Take-Two Interactive Software Inc

NASDAQ:TTWO

Earnings Call Transcript 2018-Q4

[Operator]

Greetings and welcome to the Take-Two Q4 FY 2018 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Hank Diamond. 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 fourth quarter of fiscal year 2018 ended March 31, 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 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 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, all numbers we will be discussing today are GAAP. And unless otherwise stated, 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 valuate our operating performance.

In addition, we posted to our website a slide deck that digitally 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 Zelnick, Chairman and CEO]

Thanks, Hank. Good afternoon and thank you for joining us today. I am pleased to report that during the fourth quarter, Take-Two delivered growth and net bookings driven by increased recurrent consumer spending, including better than expected results from Grand Theft Auto Online.

Our solid performance mark a completion of another outstanding year for Take-Two, highlighted by growth in net bookings, earnings and cash flow along with margin expansion. And of course our fiscal 2018 operating results greatly surpass the initial outlook that we provided at the start of the year.

During fiscal 2018 and first quarter fiscal 2019, we returned $308 million to our shareholders through the repurchase of 3.1 million shares of our stock at an average price of approximately $99 per share. At fiscal year-end, we had over $1.4 billion in cash and short-term investments. Grand Theft Auto V and Grand Theft Auto Online continue to exceed our expectations in fiscal 2018, as they have every year since their release. With combined net bookings from the titles growing year-over-year.

Grand Theft Auto Online broke monthly audience records in June, July and December, added more new users than in the prior year and delivered its biggest year yet for Virtual Currency sales. During the fourth quarter Grand Theft Auto Online generated better than expected year-over-year net bookings growth, Rockstar Games achieved these results through the ongoing release of a wide array of free additional content including during the past fiscal year, four significant updates coupled with a weekly schedule of new content offerings, and they have much more plans going forward.

Grand Theft Auto V is now sold in 95 million units worldwide, reflecting its status as the highest rating title of the current console generation and the must have game for purchasers of Play Station 4 and XBOX 1. The incredible ongoing success of Grand Theft Auto V and Grand Theft Auto Online underscores Rockstar Games unparalleled skill at producing iconic entertainment experiences that attract and engage new audiences for years after release.

We are confident that Rockstar Games will again set new benchmarks for creative excellence with the October 26th launch of Red Dead Redemption 2, which is their first title develop from the ground up for the current console generation.

Turning to our Blackship basketball series, NBA 2K18 continues to expand its audience and is now our highest selling sports title ever, with selling to-date of over 9 million units, up 17% over last year’s release. In addition our NBA 2K series continues to benefit from growing engagement of recurrent consumer spending.

During fiscal 2018 average revenue per user, revenue per hour and unique multi-player users all increased double-digits and recurrent consumer spending in NBA 2K grew 34% to a new record. We believe there remains substantial worldwide growth opportunity for NBA 2K, both through traditional and emerging platforms and business models. To that end, earlier this month, the NBA 2K league commenced its inaugural season, which Karl will discuss.

Our fiscal 2018 results were also enhanced by a number of other recent releases and catalogue titles, including WWE 2K18 and WWE SuperCard NBA 2K17, Social Point mobile games, Sid Meier’s Civilization VI and its add-on content and alien war. We remain highly focused on our strategy to deliver innovative ways to drive consumer engagement. During fiscal 2018 recurrent consumer spending grew 48% to a new record and accounted for 48% of total net bookings. In addition to virtual currency for Grand Theft Auto Online and NBA 2K, We, current consumers spending was enhanced by a variety of other offerings.

In the free to play category, Social Point’s mobile games contributed meaningfully to net bookings through its two biggest titles Dragon City and Monster Legends. During the current quarter we have significant updates planned for both. We view Social Point as an important long-term growth opportunity for Take-Two.

Recurrent consumer spending at WWE SuperCard grew over 20% and the game has been downloaded nearly 17 million times. During the last fiscal year 2K released the season IV update, which enhanced our popular WWE card battling game with more than 250 new cards additional tiers and more.

And NBA 2K18 remains the number one PC online sports game in China with over 37 million registered users. In addition, net bookings from add-on content grew more than 40% led by offerings for Sid Meier’s Civilization particularly the Rise and Fall expansion pack XCOM2, particularly War of the Chosen, WWE 2K and Market 3 [ph].

We expect fiscal 2019 to be another year of profitable growth for Take-Two including both record net bookings and record net cash provided by operating activities led by the launch of Red Dead Redemption 2 along with new annual releases from NBA 2K and WWE 2K. We will also continue to support our titles with offerings designed to drive engagement and recurrent consumer spending.

The highly anticipated titles from one of 2K's biggest franchises that have been planned for release in the current fiscal year is now planned for launch during fiscal 2020 to allow for additional development time. We remained as excited as ever about this title and expected to enhance our results next fiscal year.

I'd like to take a moment to acknowledge that this year marks the 25th anniversary of Take-Two. Over that time, we've built our company into a diversified and profitable enterprise. In particular I'm extremely proud that Take-Two is home to our industry's best talent whose passionate and creative vision consistently captivate and engage audiences around the world.

Take-Two is exceedingly well positioned to capitalize on the vast opportunities in our industry, including advances in hardware, the ability to drive ongoing engagement through connected experiences and additional content and the continued proliferation of mobile platforms and emerging business models. As a result, Take-Two is poised to deliver growth and returns for our shareholders.

I will now turn the call over to Karl.

[Karl Slatoff, President]

Thanks, Strauss. I'd like to begin by thanking our teams that really bring another great year of creative and financial results for our organization. It’s your passions and commitments that drives Take-Two and is reflected in our terrific fiscal 2018 operating results and record net bookings and cash flow outlook for the current year.

Turning to our recent and upcoming releases, last month, Rockstar Games releases the Grand Theft Auto 5 premium online addition for PlayStation 4, Xbox One and PC. This comprehensive offering features the complete Grand Theft Auto V store experience the ever evolving world of Grand Theft Auto Online and all existing Grand Theft Auto V game play upgrade and content including the Doomsday Height, Gun Learning, Smugglers Run, Bikers and much more.

In addition, purchasers receive the criminal enterprise startup pack, which provides access to a huge range of content including properties, vehicles, weapons and more.

On October 26, Rockstar Games will launch Red Dead Redemption 2, eagerly awaited sequel to one of the label's most critically acclaimed and beloved titles. Two weeks ago Rockstar Games unveiled a beautiful cinematic trailer for the game that set the stage for what is shaping up to be another massive entertainment event. Player reaction to the trailer was phenomenal. And last month Rockstar Games hosted select media outlets at their Rockstar north studio for an extended look at the game. We have been delighted by their first impressions.

We could not be more excited about the upcoming launch of Red Dead Redemption 2. Rockstar Games will have additional details to share about the game in the coming months. This fall, the next annual installment of NBA 2K will return to the hardware court with the series signature style and deep authenticity. This year marks the 20th anniversary of our industry leading basketball simulation and we are confident that 2K and Visual Concepts will once again take the series to exciting new heights with the release of NBA 2K19.

Also this fall, 2K's WWE series will be back with WWE 2K19 bringing gamers into the virtual squared circle with their favorite WWE superstars, gameplay modes and providing a hard hitting and ring action. Throughout fiscal 2019, we will continue to support our titles with additional content design to deepen consumers' experience and drive engagement, including updates for Grand Theft Auto Online WWE SuperCard and others. In addition, Social Point and 2K will continue to broaden our offerings for mobile devices.

Earlier this month, the NBA 2K League our joint venture with the NBA kicked off its inaugural season. 102 of the best NBA 2K players were drafted by 17 NBA teams and are competing in a 15 week season, which will conclude with NBA 2K league playoffs and finals in August.

While each team is living and trained together in their home market, all league play in tournaments will take place in New York City. In addition the league has been steadily building its portfolio of partnerships and sponsorships with high profile brands. Dell is the league's official PC hardware and monitor partner, featuring its elite gaming brand Alienware. And Intel is powering all PCs with its state-of-the-art 8th gen processor.

Throughout the partnership Dell and Intel will work with the league to identify new opportunities to innovate and enhance game play as latest technology evolves. Both companies have agreed to make significant marketing commitments, including sponsoring the league’s half time show. Pritchard [ph] signed on as the league’s official live streaming partners for games throughout the season, including weekly match ups, three in seasoned tournaments, playoffs and the NBA 2K18 league finals.

This live stream includes various talent providing commentary, analysis and additional league updates. On last week the league announced two official sponsorships, stop Gaming Controllers and HyperX gaming headsets. We look forward to watching the continued progress and growth of the league, which is the long-term potential to enhance engagements and to be a meaningful driver of profits for our company.

China remains another long-term emerging growth opportunity for Take-Two. Building on the popularly of NBA 2K online, 2K in Tencent are teaming up again to co-develop and release the title’s highly anticipated successor NBA 2K Online 2. This new game is based on the console addition on NBA 2K and features 2K’s legendary game play 27 customizable position types, new player trading systems, eSports optimized features, localized commentary and more. NBA 2K Online 2 is currently in close beta testing and is planned for commercial release this all.

In addition, we are pleased to expand our successful partnership with Tencent with last month’s announcement that Kerbal Space Program will be released on Tencent’s WeGame distribution platform as a premium PC game at a date to be determined. We are excited about Tencent’s WeGame platform and the opportunity to grow our business in China.

We are also very enthusiastic about the long-term potential for private division, our new publishing label that is dedicated to bringing titles from top independent developers to market. Private division currently has contracts to publish several upcoming titles based on new IP from renowned industry talent, including Panache Digital Games, The Outsiders, Obsidian Entertainment and V1 Interactive. Private division will seek to add to its already impressive roaster development partners throughout the world, and we look forward to its future announcements.

Next month at E3 in Los Angeles we will have a corporate booth and the show floor we will not be showing any new products, but we will be holding business development, investor relations, media and sales meeting throughout the show.

Looking ahead, we have a strong development pipeline across our labels, which includes new releases from our popular series along with ground breaking new IP. With our unwavering commitment to delivering the highest quality entertainment experiences that keep our audiences engaged Take-Two is better positioned than ever to provide value to our customers and 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. Today I will discuss our fourth quarter and fiscal year 2018 results and then review our financial outlook for the first quarter and fiscal year 2019. Please note that additional details regarding our actual results and financial outlook are contained in our press release.

As mentioned by Strauss, a solid fourth quarter results marks the completion of an outstanding fiscal 2018 for Take-Two. During which we delivered operating results that greatly surpassed the initial outlook we provided at the start of the year. These results are driven primarily by the sustained out performance of Grand Theft Auto Online and Grand Theft Auto V coupled with record results from NBA 2K.

Starting with the fourth quarter, our operating metric total bookings grew to $411 million and net cash provided by operating activities exceeded our expectations. Digitally delivered net bookings to 12% to $333 million and accounted for 81% of the total.

Turning to some details from our fourth quarter income statement, GAAP net revenue decreased by 21% to $450 million and costs of goods sold decreased 40% to $189 million. Operating expenses increased by 19% to $173 million, due primarily to higher R&D expense and a full quarter of expenses from Social Point, which we acquired in January 2017. And GAAP net income was $91 million or $0.77 per share as compared to $99 million or $0.89 per share in the prior year period.

Turning to our fiscal 2018 results, total net bookings grew 5% to $2 billion, driven principally by growth from Grand Theft Auto online and NBA 2K, along with a full year result from Social Point, partially offset by a lighter release fleet. Of this amount 58% were digitally delivered net bookings, which grew 25% to a new record of $1.35 billion. Our digitally delivered net bookings were driven by record recurrent consumer spending, which is partially offset by lower full game downloads due to fiscal 2018 lighter release fleet.

Net cash provided by operating activities grew 19% to $394 million, which exceeded our most recent outlook of $300 million and was more than double our original outlook at the start of the year, and we spend $62 million on capital expenditures. At fiscal year-end our cash and short-term investments balance was over $1.4 billion.

As a result of favorable market conditions, we were able to repurchase 1.5 million shares of our stock for $155 million during fiscal 2018 and an additional 1.6 million shares for $153 million during fiscal first quarter 2019 to-date.

Turning to some details from our fiscal 2018 income statement. GAAP net revenue increased to $1.8 billion and cost of goods sold decreased by 12% to $898 million. Operating expenses increased by 14%, $759 million due primarily to a full year of expenses from Social Point as well as higher R&D, stock-based compensation and reorganization costs, which is partially offset by lower marketing expense. The GAAP net income increased by 158% to $174 million of $1.54 per share.

Now I will review the highlights of our fiscal 2019 financial outlook. Starting with the fiscal first quarter. We expect net bookings to range from $215 million to $265 million. The largest contributors are expected to be Grand Theft Auto Online and Grand Theft Auto V, NBA 2K18 and Social Point. We expect GAAP net revenue to range from $345 million to $395 million and cost of goods sold to range from $83 million to $109 million.

Operating expenses are expected to range from $190 million to $200 million. At the midpoint this represent a 12% increase over last year, driven by higher R&D and stock compensation expense. We expect GAAP net income to range from $62 million to $74 million or $0.53 to $0.63 per share.

Turning to our outlook for the full fiscal year. We expect net bookings to range from $2.67 billion to $2.77 billion. At the midpoint, this represents a 37% 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 booking from Grand Theft Auto V and Grand Theft Auto Online. We expect net bookings from the current consumer spending to increase modestly and digitally delivered net bookings to grow by 15% to 20%.

The largest contributor to net bookings are expected to be Red Dead Redemption 2, NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, WWE 2K and Social Point. We expect the net bookings breakdown from our label to be roughly 55% Rockstar Games, 40% 2K and 5% Social Point and other.

And we expect our geographic net booking split to be about 55% United State and 45% international. We expect to generate approximately $710 million in net cash provided by operating activities, up 80% over last fiscal year, and we plan to deploy approximately $60 million for capital expenditure.

We expect GAAP net revenue to range from $2.5 billion to $2.6 billion and cost of goods sold to range from $1.41 billion to $1.43 billion. Total operating expenses are expected to range from $885 million to $925 million. At the midpoint this represents a 19% increase over the prior year, driven by marketing, personnel and IT expenses.

And we expect GAAP net income to range from $180 million to $211 million or $1.53 to $1.80 per share. For management reporting purposes, we expect the tax rate to be 20% down 2 percentage points from prior year due to the recent tax reform legislation.

In closing, fiscal 2018 was another great year for Take-Two. Our ability to deliver growth in net bookings, earnings and cash flow despite an unusually light release fleet, reflect the strength of our core franchises and our ability to drive engagement with and the consumer spending on our titles for years after launch.

We are very excited about our outlook for fiscal 2019, which is poised to be a record year for net bookings and net cash flow provided by operating activities. Over the long-term our company has a creative access, operational discipline and financial foundation to generate growth and margin expansion for our shareholders.

Thank you, now I’ll 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 successful year 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]

At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question is with Mike Olson with Piper Jaffray. Please proceed with your question.

[Mike Olson, Piper Jaffray]

Hey, good afternoon. Did you say that GTA exceeded your expectations and grew year-over-year in the quarter or was that the full year fiscal 2018? And if you were referring to the March quarter where was the GTA exceeded your expectations, given bookings came in at the lower end of the March quarter guidance range. Was there something else within the overall mix that disappointed versus your internal expectation?

[Strauss Zelnick, Chairman and CEO]

Yes, Mike, in fact Grand Theft Auto Online was up, year-over-year, was up in the quarter, had another record year. And we had previously expanded our guidance for the year, and we guided up, and in the fourth quarter NBA 2K Online didn't do quite as well as we expected when we have guided up.

[Mike Olson, Piper Jaffray]

Okay. And then it sounds like there is not a new content drop for GTA Online in the June quarter. So, would that explain maybe the difference between -- obviously you're not in control of what consensus does, but the difference between your guidance and consensus. I guess is that the right way to look at it, that you essentially have a touch comp off of GTA Online content that hit last year's June quarter?

[Strauss Zelnick, Chairman and CEO]

Yes, you asked and answer the question correctly, which is to say, we have begun running update in last year's fourth quarter, it is into direct comp. And we spend over and over again, it's very hard to look at this company from a quarter-by-quarter comping situation because we're driven by our content.

Now we're very fortunate that we have such a strong catalog and we have such a strong recurrent consumer spending. Company certainly looks a lots different than it used to look. But even so, we are beholding to what content we create. So, period-to-period is not offering a good comp, that's really the reason we believe that consensus is off.

[Mike Olson, Piper Jaffray]

Thank you.

[Operator]

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

[Tim O'Shea, Jefferies]

Yes, so thank you for taking my question. Just looking at the recurrent consumer spending, is it possible to quantify the impact you saw this quarter from Fortnite? Strauss, you mentioned NBA 2K Online didn't do as well. I'm just curious if you attribute any of that to Fortnite? And then maybe if you could just comment on GTA Online specifically. If there was anything that you noticed with respect to engagement or monetization as Fortnite started to gain steam through the quarter? Thanks.

[Lainie Goldstein, CFO]

Okay. I want to take the Fortnite part.

[Strauss Zelnick, Chairman and CEO]

Tim, sorry, with regard to your question about fourth quarter. First of all I misspoke earlier, it was NBA 2K not NBA 2K Online, that was not quite at our revised expectations for the quarter. In terms of what the competitive landscape was, there is no doubt there are a couple of big hits in the marketplace, Fortnite and PUBG and their big hits, that creates a lot of benefits. We think it brings new players into the market and it just shows what a robust industry that we operate in.

Naturally we would like to have all the hits, I don’t think that’s necessarily a realistic goal. It's pretty hard to determine what competitive landscape effects are however. Because entertainment properties compete with each other with themselves and with nothing at all. So, entertainment is nice to have and another must have good. So it's impossible to determine whether a particular title have an impact. Although I think we've all observed that Fortnite is going to create a lot of activity around it.

[Tim O'Shea, Jefferies]

Thanks.

[Strauss Zelnick, Chairman and CEO]

And in terms of your question around Grand Theft Auto Online, we had a record year, we had a record quarter and the title continues to perform extraordinarily.

[Operator]

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

[Eric Handler, MKM Partners]

Yes, thank you very much. So I wonder if you could talk a little bit about Social Point. I remember in last year's guidance based on the percentage of net bookings you were sort of looking for about $100 million, I'm not sure if you ever updated it, about where Social Point finished.

Now just sort of doing some of back of the envelope calculations based on the midpoint of your net bookings guidance you're looking about $136 million of revenue. Maybe you could talk about some of the key drivers for Social Point this year. Are we getting more updates, are we getting any new games? And what you expect there?

[Strauss Zelnick, Chairman and CEO]

Yes, I mean, Social Point is doing just fine Dragon City, Monster Legends are their two big hit titles in the market those will continue to drive the bulk of their results, in the fourth quarter profits were up from Social Point. The driver this year will be how those games perform and potentially how some upcoming titled perform depending on the release schedule naturally.

[Lainie Goldstein, CFO]

Yes also for Social Point and some of our mobile titles, we have some change in accounting, where we need to gross up the accounting for it instead of showing it net. So that's the difference that you're seeing in terms of the gross number for the net bookings.

[Eric Handler, MKM Partners]

Okay. And then Lainie just as a follow-up for you. Just looking at your numbers in the guidance, you're projecting record operating cash flow number, but it doesn't seem like you're projecting a record EPS. So I'm just curious is there any accounting reversals or puts when you think of the puts and takes the difference between EPS and operating cash flow and is sort of impacting that?

[Lainie Goldstein, CFO]

So since our business mix is weighted a little bit towards the new releases, we're having some higher software development cost in the year. And then also the marketing that's associated with it. So, it depends on the timing of the marketing and then also the software development cost the cash is behind us.

[Eric Handler, MKM Partners]

Got it, thank you.

[Operator]

Our next question is with Justin Post with Merrill Lynch. Please proceed with your questions.

[Justin Post, Merrill Lynch]

Great. I would like to focus a little on next year's guidance, definitely seems to imply it might just have some acceleration in recurrent spend after the first quarter and then a big healthy number for Red Dead. Can you talk about if you think some of the recurrent spend growth is going to accelerating your guidance? And besides that 55% of bookings from Rockstar, any other clues you can give us on kind of your expectations for Red Dead? Thank you.

[Lainie Goldstein, CFO]

So for Red Dead, we don't share unit expectations. But looking at recurrent consumer spending, we usually have bigger quarters in our second and third quarters of the year. So you would start to see that be in line with what you see in previous years.

[Justin Post, Merrill Lynch]

Got it. And when you think about the quality of releases for Grand Theft Auto Online, the quantity of releases. I mean do you feel like this year is going to compare well to last year or how are you thinking about, how much content is coming for that?

[Strauss Zelnick, Chairman and CEO]

As you know our labels comment on their upcoming releases and what they're going to look like and we like it that way. That's what Rockstar Games have said they have much more content coming for Grand Theft Auto Online they will continue to support it. And obviously we just enjoyed another record year for Grand Theft Auto Online

[Justin Post, Merrill Lynch]

Thank you.

[Operator]

Our next question is with Chris Merwin with Goldman Sachs. Please proceed with your questions.

[Chris Merwin, Goldman Sachs]

Okay, thank you. I had another one on the guidance for fiscal 2019, it looks like non-GAAP gross margin guidance was just below 50%, which is I think is down pretty significantly year-on-year and of course you've got Red Dead coming on in the December quarter. So does the full year guidance just reflects the higher software amortization that you called out, or is it a higher skew of physical revenue compared to last year? And maybe as a related question what does your guidance assume for the digital download mix for Red Dead?

And just a quick second one, curious if Fortnite has caused you to maybe think about the potential for cross platform game play, which of your titles do you think might be well suited for the smaller screen and how long will it take to develop a game like that for mobile? Thanks.

[Lainie Goldstein, CFO]

So let me take the first one first. When you're talking about next year in our margins. So you're correct that it is driven by the software development costs associated with the new title, our big new release. And then also for our blockbuster titles typically they have had higher physical sales instead of digital. So that's also going to move the margin as well.

[Strauss Zelnick, Chairman and CEO]

And regarding cost platform availability. We already make many of our titles available on multiple platforms, including overtime, sometimes mobile platforms it all depends on the title or VR platform. So we take it on a case-by-case basis and I wouldn’t say there is anything about Fortnite experience that would change our view about platforms and we are obviously familiarly with mobile platforms we have plenty of games available on mobile platforms most notably Social Point games as well as WWE SuperCard and some other titles that come from other of our labels. And Rockstar Games has made titles available on mobile platform as well.

So it really depends on what the opportunity is title-by-title, but wouldn’t say that our outlook about our making titles available where consumers are has changed our strategies to be where the consumer is.

[Chris Merwin, Goldman Sachs]

Okay, thank you.

[Operator]

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

[Brian Nowak, Morgan Stanley]

Thanks for taking my questions. I have two, the first one is on the NBA E league appreciate the color on the sponsor and kind of the steps that had been taken, I guess, I’d be curious to think about how you all are thinking about the timing you can really get a meaningful impact from monetization what are the biggest drivers of monetization you see. And then Strauss maybe kind of most recently how do you think about the potential for eSports gambling given the change in legislation?

And then kind of a bigger picture question on Fortnite, Strauss what were your biggest learnings from kind of watching the Fortnite phenomena sort of pop up because the way you think about the potential future for gaming and the way players come into the gaming ecosystem?

[Strauss Zelnick, Chairman and CEO]

So you have a number of questions, with regard to the NBA 2K league we are couple of weeks in, we’re excited by the early experiences there are a lot of people watching on twitch and we think there is a great opportunity. We have said along that our risk profile is exceeding low that the actual exposure things don’t work out the way we like is di minimis certainly not material, and the upside we believe is substantial.

However we haven’t include any of that upside in our outlook and that’s sort of the way we tent to conduct business around here. We want to take exceedingly measured risks and then we report back and then when we have results and we don’t like to over promote in advance. In terms of where monetization can come from, I think you can -- your expectations would properly the sponsorship, which is going well it’s days, but it’s going very well and media rights also going well.

And then eventually depending on the level of success of course you could imagine event related revenue merchandize and the like, but again it’s earlier days and we are gaining new experience as every day passes.

In terms of the recent Supreme Court decision on the potential for sports gambling, this will now be left to the states. We certainly think it’s a good decision we think there may indeed be an influence and a meaningfully positive influence on our business. However it’s not in our current sites, we don’t have any expectations right now simply observing there are potential opportunities in the future. And I’d be very surprised if sports gambling didn’t intersect with the industry at some point relatively near future.

In terms of learnings around Fortnite, look as I said earlier maybe the biggest learning is just reinforcement of the fact that big hits by their very nature unexpected. And that would drive the big hit is innovation not derivation. And I mean we are very proud around here, we put our Red Dead Redemption the conventional wisdom was that western title don’t work in the video game business and Red Dead Redemption was a big hit and we have extremely high expectation for Red Dead Redemption 2.

So I think the fact is Fortnite surprised everyone, particularly given where Fortnite came from after all what is now in the market was based on a prior release that didn’t perform although well, which is just a reflection of the fact that if you innovate and give consumers what they want you can get an extraordinary results. And while we would love to corner the market and hits, and we certainly see it as our job to do so we don’t have all of the hits, and we shouldn’t expect too.

So -- but I don’t think what one takes away from this properly is that a particular approach, a particular mode had suddenly redefine the business I don’t believe that’s the case. And in fact to the contrary I think if one change in one’s business to follow other people’s big hits you constantly be playing catch-up and to say that you wouldn’t be in second place is an understatement you might remain in last place. So it's our job always to innovate and more often than not that has driven our success.

[Brian Nowak, Morgan Stanley]

Great, very helpful. Thank you.

[Operator]

Our next question is with Ben Schachter with the Macquarie Group. Please proceed with your questions.

[Ben Schachter, the Macquarie Group]

Yes, a few questions. On Red Dead, should we expect that consumers will be able to access and purchase extra content immediately after release or it will take time for that to evolve? And on the NBA, Lainie I think you said we should expect growth from in FY2019. So what gives you the confidence that we should expect growth and what happened in the March quarter that drove the underperformance?

And then also just on the NBA on the league, anything that you can say that would sort of different or unexpected during the launch period? And sorry one more Lainie just in terms of amortizing the capital cost for Red Dead given how successful GTA has been over the long-term? Should we capitalize those costs over longer period of time for Red Dead than we’ve seen historically? Thanks.

[Strauss Zelnick, Chairman and CEO]

So, Lainie why don't you take the last question first and then I'll dive in.

[Lainie Goldstein, CFO]

So we usually share on a title-by-title case amortization. But you can -- if you think about Blockbuster titles and how Grand Theft Auto has performed, it would be something that we would look at in terms of how long we would amortize the title over. And we usually look at what are estimated life of that title is going to be?

[Strauss Zelnick, Chairman and CEO]

And then on Red Dead, obviously Rockstar will give clarity on content drops and the like in due time. We're very excited about the October 26 release. Everyone who has experienced the trailers also excited. And obviously Rockstar will make further announcements in due time.

In terms of NBA and recurrent consumer spending in the fourth quarter, we think there were many number of factors that affected the level of monetization of the title and visual concepts has plans to address those factors in NBA 2K19. We think fiscal 2019 will be another year of growth for NBA 2K, including both unit sales and recurrent consumer spending.

So our view is look, we always have to get better, we pay attention to what the consumer says. We've had an amazing year for our basketball franchise, just amazing. And we expect it to get even better.

[Operator]

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

[Ray Stochel, Consumer Edge Research]

Great, thanks for taking my question. Could you talk about the nature of the 2K property delay and anything that you could say to give us some confidence in that title after this delay? Of course any quantification would be helpful. And then also under the 2K label, can you talk about all the changes that are happening at Hanger 13 and what are your thoughts on that studio going forward? Thanks.

[Karl Slatoff, President]

So in regards to the 2K title. It’s simply because it needs more time for development at this point. And in terms of confidence level, when it's going to come out? We are highly confident that this title will certainly becoming out in fiscal year 2020, which is what we’ve said in our statements today. So our confidence levels are very high.

In terms of Hanger 13, Hanger 13 is a long standing studio for us, very talented group of folks. We are constantly spending time figuring out where best to put our resources on which project and I see what you're seeing there is a reflection of that specifically. We're moving assets around from game-to-game all the time and the movement that you're seeing is a reflection of just our view on where the best place to deploy our assets are.

[Operator]

Our next question is with Gerrick Johnson with BMO Capital Markets. Please proceed with your question.

[Gerrick Johnson, BMO Capital Markets]

Great, thank you. In your 2019 guidance are you planning any marketing spend in 4Q for the 2K new title release. And then also on the NBA 2K League it is Twitch paying for streaming rights, and if so can you discuss some numbers there? Thank you.

[Lainie Goldstein, CFO]

So for marketing, we do expect have some marketing and for the 2K release for our fiscal year 2020.

[Strauss Zelnick, Chairman and CEO]

And with regard to e-league our media rights are valuable. And so it's appropriate to assume that there is an economic cost to media rights. However, we're not talking about giving any specific on specific media or sponsorship deals for the league.

[Gerrick Johnson, BMO Capital Markets]

And Lainie, you cut out I didn’t hear the first part of your answer on the margin spend.

[Lainie Goldstein, CFO]

Sorry. So for the margin spend for the 2K release, we do expect to have some marketing in this fiscal year for the title’s release next year.

[Gerrick Johnson, BMO Capital Markets]

Great, thank you.

[Operator]

Our next question is with Ryan Gee with Barclays. Please proceed with your question.

[Ryan Gee, Barclays]

Yes, good afternoon, thank you for taking my questions. A quick question for Lainie I think in your guidance [technical difficulty] 200 basis points year-over-year, low 20s that sounds from a midpoint of this year. So I was hoping you can maybe update us on the way you’re thinking about the potential margins are for your company?

[Strauss Zelnick, Chairman and CEO]

Ryan, we can’t hear you.

[Lainie Goldstein, CFO]

You’re breaking out.

[Ryan Gee, Barclays]

Okay, sorry. A question for Lainie specifically on the online margin, it looks the guidance is for down 200 basis points year-over-year and I was hoping if you could just give us an update on what you think for the company the potential long-term operating margins are for you maybe sort of timeframe or some milestones that you are thinking about achieving that?

And then a quick follow-up the NBA 2K franchise, you mentioned the new NBA 2K Online 2 and kind of a Tencent anything you can tell us how that has significant original NBA 2K Online is there for you guys financially? And then once that does come out, what are your expectations around that? Thanks.

[Lainie Goldstein, CFO]

Ryan, our margins we did talk about that for this fiscal year be slightly down, since we have a big release. So there is higher software development costs of marketing associated with the title. But we expect our margins to expand over the long-term and on a year-by-year basis, they are going to vary based on our release schedule.

[Strauss Zelnick, Chairman and CEO]

And in terms of the NBA 2K franchise, we have very high hopes for the NBA 2K Online 2 title, where we’re obviously in business with Tencent they’re a phenomenal partner it’s a great market, NBA 2K Online has been the number one PC online sports title for some time. We have 37 million registered users, so we’re phenomenally excited about the upcoming release. It’s in close beta now it’s planned for commercial release in the fall so stay tuned.

[Operator]

Our next question is with Andrew Uerkwitz with Oppenheimer. Please proceed with your question.

[Andrew Uerkwitz, Oppenheimer]

Hey, thanks for taking my question. Strauss, I appreciate your comments regarding Fortnite and your strategy around developing new games. But if you take a look at Fortnite, and some of the other titles have come out over the past couple of years. It seems that there has been an exception of the market around casual gamers and getting casual gamers to play more and potentially spend more. And it seems like the Rockstar titles 10 to focus more on the harder core players. Has some of these recent titles shape the way you have developed or think about developing games for a broader audience along those lines at all?

[Strauss Zelnick, Chairman and CEO]

I think the explosion -- I am not sure casual is the right term, because I am not sure people will call Fortnite a casual title, but I do think what you’re alluding to is right, and that the free to play revolution if you will, whether that’s mobile or fixed, has been transform so the business it’s massively increased the size of the business. And we’re in the free to play business, whether it’s a mobile platform or fixed platform.

We’re in that business in China, we’re in that business at 2K, we’re in that business with Social Point. And you’re right, it’s huge growth business what we liked about it is some free to play games, some particularly free to play mobile games speak more to an older demographics, some speak more to a female demographic. There are a lot of people who believe that Fortnite has welcomed into our industry people who didn’t previously play video games.

Some of that’s anecdotal, it’s hard to know, but I think that’s right. So this is all good news and it is news that is not lost on us hence the Social Point acquisition and our emphasis on free to play titles as we grow our core business. That said, what has historically been our stock in trade the highest quality console games, deep immersive many hour experiences that are available to premium price, remains a terribly important business.

And while I think hardcore gamers are excited about both Rockstar and 2K bring to bear, it’s worth noting and forgive me for maybe being modest about it on behalf of our company and Rockstar Games. But Grand Theft Auto has sold in over 95 million unites and according to others apart from us, it's the highest growth and most profitable entertainment product ever made of any sort.

So it's not only exciting to a small core, it’s exciting to a very, very broad audience. And I think what Rockstar Games has unequally shown the ability to do is to make the title easy to approach and difficult to master. You can approach Grand Theft Auto and Grand Theft Auto Online in any number of ways. And if you are a hardcore gamer, you can find it supper compelling and if you are somewhat more casual you can find the experience super compelling and there is so much there now, you can very much define your own experience and create that for many, many hours of wonderful entertainment.

And I think that that approach to the entertainment business ever becomes antique I do not I think that's the nature of the entertainment business. So, just sort of saying it’s like in a multiple choice test all of the above. And that's how we view our obligations around here. We need to do where the audience is, that's one of the reasons that we did the Social Point acquisition, that's the reason that we started private division group, which will bring independent titles there, we hope meeting another audience need, that's why we acquire Kerbal Space Program. And that’s why we find ourselves in the position that we're in today, with an incredibly strong balance sheet on the one hand and then incredibly strong creative team on the other.

[Andrew Uerkwitz, Oppenheimer]

Got it, thank you so much.

[Operator]

Our next question is with Brandon Ross with BTIG. Please proceed with your question.

[Brandon Ross, BTIG]

Hi, thanks for taking the questions. A couple, another one of the margin side, can you get a little more granular on the percent of or give us any more color on the percent of amortization you expect to take on Red Dead this year on a non-GAAP basis? And then just a -- maybe is undergoing a pretty massive consolidation wave right now and the video game publishers have not participated to-date in that. Why do you think that days as you expect that to change in the coming months or years? Thanks.

[Lainie Goldstein, CFO]

So, on the margin for the amortization of Red Dead, as I said we don't give that out on a title by title basis, but if you think about larger titles and what the lifetime potential of them are and how long they would spread out that’s the best way for you to take a look at that.

[Strauss Zelnick, Chairman and CEO]

And on the consolidation point, I think the consolidations you are seeing we are expecting in traditional so called traditional media businesses has been driven by lack of growth frankly. And a need to create scale, reduce costs, find cost synergies and like. And that -- I think that just doesn't apply to such a high growth business the one we find ourselves in and our competitors just find ourselves.

Historically the media and entertainment businesses are tend to consolidate are the ones where a massive portion of your revenue was driven by catalog, that's already amortized and doesn't cost there much too continue to create value. And in our business because of technological change and the importance of frontline releases, catalog is still relatively small part of the business compare to other mature entertainment businesses.

I think you'll start potentially seeing consolation if and when we reach a technological ascent or and therefore if and when catalog creeps well over 50% year-in year-out including big front-line release years. Now we perform particularly well on catalog, so our numbers are necessarily reflective of the industry as a whole, but I think the point stands.

The other piece is in a business that is front-line driven, I mean, if you do consolidate you are potentially arguing that you are in a much bigger exposure front-line shelf space whether that's digital or physical that maybe realistic to assume. And of course the day after you close you still have to invest in front-line production and front-line marketing which is costly.

So I think as I said, I think you would look for entertainment consolidation as businesses mature and they’re either not growing, flat or even potentially declining and none of that describes the interactive entertainment business.

[Brandon Ross, BTIG]

Do you think there is any merit whatsoever to putting together traditional media assets with video game publisher?

[Strauss Zelnick, Chairman and CEO]

Potentially although so far we haven’t seen it, but I definitely would have thought so. I think years ago I said I expected such consolidation and it didn’t materialize rather and the facts force me to change my outlook. I think when you look at the quality of the intellectual property created and owned by ourselves and some of our competitors, it’s hard to imagine that there wouldn’t be opportunities in other forms of entertainment and indeed some of our competitors they have entered forms.

So if it make sense to enter other forms of entertainment at which some traditional media companies are already expert you would imagine that that kind of consolidation could have some industrial logic. But I would observe that not only has it not occurred, but that some legacy entertainment companies have in fact exited interactive entertainment of late.

[Brandon Ross, BTIG]

Thank you.

[Operator]

Our next question is with Doug Creutz with Cowen. Please proceed with your question.

[Doug Creutz, Cowen & Company]

Thanks. You mentioned that you had four major GTA Online contain updates in last fiscal year, I was just wondering if you could talk about kind of how you are thinking about the contain pipeline shaping up for the next fiscal year, can you match that kind of cadence? And I think in the past several years you typically had started that you are assuming GTA Online would be down year-over-year, did you build that kind of conservatism into your guidance as well this year? Thanks.

[Strauss Zelnick, Chairman and CEO]

Yes, in terms of our contain updates, Rockstar Games has said that much more content is coming for Grand Theft Auto Online and obviously they intent to continue supporting the title. And yes, our guidance does reflect an expectation that the results will moderate this year.

[Doug Creutz, Cowen & Company]

Thank you.

[Operator]

Our next question is with Stephen Ju with Credit Suisse. Please proceed with your question.

[Stephen Ju, Credit Suisse]

Thanks. Strauss the 2K or Tencent had all the development of NBA 2K Online 2, and consequently who will be handling the distribution of title, this title outside of the Chinese market? I mean, presumably you may have plans to release the game in non-console territories.

And secondarily, I mean there is obviously now hits from studios not affiliated with yourself or some of your publisher peers, so they said there are content studios and IP out there that you may think about acquiring and brining in-house, but deals seem to be pretty few and far in between so has the M&A environment become more difficult? Thanks.

[Strauss Zelnick, Chairman and CEO]

Thanks for your questions. With regard to the development of NBA 2K Online with Tencent, that’s obviously an arrangement between Tencent and 2K and both companies are actively involved in bringing that title to market Social Point is not involved with bringing that title to market.

With regards to potential acquisitions, we acquired the Kerbal Space Program, intellectual property we are continuing to develop and release around that title we said when we acquired Social Point and over the years that we have made numerous other selective acquisition typically when we can acquire intellectual property and a team that goes along with it.

I don’t think the environment is any more challenging than it’s been, I think it’s been challenging for quite some time because this has been a growth business for quite some time. And there have been some hefty multiples paid I think we feel that our discipline has really paid off there are a few things that occurred that we feel like we miss the boat on, but precious few and we much more often indulge the bullet than miss the boat.

[Stephen Ju, Credit Suisse]

Thank you.

[Operator]

Our next question is with Mike Hickey with Benchmark. Please proceed with your question.

[Mike Hickey, The Benchmark Company]

Hey guys, thanks for taking my question, congrats on another strong quarter. Curious still I guess a bit far away here, but there has been some speculation that may have a new console from play station in 2020 obviously that’s now something that you can talk to, but think anyway but I am just curious sort of your perspective on what it means to sort to have still sort of a consoles cycle type opportunity or challenge.

And also wondering how you release GTA 5 at the end of the prior cycle and were obviously very strategic and optimistic to release the current Gen shortly thereafter. So, how you think about that sort of strategic opportunity potentially comings into maybe a new play station box in 2020? Thanks guys.

[Strauss Zelnick, Chairman and CEO]

Well thanks, Mike. Always nice to hear from you. As you'd imagine, I think you know this already we don't -- we wouldn't have any ability to comment on another company's plans. You’ll ask them about that. I think we've navigated transitions and consoles and console releases and other platform releases pretty well around here since we showed up roughly 11 years ago. We're actually really proud of that, because historically as you know during a transition period, the challenges can be very significant if you bet wrong in terms of what you're up to whether that’s supporting something new or supporting something old.

But again what's driven that is less corporate cleverness and much more that our labels create the highest quality of properties that defy normal behavior in console transition period. So the last transition period for example was a lot noise in the marketplace about how challenging it was for catalog products. And this is going back sometime, but you've been in the industry a long side. So you'll remember this as I do. And we weren't challenged in the least we did exceedingly well why because I believe quality of our catalog was so high and is so high. And that's why for example our catalog sells more per skew than I think any other company in the business.

So I think because we have a limited number the highest quality releases, because our titles tend to do well as catalog titles transition period creates somewhat less risk for us. We're not dealing with massive tonnage of skews that we have to make decisions about. And because our titles are typically very, very high quality they can continue to perform as new platforms are released.

So obviously Grand Theft Auto 5 was developed for the last generation and yet it remains the standard there for this generation, which is extraordinary. And something that we are grateful to Rockstar for and incredibly proud of. So in the event that there are new platforms we will make decisions about what to support based on our view of potential success.

I would observe that the PC platform has become a very, very important part of what we do driven by digital distribution. And that was not the case for so called console titles 10 years ago. And it is the case now. Does that mean that the business is flattening out and everything become open and we don't care what brand is on the box not the least, I wouldn't rule out the possibility of more generations. However, it does get us closer to a point where we truly can be platform agnostic as an industry. And I would say we are not there yet, but that day will come.

[Mike Hickey, The Benchmark Company]

Thank you so much. Good luck guys.

[Operator]

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

[Strauss Zelnick, Chairman and CEO]

Well we’ve kept you all long enough. We're really proud of our results, we're grateful to our creative colleagues who drive these results. We're grateful to our business colleagues who keep the trains running on time. We’re grateful to our marketing and distribution colleagues who we believe are the best in the business. This company has a wonderful culture and enjoys terrific results on a consistent basis. We're proud of that and for those of you attending the call today our shareholders and those who follow us thanks so much for your support and interest.

[Operator]

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