Take-Two Interactive Software Inc

NASDAQ:TTWO

Earnings Call Transcript 2019-Q2

[Operator]

Greetings, and welcome to the Take-Two Interactive Software Second Quarter Full Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your Hank Diamond, SVP of IR. Please proceed.

[Henry A. Diamond, Take-Two Interactive Software, Inc.]

Good afternoon. Welcome and thank you for joining Take-Two's conference call to discuss its results for the second quarter of fiscal year 2019 ended September 30, 2018. 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 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. Additional details regarding our actual results and financial outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance.

In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. 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, Take-Two Interactive Software, Inc.]

Thanks, Hank. Good afternoon and thank you for joining us today. I'm pleased to report that during the second quarter, Take-Two delivered better than expected operating results, including growth in net bookings. This outperformance was driven primarily by Grand Theft Auto V and Grand Theft Auto Online as well as the successful release of NBA 2K19.

On September 11, 2K launched NBA 2K19 to critical acclaim. Forbes noted, there's no such thing as a perfect sports game, but this is as close as it gets. IGN called NBA 2K19 the best of the series and Game Informer said the title isn't just a game, it's a lifestyle.

During the second quarter, net bookings from NBA 2K19 grew 10% over last year's release, driven by better than expected growth in recurrent consumer spending. In addition, digitally-delivered sales of the game increased significantly.

According to the NPD Group, based on combined physical and digital sales in the U.S., NBA 2K19 achieved the highest launch month in terms of dollar sales of any sports game released since it began tracking industry sales in 1995. NBA 2K19 represents the biggest launch of any title in the NBA 2K series, and NBA 2K19 is now the best-selling sports game of 2018 year-to-date.

Our industry-leading basketball series continues to benefit from strong engagement and recurrent consumer spending. For NBA 2K19, online games played, percentage of players who buy virtual currency and average revenue per user, all have increased double digits over NBA 2K18.

During the second quarter, recurrent consumer spending on NBA 2K grew approximately 70% to a new record. In fact, NBA 2K was the single largest contributor to recurrent consumer spending in the period. We expect the net bookings from NBA 2K19, including recurrent consumer spending, would be the highest ever for a 2K sports title.

I'd like to congratulate Visual Concepts and 2K for continuing to innovate our beloved basketball series and setting the standard for sports games in interactive entertainment. Even with this tremendous success, we believe that there remains a substantial worldwide opportunity for NBA 2K, both in terms of unit sales and recurrent consumer spending.

Grand Theft Auto Online continue to exceed expectations in the second quarter as it has in every period since its release. Recurrent consumer spending on the title grew sequentially and was close to flat year-over-year. During the quarter, Rockstar Games supported Grand Theft Auto Online with an array of new content, highlighted with the highly successful After Hours update, and they have much more planned going forward.

Sales of Grand Theft Auto V also outperformed our expectations and the title is now sold in more than 100 million units. Our second quarter results were also enhanced by a variety of other offerings, including Social Point's mobile games, NBA 2K18, WWE SuperCard and NBA 2K Online 2 in China.

Delivering new and innovative ways for consumers to stay captivated by and engage with our titles after their initial launch remains a key strategic priority for our organization. During the second quarter, recurrent consumer spending exceeded our expectations, growing 28% and accounting for 53% of total net bookings.

In addition to virtual currency for NBA 2K and Grand Theft Auto Online, recurrent consumer spending was enhanced by a variety of offerings. In the free-to-play category, Social Point once again was a significant contributor to our results through its two biggest mobile titles, Dragon City and Monster Legends. Combined net bookings from these two games grew sequentially over the first quarter. Social Point remains focused on its exciting pipeline, which includes 10 new games in development.

Recurrent consumer spending on WWE SuperCard grew 47% net of platform fees and the game has now been downloaded over 18 million times. 2K supported WWE SuperCard with three updates during the second quarter and has announced that WWE SuperCard – Season 5 will be released this fall.

And NBA 2K Online in China grew 85%, driven by the launch of NBA 2K Online 2 in August. Total combined registered users for NBA 2K Online 2 and its predecessor currently stand 40 million people and the franchise remains the number one PC online sports game in China. Add-on content also contributed meaningfully led by offerings for Sid Meier's Civilization and XCOM 2.

On October 26, Rockstar Games launched its highly anticipated title, Red Dead Redemption 2. Our collaboration among all of Rockstar Game studios worldwide, including more than 2,000 team members, Red Dead Redemption 2 features the deepest and most expansive Rockstar world to-date and is the label's first experience built from the ground up for the current console generation.

Red Dead Redemption 2 has received outstanding reviews with numerous influential critics awarding the title a perfect score, including IGN, The Guardian, Game Informer, The Telegraph, Digital Trends and others. The Washington Post called it, jaw-dropping at every level.

Hollywood Reporter said, what Rockstar has delivered in Red Dead Redemption 2 is not just the best game of the year, but the best game of the decade. CNET wrote, Red Dead Redemption 2 has undoubtedly raised the bar for narrative open-world games and will likely have a lasting impact on how they are made in the future. And GQ UK said Red Dead Redemption 2 is Rockstar's best game; a grand, magnificent adventure that's vast yet intimate.

Red Dead Redemption 2 is now tied with Grand Theft Auto V as the highest rated title on PlayStation 4 and Xbox One with a 97 Metacritic score. Red Dead Redemption 2 has also exceeded our sales expectations to-date. The title has set numerous records, including achieving the biggest opening weekend in the history of entertainment, with over $725 million in retail sell-through during the first three days.

Red Dead Redemption 2 sold-in more units in its first eight days than the original blockbuster Red Dead Redemption sold in its first eight years. And as of today, the title has sold-in over 17 million units worldwide.

I'd like to congratulate the entire team of Rockstar Games for once again raising the bar for what can be achieved creatively in interactive entertainment, as well as delivering a resounding critical and commercial success.

As a result of our strong performance in the second quarter and outstanding early results from Red Dead Redemption 2, we're increasing our financial outlook for fiscal 2019, which is also poised to be a record year for net bookings and adjusted operating cash flow. This is one of the most exciting times in our organization's 25-year history. New technologies, business models and distribution platforms are enabling interactive entertainment to reach consumers like never before and allowing our business to evolve further and expand globally.

Take-Two is exceedingly well-positioned to capitalize on all the positive trends in our industry. Creatively, we're home to the best development teams in the business, which have a proven track record of delivering the highest quality entertainment that captivates audiences and keeps them engaged.

Operationally, we're committed to excellence. We strive to be the most efficient company in our sector. And finally, we have access to the capital needed to pursue all compelling opportunities, both organic and inorganic. As a result, Take-Two is better positioned than ever to deliver growth and returns for our shareholders over the long-term.

I'll now turn the call over to Karl.

[Karl Slatoff, Take-Two Interactive Software, Inc.]

Thanks, Strauss. Today, I'll begin by discussing our other recent launches. On October 9, 2K returned to the ring with WWE 2K19, the latest installment in our popular sports entertainment series. Developed collaboratively by Yukes and Visual Concepts, the title received positive reviews from critics, including Bleacher Report, who called the game phenomenal, and IGN who noted, MyCareer this year is fantastic and is exactly what the template should look like in future years.

WWE 2K19 is being supported with a series of downloadable content, including a Season Pass, as well as the WWE 2K19 Million Dollar Challenge, where one finalist will compete one-on-one against AJ Styles for the chance to win a $1 million grand prize.

On October 16, 2K bolstered our NBA basketball offerings with the release of NBA 2K Playgrounds 2. The title is a fun throwback to the classic two-on-two, arcade style basketball that continues to earn worldwide fans and critical acclaim. IGN rated the game an 8 out of 10 and said, NBA 2K Playgrounds 2 proves that pick-up-and-play arcade basketball is still alive and well.

NBA 2K Playgrounds 2 features multiple ways to play on your own, with friends, or against the world. The game is being supported with a series of post-launch updates featuring 180 additional players, including NBA legend Kareem Abdul-Jabbar, as well as additional playgrounds.

Yesterday, 2K launched Carnival Games for Nintendo Switch, PlayStation 4 and Xbox One. This new offering from our popular franchise that has sold-in over 9.5 million units worldwide is perfectly timed for the upcoming holiday season. Offered at a family-friendly price point of $39.99, Carnival Games is fun for gamers of all ages.

On Nintendo Switch, the title can be played alone or with up to four people simultaneously, leveraging the unique accessibility of the console's Joy-Con controllers. The game features 20 exciting re-imagined games in four unique alleys that can be played at home or on the go, alone, or with family and friends.

Turning to our upcoming releases. On November 13, in North America, and on November 16, internationally, 2K will release physical versions of The Golf Club 2019 featuring PGA TOUR for PlayStation 4 and Xbox One. Developed by HB Studios, 2K launched the game digitally for these consoles and PC this past summer, marking the franchise's first release featuring the official PGA TOUR license. Within its first two months in market, the title sold in over 30% more units than last year's edition.

In addition, critics agreed that The Golf Club 2019 featuring PGA TOUR is the most comprehensive and engaging virtual golf experience to date. With Operation Sports calling it, exciting, fun, and authentic, and GameSpot saying, it's a drive forward for the golf simulation series. We're pleased to expand our sports portfolio and we continue to explore opportunities to complement our offerings.

On November 16, 2K and Firaxis Games will launch Sid Meier's Civilization VI for Nintendo Switch. Civilization VI won both The Game Awards' and DICE Awards' Best Strategy Game 2016. And on Nintendo Switch, the title will include the latest game updates and improvements as well as four additional content packs that add new civilizations, leaders and scenarios. We are confident that gamers will enjoy taking one more turn in our beloved, award-winning strategy series on the Nintendo Switch.

On December 14, 2K and Gearbox Software will bring the critically-acclaimed and genre-defining shooter-looter Borderlands franchise to PlayStation VR with Borderlands 2 VR. Available for digital download, the title brings the iconic world of Pandora to life like never before with brand new VR-specific features like BadAss Mega Fun Time, first-person perspective driving, and all new VR specific Vault Hunter skills and abilities and more.

Just in time for the holidays, both fans and the press are excited for Borderlands VR arrival with Game Informer saying, grab your guns and get into Pandora once again with Borderlands 2 VR on PS VR.

I'd like to take a moment to join Strauss in congratulating Rockstar Games on the phenomenal success of Red Dead Redemption 2. Later this month, Rockstar Games is planning to launch an initial public beta of Red Dead Online, a new online connected experience set against the backdrop of Red Dead Redemption 2's enormous open world.

Red Dead Online is an evolution of the classic multiplayer experience in the original Red Dead Redemption, blending narrative with competitive and cooperative game-play in fun new ways. Using the gameplay of Red Dead Redemption 2 as a foundation, the vast world of Red Dead Online will be ready to be explored alone or with friends, and will feature constant updates and adjustments to grow and evolve this experience for all players. Access to Red Dead Online will be free with the purchase of Red Dead Redemption 2 on both PlayStation 4 and Xbox One.

In the coming months, we will continue to support our titles with additional content designed to drive consumer engagement, including updates for Grand Theft Auto Online, WWE SuperCard and more. In addition, we'll continue to broaden our offerings for mobile devices.

Following the successful completion of the NBA 2K League's inaugural season, four additional teams have signed on bringing the total to 21 teams that will compete in Season 2. The draft qualification process for Season 2 began last week and will conclude November 26.

Non-retained players from the first season will automatically be entered into the draft pool for Season 2. The NBA 2K League also plans to conduct one or more tournaments outside of North America to identify additional international players for the 2019 draft pool. We look forward to the continued progress and growth of the league, which has a long-term potential to enhance engagement and to be a meaningful driver of profits for our company.

Looking ahead, our labels had a strong development pipeline, which includes groundbreaking, new intellectual properties and releases from our renowned franchises. In addition, we'll continue to support our games with offerings designed to enhance players experience and drive engagement. This is an incredibly dynamic time for our company and the industry with vast opportunities presented by emerging platforms, business models, and markets that are enabling us to reach new consumers in all new ways. We're excited about the future and confident in our ability to continue to provide value to our consumers and returns for shareholders over the long-term.

I'll now turn the call over to Lainie.

[Lainie Goldstein, Take-Two Interactive Software, Inc.]

Thanks, Karl, and good afternoon, everyone. Today, I'll discuss our second quarter results and then review our financial outlook for the third quarter and fiscal year 2019. Please note that additional details regarding our actual result and financial outlook are contained in our press release.

Strauss mentioned, our business delivered better than expected operating results in the second quarter. Total net bookings grew to $583 million, which exceeded our outlook range of $500 million to $550 million, due primarily to the outperformance of Grand Theft Auto V and Grand Theft Auto Online, as well as the successful launch of NBA 2K19.

Digitally-delivered net bookings grew 20% to $426 million and accounted for 73% of the total. During the second quarter, 47% of our sales of current-generation console games were delivered digitally, up from 35% last year, a result that exceeded our expectations.

Turning to some details from our second quarter income statement, GAAP net revenue increased by 11% to $493 million and cost of goods sold decreased 5% to $235 million. Operating expenses increased by 11% to $232 million, due primarily to higher marketing spend as well as R&D expense for titles that are not technologically feasible. And GAAP net income was $25 million or $0.22 per share, up from a loss of $3 million or $0.03 per share in the prior year period.

Now, I'll review the highlights of our fiscal 2019 operating and financial outlook, starting with the fiscal third quarter. We expect net bookings to range from $1.4 billion to $1.45 billion, up from $654 million in the third quarter last year, driven by the record-breaking launch of Red Dead Redemption 2.

I would like to join Strauss and Karl in congratulating Rockstar Games for delivering this incredible creative and commercial achievement. The largest contributor to net bookings are expected to be Red Dead Redemption 2, NBA 2K19, Grand Theft Auto Online, and Grand Theft Auto V, and WWE 2K19.

We expect recurrent consumer spending to be approximately flat and we expect digitally-delivered net booking to increase by around 70%. Our forecast assumes that 30% of our current-generation console games will be delivered digitally, up from 26% in the third quarter last year.

We expect GAAP net revenue to range from $1.1 billion to $1.15 billion, and cost of goods sold to range from $773 million to $799 million. Operating expenses are expected to range from $290 million to $300 million. At the midpoint, this represents a 45% increase over last year, driven primarily by higher marketing expense. And GAAP net income is expected to range from $36 million to $48 million or $0.31 to $0.41 per share.

Turning to our outlook for the full fiscal year, we are raising our fiscal 2019 operating outlook primarily as a result of our stronger than expected second quarter results and increased outlook for Red Dead Redemption 2 as well as higher recurrent consumer spending on NBA 2K. These are partially offset by modestly reduced unit expectations for NBA 2K19 and WWE 2K19.

We now forecast net bookings to range from $2.8 billion to $2.9 billion, up from our prior outlook of $2.7 billion to $2.8 billion. At the midpoint, this represents a 43% increase over fiscal 2018 driven primarily by the launch of Red Dead Redemption 2 and expected growth from NBA 2K, which we forecast to be partially offset by lower net bookings from Grand Theft Auto V and Grand Theft Auto Online.

The largest contributor to net bookings are expected to be Red Dead Redemption 2 and Red Dead Online, NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, WWE 2K and Social Points mobile offerings. We expect the net bookings breakdown from our label to be roughly 60% Rockstar Games, 35% 2K, and 5% Social Points and other. And we forecast the geographic net bookings split to be about 55% United States and 45% international.

We now expect recurrent consumer spending to grow in the low teens and we have increased our digitally-delivered net bookings growth forecast to approximately 30%. Our increased forecast for digitally-delivered net bookings is driven primarily by a higher full-game download mix for Red Dead Redemption 2 and NBA 2K 2019. We now forecast that 37% of our current generation console games will be delivered digitally in fiscal 2019, up from 34% last year and up from our prior expectation of 32%. We expect to generate approximately $730 million in adjusted operating cash flow, which represents nearly a $20 million increase from our prior implied outlook.

Adjusted operating cash flow is our new non-GAAP measure and is defined as GAAP net cash from operating activities adjusted for changes in restricted cash. It is equivalent to what we formally reported as GAAP net cash from operating activities prior to our April 1 adoption of a new accounting standard, which requires that changes in our restricted cash be included within our cash flow statement.

We plan to deploy approximately $60 million for capital expenditures with GAAP net revenue to range from $2.55 billion to $2.65 billion and costs of goods sold to range from $1.45 billion to $1.47 billion. Total operating expenses are forecasted to range from $890 million to $930 million. At the midpoint, this represents a 20% increase over the prior year, driven primarily by higher marketing, personnel, IT and R&D expenses. And we expect GAAP net income to range from $202 million to $232 million or $1.73 to $1.98 per share. For management reporting purposes, we expect our tax rates to be 20%.

In closing, during the first half of fiscal 2019, Take-Two produced strong results and we are poised to generate record operating results for the full year. Over the long-term, our industry-leading creative assets, firm commitment to operational excellence, and strong financial foundation position our company to deliver growth and margin expansion for our shareholders.

Thank you. I'll now turn the call back to Strauss.

[Strauss H. Zelnick, Take-Two Interactive Software, Inc.]

Thanks, Karl and Lainie. On behalf of our entire management team, I'd like to thank our colleagues for their dedication and hard work and for delivering on another successful quarter. To our shareholders, I want to express our appreciation for your continued support.

And we'll now take your questions. Operator?

[Operator]

Thank you. Our first question comes from Mike Olson with Piper Jaffray. Please proceed with your question.

[Michael Olson, Piper Jaffray & Co.]

Hey, good afternoon, and congrats on the results and the launch. I realize we're only 10 days into this and it'll only be relevant over probably a longer period of time. But at this point, do you think you're seeing any material cannibalization of GTA Online from the launch of Red Dead Redemption 2?

And somewhat related to that, is it likely that Rockstar will release content updates for GTA V and Red Dead Redemption 2 in a staggered manner in the coming quarters or will they just kind of be released when they're ready? Thanks.

[Strauss H. Zelnick, Take-Two Interactive Software, Inc.]

I've been asked repeatedly over some prior calls about whether I felt cannibalization would potentially be an issue. And my view is that, all games, all products, all entertainment products stand alone. They compete with everything in the market, they compete with themselves, and they compete with nothing at all, because if there's a bunch of good stuff out there, you want to consume it all. And if there's nothing that appeals to you, you don't need entertainment at any given time.

The fact that Red Dead Redemption 2 has come from Rockstar Games does not make it more or less competitive with any other title in the marketplace. And specifically to answer your question, we do not see any cannibalization, nor do I expect any.

[Michael Olson, Piper Jaffray & Co.]

Thank you.

[Operator]

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

[Timothy O'Shea, Jefferies LLC]

Yes. So, thank you for taking my question. I'm just curious, what kind of marketing promotional activity should we expect for Red Dead through the holidays? I'm just wondering if this is the type of game that will be a gifted item.

Was this a type of game that could see a nice boost during the holiday shopping season? And just given the strength of the early sales of Red Dead, I'm wondering how strong this game could sell through the rest of the December quarter. Thanks.

[Strauss H. Zelnick, Take-Two Interactive Software, Inc.]

I think you can obviously expect that we'll be very supportive of the title on an ongoing basis. More specific details would be given by Rockstar.

[Operator]

Our next question comes from Ryan Gee with Barclays. Please proceed with your question

[Ryan Gee, Barclays Capital, Inc.]

Yes. Hi. Good afternoon. Thanks for taking the question. So, maybe for Lainie. If we just do some rough math, it puts Red Dead Redemption somewhere at already around the $700 million net bookings to-date. And that compares to your new guidance for the Rockstar business to do about $1.7 billion, up from the $1.5 billion that was in the guidance last quarter.

So, how should we think about that gap being made up by the rest of the Rockstar products? Should we think that, that's really in your guidance primarily unit sales, or is it really a catalog of GTA or perhaps the two Rockstar online businesses? Any color you could give there would be great.

[Lainie Goldstein, Take-Two Interactive Software, Inc.]

So, what you're referring to are retail sales, not just what our sell-through would be and our total (27:49) sales would be for our digital and physical. So, those numbers aren't comparative. But if you think about just Q2 in general, and we've lifted the full year, and that is due to the increased outlook for Red Dead Redemption 2 and then higher RTFs on NBA, partially offset by reduced unit sales expectations for NBA 2K19 and WWE 2K19.

[Operator]

Our next question comes from Eric Handler with MKM Partners. Please proceed with your question.

[Eric O. Handler, MKM Partners LLC]

Yes. Thank you very much for the question. A couple of things on Red Dead, Lainie, in particular, I wondered if you can talk about the dispersion between the base SKU and how you did versus the two other premium SKUs. Wondering if you might give a little insight there.

And then, also, as you know, when you think about the game and the online portion of the game, can you maybe talk about possibly some similarities in how GTA Online ramped when it first started and how you think that might progress with Red Dead?

[Strauss H. Zelnick, Take-Two Interactive Software, Inc.]

Hey, Eric, it's Strauss. No, we don't break down how the different editions have sold. We will break down some details, but we don't tend to break that down. And it's way too early to talk about Red Dead Redemption 2 Online, hasn't launched yet. It will launch in public beta towards the end of the month. Rockstar will have a lot more to say about it, but we're not making any current predictions.

[Eric O. Handler, MKM Partners LLC]

Fair enough. And then, I guess just one quick follow-up. Wondered – I'm not sure if I missed it or not, but how Red Dead did in terms of full game downloads versus physical sales?

[Lainie Goldstein, Take-Two Interactive Software, Inc.]

We're not giving the detail by title, Eric, but we did say that we have seen a higher proportion of digital sales versus physical than we already had originally expected. So, for the full year, we're expecting on current-gen our full game downloads to be 37%, up from 34% last year, and we had expected it to be 32% when we gave our guidance last time.

[Eric O. Handler, MKM Partners LLC]

Understood. Thank you very much.

[Operator]

Our next question comes from Justin Post with Merrill Lynch. Please proceed with your question.

[Justin Post, Bank of America Merrill Lynch]

Great. Thank you, and congrats on Red Dead. Maybe related (00:30:32) to NBA, can you talk about the dynamics that may be driving units a little bit below your forecast but RCS higher? And then, Lainie, I think you have about $800 million of long-term capitalized software on the balance sheet. I imagine some of that's related to Red Dead. Wondering why that's not in the short-term side. And then, how that will flow through the income statement for the next few quarters? Thank you.

[Karl Slatoff, Take-Two Interactive Software, Inc.]

Hi, Justin. It's Karl. Just to address your first question about the dynamics of the units forecast at this point, so, yeah, to-date, the units of NBA 2K19 are down modestly versus 2018. So, we're forecasting them down a little bit for the full year.

You don't ever have exact answers of why that's the case, but we have seen a higher number of consumers who bought NBA 2K18, continue to be engaged with that title. And they haven't kind of converted over to 2K19 yet, which certainly could have an effect on the unit sales of NBA 2K19. There's also some competitive dynamics that could be affecting as there are a lot of titles in the market now, but 2K continues to pursue strategies to increase the number of units out there. So, we're obviously not taking it sitting down.

But in terms of RCS, you're right. Consumers are much more engaged. I think the good news on here is that consumers actually are in the title, all the key metrics are much better than they had been in the past. And that just shows you just – credit to how engaging the title is and how much Visual Concepts' improved that title year-upon-year.

[Lainie Goldstein, Take-Two Interactive Software, Inc.]

So, for cap software for long-term, we wouldn't see Red Dead Redemption move into short-term until the game releases. So, you wouldn't see a movement of that until Q3. And that number, that $800 million includes capitalized stock expense and that won't go through our management reporting, you'll only see that go through our GAAP reporting. And once we release the game, we'll be creating a lifetime estimate of the title. And we don't share our lifetime estimates, but a blockbuster title you can imagine has a bit of a longer life. And that will help you to determine what the amortization period is over the life of the title.

[Justin Post, Bank of America Merrill Lynch]

Great. Thank you.

[Operator]

Our next question comes from Ben Schachter with Macquarie Group. Please proceed with your question.

[Benjamin Schachter, Macquarie Research]

Hey, guys. Congratulations on the launch, just really a great experience and I'm personally spending probably too much time chasing the legendary bear. On sales, can you talk a little bit about the international opportunity, where it's done well, where it's not done as well as you would've liked and where you think it could grow?

And then separately, Lainie, you listed Red Dead Online second when you talked about a contributor for FY 2019, I believe, in the script. Can you clarify what that means in terms of the magnitude of Red Dead Online for this year's guide? How you're thinking about monetizing there?

And then, just one more on the capitalized part. If we assume that the success of GTA was so long, for this one, obviously, it's going to be more than a year of capitalized software amortization, is it two years? Is it three years? And is it straight line or would it be relative to sales? Thanks.

[Strauss H. Zelnick, Take-Two Interactive Software, Inc.]

So, thanks for your questions. I'm glad you like the game. We're – I actually went into Karl's office right before this meeting and he was playing it. That is the truth. So, it's beloved already here. It's selling great around the world. It's incredibly strong everywhere. It's doing very, very well in international markets. And in terms of online, we're not breaking out Red Dead Online for the year. And Lainie will take the third question.

[Lainie Goldstein, Take-Two Interactive Software, Inc.]

Sure. So, yes, it's true. GTA did have a really long life and we would look at all of our titles and similar titles to determine the lifetime, but we have to look at history of all of our titles and GTA is definitely a unusual circumstance. But if from blockbuster, you would assume that it would be more – it wouldn't be just one year, it would be a longer life than that.

And in terms of how we would amortize, it would probably be over the revenue stream. It's the higher of the matter (00:35:02) straight line. And based on the launch quantity, I would assume that it would go over the revenue stream.

[Benjamin Schachter, Macquarie Research]

Great. And then, just a quick follow-up. So, you did say Red Dead Online when you were talking about revenue. So, should we assume that ,that means there is monetization in Red Dead Online and that's part of the guide?

[Lainie Goldstein, Take-Two Interactive Software, Inc.]

I didn't say about Red Dead Online. I was talking about Red Dead, the launch of Red Dead.

[Benjamin Schachter, Macquarie Research]

Okay. Thanks. Okay.

[Operator]

Our next question comes from Brian Nowak with Morgan Stanley. Please proceed with your question.

[Brian Nowak, Morgan Stanley & Co. LLC]

Great. Thanks for taking my questions. I have two. The first one, Strauss, just you step back, you've done a great job the last couple of years sort of building up a stable of software engineers and the ability to put out more content. How do you think about the potential to sort of put out more recurring titles on an annual basis the next two, three, four years? Where are you now as far as capacity?

And the second one, you mentioned 10 new games in development at Social Point. Any thoughts on timing and all you can share with us? Which genres of mobile are you most excited about? Thanks.

[Strauss H. Zelnick, Take-Two Interactive Software, Inc.]

So thanks for your question. And regarding our upcoming release schedule, we've said that our goal in any years is to have a handful of really powerful frontline releases and those would be taking advantage of our extraordinary collection of franchises. We have 11 franchises that have each had at least one 5 million unit released. We have over 60 that have sold at least 2 million units in an individual release. So we will certainly bring back beloved franchises to market and we aim to create new intellectual property every year as well. We haven't always been able to do that, but that's our goal.

And in so doing, that looks an awful lot like annualizing titles without bringing really high-quality titles or trying to bring the really high-quality titles to market too frequently, which we think is exceedingly difficult to do. We think if you're able to do that right, we should be able to have an incredibly powerful frontline release program without asking too much from either our development teams or the consumers in terms of over and over again bringing a non-sports title to market. Our sports entertainment titles on the other hand are annualized. They worked really well. So I think that's what you should expect going forward.

The second question was with regard to Social Point. The games are sort of described as mid-core. They're deeper, they're engaging, they're intended to be deeper and engaging. Beyond that, Social Point will talk about their upcoming releases because it's important that our label speak for themselves from the point of view of developing and marketing. But it's a diverse array of titles that are expected to be highly competitive. We're thrilled that they have hits in the marketplace and we're excited about what is to come.

[Brian Nowak, Morgan Stanley & Co. LLC]

Great. Thanks.

[Operator]

Our next question comes from Evan Wingren with KeyBanc. Please proceed with your question.

[Evan Wingren, KeyBanc Capital Markets, Inc.]

Thank you. Just wanted to ask quickly about the RCS outlook for 3Q. I think you mentioned that it was flat. Respecting that The Doomsday Heist did launch a bit later in the quarter last year for GTA, just trying to understand the puts and takes, given your comment that NBA 2K is growing, and with respect to Strauss's comment that you don't expect cannibalization, so just trying to understand that dynamic.

And then just to be crystal clear, because I was actually a little still confused. You're saying there is nothing in the guide for Red Dead Online. Thanks.

[Lainie Goldstein, Take-Two Interactive Software, Inc.]

No, we didn't say there wasn't anything in the guidance. We've just said that when I was talking about the amortization of capitalized software, I was talking about the core product of Red Dead Redemption 2 and the full game that was already released.

For recurrent consumer spending, what we're talking about in terms of the full year is that NBA 2K is going to be up for the full year. We will have Red Dead Redemption 2 launch and that's some time later this month. And so, it won't be like a full quarter, so that's why the number won't up significantly.

And we did say it was offset by GTA Online, which is reduced. And we have given out original guidance for GTA Online to be down for the full year and also for Q3 and for Q2. And it beats our expectations every time the title comes out each quarter.

[Evan Wingren, KeyBanc Capital Markets, Inc.]

Okay. Thanks and then just one quick one on the NBA 2K. Give a sense for why this title, given that it was so well reviewed relative to last year, has sort of underperformed your expectations slightly? Thank you.

[Karl Slatoff, Take-Two Interactive Software, Inc.]

Hi. Yeah, the title has not underperformed our expectations at this point. Actually, from a revenue perspective, we still anticipate this is going to be our highest title ever. We did say that the units are a little bit below where we expected them to be at this point in time. And as I said in an earlier question, could be a vast array of reasons. We've got a lot more people engaged in 2K18 for a longer period time that may have not transitioned over. There are a lot of games in the market. But like I said, 2K is obviously focused on trying to bring the audience base as high as it possibly can be and grow it.

[Evan Wingren, KeyBanc Capital Markets, Inc.]

Thanks for the clarification.

[Operator]

Our next question comes from Todd Juenger with Sanford Bernstein. Please proceed with your question.

[Todd Michael Juenger, Sanford C. Bernstein & Co. LLC]

Hi, thanks a lot for taking the question. At this point, it's hard not to overlap a bit with some previous ones, but can I go back to the NBA 2K number? I want to make sure I heard it right. I thought I heard 70%, 7-0%, increase in recurring revenue. If I heard that right, that's obviously a very big number. I know you said it had to do with more players higher attach rate, more ARPU.

Any more detail about that would be helpful. But I guess more broadly, what do you think about the game is driving such a change in behavior? Was there any change in the game design? Is there some timing issues? Is it just the evolution of just that concept generally being accepted by consumers? Trying to understand what drove that result if I heard it correctly. Thanks.

[Strauss H. Zelnick, Take-Two Interactive Software, Inc.]

You did hear right, up 70% recurrent consumer spending over last year's quarter. And it is great result and it's reflective of a lot more engagement, and the increased engagement, we think is that the consumers who are inside the game are avid consumers. They love what Visual Concepts is bringing to market and they're voting that they love it.

So I wish I could give you a better answer. Lord knows, we'd like to know it too. I can confirm that our approach every year is to make the game better, deeper, more entertaining, more captivating, more engaging. That's the goal. And when you see this kind of change in recurrent consumer spending, that obviously is reflective of engagement.

[Todd Michael Juenger, Sanford C. Bernstein & Co. LLC]

Thank you.

[Operator]

Our next question comes from Ray Stochel with Consumer Edge Research. Please proceed with your question.

[Raymond L. Stochel, Consumer Edge Research LLC]

Great. Thanks for taking my questions. So, a couple here on Red Dead Redemption 2 and Rockstar. So, the first would be, whether or not Red Dead Redemption 2 changes how you're thinking about your current cash position, now that you are sort of through the launch of the game and you know it's been successful? Then, in addition to that, could you isolate any key driver of Red Dead's success relative to your expectations? Would that be review scores or preorders or just the general customer reception? And then, one thing with Rockstar broadly, do you guys think about Rockstar's Social Club as a big competitive advantage? And is there any way that we can think about Social Club in sort of a bigger context? If you have any data points on Social Club, that'd be great? Thanks.

[Strauss H. Zelnick, Take-Two Interactive Software, Inc.]

So, in terms of the successful year that we expect to have affecting our cash position, we expect that adjusted cash flow from operations will be over $700 million and CapEx will be, as expected, around $60 million. We announced that we have cash a little over $1 billion at the end of this quarter. So, you can do the math. We obviously expect to have a significant cash balance at year end.

We've said that our expectations with regard to our cash are, first, to support our organic growth on an ongoing basis. That's really our story. This is a company that's been driven by organic growth largely. Secondly, when we find great opportunities to support inorganic growth opportunities, for example, the purchase of Social Point, we look through a very narrow lens though. We want a deal to be accretive, if not immediately, then very quickly. And that does matter to us.

And then, of course, we're prepared to return capital to our shareholders. We bought back around $300 million of stock in the last 12 months or so. Those are the three uses of cash, but it's obviously a great place for us to be with no debt.

I would observe that if you have concerns about the economy, and I think many of us feel like it's riding high and we don't know when it will change, we do know that at some point it changes, that having a significant cash asset is strategically beneficial. And we do want to be well-positioned for long-term growth. We're not a quarter-to-quarter company.

So, the second thing, I think, you asked what drives the enormous success of Red Dead Redemption 2. And the answer I think is that Rockstar is known to make the best games in the business. And I think the creation of Grand Theft Auto V, which has really became a threshold event for the industry, for Rockstar, for Take-Two as a whole, because it basically demonstrated that if something is so good as to be breathtaking that you can have amazing results. And I think when consumers understood, which they did, that Red Dead Redemption 2 would be the first game built from the ground up for the next-generation by Rockstar Games, that became a must-have item.

Now, when something is a must-have item and you get it home, it's got to be great. And 97 Metacritic score, that ties it with Grand Theft Auto V, basically says it's great. And I promise you if you play video games and you play Red Dead Redemption 2, you will agree, it's great.

So, what drives the success of any hit is that it's phenomenal and usually phenomenal in a somewhat unexpected way, as high as the expectations were for this release. I'm not sure anyone could have anticipated just how amazing it is.

With regard to the Rockstar Social Club, it's a vibrant and passionate community. The label supports it continuously. It has lots and lots of people who are engaged. We don't give much more detail than that, but we do think it's strategically interesting and beneficial asset.

[Operator]

Our next question comes from Mike Hickey with The Benchmark Company. Please proceed with your question.

[Mike Hickey, The Benchmark Co. LLC]

Hey, Strauss, Karl, Lainie, Hank, congrats on an awesome quarter, guys, and congrats on Red Dead and the Rockstar as well, truly amazing success. Curious on Red Dead Online, this is a bit of a stretch. Obviously, there's competitive game play elements to it, at least (00:46:36) I think that's what you said. You've seen this sports opportunity at all for that game. And I guess more broadly speaking, it's hard to get a read on what Rockstar is thinking philosophically, obviously, that nailed single player, that nailed by (00:46:48) service but do you think they have any ambition to compete in the eSports market over time?

[Strauss H. Zelnick, Take-Two Interactive Software, Inc.]

I think if there is an eSports interest, Rockstar will talk about it. I think as always, we want our labels to be out in front with marketing announcements. I would observe that so far, Take-Two's eSports ambitions have centered around NBA 2K and the NBA 2K League.

[Mike Hickey, The Benchmark Co. LLC]

Okay. Cool. And the last one from me, you said 17 million units sold-in. Any perspective on what the channel looks like on physical side, obviously?

[Strauss H. Zelnick, Take-Two Interactive Software, Inc.]

It's selling rapidly.

[Mike Hickey, The Benchmark Co. LLC]

Well, it sounds like. All right. Thanks, guys. Good luck with that (00:47:37).

[Operator]

Our next question comes from Brandon Ross with BTIG. Please proceed.

[Brandon Ross, BTIG LLC]

Hi. Thanks for taking the questions. Just a follow-up on the capital allocation question from earlier. M&A opportunities seem obvious within gaming, whether kind of bulking up in mobile or console. Maybe you can update us on what your ideal opportunities within gaming would be besides being accretive? And if there are any other strategic opportunities in adjacent businesses that might make sense for you guys?

And then on Social Point, you called out Social Point's success this past quarter and the number of titles that are coming. Are there any ways you see them working with 2K or Rockstar to make those mid-core games based on, I guess, 2K or Rockstar IP now that Social Point is well-integrated? Thanks.

[Strauss H. Zelnick, Take-Two Interactive Software, Inc.]

Thanks for your good questions. I know you said, yeah, we know you want acquisitions to be accretive, but believe it or not, that's a relatively unusual approach in our business. And it shouldn't be. It really is relevant because in the absence of thinking about that, you'd look at a whole bunch of things. The precedence of that as a metric, you don't look at so many things at all.

Generally, what we've said is an acquisition should bring us owned intellectual property, teams and potentially technology. Doesn't have to bring all three. We've done acquisitions that brought us one of three, two of three, three of three would be even better. And we are indeed very selective. Most corporate acquisitions fail. And thankfully, the ones we've done around here at least so far have succeeded. We'd like to keep it that way.

To your second question about Social Point, their focus as is the focus of all of our labels is to create their own intellectual property. And I would just note that in terms of the biggest titles in mobile, they're all native to mobile. They were all made for that platform.

There's no doubt that we've had success with intellectual property brought to the platform, WWE SuperCard being a great example, but the really huge successes are native. And that's what Social Point is trying to achieve. I wouldn't rule out the possibility of Social Point working with another label inside the Take-Two family, but that isn't the card approach and it wouldn't be our primary approach.

[Brandon Ross, BTIG LLC]

Thank you.

[Operator]

Our next question comes from Drew Crum with Stifel. Please proceed with your question.

[Drew Crum, Stifel, Nicolaus & Co., Inc.]

Okay. Thanks. Hi, guys. Good afternoon. So, can you talk about the frequency of content updates we should expect for Red Dead 2 Online? And I think -and I apologize if I missed the response to the question, but I think there was an earlier question on whether Rockstar will stagger the release schedule between Red Dead Online and GTA Online. And then separately, Red Dead 1 was not on PC. Any updated thoughts on making Red Dead 2 available on PC down the road? Thanks.

[Strauss H. Zelnick, Take-Two Interactive Software, Inc.]

Sorry, could you just repeat the third question?

[Drew Crum, Stifel, Nicolaus & Co., Inc.]

Yeah, Strauss, just on making Red Dead 2 available on PC.

[Strauss H. Zelnick, Take-Two Interactive Software, Inc.]

On making it available on PC? So, on Rockstar, we'd normally update everyone on upcoming releases and that would sort of answer all of your questions. But it's too early to talk about content updates for Red Dead 2 Online because it hasn't launched yet, obviously. Historically, obviously, we have updated content for our online offerings.

And in terms of ongoing releases, Rockstar will talk about what their intentions are going forward with regard to all upcoming products and that the same would hold true for platform. So, in this particular instance, I can't really give you too much clarity, apologies.

[Drew Crum, Stifel, Nicolaus & Co., Inc.]

Okay. Thanks, guys.

[Operator]

Our next question comes from Andrew Uerkwitz with Oppenheimer. Please proceed with your question.

[Andrew Uerkwitz, Oppenheimer & Co., Inc.]

Yeah. Thank you. Thanks, gentlemen, and Lainie. One of the big benefits I think GTA V experienced was the fact it was such a great game that when a new console cycle came, people all went out and bought it again. Sony and Xbox tend to talk a lot about forward-backwards compatibility. Does that change that dynamic as we approach the next console cycle because it looks like Red Dead could easily have the legs to last for multiple years?

And then the second question, you showed NBA 2K at the Apple event, Civilization VI is the full game, I think is on iPad and iPhones and mobile. Are those devices becoming powerful enough that they become an entire another medium for you to push a lot of your content too? Thanks.

[Strauss H. Zelnick, Take-Two Interactive Software, Inc.]

Yeah. I don't think backwards compatibility is actually all that important. I think the reason that we had such a great experience with Grand Theft Auto V when we brought it to new generation is, first of all, the content was meaningfully updated with amazing new features. And secondly, because the title was so extraordinary that it remained the standard bearer for the new generation straight through until the release of Red Dead Redemption 2 because nothing stood up to it technically or creatively. So, how Red Dead Redemption 2 fares going forward, it's hard to know, but it's certainly off to a great start.

But we don't – our success is not built defensively by managing platform transitions. Those things are really out of our control. Our success is built by making the very best entertainment that we possibly can and we're grateful that at least so far, it appears that it's some of the best entertainment made. And that's the whole drill.

On your point about technical abilities, and thanks for referencing the Apple event, we're really thrilled to participate for NBA, I do think that it's just a matter of time before mobile devices are every bit as powerful. The question is whether the form factors going to appeal to every kind of title. I'm skeptical that it will. I say that and then you can find people who like to watch movies on their smartphone.

So, I'm sure you can find some people who when the platforms are powerful enough – and to be clear, they're not yet, but when they are, we'll be really happy to play our very deep, very robust, very memory-intensive, technologically intensive titles on platforms like iPads or smartphones. But right now, we're not quite there yet. But if you believe in Moore's law, and I do, it's just a matter of time, probably not that long a time before that's the case.

[Andrew Uerkwitz, Oppenheimer & Co., Inc.]

Got it. Thank you very much, guys. Appreciate it.

[Operator]

Our next question comes from Doug Creutz with Cowen & Company. Please proceed with the question.

[Doug Creutz, Cowen & Co. LLC]

Thanks. This is for Strauss. You were recently named Interim Chairman of CBS and congratulations on that, by the way. They're a company that's facing a lot of important decisions over the next two years, both internally and externally. And I've even seen your name mentioned in the press release in one spot in conjunction with – as being a possible CEO candidate. Do the responsibilities there at all affect what you're doing at Take-Two? Has there been any kind of reshuffling of responsibilities? And how do you think about kind of balancing those roles off against each other? Thank you.

[Strauss H. Zelnick, Take-Two Interactive Software, Inc.]

The CBS role is specifically interim and non-executive. So, you have to think of it as a board seat with a responsibility to convene meetings. And I'm grateful for any opportunity to be of service to friends in the industry. Take-Two is where my head and my heart remains. Really proud of what the team here has accomplished in the last 11 years. I'm firmly committed to the company. I love what I do every day and it keeps all of us plenty busy.

I'd observed that I'm one of only 4,300 team members, and this is a team effort. And I'm really proud of what we together accomplish, but it is not a singular activity. So, it's kind of you you'd to ask the question. But a much more relevant question is how does the team feel about continuing to do this together. And my primary job is to make sure that we constantly have a fantastic strategy backed up by an amazing culture that this remains the place of choice for people who want to do the very best work in entertainment.

And that when they are here, they get to pursue what they're passionate about because more often than not, that yields the kind of results that we're talking about today. So, I'm really grateful to be able to do this every day and I'm quite – and to be specific, entirely committed to continuing to do so.

[Doug Creutz, Cowen & Co. LLC]

Great. Thank you.

[Operator]

At this time, I would like to turn the call back to management for closing comment.

[Strauss H. Zelnick, Take-Two Interactive Software, Inc.]

Just want to thank everyone for joining us today. We're obviously grateful for a terrific second quarter. We're thrilled that we're able to guide up for the year. And it is a gross understatement to say that we're excited for the initial release of Red Dead Redemption 2. And we have wonderful hopes for how the title will continue to unfold. Thank you again for joining us. We really appreciate your support.

[Operator]

This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.