Please proceed.

[Daniel Ernst:]

Yes. Good afternoon. Thanks for taking my questions. Two quick ones, if I might, first, maybe re-ask the digital question. Could you give us a general sense of the mix of your digital revenues of full game downloads, micro-transactions and DLC kind of what’s the rank order bucket or some general size of the mix? And then secondly, more broadly, Strauss, used to be one of the takes on Take-Two was you had an over concentration of revenues and profits in one franchise and that being GTA, and we have been arguing and you have been delivering a broadening of that portfolio with things like Borderlands and the re-launch of Red Dead and BioShock and so you have done that. But the problem is GTA has grown much, much faster, it is actually continued to, as you say, delight and surprise and so we still have this problem. Is that just a high quality problem and you don't deal with it or you almost just want to double down on that franchise, tell me how you think about allocating resources to your portfolio? Thanks.

[Lainie Goldstein:]

The digital, so we talked about in this quarter that 23% of the quarter was digital business, 36% of it was for recurrent consumer spending and we don’t breakout this pieces of the recurrent consumer spending, but the majority of it came from the GTA Online was our biggest component. And then the remainder of the digital, the full game downloads is approximately 50% of overall total sales for the quarter.

[Operator:]

Thank you. [Operator Instructions]

[Strauss Zelnick:]

No. Sorry. Sorry, I have a second question to your question Daniel. In terms of the over concentration of Grand Theft Auto as a contributor to our revenues and profits, nearly as you pointed out that’s a high-class problem, to use the phrase for the second time in the call. And remember, our goal is to make everyone of our release as big as it can possibly be. That would be everything from Grand Theft Auto to all the other hits that have around here. And the fact that Rockstar keeps making Grand Theft Auto more and more relevant that it attracts more and more consumers. The Grand Theft Auto V has sold in approximately 45 million units for legacy and next-gen consoles is nothing short of extraordinary. We have a great story to tell with our other intellectual property tiers as well and they continue to grow. So if someone’s looking at the company and saying, you have this massive industry hit and then you have an array of simply huge industry hits, its very difficult for me to see bad news in there as long as we keep delivering more and more successful franchises and every year since ’07, this company has successfully launched at least one new mega-million unit selling franchise. It’s our goal to keep doing that, can’t guarantee we will always do, but there are goal to keep doing it. And if we do that, I think, we are doing our job well and it’s reflected in our revenues and profits, and if we are fortunate enough that Grand Theft Auto can also grow simultaneously that will only be a thing. I can’t find anything bad about it.

[Daniel Ernst:]

Okay. Thanks for the color.

[Operator:]

Thank you. [Operator Instructions] Thank you. Our next question comes from the line of Ben Schachter with Macquarie. Please proceed.

[Ben Schachter:]

Hey, guys. Congratulations really on a couple of years of just excellent execution. I know you're not going to announce the specific title on the earnings call? But for holiday 2015, should we expect a significant new title from Rockstar? And then literally, when -- by when should we know the holiday lineup, do we wait for the next earnings call or should we expect that before then? And Lainie, if you could let us know the FX impact on the quarter and FY15 guidance and finally, just to clarify what you said on the previous question about 50% of total sales digital downloads, I wasn't sure what that was? Thanks.

[Strauss Zelnick:]

Yeah. Ben, we are not going to talk about Rockstar’s upcoming releases in the call and I know everyone like us too, but it just not the way that we tend to do, we like to leave those announcements to our labels. And certainly when we provide our initial guidance for the year, you could expect more color on what the release schedule looks for the company as a whole.

[Lainie Goldstein:]

To just clarify on the digital, so what I said was the full game download represent 15% of our overall revenue in the quarter. To be, so, is that clear?

[Ben Schachter:]

Yeah. And then the FX impact?

[Lainie Goldstein:]

Okay. For the FX impact on the quarter was immaterial and in terms of looking forward with the FX changes, we are pretty much naturally hedged everywhere. So we do have a hedging program to our cover our balance sheet items. But in terms of our overall operations we have a natural hedge that we feel very comfortable with.

[Operator:]

Thank you. Our next question comes from line of Arvind Bhatia with Sterne, Agee. Please proceed.

[Arvind Bhatia:]

Thank you. And I’d like to add my congratulations on the fantastic quarter. I wanted to actually just continue on the discussion of digital downloads? We are getting some questions on that? So I think you just clarify that it was 15% of the quarter? I am just wondering, this quarter you had Civilization as well and how that impacted that percentage of PC, obviously tends to be higher mix digitally? And maybe if you can talk about GTA V on next-gen specifically, what trends you saw in terms of full game downloads on that one? And lastly on GTA Online, you had that for the fourth quarter last year and this year, wondering if you would give us some color on kind of the year-on-year growth? I don’t see growing every quarter, but just kind of where that ended up this year in Q4 -- in December versus last year? Thank you.

[Lainie Goldstein:]

So for the full game download, we don’t break that out on a title by title basis. But you are correct. It is the fifth title during the quarter, being a PC title is heavily weighted towards digital and that would drive that full game download percentage higher specifically in this quarter. And when we talk about the GTA Online this quarter is essentially been rising each quarter and it has been up from last year. We also introduced it on to the next-gen this quarter. So that also drove more online revenue and virtual currency revenue, as well as updates during this quarter.

[Arvind Bhatia:]

Okay. And I know you're not getting specific by title, but could you kind of generally talk about where you see full game downloads going, just on consoles alone, say over the next 12 months?

[Lainie Goldstein:]

We continue to see it rise on a quarter-by-quarter basis, so we’ve expected to continue to do so.

[Arvind Bhatia:]

Okay. Great. Thank you, guys.

[Operator:]

Thank you. Our next question comes from line of Brian Fitzgerald with Jefferies. Please proceed.

[Brian Fitzgerald:]

Thanks guys. Curious around what type of interest or engagement you’ve seen around the new set top boxes like the Kindle Fire. Have you seen anything noticeable regarding platform uptake from say NBA to GTA to most recently Evolve Hunters? And then does it impact digital downloads or purchases via Amazon versus other channels? Thanks.

[Karl Slatoff:]

So on your first question, you ask if we’ve seen any uptakes. I think that those platforms are still little -- they are early. But we actually think that they might be very interesting for us. And obviously, we’ll support them with titles to the extent they become relevant. In terms of specific -- our specific experiences, we are not seeing a huge amount of activity because we don’t have a huge amount out there right now for people to actually engage with. So I don’t -- I'm not really a best person to give you any real color on the market there. I’m sorry the second question?

[Brian Fitzgerald:]

It’s just related to those boxes, Karl, and whether or not it drives purchasers to Amazon to purchase their kind of right out of the Kindle Fire?

[Karl Slatoff:]

Yeah. I mean, I imagine it does but I really don’t have any real clear perspective to give you there. But it certainly makes intuitive sense that it would.

[Brian Fitzgerald:]

Great. Thanks guys.

[Operator:]

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

[Mike Hickey:]

Hey, guys. Great quarter. Thank you for taking my questions. Appreciate it. Strauss, I was hopeful you could remind us on how you and maybe your Rockstar team think about the appropriate pacing between mega-franchise titles like GTA and Red Dead and so forth into this sort of cycle? That, I guess, would be the most patient at this point?

[Strauss Zelnick:]

I don’t think we think about pacing in a traditional way. We have said that we think big tentpole releases should not be annualized except for sports titles because we think it’s valuable to build anticipation and because it takes some time to make the highest quality products in the business. But apart from that, I wouldn’t say we over think pacing. I think we bring the titles to markets when they are ready to be marketed.

[Mike Hickey:]

Okay. Thank you. And then on Evolve I am sort of curious how that title is shaping up into the release obviously as next week and a fair amount of buzz around. I'm curious if there's any sort of -- there's a bit of negative feedback, I guess, in the DLC strategy. I'm wondering if that's had any sort of impact on the game and the launch here?

[Strauss Zelnick:]

Yeah. You’re right, Mike. There was some controversy start-up by an online post. And I guess, controversy, generally speaking, is a good thing. People can argue about the business model. I think we’re delivering a fantastic title that’s well versed with consumers who will pay for it. And all signs are extraordinarily positive. I never like to claim success before it’s occurred. This looks to be a good news event. I’m going to leave it at that. Hopefully, in our next call, we’ll have great news to report. But certainly the title won Best of Show at both E3 and Gamescom that’s never been done as far as we know in the same year and the buzz is massive. So we’ll wait till consumers tell us what they think. And all our body parts are crossed around here.

[Mike Hickey:]

Fair enough. Best of luck guys.

[Operator:]

Thank you. Our next question comes from the line of Ben Pham with BMO Capital Markets. Please proceed.

[Unidentified Analyst:]

Hi. This is [indiscernible] for Edward Williams. I was curious if you could share what your thoughts are on -- what you are seeing as the overlap between Grand Theft Auto sales on next-gen. There are net -- how many of them are net new buyers versus maybe an overlap on legacy console? Give a little bit on legacy consoles?

[Strauss Zelnick:]

It’s a good question. It’s difficult to say. I think it’s a mix and it’s very hard for us to determine which it is. We think there are 45 million sold but there are billions of people on the face of the earth. So we got plenty of room.

[Unidentified Analyst:]

Okay. Great. And then I was wondering, do you see any trends as to how the next-gen players are spending versus the new legacy players. So maybe in the month of December versus last year?

[Strauss Zelnick:]

It is early. They are both fully engaged and I wouldn’t say that at this early point, we have a perspective on difference.

[Unidentified Analyst:]

Okay. And then just one final question for Lainie. Lainie, can you just tell me, remind me of the percentage of cash you have offshore?

[Lainie Goldstein:]

Sure. It’s approximately 25% of our cash that’s held internationally.

[Unidentified Analyst:]

I’m sorry. Can you say that one more time?

[Lainie Goldstein:]

25% is held offshore and 75% is domestic.

[Unidentified Analyst:]

Perfect. Great. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Stephen Ju with Credit Suisse. Please proceed.

[Stephen Ju:]

Hey. Thanks. Hi, guys and congratulations on a well executed quarter. So, Strauss, I wanted to make sure I heard you correctly. I think you just mentioned that the PC version of GTA V will have the online version packaged in there with it. And is this a simultaneous global release that you are planning for the title and a secondary, how will the PC version of GTA online be different from the console version, if at all? Thanks.

[Karl Slatoff:]

Hi, Stephen. It’s Karl. Yes, the GTA online will be available with the release of PC. I think the last component was one of the differences between the two.

[Stephen Ju:]

Yeah.

[Karl Slatoff:]

For a PC and the online versions, you can play 30 players at the same time, so that’s a difference. But other than that, there is not really much to say in that regard. And what was the middle question?

[Stephen Ju:]

Is this a simultaneous global release that you are planning across all territories?

[Karl Slatoff:]

Yes.

[Stephen Ju:]

Okay. Thanks

[Operator:]

Thank you. Our next question comes from the line of Larry Haverty with GAMCO. Please proceed.

[Larry Haverty:]

Hi. Two quick questions. One, do you folks have any strategy for the convertible? I would just assume it left the balance sheet but that’s essentially your quality? Just going to let it run or can you force it at some point? And I have got a follow-up question?

[Lainie Goldstein:]

On $250 million convert matures in 2016, it doesn’t make sense economically right now for us to take it out until that time, but we continue to evaluate options to see if there is an opportunity to make any changes to our capital structure. And when it makes sense, we will do so.

[Larry Haverty:]

And second question which is pretty far away from the first. In the last few weeks, Take-Two -- or not Take-Two, Tencent has announced significant more involvement with the NBA. Could you update us on what’s going wrong with your online game and whether this increased involvement with Take-Two or with Tencent and the NBA means that that product perhaps has much more potential than you might have imagined?

[Strauss Zelnick:]

We’ve always been optimistic about the opportunity with NBA 2K online in China. We now have 24 million registered users. It continues to generate revenues and profits for us. We are very-very happy about it. In terms of Tencent and the NBA, two very big important organizations, we have relationships with both. And I will let them comment on their own activities. Probably better not for me to do so.

[Larry Haverty:]

Thanks.

[Operator:]

Thank you. We have no further questions in queue at this time. I would like to turn the floor back over to Mr. Zelnick for closing remarks.

[Strauss Zelnick:]

Just want to thank everyone for joining us today. We are very gratified by the results. Once again, how we do around here is generated first and foremost by 2,000 highly creative people who dedicate their lives to working here under our auspices and partnership with us and we couldn’t be more grateful for their activities. And of course, they are supported by an equally dedicated group of people who market and distribute those products. And then people who make sure that the trains run on time right here, including people sitting with me today. We are phenomenally proud of what our team collectively has built here at Take-Two. We are all grateful to have an opportunity to work here and we are happy to be able to deliver these results for ourselves, for our colleagues and for our shareholders. So, thanks so much for joining us today.

[Operator:]

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