Take-Two Interactive Software Inc

NASDAQ:TTWO

Earnings Call Transcript 2018-Q3

[Operator]

Greetings and welcome to the Take-Two Q3 Fiscal Year 2018 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Hank Diamond, Senior VP of Investor Relations and Corporate Communications. Please go ahead.

[Henry Diamond, SVP, IR and Corporate Communications]

Good afternoon. Welcome and thank you for joining Take-Two's conference call to discuss its results for the third quarter of fiscal year 2018 ended December 31, 2017. 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've no obligation to update these forward-looking statements.

Actual operating results may vary significantly from the 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, all numbers we will be discussing today are GAAP. And unless otherwise stated, all comparisons are year-over-year. 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 Zelnick, Chairman and CEO]

Thanks Hank. Good afternoon and thank you for joining us today.

I'm pleased to report that during the holiday quarter, Take-Two benefitted from high consumer demand for our offerings, enabling our company to deliver both strong net bookings and net cash provided by operating activities.

Excuse me, our results were highlighted by record recurrent consumer spending on Grand Theft Auto Online and NBA 2K18, robust ongoing sales of Grand Theft Auto V and the successful launch of WWE 2K 18. As a result of our outstanding third quarter performance and increased fourth-quarter forecast, we've raised our fiscal 2018 outlook for net bookings.

2017 was the best year yet for Grand Theft Auto Online capped off by an epic December that saw more players in the game than ever before. During the fiscal third quarter, Grand Theft Auto Online substantially exceeded our expectations and remain the single largest contributor to consumer spending.

Rockstar Games has driven sustained engagement through the ongoing release of a rich array of premium content led by the massive doomsday hike which is the biggest update for Grand Theft Auto Online to date, as well as rest of surprised 2017, special Halloween content and additional themed content for smart.

Also Rockstar games released the Criminal Enterprise Starter pack which gives players the access to a wide range of the most exciting and popular additions to Grand Theft Auto Online plus $1 million in GTA Virtual Currency. Rockstar games will continue to support Grand Theft Auto Online with more new content going forward.

Although it was launched over four years ago during 2017, Grand Theft Auto Online V was the number three selling game in units and number six selling game in revenue based on combined U.S. digital and physical sales across the PC, console and portable according to the NPD Group.

The title remains the must have videogame especially of the installed base of current generation consoles continues to grow and is now sold in more than 90 million units. The unparalleled longevity and success of Grand Theft Auto V and Grand Theft Auto Online is a testament to Rockstar games' ability to deliver entertainment experience that sets new creative benchmark and appeal for a broad range of audiences around the world.

Turning to our annual sports releases, NBA 2K18 delivered better than expected net bookings during the holiday quarter. The total is sold in over eight million units to date up nearly 25% over the prior year's release and digitally delivered sales have increased significantly.

NBA 2K18 was the second highest selling game of 2017, both in revenue units based on combined U.S. digital and physical sales across PC, console and portable, according to the NPD Group.

Our NBA 2K series also continues to benefit from growth in engagement and recurrent consumer spending. To date, total users and average daily users of NBA 2K 18 are current generation platforms are up more than 20% over last year and during the third quarter, recurrent consumer spending and NBA 2K grew 33%.

We expect NBA 2K 18 to become our most successful sports title ever, both in terms of units sold and recurrent consumer spending. Even with its tremendous success, we believe there remains a substantial worldwide growth opportunity for NBA 2K.

In October 2K successfully launched WWE 2K 18, the latest installment of our popular WWE simulation-based series. The title has been supported with an array of post-launch downloadable content including a season test. That the WWE brand is as popular as ever and we believe there's a substantial long-term opportunity to grow our WWE 2K series by leveraging further the development and marketing expertise of 2K and visual content.

Our results also benefited from a number of other titles led by new versions of Rockstar games blockbuster detective thriller L.A. Noire for the Nintendo Switch, PS 4 and Xbox One as well as mobile games from our Social Point Studio.

In addition, Rockstar Games released L.A. Noire, the The VR Case Files for the HTC VIVE system, which is now one of the industry's top-rated virtual reality experiences in winter the hour's Best Buy Game Award for 2017.

Today the highest quality entertainment experiences must provide new and innovative ways for audiences to stay captivated and engaged for longer periods of time. We're committed to this strategy and its successful execution has enabled us to deliver better than expected net bookings from recurrent consumer spending, which grew 44% to a new record and accounted for 40% of total net bookings in the third quarter.

In addition to Grand Theft Auto Online and NBA 2K recurrent consumer spending will enhance by a variety of other offerings. In the free to play category, Social Point's mobile games continue to be a meaningful contributor to net bookings through it's duplicate titles, Dragon City and Monster Legends. We view social points as an important long term growth opportunity for Take Two.

Recurrent consumer spending of WWE SuperCard grew 25% and the game has now been downloaded more than 16.5 million times. 2K releases season 4 update which features 250 new cards additional tiers and more. And NBA 2K Online remains the number one PC online sports game in China with over 36 million registered users.

Also net bookings from add-on content grew more than 20% led by WWE 2K 18, Sid Meier's Civilization and XCOM2. Rockstar Games has announced the Red Dead Redemption 2 will launch on October 26, 2018. We continue to expect to deliver both record bookings and record net cash provided by operating activities in fiscal 2019, in excess of $2.5 billion and $700 million respectively led by the launches of Red Dead Redemption 2, an highly anticipated new title from one of 2Ks biggest franchises.

Interactive Entertainment has captured the imagination of audiences for decades and is one of today's most exciting and popular art forms. Advances in technology as well as new platforms and business models continue to enhance our team's ability to express their creative visions and to provide connected experiences that drive vast consumer engagement.

Whether AAA title from Rockstar Games and 2K, exciting new IT from independent developers or offerings within emerging areas such as mobile and eSports, Take-Two is incredibly well positioned to provide value to customers and returns for shareholders over the long term.

I'll now turn the call over to Karl.

[Karl Slatoff, President]

Thanks Strauss.

In December Take Two announced an important initiative, the formation of private division a new publishing label that is dedicated to bringing titles from top independent developers to market. Our groundwork for private division began over two years ago and its mission is to empower independent studios to develop games about which they are passionate by providing the support they need to make their titles critically and commercially successful on a global scale.

There are a growing number of independent studios in industry that have top talent and are focused on creating high quality new IP. Private division was formed to enable our company to benefit from this trend by partnering with the best independent developers to bring incredible experiences to gamers around the world.

Private developers currently has contracts to publish several upcoming titles based on new IP from renowned industry talent, including the previously announced ancestors to humankind artistry for Panache digital games led by Assassin's Creed creator Patrice Désilets and unannounced RPG currently code named Project Wight from the Outsiders led by David Goldfarb who is formerly a senior game designer at DAFE and Starbury Studios, an unannounced RPG from Obsidian Entertainment led by Tim Cain and Leonard Boyarsky, co-created as a follow up and unannounced site by first person shooter from V1 Interactive, a studio founded by Halo co-creator Marcus Lehto.

In addition, private division is the publisher of Kerbal space program which we acquired in May 2017. We are very excited about the long term potential for private division to be a meaningful contributor to revenues and profits. I will discuss our recent releases and development pipeline.

On January 16, Private Division squad and [indiscernible] released Kerbal Space Program Enhanced Edition, a new console version of the lost space simulation game for digital download on Play Station 4 and XBOX 1. Kerbal Space Program Enhanced Edition was built from the ground up to include rework and console optimized UI, a new control scheme exclusively for consoles and more ways to enjoy launching spaceships into orbit.

Sales of the tail are outperforming our expectations. Later this quarter on March 13, Private Division will release Kerbal Space Program making history expansion for PC, adding rich new content to the series, including the Mission Builder and history PAC. We view Kerbal Space Program as a long term franchise that complements our portfolios of own intellectual property.

Tomorrow, 2K Interactive games will release Sid Meier's Civilizations VI: Rise and Fall. The expansion pack for the critically acclaimed and award winning strategy title for PC. Civilization VI: Rise and Fall claims new choices and strategies for players as they guide a civilization to Dark Ages and golden ages with the help of governors and a new royalty system.

With this expansions array of new features, players will be both challenged and rewarded in a ways never before seen during the 26 year history of the Civilization franchise. This quarter, Social Point will release significant update for its two biggest games Dragon City and Master Legends and it's also working on a number of exciting new titles plan to launch over the next two years.

Turning to eSports, both our team and the NBA continue to prepare for the May 2018 launch of the NBA 2K league. Last month 72,000 players from around the world participated in the League's qualifying round and fulfill the 50 Pro game requirement.

This month the league will complete its registration process and then will host a series of in-game events during February's combine. This will determine the best NBA 2K players in the world will be available in the March draft for 17 teams participating in the inaugural season.

We are very pleased with the progress of the NBA 2K League and look forward to expanding our presence in competitive gaming which has a long-term potential to enhance engagement and to be a meaningful driver of profits for our company.

Looking ahead, we have a strong development pipeline across our labels including both new releases from our industry-leading portfolio and groundbreaking original intellectual property. We remain committed to delivering the highest quality entertainment experiences and supporting them with innovative offerings designed to drive audience engagement.

These are incredibly feeding homes for both our company and our industry. Take Two is better position than ever to capitalize on as many opportunities to generate growth and profits over the long term.

I will now turn the call over to Lainie.

[Lainie Goldstein, CFO]

Thanks Karl and good afternoon, everyone. I will now just start our third quarter results and then review our financial outlook for the fourth quarter and fiscal year 2009. Please note that additional details regarding our actual results and financial outlooks contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our offering performance.

As Strauss mentioned, we deliver outstanding results in the third quarter driven by the better than expected performance of Grand Theft Auto online and NBA 2K, continued robust sales of Grand Theft Auto V and the successful launch of launch of WWE 2K.

Total net bookings were $654 million, the high end of our outlook range, of this amount 58% which were digitally delivered net booking which grew 6% to $380 million. Our digitally delivered net bookings were driven by record recurrent consumer spending, which was partially offset by lower booking downloads due to this year's later holiday release late.

We generated strong cash provided by operating activities of $203 million and we deployed $50 million for capital expenditures. As a result of favorable market conditions, we were able to spend $110 million to repurchase 1.6 million shares of our stock at an average price of $103.54. As of December 31, we had more than $1.3 billion in cash and short-term investments.

Turning to some details from our third quarter income statement, GAAP net revenue exceeded our outlook and grew to $481 million. Cost of goods sold decreased by 14% to $268 dollars. Operating expenses increased by 5% to $204 million, due primarily to the inclusion of social point, as well as our higher stock-based compensation and headcount expenses which are partially offset by lower marketing expenses.

Operating expenses were lower than our expectations, due primarily to the timing of marketing campaigns. And GAAP net income exceeded our outlook increasing to $25 dollars or $0.21 per share price.

Our GAAP results reflect the $30 million net tax benefit which is driven primarily by changes in valuation allowance, release of unrecognized tax benefit due to statute expirations and the net effect of changes resulting from the Tax Spreads and Jobs Act.

Tax benefit had no effect on our management reporting tax rate which is 22% for fiscal 2018. We’re in the process of evaluating whether the recent tax legislation will reduce our management supporting tax rates in fiscal 2019. We expect to provide more clarity on our fourth quarter earnings call.

Now I will review the highlights of our fiscal 2015 financial outlook. Starting with the fiscal fourth quarter. We expect net bookings to range from $410 million to $460 million. At the midpoint, this represents 7% growth over the prior year period. The largest contributors to the net bookings outlook are Grand Theft Auto Online and Grand Theft Auto V, NBA 2K 18 and WWE 2K 18.

We expect GAAP net revenue to range from $460 million to $510 million and cost of goods sold to range from $196 million to $225 million. Our operating expenses are forecasted to range from $190 million to $200 million.

At the midpoint this represents 34% plus an increase over last year, driven by the inclusion of social points as well as higher marketing and R&D expense. And we expect GAAP net income range from $87 million to $99 million or $0.73 to $0.83 cents per share.

Turning to our outlook for the full fiscal year, as a result of our strong third quarter results and improved forecasts for the remainder of the year, we are increasing our outlook for net bookings. We now forecast net bookings to range from $1.99 billion to $2.04 billion up from our prior outlook of $1.93 billion to $2.03 billion.

As a midpoint, this represents 6% growth over the prior year. By the lighter release fleet driven primarily by growth in NBA 2K and Grand Theft Auto, as well as the inclusion of a full year of net bookings and social points. We continue to expect net bookings from the current consumer spending to increase approximately 50% and digitally deliver net bookings to grow around 25%.

The largest contributors to our net bookings outlook for Grand Theft Auto Online and Grand Theft Auto V, NBA 2K and WWE 2K. We expect the net bookings breakdown from our label to be roughly 50% 2K, 45% Roaster games and 5% social point and other. And we forecast a geographic net bookings to be about 60% in I-State and 40% international. We continue to expect to generate approximately $300 million net cash provided by operating activity, and we plan to deploy approximately $60 million to capital expenditure.

Turning to our income statement, we are increasing our outlook for both GAAP net revenue and GAAP net income. We expect GAAP net revenue to grow through a range of $1.8 billion to $1.85 billion and cost of goods sold to range from $905 million to $934 million.

Total operating expenses are forecasted to range from $776 million to $786 million. At the midpoint, this represents a 17% increase over the prior year, driven by the inclusion of social points, higher R&D expense and higher stock based compensation expense. And we expect GAAP net income to range - increase to range of $170 million to $181 million, $1.50 to $1.60 per share.

In closing, the continued positive momentum of our business reflects Take Two's ability to see these goals of our firm commitment to creative leadership, innovation and operational excellence. As we near the close of fiscal 2018 which will be another year of net bookings revenue and earnings growth for our organization, we remain focused on our many opportunities to expand our business and increase profit.

To that end, we expect fiscal 2019 to be a record year for both net bookings and net cash provided by operating activities and the long term future of our company has never been more promising. Thank you.

Now I will turn the call back to Strauss.

[Strauss Zelnick, Chairman and CEO]

Thanks Karl and Lainie. On behalf of our entire management team, I'd like to thank our colleagues for delivering another strong quarter for our organization and to our shareholders I want 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 Eric Handler with MKM Partners. Please proceed with your question.

[Eric Handler, MKM Partners]

Actually two questions for you. Strauss just as you look into fiscal '19 and using your guys words, you have a highly anticipated game from the 2K Studio. One would presume that is again, that's well known either Bioshark or Borderlands - a new Borderlands title. Many people are thinking Borderlands, given that you have decent lead times for these games from a marketing perspective that would seem to suggest, it's a back half of your title. Then it becomes a question of would you want it to compete in the December quarter against Red Dead and assuming probably not, then it becomes a March quarter title?

And you think about the March quarter versus on October quarter which should be fiscal - December quarter, sorry - which would be fiscal '20. Can you talk about, how you feel about some of these games coming in on March quarter versus coming in the holiday quarter and how you think about that with some of the big 2K Games?

And then secondly it was good to see capital being turned to shareholders, $100 million in the share buyback. Just curious, why you think that this quarter was a good use of that capital versus prior quarters when those share price was lower.

[Strauss Zelnick, Chairman and CEO]

We've released titles all over the calendar year and the only period of time that we tend to avoid a big frontline release would be dog days of July. And so otherwise you know our release dates are driven by when a title is ready and when a title is ready to us is, when we have -- our studious believe they've optimized the quality of what we can do and that's how we'll continue to look at it going forward.

More specific information will come from our labels as always. And in terms of the buyback you know we've always said that, we would look to do a buyback a deep value and that is in the eye of the holder. The management team voted by buying back over $100 million of stock at a $103 a share.

And in terms of why we might have or might not have done it earlier, we have done buybacks earlier. We bought back about little less than $300 million worth of stock in the past several years and admittedly lower prices. With the benefit of hindsight, we should have bought as much as we possibly could buy when the stock was put up naturally we didn't have that benefit prospectively.

And we're always balancing our perception of the value of the enterprise with the solidity of our balance sheet. And we do have other uses for cash supporting organic growth which has really been the story around here, supporting organic growth and we did a meaningful acquisition last year. And of course, returning capital to shareholders appropriately.

So I wouldn't say that, we've optimized perfectly. I think that's very hard to do and say that we see ourselves as stock pickers or even stock price pickers even with regard to our own security, now our folks as heads down building this business.

We do run a very, very disciplined operation particularly on the financial side. Thanks to Lainie and the team. As you know, we do everything we can to mitigate risk and that includes the nature of our balance sheet.

[Eric Handler, MKM Partners]

And just a quick follow up to that, you were buying back some stock is that a reflection that all, that there is just not a lot to buy right now in the M&A market?

[Strauss Zelnick, Chairman and CEO]

No, we still think there's plenty of opportunity. We're very selective about those opportunities. We’ve talked about this in the past and I think it will work. We have a terrific corporate development team. We look at everything that's potentially available.

And one of the things you ask yourself is that as I look back and we've been around here for the better part of 10 years, you know they look back other things I wish, I would have done is price at which they got done. And I suppose there are couple of transactions that would fall into that category, but precious few.

[Operator]

Our next question comes from the line of Chris Merwin with Goldman Sachs. Please proceed with your question.

[Chris Merwin, Goldman Sachs]

I just had a couple. So, if you could talk a little bit about the growth in reoccur contributor spenders still obviously very impressive number on an absolute basis, but it did slow pretty significantly from fiscal 2Q. So just wondering if you could talk about what the main cause of that, was maybe just like large numbers but any color there would be appreciated?

And just a second question on the social point. I think you mentioned that asset continue to perform really well, I just was wondering if you could update us on its contribution to total revenue or growth rate there?

And then just as a related question if you see an opportunity to take any of your IP from Rockstar Take-Two and leverage social point developers to release that on mobile? Thank you.

[Lainie Goldstein, CFO]

In terms of consumer spending it is continuing to grow. For us is a big focus for us in all of our game. For instance, GTA Online Q3 was our biggest quarter ever, and it's up significantly over last year. So we're still very focused on it. We think there's a lot more opportunity there. And we’re focused on our NBA game as well as our consumer spending.

[Strauss Zelnick, Chairman and CEO]

Right, changes in between quarters, we're not - it is a very hard to comp quarter to quarter because titles expand and certain times contract even in the context of continued growth. And there is seasonality, little bit of seasonality in our business.

So, you wouldn't you can't really comp quarter to quarter or same quarter over prior year quarter, those comps just don't make sense. For example, our third quarter was quite different this year for fiscal than the prior fiscal because we did different release schedule.

On your question about social points, social point and the private division games I think represent around 5% of our revenue. So it's still relatively small percent of our revenue.

We're excited about the potential growth in that area. In terms of intellectual property, social points mission is to create and build endemic made for mobile properties and those are the properties that tends to do best in the mobile space. Now it is true 2K has done really well with the WWE. SuperCard we've done well with our NBA App and we expect to continue to support titles like that through to 2K division.

Social point certainly has the ability to work with both internal labels and external labels on licensed properties, but generally speaking we think the best way to go is to make titles that are meant for the business channel, the consumer channel the hand and to own that intellectual property.

[Operator]

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

[Justin Post, Merrill Lynch]

A couple of questions. First looks like your recurrent consumer spending, prepared remarks was better than expected. But you're kind of in the range this quarter versus the last few quarters. So just wondering if anything kind of missed your expectations or was below forecast on packaged goods or other revenue side?

And then Lainie, I just wanted you know it looks like the balance sheet the convertibles off the balance you just want to confirm that? And what’s a good share count to users, is the 118 non-GAAP reported in the quarter a good fully diluted share count to use? Thank you.

[Strauss Zelnick, Chairman and CEO]

Yes no, everything is going better than expected. We obviously did much better than expected in the quarter pretty much across the board where it counts. And we were at the very high end of our range, in terms of net bookings and obviously the cash flow provided by operating activity is meaningfully better than expectations and we have guided up for the year.

So we're excited about how things continue to unfold. NBA 2K is up 25% year-over-year and was the number two selling title in 2017 and Grand Theft Auto V 4 years after its initial release was actually the number three selling title according to the NPD Group in terms of units in 2017. We have more users than ever playing Grand Theft Auto Online in the third quarter. We're expecting another record year for Grand Theft Auto online.

So everything is going better than expected and we do have pretty high expectations around here and Lainie will talk about the share count.

[Lainie Goldstein, CFO]

So for that covert that’s less on the balance sheet, so we still have data about 13.8 million and it represents about approximately 500,000 shares that are left. So all the shares have been moved into the share count. So for Q4 if you see our press release we have 118.5 million shares in the count and for the full year 119.5 million shares.

[Justin Post, Merrill Lynch]

Thank you.

[Lainie Goldstein, CFO]

Sorry, its 118 for the full year.

[Karl Slatoff, President]

And Justin that's only down in our press release.

[Operator]

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

[Ryan Gee, Barclays]

I appreciate the color on GTA Online players. I just wanted to ask about the revenue, did you say in your prepared remarks the GTA Online stand is also a record this quarter?

And then when you think about it the do’s day highs that obviously launched in late in December. So, could you expect that content to be in an even larger tailwind for RCS as we move into fiscal 4Q and in the fiscal '19 and then I have just one follow up?

[Strauss Zelnick, Chairman and CEO]

Yes, you're right that things have gone really well for Grand Theft Auto online in the third quarter. It performed better than expected and we think a big part of that performance is Rockstars ongoing content drops which have been nothing short of phenomenal. And Rockstar games were intense Grand Theft Auto online with more content going forward. And we did have a record number of users.

[Lainie Goldstein, CFO]

We had a record quarter in Q3.

[Ryan Gee, Barclays]

And then is there any new content updates for GTA Online implied into the guidance for fiscal 4Q at all?

[Lainie Goldstein, CFO]

In fiscal Q4, we included higher GTA Online revenue over last year, but not as high as Q3 and there was a record quarter for us.

[Operator]

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

[Mike Olson, Piper Jaffray]

I had a couple of questions on NBA 2K. I'm wondering if you could talk about what kinds of tactics you're using in NBA 2K 18 to drive the significant growth in recurring consumer spend? And then secondly on eSports, do you view the NBA 2K League as more of a potential revenue driver or more of a marketing halo for increased engagement in the game?

[Strauss Zelnick, Chairman and CEO]

Remember our strategy is always to captivate and engage consumers and you know the revenues are a function of that strategy, it's not the other way around. And however, we can keep consumers excited and make them happier, that's how we do it. And it is true that the fact of doing that has been that we've had really great results.

Our strategy is driven by the goal of making great entertainment and the world has changed. Used to be that one prime time we put our title people engaged. Now it was over we went after that title.

Now if you do it right, there is an opportunity to keep people engaged and having an online cohort does exactly that. And basketball has been succeeding mightily with recurrent consumer spending.

I think 30% year over year. And obviously Grand Theft Auto Online also reflects extraordinary engagement. We know the economic impact as we talked about our economic results, but the most exciting thing is we get a record number of people playing in the third quarter. That's what's really exciting.

Turning to the NBA 2K league, the goal is to build the first professional sports league that's built on a professional sport. And we know that people love basketball. We know the NBA itself is incredibly successful and we think it's just a natural to build a league around video gaming that in and of itself will be a successful sport, a successful occupation for consumers.

So we expect it to standalone and to be successful on its own and to be profitable on its own. We do think we do it right and will also help the NBA brand overall and it will help to NBA 2K brand.

[Operator]

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

[Brian Nowak, Morgan Stanley]

The first one on GTA Online, you mentioned the record number of players and the strong monetization. I'd be curious to hear about how you're driving new players to come into the ecosystem? Are you still seeing growth in the number of people who are paying digitally? What do you think is driving that?

And just talk about, some of the digital mechanics that you've used are going to bring new players into the ecosystem if that is the case? And then just going back to NBA 2K eSports, can do you just walk us through some of the business side signposts that we should look for whether it has the potential to sign streaming rights deals, sign affiliates, understanding the draft is coming, the combine is coming. Talk us through some of the business steps to happen as we get to the launch? Thanks.

[Strauss Zelnick, Chairman and CEO]

I appreciate it. We're focused on players not payers. We're focused on captivation and engagement and we get that right, everything else will follow.

In a way we get it right, it's continuing to give people what they want which is great free content and that's a strategy of Rockstar Games that done it just remarkably well which is why the game remains so successful and it's such an important part of consumer culture. So the focus is on the players and on the player experience and the modernization will take care of itself if we do that right.

On the NBA 2K league, some of the business drivers that you will be interested in to hear about naturally are sort of how the draft turns out, where those teams look like? How the first season go? How are the games actually look? How did people feel about the experiences and naturally and purely in the business side what are the media rights look like and what a sponsorship looks like and all of that is you know information to come.

[Operator]

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

[Ben Schachter, the Macquarie Group]

We've got a few questions, one for Lainie and two Strauss. We are doing modeling for next year, how should we think about the potential of cannibalization of GTA online and Red Dead, anything in particular we should be thinking about?

And then Strauss two things, one it was reported today that Google! is exploring some type of streaming service. And I understand you guys go actually platform agnostic but how would be entry in misleading platforms in fact how you think about the business?

And then secondly, when you think about the scale of the business versus some of your larger competitors, do you think you can optimize margins at your current scale or do you think you need an acquisition or potentially merging someone else? Thanks.

[Karl Slatoff, President]

I'm actually going to take the point on cannibalization because I addressed it before. We think every game and every entertainment experience stands on its own. And entertainment experience competes - internally it competes externally and it competes with unrelated experiences because entertainment is want to have activity not a must to have activity.

To the extent that there were a competitive threat one would assume that competitive threat is realized by properties outside of our company first and foremost and so far Grand Theft Auto Online is just doing phenomenally well we are having another record year. So we think these titles standalone and Rockstar Games is continuing to support Grand Theft Auto Online and the results reflect that.

I’m not going to comment on any particular news or potential launch expect to say that our policy is to support broad distribution because we want to be where the consumer is. That said, it is important that everything we support is consistent with our creative approach and with our business model and we’ll look at it through that lens.

And finally in terms of margins we have seen our margins grow. They grow with success the mortgage we have you noticed of course the higher our margins are if we have pure hits the lower our margins are. And of course as we grow scale as long as we grow that scale and maintain the same profitability levels, you’re going to see our operating profits go up.

So could gross margins go up, yes they can as we shift more to digital distribution which I think we’re all saying and actually heard our gross margins go up and our operating margins will also go up. Our scale will help us achieve that. We have shown an ability to grow scale meaningfully organically we see it as challenged to continue doing so and we’re balance and determined to meet that challenge equally accretive acquisitions that build scale when that truly act in service of higher operating margins as well.

[Operator]

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

[Ray Stochel, Consumer Edge Research]

Big picture question, how should we be thinking about companion apps within your business for your two major labels and do you view companion Apps as a standalone revenue generator or more as something that is just the way to drive engagement back into the base game? Thanks.

[Karl Slatoff, President]

I think what we’re seeing with WWE SuperCard and with the NBA is that mobile games have standalone has great experiences and that’s how we’re focused on and I think the days of companion Apps for marketing purposes or even engagement purposes perhaps are gone and every offerings of consumer has the standalone powerful offerings.

[Operator]

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

[Mike Hickey, The Benchmark Company]

See if I can ask this correctly, Strauss thinking about the Battle Royale they’re obviously two major incumbents here - Fortnight and you looked similar mode I guess within GTL line that I think has gotten some success. I am just curious how you see the market opportunity to overall for new entrants and also if you feel that sort market offer [indiscernible] to Asia assuming you have PC based here and I have follow up?

[Strauss Zelnick, Chairman and CEO]

I think more detail on game mechanics specifics really comes at the label level but I would just observe that someone else's success is really interesting and we’re obviously informed by what our competitors do. But our goal is to be as innovative as possible and title you don’t really titles that are derivative never seem to do as well as innovations that Ron expected.

So when we came out with the first Red Dead Redemption the conventional wisdom was that Western’s don’t work and have been awfully long time since our Western theme video game had come out and Rockstar took a massive creative risk and the result was extraordinary.

So I don’t see our labels being super excited about being derivative. That said of course, we play in the world and we're informed by what's going on. And it is our job to bring consumers what they want.

And because you are eluded to Asia, Asia remains an enormous area of focus. We've built a great business in Asia and we continue to be very interested in growing our business in and outside of China.

[Mike Hickey, The Benchmark Company]

The last question, obviously you have -- it appears to be a strong working relationship with WWE also appears to some mutual respect there, for what it's worth.

But when I am sure saw when Vince announced the relaunch I guess of the XFL, there appear to be certain eSports being and it was my impression on the watching the video stream and of course you guys have history long time ago now I guess history of making a very respected football game.

So I'm just curious how you think about the possibilities of creating a football team, new sports angled into the launch of XFL?

[Strauss Zelnick, Chairman and CEO]

Well, we have an enormous respect for the entire WWE Organization. We're thrilled to be in business with them. And you know if Mr. McMahon is going to pursue a new venture, we're rooting for his success enthusiastically, whether we’d be fortunate enough to gain an opportunity from that remains very much to be seen.

[Operator]

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

[Evan Wingren, KeyBanc]

Just two quick ones, just to clarify on the buyback, reviewing that is more opportunistic or is that something that we should assume, as more of a regular contributor in terms of the go forward, given the visibility you have into next year?

And the second question just with the additional time for Red Dead, does that potentially change your perspective in the near term about potentially porting the game to additional platforms or was the move perhaps not related to that at all? Thank you.

[Strauss Zelnick, Chairman and CEO]

Well, we we've said that there are three potential uses for our cash balance supporting organic growth which is really our bread and butter, supporting organic growth which has been necessary lately as we acquired Social point and we are interested in potentially broadening the enterprise in that way and returning capital to shareholders which obviously we've just done with a meaningful buyback.

We'll continue to pursue all three buys and when they make sense. So there's no change in our strategy. And in terms of Red Dead, any announcements about platforms for it will probably come from Rockstar Games.

[Operator]

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

[Tim O'Shea, Jefferies]

Yes, thank you for taking my question and congrats on another great quarter. So on Red Dead, can you walk us through the decision to delay Red Dead for a second time?

Is this a case of wanting to add some final polish to the game or are you reworking game play just love to hear your thoughts? And what’s the level of confidence in the October 26 release date?

And then, just curious how the holiday launch window compares to spring, how you think about the competitive environment or holiday spending? Love to hear your thoughts guys. Thanks.

[Strauss Zelnick, Chairman and CEO]

We've said repeatedly, we've put our money where it matters and the entire focus of this organization is on delivering high quality entertainment experiences of any kind. And more often than not we feel proud that we're able to do that.

All of our labels are focused on releasing the title when they reach that apex of effort and perfection. And in this instance, Rockstar Games thought more polish was required and naturally we’re in favor of that decision. The date of October 26 is set, and I'm confident that will be the release date and incredibly excited about it.

We release titles all over the calendar. The only time we tend not to would be when it's super hot in July, but otherwise we've been in every other quarter.

Heading into the holiday season can be a particularly powerful time and I had observe that even though there are some competitive releases it’s a lot more open field today than it was say 10 years ago. There is plenty of opportunity to go around, so we’re really excited about both the launch and the timing related to the launch.

[Tim O'Shea, Jefferies]

And then just one more if I may. You guys have now raised you full year outlook every quarter or year you’re guiding to over 2 billion of revenue, $3.23 of EPS at the midpoint. And my question is just at high level how much of this is truly recurring I mean how much might we expect to get back next year and I know you previously said and you reiterated in this release that the fiscal 2019 revenue could exceed $2.5 billion but we’re already at 2 billion this year with a very light release play and next year we have two major game launch just it were in this year’s plan. So just love to hear your thoughts on how much you think is truly recurring? Thanks.

[Karl Slatoff, President]

It’s a great question. We haven’t given any color on fiscal 2019 apart from what we said already naturally in the coming months we will do so and we’ll get a bit more granular about it. You’re absolutely right that we use the phrase for current consumer spending but nothing is forever where typically nothing is forever.

And we have to show up and create new content for consumers for every experience that we offer them and not everything always goes perfectly. We are having a great year we had a great number of years we are mentally grateful for that that is all driven by the creative quality of the work done by our labels.

And while we hope that will continue and so far we have been very fortunate you’re absolutely right to imply this is not recurring in the way say interest payments on the AAA rate of municipal bonds are good recurring.

[Operator]

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

[Doug Creutz, Cowen & Company]

It looks like you lowered your operating expense guidance for the year by a few tens and millions of dollars. I was just wondering if how much of that might have been due to the Red Dead 2 delay and potentially lesser marketing campaign for that in this fiscal year? Thanks.

[Lainie Goldstein, CFO]

The majority of these lowering of the OpEx is due to the timing of the marketing campaigns and it is for Red Dead Redemption but also some of our other title.

[Operator]

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

[Drew Crum, Stifel]

So Karl just want a point of clarification, did you say the NBA E league will launch in May and if so my understanding was this was originally suppose to start in the fall so if that’s true why the change. And then separately L.A. Noire is test case on the Switch can you talk about the prospects or opportunities with other games on the Switch such as Grand Theft Auto you’ve got a 90 million base of players at this point? Thanks.

[Karl Slatoff, President]

So yes, we’ll take the NBA league. It was never intended for launch there was no change May is our launch date and that’s when we plan to do it. So that actually just to clarify that was not a change, and start to bring other titles to Switch. Obviously we’ve done a few titles already we done NBA, WWE, L.A. Noire and we look at this like any other platform opportunity to extent that we look our development cost this again right for the platform what is audience look like what is the install base.

So when we do believe that there is an opportunity to do something on Switch then you’ll hear from the labels and we are impressed with the growth. We are impressed with the units that have been sold into the market so far. So we’re very sanguine at this point but we have nothing more to announce specifically at this point.

[Operator]

Our next question comes from the line of Brandon Ross with BTIG. Please proceed with your question.

[Brandon Ross, BTIG]

Two questions, first on GTA Online how should we think of the pacing of content releases this year should we expect it to be similar to what it was last year and will that at all be affected by the coming release of Red Dead. And how if all you’ve intend to use that GTA Online funnel to drive Red Dead Cells and players in Red Dead Online.

And then another Fortnight-related question, Fortnight has been pretty successful with a free to play strategy, especially with return consumer spending being what it is. Do you see a big opportunity in free to play on console, thanks?

[Strauss Zelnick, Chairman and CEO]

Thanks. We don't really talk about paid single content and I'm not even sure we really think about it that way. We create great entertainment experiences and when they're ready, we deliver them to consumers and so we don't have any kind of metronome quality till the creation of any of our entertainment experiences here.

Rockstar Games has the intent to continue to support Grand Theft Auto Online and that supportive Grand Theft Auto Online has nothing to do with the launch of Red Dead Redemption II. These are different projects and they stand independent of one another.

In terms of my own views on free to play console, I think there are potentially opportunities there. We have a free to play experience in China, NBA 2K online in China. It's a PC experience. Certainly it could be a console experience and naturally when people are involved with our online games, in many ways, those look like free to play experiences, yet you have to purchase titles, but if you are involved years later, it's hard to imagine that there is much difference between the emotional caliber of that experience and free to play experience.

If your question is whether the business model moves in that direction, I would say it probably can't because in a free to play environment 10%-ish of your consumers maximum are paying you and that's not going to support the very significant investment that a AAA title requires here and in our competitor's shops.

And we think consumers understand that and I think to the extent people want to continue to have big AAA experiences and they do, there are prepared to pay what ultimately is very little price given the massive number of hours that one can spend enjoying the titles.

[Operator]

Our final question comes from the line of Andrew Uerkwitz with Oppenheimer. Please proceed with your question.

[Andrew Uerkwitz, Oppenheimer]

I just have two quick ones here. Strauss, when you look back at GTA, I doubt that anybody internally through it had quite the success it's having now. It's been a record quarters now four years later.

Is there one or two things that you guys look at as you put money more in quarterback, that you think has been the difference that's made this title what it is and then if so, how do you guys think about translating that to future titles across the portfolio?

[Strauss Zelnick, Chairman and CEO]

Thank you for the last question today. It's hard particularly like ending on a high note. I don't think there's much of a magical answer to the question. Of course we ask ourselves that. It's just further recognition that the best quality wins and in the case Grand Theft Auto V and Grand Theft Auto Online I have to hold myself back from over-promoting because it's not our style.

But I do think that the title became standard there for not just the generation, but in many ways for the modern video game business and in other past iterations of the franchise I think there were potentially couple of other extraordinary titles that cost around competitively.

And that hasn’t seem to have been the case here with 90 million units sold and record result for Grand Theft Auto Online four years after its release. Is there a secret sauce? Yeah, the secret sauce it's a really ordinary experience that people love and was created and delivered and now supported by a label that never ever rest of the past and is utterly focused on innovation and breaking barriers with an eye towards an amazing entertainment experience.

And that's easy for me to say those words exceedingly hard to do and I would argue impossible for others to replicate, but what we mostly feel around here is a sense of enormous gratitude to our colleagues at Rockstar Games for creating and supporting and delivering this experience or not with these very many years.

And I suppose it is bad experience to please us to be so enthusiastic about the future when your strategy is guided by a true genuine appreciation for our mission which is to entertain people. And a genuine not financially driven commitments quality comes first it just comes first and then thankfully we run what we believe is a highly rationale exceedingly disciplined business environment which gives people who are creative a very safe place to do their very best work. Anyway that’s our goal and we think that’s why things are going pretty well.

[Operator]

Ladies and gentlemen we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks.

[Strauss Zelnick, Chairman and CEO]

Thanks so much for joining us today. We’re really thrilled with the results of the quarter and incredibly pleased for the outlook for the remainder of the year and the early outlook for fiscal 2019. I want to thank you for joining us today and for your continued support.

[Operator]

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