Take-Two Interactive Software Inc (TTWO) — Q4 2017 Transcript

Good morning. Welcome, and thank you for joining Take-Two's conference call to discuss its results for the fourth quarter and fiscal year 2017 ended March 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 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. I'd also like to note that, unless otherwise stated, 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.

Thanks, Hank. Good morning, and thank you for joining us today. Before we begin, all of us here at Take-Two, all around the world, want to acknowledge and express our sympathy in the wake of these terrible and tragic attacks in Manchester. It's terribly sad that at an entertainment event, where people went to be pleased and delighted, that this terrible thing occurred, and we're deeply saddened by it, and obviously, it puts into context the conversations we're having today. So with that said, we'll turn our attention to business. Consumer demand for our offerings remained exceedingly strong in the fourth quarter, finishing off another outstanding year for our organization. During fiscal 2017, we delivered bookings that significantly exceeded our expectations, along with revenue growth and margin expansion. These results were driven by the continued extraordinary performance of Grand Theft Auto V and Grand Theft Auto Online, a diverse array of titles from 2K and record digitally delivered revenue and bookings, including our highest-ever from recurrent consumer spending. Our business performance converted into substantial cash provided by our operating activities, which grew 27% to $331 million. We invested our capital to grow and diversify our business further, including acquiring Social Point, a leading free-to-play mobile game developer. As of March 31, 2017, we had $1.4 billion in cash and short-term investments. Grand Theft Auto V and Grand Theft Auto Online outperformed our expectations during the fourth quarter as they have in every period since their release. Grand Theft Auto V remains our industry's standard bearer for creative excellence and the highest-rated game of the current console generation, with sales now surpassing 80 million units. The title continues to attract and delight new audiences, especially as the install base of PlayStation 4 and Xbox One expands further. In addition, Grand Theft Auto Online again delivered year-over-year bookings growth in the fourth quarter, substantially exceeding our expectations and was the single largest contributor to recurrent consumer spending. Rockstar Games has driven sustained engagement through the ongoing release of a wide array of additional content. Most recently, the Cunning Stunts: Special Vehicle Circuit update, followed by the Land Grab and Tiny Racers modes. In total, Rockstar Games released 12 significant updates during fiscal 2017, coupled with a regular weekly schedule of new content offerings and more planned going forward. It's a remarkable achievement that recurrent consumer spending on Grand Theft Auto Online has grown every year since its release and reached record levels in fiscal 2017 more than three years after its initial launch. Our results also benefited from 2K's robust holiday lineup. NBA 2K17 remains the top-rated sports game of the current console generation and is poised to become our highest-selling sports title ever, with sales to date of nearly 8 million units. Engagement with and recurrent consumer spending on our industry-leading basketball series continues to grow, with over 2 billion games of NBA 2K17 played on PlayStation 4 and Xbox One, up 16% over NBA 2K16. More than 1.3 billion of these games were multiplayer, a 40% increase, and the average time consumers spent playing multiplayer games increased by nearly 30%. This remarkably strong engagement helps to drive record recurrent consumer spending on NBA 2K, which grew 71% during fiscal 2017. Furthermore, we're thrilled to broaden our industry-leading basketball brand and expand our footprint in the evolving world of competitive gaming, with the upcoming launch of the NBA 2K eSports league, which Karl will discuss in more detail. Mafia III was praised by the media and consumers alike for setting new creative benchmarks through its deep storytelling, diverse characters, and authentic period setting. The title's being supported with downloadable content, including a Season Pass that delivers three narrative-focused experiences, which expand the world of New Bordeaux with thrilling new storylines alongside characters, both familiar and new. Mafia III's add-on content also brings fresh new locations to explore, gameplay mechanics, weapons, vehicles, outfits, and activities. We're proud of Hangar 13's inaugural release, which is now sold in more than 5 million units. WWE 2K17 continued to build on the success of our popular sports entertainment series and is sold in approximately 3 million units today. Developed collaboratively by Yuke's and Visual Concepts, WWE 2K17 is being supported with downloadable add-on content, including a Season Pass. We believe there remains a substantial long-term growth opportunity for the WWE 2K series by further leveraging the development and marketing talent of 2K and Visual Concepts, which are responsible for the tremendous success of NBA 2K. Sid Meier's Civilization received stellar reviews and is the fastest-selling title in the history of the series, with sales to date of nearly 2 million units. The robust post-launch content for Civilization VI includes the Australia Civilization & Scenario Pack and the Persia and Macedon Civilization & Scenario Pack. In addition, two more civilization & scenario packs will be added automatically for owners of the Civilization VI - Digital Deluxe edition at no extra cost. We're immensely grateful to Sid and the team at Firaxis Games, who captivated audiences for more than 25 years and continue to raise the bar for this beloved strategy series, which is sold in more than 40 million units worldwide. In addition, several other releases within catalog titles contributed to our fiscal 2017 results, including NBA 2K16, BioShock: The Collection, and XCOM 2. We continue to benefit from our industry's ongoing transition to digital distribution. In fiscal 2017, we delivered record digitally delivered revenues and bookings, driven by growth in both full-game downloads and recurrent consumer spending. Recurrent consumer spending grew 52% to its highest level ever and accounted for 57% of digitally delivered bookings or nearly one-third of total bookings. In addition to record sales of virtual currency for Grand Theft Auto Online and NBA 2K, recurrent consumer spending was enhanced by a variety of other offerings. Starting with the free-to-play category, WWE SuperCard delivered its best year ever, with bookings up more than 70% and total downloads now exceeding 14 million. During fiscal 2017, we released three updates for the title that significantly enhanced this popular card game. NBA 2K online, which remains the number one PC online sports game in China, with approximately 35 million registered users, also enjoyed record results, including strong double-digit bookings growth. Social Point, which we acquired in January, is already outperforming our expectations. Bookings from its two biggest games, Dragon City and Monster Legends, grew in the fourth quarter, and daily average revenue per user increased nearly 30%. We expect this acquisition to be a significant contributor to recurrent consumer spending in fiscal 2018 and a meaningful growth opportunity over the long term. In the downloadable add-on content category, bookings grew substantially, led by our offerings for Sid Meier's Civilization, WWE 2K, and XCOM 2. As announced yesterday, Rockstar Games has decided to move the release of Red Dead Redemption 2 to spring 2018. Red Dead Redemption 2 will be their first game created from the ground up for the latest generational console hardware, and some extra time is necessary to ensure the best experience possible. Thus, decisions are not made lightly and are driven by our team's unwavering commitment to unparalleled quality. That said, we still expect fiscal 2018 to be a year of strong earnings and cash provided by our operating activities for Take-Two, despite an unusually light release slate. Our ability to project significant profits with a lineup that solely includes new frontline releases of our annual sports entertainment titles reflects the strength of our robust catalog led by Grand Theft Auto and a substantial contribution we now receive from recurrent consumer spending. While we still have many opportunities to make our release slate and results more consistent over time, our enterprise has been transformed into a significantly higher margin business than at any time in its history. Looking ahead to fiscal 2019, we expect to deliver both record net sales and record net cash provided by operating activities led by the launches of Rockstar Games' Red Dead Redemption 2 and a highly anticipated new title from one of 2K's biggest franchises. As the audience for interactive entertainment continues to grow and our industry leverages new technologies, Take-Two is benefiting from these positive trends in numerous ways. Whether a broader canvas on which we can create groundbreaking entertainment or digital distribution channels, new business models, and emerging platforms that are expanding the way consumers experience our games, there's never been a more exciting time for our company and our industry. Take-Two is superbly positioned to capitalize on all these opportunities creatively, operationally, and financially, and continue to deliver value to our customers and returns for our shareholders over the long term. I'll now turn the call over to Karl.

Thanks, Strauss. I'd like to begin by congratulating our teams on delivering a very strong fourth quarter and another exceptional year for Take-Two. Our fiscal 2017 results reflect our company's ability to deliver the highest quality entertainment experiences across a variety of genres, platforms, and distribution channels. Moreover, we continue to find new and innovative ways to increase our audiences' engagement with our renowned brands. It is our teams' creative vision and tireless dedication to excellence that drives our success, and they continue to set new benchmarks for groundbreaking entertainment that captivates players around the world. I'll now discuss our recent strategic accomplishment: the formation of the NBA 2K eSports league. The emergence of competitive gaming as a spectator sport represents an incredibly exciting opportunity for both our industry and Take-Two. According to research firm Newzoo, the audience for competitive gaming has grown to over 250 million people, nearly half of which are avid viewers that watch major international events. In addition, the financial opportunity is substantial, as the competitive gaming market is expected to reach $1.1 billion by 2019. While our initial forays into this space were tournaments for NBA 2K16 and 17 that were designed to benefit marketing and the brand, we believe that with the right partner, competitive gaming could be a direct driver of revenues and profits for our company over the long term. To that end, we were thrilled to announce in February an exciting joint venture with the NBA to create and launch the NBA 2K eSports league. This partnership builds upon the success of our NBA 2K brand and relationship with the NBA to bring together the best basketball gamers in the world, marking the first official competitive gaming league that is jointly owned by a U.S. professional sports league. The NBA 2K eSports league will launch in 2018, and 17 out of the NBA's 30 teams will participate in the inaugural season. Teams will be comprised of professional eSports players, who will play NBA 2K as user-generated avatars in a 5-on-5 format. The teams will compete head-to-head throughout a regular season, which will culminate with bracketed playoffs and a championship matchup. We believe that the NBA 2K eSports league has long-term potential to generate significant revenues and profits through broadcasting rights, ticket sales, pay-per-view events, sponsorships, advertising, and merchandise, just like any other professional sports league. We recently announced the appointment of sports industry veteran and NBA executive Brendan Donohue as the league Managing Director, and we will have more updates to share about the league's progress in the coming months. Turning to our fiscal 2018 lineup. 2K and Visual Concepts are hard at work on NBA 2K18, the latest installment of our industry's perennial number one rated and number one selling basketball series. Earlier this month, 2K announced that 2016 Hall of Famer and 15-time NBA All-Star Shaquille O'Neal will be on the cover of this year's Legend Edition and Legend Edition Gold, which will retail for $99 and $149, respectively. NBA 2K18's Legend Editions follow the success of prior special editions and represent the franchise's increased focus on premium consumer offerings, with more virtual currency and digital items bundled together for maximum consumer value. These collections will include special Shaq-themed memorabilia and content, celebrating his legacy as one of the most dominant centers in NBA history. NBA 2K18 will be available on September 19 for PlayStation 4, PlayStation 3, Xbox One, Xbox 360, Nintendo Switch, and Windows PC. 2K will have more to share about the title, including announcing the cover athlete for the standard edition in the coming weeks. This fall, our popular simulation-based WWE series will return with WWE 2K18, featuring authentic hard-hitting action, fan-favorite game modes, match types, creation capabilities, and everything players have come to love from the series. WWE 2K18 looks to bring everyone closer to the in-ring action than ever before. In addition to our annual sports titles, we will have new downloadable add-on content for our recent frontline releases. Next week, Hangar 13 and 2K will launch Stones Unturned, the second of three story-driven add-ons for Mafia III. 2K will also soon reveal more about the third and final expansion, Sign of the Times, which is planned to release later this summer. And in the coming months, 2K and Firaxis Games will release two additional civilization & scenario packs for Sid Meier's Civilization VI and will introduce three new leaders representing civilizations from Africa and Southeast Asia. This content will be available automatically at no extra cost for purchasers of the Civilization VI - Digital Deluxe edition upon their release. Social Point is also hard at work on its robust development pipeline and has several exciting games planned for launch over the next two years. Next month, at E3 in Los Angeles, we'll have a corporate booth on the show floor. We will not be showing any new products, but we will be holding business development, investor relations, media, and sales meetings throughout the show. Looking beyond the current fiscal year, we have a strong development pipeline across both of our labels, which include new releases from popular series, along with groundbreaking new IP. We remain focused on delivering the highest quality titles and supporting them with digitally delivered offerings that provide additional value to consumers as well as drive engagement and recurrent consumer spending. Coupled with our emerging opportunities in competitive gaming, mobile, and geographic expansion, our potential for growth over the long term is better than ever.

Thanks, Karl, and good morning, everyone. Today, I'll discuss our fourth quarter and fiscal year 2017 results and then review our financial outlook for the first quarter and fiscal year 2018. Please note that additional details regarding our actual results and financial outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. As mentioned by Strauss, our fiscal fourth quarter provided a strong finish to another great year for Take-Two. Sales of our offerings exceeded our expectations due primarily to the continued outperformance of Grand Theft Auto V and Grand Theft Auto Online, total bookings growing 14% to $371 million in the fourth quarter. Of this amount, 72% was digitally delivered bookings, which grew 28% to $257 million as we continued to benefit from growth in recurrent consumer spending as well as our industry's ongoing transition to full-game downloads. While the performance of our business exceeded our expectations as reflected in our strong bookings and cash flow growth, this outperformance is not reflected in our GAAP results for two reasons. First, our bookings outperformance is driven by titles that we have acquired previously, and therefore, our revenues and profits won't benefit from these bookings until a future period. And second, because of the better-than-expected performance of Grand Theft Auto V and Grand Theft Auto Online, we recorded higher-than-forecasted internal royalties, which are calculated using results that are adjusted to exclude the impact of deferrals and unlike certain other costs of goods sold are not deferred. Turning to some details from our fourth quarter income statement. GAAP net revenue grew by 52%, to $572 million, and cost of goods sold increased 50% to $315 million. This growth was driven primarily by the recognition of previously deferred revenues and costs from Mafia III. Operating expenses increased by 18% to $145 million due primarily to higher stock-based compensation, legal, and IT expenses. And GAAP net income increased by 114% to $99 million, or $0.89 per share. For the full fiscal year, we delivered bookings in cash provided by operating activities that substantially exceeded the original outlook we gave last year. These results were driven primarily by the sustained outperformance of Grand Theft Auto V and Grand Theft Auto Online coupled with better-than-expected sales of NBA 2K and record recurrent consumer spending. Total bookings grew 19% to $1.8 billion, driven primarily by the launches of Mafia III and Sid Meier's Civilization VI, along with growth of bookings from NBA 2K and Grand Theft Auto Online. Of this amount, 55% were digitally delivered bookings, which grew 25% to a new record of $987 million. Our better-than-expected bookings converted into strong net cash provided by operating activities, which grew 27% to $331 million. We spent $21 million in capital expenditures, and we acquired Social Point for $175 million in cash, along with 1.5 million shares of Take-Two common stock. As of March 31, our cash and short-term investments balance was $1.4 billion. Turning to some details from our fiscal 2017 income statement. GAAP net revenue and cost of goods sold each grew 26% to $1.78 billion and $1.02 billion, respectively due primarily to the launches of Mafia III and Sid Meier's Civilization VI as well as the recognition of higher revenues and costs from the growth of NBA 2K. Operating expenses increased by 9% to $665 million due primarily to marketing expenses for fiscal 2017 release slate and Red Dead Redemption 2 as well as expense, professional fees, and stock-based compensation expense, partially offset by the absence of a business reorganization charge recorded in fiscal 2015. And GAAP net income increased to $67 million, or $0.72 per share, up from a net loss of $8 million, or $0.10 per share. As noted in our press release, starting with our financial outlook and results for fiscal first quarter 2018, we are replacing bookings with net sales as an operational metric. The company is making this change in order to increase transparency and to be consistent with the operational metrics provided by our peers. Net sales are defined as the net amount of products and services sold digitally or sold physically during the period. Unlike bookings, net sales includes licensing fees, merchandise, in-game advertising, strategy guides, and publisher incentives. Now I will review the highlights of our fiscal 2018 financial outlook. Further details are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. Starting with the fiscal first quarter. We expect net sales to range from $240 million to $290 million. The largest contributors are expected to be Grand Theft Auto V, Grand Theft Auto Online, NBA 2K17, and WWE 2K17. We expect GAAP net revenue to range from $390 million to $440 million and cost of goods sold to range from $147 million to $175 million. Operating expenses are expected to range from $160 million to $170 million. At the midpoint, this represents a 4% increase over last year, driven by the acquisition of Social Point. Now we expect GAAP net income to range from $74 million to $85 million, or $0.65 to $0.75 per share. Turning to our outlook for the full fiscal year. We expect net sales to range from $1.42 billion to $1.52 billion. This is expected to be down from fiscal 2017 due to fewer new releases and moderating sales from Grand Theft Auto V and Grand Theft Auto Online, partially offset by growth from our NBA 2K and WWE 2K series as well as the acquisition of Social Point. We expect digital to increase as percentage of net sales and to be down slightly on an absolute dollar basis. A slight decline in digitally delivered net sales is expected to be driven by lower full-game downloads due to a lighter release slate, which is expected to be largely offset by mid-single-digit growth in the recurrent consumer spending. The largest contributors in net sales are expected to be NBA 2K, Grand Theft Auto V, and Grand Theft Auto Online and WWE 2K18. We expect the net sales breakdown from our labels to be roughly 60% 2K, 34% Rockstar Games, and 6% Social Point. We expect our geographic net sales split to be about 65% United States and 35% international. We expect to generate approximately $150 million in net cash provided by operating activities, and we plan to deploy approximately $60 million for capital expenditures. We expect GAAP net revenue to range from $1.95 billion to $2.05 billion and cost of goods sold to range from $671 million to $712 million. GAAP net revenue is expected to increase due to the recognition of previously deferred revenues from Grand Theft Auto V and Grand Theft Auto Online as well as NBA 2K. GAAP cost of goods sold is expected to decrease primarily due to lower software development costs and lower internal royalties. Total operating expenses are expected to range from $720 million to $740 million. At the midpoint, this represents a 10% increase over the prior year, driven by the acquisition of Social Point. We expect net income to range from $504 million to $540 million, or $4.35 to $4.55 per share. In closing, our ability to deliver consistently, the highest quality interactive entertainment experiences balanced with a disciplined focus on operational excellence has enabled us to deliver growth in revenue, earnings, and cash flow in fiscal 2017. Fiscal 2018 is poised to be another strong year for Take-Two, despite an unusually light release slate. And fiscal 2019 promises to be one of our best years yet, with net sales and net cash provided by operating activities expected to exceed $2.5 billion and $700 million, respectively. Over the long term, our company is better positioned than ever to generate growth and margin expansion for our shareholders. Thank you.

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

I don't know what you can say around it, but I'm sure there can be various reasons for a game to be delayed, some good in the sense that you could be adding more content or other features, or it could be that there's something mechanically wrong with the game. Can you provide any context around what category this delay would fall into? And then secondly, as you said, recurrent consumer spend for GTA Online has grown every year since launch. Does the fiscal 2018 revenue guidance include that GTA Online specifically grows or declines year-over-year?

Mike, it's Strauss. I think the purpose of the delay for Red Dead Redemption 2 is to make sure that we deliver the most extraordinary experience we're capable of providing. We haven't gone into particular issues. We are building a new game from the ground up for the first time for new generation consoles, and the pressure that we put on ourselves to deliver excellence and to delight consumers is extraordinary. And we want to make sure that the appropriate time is taken to do the very best job we can, and I think that's what consumers expect of Rockstar Games, and that's what Rockstar Games typically delivers. So we support emphatically the label's decision, and we're utterly confident that it'll prove, in time, to be wise, first and foremost, creatively, artistically, and economically as well. And to your second question, Lainie will take that.

Our guidance assumes that GTA Online will moderate in fiscal year 2018. It did grow significantly in 2017, and we continue to support it. But since it's unlike anything else that we've ever had and we have very little visibility into how long it will continue this trend of growth, we've included it as moderating in this year's guidance.

I have two questions, one for Strauss and one for Lainie. Strauss, could you share how anticipation is building for the Red Dead launch and what signals you are tracking from the community that could indicate the potential success of this launch? Lainie, since you are moving Red Dead to fiscal '19, I'm curious if there are any costs related to Red Dead included in the fiscal '18 outlook, such as marketing expenses.

Yes, Tim, I appreciate it. It's not really my nature or our nature to claim victory before it occurs; more my nature to do the very best we can to delight consumers and then report the results. To say that we're highly confident about Red Dead Redemption 2 is an extraordinary understatement, but I'm not sure that really matters. In the fullness of time, the title will be released and consumers get to vote. There is no doubt that the engagement with the materials that we released was extraordinary, the screenshots are beautiful, the buzz is palpable and growing. But beyond that, Rockstar Games will talk about how the title is progressing and how consumers are responding in the fullness of time. It does fall into the category of how high is up. It is a highly anticipated title; that's an understatement. But it's our style to say, look, we do the very best we can and the results will speak for themselves.

And we are including marketing for Red Dead Redemption 2 in our fiscal year 2018 guidance. Since it's a spring release, we will certainly see some marketing for the title during the fiscal year.

So I want to go back to GTA Online. Talk about what Rockstar's plans are for content fiscal '18, if there's any change there given the timing of Red Dead 2. And then separately, on Social Point, can you remind us what the earn-outs are for calendar '17 and '18, what's embedded in guidance? And it looks like there's no new games planned for Social Point, but you follow the same protocol, rely on them to make the game announcements and then expound upon those with earnings calls.

Drew, it's Strauss. On GTA Online, we have said that plenty more content is coming. More announcements will be made by Rockstar Games. The title is absolutely being supported by the label. Consumers love it. It remains an enormous focus of everyone's attention. We remain very excited about it even though our financial results are expected to moderate. In terms of Red Dead Redemption 2 coming, that's unrelated to GTA Online, as I've said many times before; all entertainment from all enterprises competes with everyone and competes with no one. Entertainment stands on its own. No one ever needs another entertainment property. When there's nothing in the marketplace that excites us, we stay home. When there's plenty in the marketplace that excites us, we buy as much as we can afford. So I don't believe there's any connection between Grand Theft Auto Online and Red Dead Redemption 2. And certainly, here, at our enterprise, we're full steam ahead, supporting all of our successful properties and always trying to make more as we go along.

To address your question about the earn-out, the sellers are eligible to receive an earn-out. It's public information you can verify. Essentially, it amounts to 4.5 times every dollar of EBITDA generated by Social Point, above $32.5 million in 2017 and $38.5 million in 2018, with a maximum cap of $25.9 million. That's the structure of the earn-out. What was your other question about Social Point? I didn't catch that.

It seems you haven't announced any new games for fiscal '18. Is there a chance some will be released this year, or should we not expect anything for fiscal '18?

What we have said is that Social Point has got a pipeline of games that are coming out over the next couple of years. We'd not announced timing about when those games are. There are games in various stages of development and testing. It's a little bit of a different process than we thought with our other two labels just given the nature of the games themselves. It's more of an iterative development and release strategy. But rest assured, there are games in the pipeline over the next couple of years.

Okay. And Karl, just to go back to the first part of the question, the $32 million and $38 million, respectively, of EBITDA. Are you assuming that Social Point hit those thresholds as part of your guidance?

We're not commenting on where it fits.

When you look at your full-game digital downloads, where are you right now as you end fiscal '17? Like what percentage of your games are getting the full-game download versus what you are implying with your guidance for fiscal '19 and how you think that trend is progressing? Secondly, with regard to your statement about fiscal '19, the last time you guys generated $700 million of operating cash flow was the launch year for GTA 5, and you did $4.26 that year. I'm just curious, is that sort of like a good baseline to think about for EPS in fiscal '19?

Thanks, Eric, and I really appreciate the question. On full-game downloads, digital distribution is responsible for roughly 25% of our console sales and about 90% of our PC sales. For frontline and catalog, it's obviously greater. We expect that in our numbers to be roughly the same going forward. Strategically, however, over time, we think digital distribution grows as a percentage of total revenue. For fiscal '19, we're not commenting on EPS. I think we've given a good deal of visibility already.

Two questions. First, does the delay of Red Dead impact any of other Rockstar's other projects? And then secondly, could you help us frame the opportunity for NBA eSports relative to the current revenues that the franchise is generating? Like how would you think about the incremental revenue opportunity?

The decision to move the release of Red Dead Redemption 2 will not affect any of Rockstar Games' other activities. Regarding our eSports venture, we are really excited about it. We had a meeting yesterday with Brandan and the Commissioner during our regular catch-up, and we are thrilled with the progress being made. More details will be shared in the future, but we are not including this progress in our outlook. It's not due to a lack of optimism; it's just too early to quantify. We understand that if we do this right, there is a fantastic opportunity for the fans, and consequently, a significant economic opportunity. This is always how we approach things. Nonetheless, we have not included it in our outlook.

Any way of framing it, like three or five years out, like how you think about it?

It's tempting to express my views. I'm generally optimistic, while some of my colleagues here might be more pessimistic. However, I believe our opinions don't matter as much. Over the past ten years of managing this business, we’ve shown up every day, alongside our 3,400 colleagues, working hard to be the most creative, efficient, and innovative organization in entertainment. Sometimes we falter, and we own that, but more often, we succeed, which is evident in our results. We are focused on getting it right, and I am confident that if we do, the economic outcomes for the venture and our related games will be outstanding. That said, I wouldn't place too much weight on that. We're progressing toward our goals, which are shared collectively. As the first professional sport to establish a competitive gaming league, the excitement is tangible among our fans, teams in the NBA, and our partners at 2K and Take-Two. It’s our responsibility to turn this excitement into reality, and the financial success will follow.

Can you tell us how much of the growth in NBA 2K unit sales is coming from the U.S. versus international? And then the second question is something more broad. Does the ongoing success you're seeing in recurrent digital spend change your view in strategy with frontline title releases in any way?

So we don't break out international or domestic sales for NBA. However, international growth has been a big benefit for us. We are focused on it. We focus more on localization. We have local commentators. As the sport grows overseas, so does our game. And there's an enormous amount of ongoing opportunity. In terms of recurrent consumer spending, yes, we have said that as we look at future releases, all of them are built with an eye toward ongoing engagement. So this business used to be a business where we did our best to create this extraordinary experience, the experience was finished, we launched it into the market, the consumer voted, we went on to the next, and we had a catalog. And because the technology was constantly changing, we encapsulated limited value. All of that has now changed in reverse order. Catalog now has much more value. We have the highest-selling catalog per SKU, frankly, because we have the highest Metacritic scores, and our quality holds up over time. People want to play our games many, many years after the release. And equally, we can now look at a hit game and say, when you have a hit title, people want to stay engaged. So we have to plan ahead and say, are we going to have meaningful ongoing opportunities to engage? Each game is different. Each game looks at those meaningful opportunities through a different lens. It could be the lens of a multiplayer version online, virtual currency sales, a free-to-play title launched by Social Point, which has in-game purchases, NBA 2K online in China, which has in-game purchases, WWE SuperCard, which has in-game purchases, or downloadable add-on content, for which one pays. It could be free add-on content. Anything that delights consumers and keeps them engaged with our titles and our brands is good for them, and therefore, good for us. And we find that the monetization follows. We're definitely getting better at the data surrounding this. We're getting better at translating engagement into monetization. But at the risk of being repetitive for this company, first and foremost, we focus on the consumer, and the monetization follows.

Given that your catalog sales are growing and you're seeing more engagement with existing titles, could we consider releasing larger titles less frequently than we have in the past?

We stated a strategy not to annualize any titles apart from sports entertainment titles ten years ago, and the market has moved in our direction, has become more complex to deliver big titles and more difficult and more time-consuming to create A-plus quality, which is what the market demands. Our cadence isn't expected to change. And in certain instances, we hope that the time in between releases will actually decrease. I don't expect that the time length between releases will increase.

I guess this is going off of the last subject. But do you have any update on the digital strategy for Red Dead Redemption 2?

We've said that there will be an online component, and we'll leave the rest of that discussion to Rockstar Games.

Got it. And then quick bigger picture follow-up. How are you thinking now about your PC distribution strategy as you grow and increasingly become more relevant in the market? What are the pros and cons of owning your own platform?

We do have our own platform where consumers can buy directly from our store, but it's a small part of our business. In general, we believe consumers prefer to shop at places offering a variety of titles rather than being limited to a single company's products. We're happy to collaborate with our distribution partners, as that's typical in the entertainment industry. Our strategy, instead of trying to capture all the profit and sell directly, is to be a great and trusted partner to every possible storefront worldwide. We have always maintained that we want to be where the consumers are. The economics of our physical business involve sharing, and the same goes for our digital business. Naturally, we would like to increase the percentage of revenue we keep, but the key focus economically is the total revenue we generate. We believe that the best way to achieve that is through the widest possible distribution. Some of our competitors have placed a strong emphasis on direct distribution. While there are aspects of the free-to-play mobile business that resemble that, there is always someone to share with in that model. Therefore, we focus more on the revenue we generate and the availability of our products than on the percentage we have to share for distribution.

I have a few quick modeling questions for Lainie and then one for Strauss. Lainie, can you help us with the change in deferred revenues for FY '19? And also what's the tax rate we should be using for '18 and '19? And then also, in the initial guide for FY '19, what's the relative size of Red Dead vs. the 2K game discussed in the press release? And then, Strauss, can you discuss Rockstar's capacity to work on more than 2 franchises at one time? We obviously know they're working on Red Dead and continuing on GTA. Do they have enough resources to be working on other titles at the same time?

So regarding the change in deferred revenue for '19, we haven't provided any additional details beyond what we expect for net sales and cash from operations. For our tax rate in '18, we are using 22% for management reporting. And for '19, we are not sharing any more information than what we have already disclosed.

And in terms, Ben, of Rockstar's capacity, yes, Rockstar and 2K, both have the capacity to work on a multiplicity of projects. There's attention, of course, that as we've shown an ability and a willingness to hire plenty of creative talent, the growth in our headcount over the past ten years has largely been creative headcount. There is attention in finding the best talent in the business. We've made no bones about that; it's true for our competitors who are only looking for the best and the brightest. That said, both 2K and Rockstar have the ability to work on a multiplicity of projects simultaneously. And the question for both of them is how do you direct your resources on the one hand to support something that's working mightily now, and on the other hand, to something that will, we hope, work mightily in the future. And that's a decision that is a challenging and complex one that one makes with limited information at every entertainment enterprise. But resources are our issue, and ambition isn't our issue. We have 11 extraordinary franchises that have each sold over 5 million units in individual releases. We have something like 55 that have sold at least 2 million in individual releases. That's pretty different state of play than just a few years ago with this enterprise. We think we have the best collection of owned intellectual property in the business. Our business is exploding in every area, whether that's sports entertainment, free-to-play, mobile, GTA Online, or the sale of GTA 5 itself, nearing 80 million units, and the list goes on. So the question for us is always, how do we reach a new height? And that's what we're focused on at 2K; that's what we're focused on at Rockstar; and certainly, that's what we're focused on at Social Point; and finally, at Take-Two.

Strauss, If I can just sneak one more in. Can you remind us how you think about excess cash in terms of one-time dividend, buyback? Just in general, your philosophy on what you do with excess cash.

I guess it is a natural question when we talked about what fiscal '18 looks like, generating about $150 million of cash flow from operations in fiscal '19 where the initial outlook sitting here today is $700 million of cash flow from operations. So it's a fair question, since we just reported $1.4 billion in cash, and we just spent $250 million on an acquisition a few months ago. I would observe these are high-class problems. We said over time that there are three areas in which to deploy capital. The first is to support organic growth. This company story has largely been an organic growth story. And we now have the ability to take measured risks when we believe there's a great opportunity for return, and that's worked out very well for us. Second, we've said we are now in a position, seriously, to consider accretive inorganic opportunities, and we're acting accordingly with the acquisition of Social Point. I think our view is many more opportunities will present themselves. What's our lens? We're highly disciplined strategically, we’re highly disciplined economically; we've said we would do deals when they're accretive. Social Point is immediately accretive to the cash flow from operations and soon will be accretive to revenues and earnings. We look through that lens. We're not interested in pie in the sky; we're not interested in talking about strategy and overpaying for something. We're certainly not interested in buying a money-losing enterprise. Finally, we've shown a willingness to return capital to our shareholders. We'll do buybacks when we can execute them at deep value in our view and in any scholarly view of merit. That's the only time it ever makes sense for an organization to do a buyback. We've done two, both at deep value, and with hindsight, of course, we didn't have hindsight when we made the decision. We will contemplate other forms of returning cash to shareholders. Right now, we still have a convertible bond that we have to take care of. That will clean up our balance sheet and leave us entirely debt-free. These are issues that we will continue to contemplate going forward, but that's how we look at the world. Specifically, just for transparency, hard for me to believe that a one-time dividend will make sense.

Chris Hum for Steven. Curious about the launch window for Red Dead. Is there something about this game that you feel would make it better for a summer launch versus launching in the winter? And kind of how your expectations have changed since we last talked?

Yes. For a title like this, I don't think the launch window really matters. Obviously, Red Dead Redemption went out in May and was an extraordinarily successful title. Consumers are consuming entertainment year-round; they don't stop in the summer months. We believe that if you give people an extraordinary experience, they will show up for it.

We just want to thank everyone for joining us today. Obviously, we’ve a lot going on here. Really pleased to report the results that are meaningfully ahead of our initial expectations. We're looking forward to a fiscal year that, despite a rather light frontline release schedule, looks incredibly sound economically. And naturally, we're all super excited about our upcoming release schedule and what that will bring in fiscal '19 and in the years beyond. Thank you so much for joining us today.