Take-Two Interactive Software Inc (TTWO) — Q1 2018 Transcript

Good afternoon. Welcome, and thank you for joining Take-Two's conference call to discuss its results for the first quarter of fiscal year 2018 ended June 30, 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 have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors. These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors. I'd also like to note that, unless otherwise stated, all numbers we will be discussing today are GAAP. And 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 afternoon, and thank you for joining us today. I'm pleased to report this fiscal 2018 is off to an excellent start, with our business' positive momentum continuing to exceed our expectations in the first quarter. Take-Two delivered growth in both net sales and net revenue as well as margin expansion. Grand Theft Auto V and Grand Theft Auto Online continued to outperform our expectations during the first quarter, nearly 4 years after their initial release. Grand Theft Auto V remains the highest-rated game of the current console generation and the must-have title for gamers on both console and PC. Grand Theft Auto Online delivered its best quarter ever, substantially exceeding our net sales expectations and was once again the single largest contributor to recurrent consumer spending. Rockstar Games has continued to drive sustained engagement and growth in recurring consumer spending through the ongoing release of free additional content, most recently the Dawn Raid, Overtime Rumble, and Power Mad updates. On the heels of the June 13 release of the substantial Gunrunning update, June and July successfully became our 2 biggest months ever for Grand Theft Auto Online monthly active users. And Rockstar Games will continue to support the game going forward. As a result of Grand Theft Auto Online's performance in the first quarter, we now expect the game to deliver net sales growth during fiscal 2018 and another consecutive year of record results. NBA 2K17 remains the top-rated sports game of the current console generation and is now our highest selling sports title ever with sales to date of more than 8.5 million units. In addition to robust demand for the game itself, net sales from our NBA 2K series continue to benefit from strong engagement and recurrent consumer spending. During the first quarter, recurrent consumer spending on NBA 2K once again exceeded our expectations and grew 64%. NBA 2K has been a tremendous success, and we believe that the series can continue to grow both unit sales and recurrent consumer spending for years to come. In addition, a number of other titles from our diverse portfolio contributed to our first quarter results, including Social Point's redeploying mobile titles, WWE 2K17 and WWE SuperCard, Mafia III, and Sid Meier's Civilization VI. Digitally delivered net sales exceeded our expectations in the first quarter, driven by growth in both recurrent consumer spending and full-game downloads. Recurrent consumer spending increased 71% and accounted for 58% of total net sales. In addition to virtual currency for Grand Theft Auto Online and NBA 2K, a variety of other offerings contributed to recurrent consumer spending. In the free-to-play category, Social Point continues to outperform our expectations, with net sales from its 2 biggest games, Dragon City and Monster Legends, growing double digits in the first quarter. We view Social Point as an important long-term growth opportunity for Take-Two. WWE SuperCard also continued to grow with net sales up more than 50% and total downloads now exceeding 15 million. And NBA 2K Online remains the #1 PC online sports game in China, with over 35 million registered users. Downloadable add-on content also contributed to the growth in recurrent consumer spending, led by offerings for Sid Meier's Civilization, Mafia III and WWE 2K17. We expect fiscal 2018 to be another strong year for Take-Two, and we've raised our outlook for net sales and net cash provided by operating activities. Looking ahead to fiscal 2019, we expect to deliver both record net sales and 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. Today, our industry is only just beginning to realize its vast potential. From the introduction of exciting new hardware platforms to the continued growth of digital distribution, we now have the ability to reach and captivate audiences like never before. In addition, the ways in which consumers engage with interactive entertainment are continuing to evolve, including through mobile devices and the fast-growing world of competitive gaming. Take-Two is exceedingly well positioned creatively, operationally and financially to capitalize on all of these opportunities and 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 providing an update on our recent strategic accomplishments and then review our lineup for fiscal 2018. In May, we further diversified our industry-leading portfolio of owned intellectual property through the acquisition of Kerbal Space Program, the critically acclaimed physics-based space simulation game. Created by independent developer Squad, Kerbal Space Program was originally released on PC in April 2015 and has sold over 2 million units to date. The title has been widely popular with critics and consumers alike, earning a Metacritic rating of 88 and a Steam user score of 97%. In Kerbal Space Program, players must build a space-worthy craft capable of flying its crew of lovable beings called Kerbals into space. Players who successfully launch their spacecraft can explore their planets, moons and solar system as well as share their unique creations and advice with a vibrant and growing online community. Kerbal Space Program is currently available solely through digital download for PC. The team at Squad will continue to provide support and ongoing development for the title through updates and additional content, including the previously announced Kerbal Space Program: Making History Expansion, which we will launch later this calendar year. Since completing the acquisition, sales of Kerbal Space Program outperformed their expectations. We view the brand as a new, long-term franchise that adds a well-respected and beloved IP to our portfolio as we continue to capitalize on opportunities across the independent development landscape. Turning to the exciting and growing world of eSports. Our team and the NBA remain hard at work on setting the foundation for the launch of the NBA 2K eSports league in 2018. This joint venture 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. We are thrilled to expand our presence in competitive gaming, and believe that the NBA 2K eSports league has a long-term potential to be a meaningful driver of profits for our company. I'll now discuss our fiscal 2018 lineup. On September 19, 2K and Visual Concepts will launch NBA 2K18, the latest installment of our industry's #1 rated and #1 selling basketball series. The title will be available for PlayStation 4, PlayStation 3, Xbox One, Xbox 360, Windows PC and will also be our first offering for the Nintendo Switch. This year, the Cleveland Cavaliers' Kyrie Irving will grace the cover of the NBA 2K18's Standard Edition, while the Toronto Raptors' DeMar DeRozan will be the game's first ever cover athlete specifically for the Canadian edition. In addition, 2016 Hall of Famer and 15-time NBA All-Star, Shaquille O'Neal, will be on the cover of the Legend Edition and Legend Edition Gold, which will retail for $99 and $149, respectively. Fans who pre-order the standard edition of NBA 2K18 at participating North American retail and online vendors will receive Early Tip-Off access, ensuring that they receive their copy and in-game bonuses 4 days early on September 15. On October 17, 2K, Visual Concepts, and Yuke's will launch WWE 2K18, the newest offering from our popular simulation-based WWE series for PlayStation 4 and Xbox One. The title will also be available this fall for the Nintendo Switch, marking the first time in 5 years that the series has been released for a Nintendo platform. WWE superstar, Seth Rollins, will be the game's cover athlete, and decorated Olympian, WWE Hall of Famer, and current Raw General Manager, Kurt Angle, will return to WWE in-ring action virtually for the first time in more than a decade as a bonus character for those who pre-ordered WWE 2K18 at participating retailers. In addition, 2K will celebrate the 15-year career of WWE superstar, John Cena with the limited worldwide release of the Cena Nuff Edition, which includes exclusive memorabilia and in-game content. WWE 2K18 will be supported with a series of post-launch downloadable content, including a Season Pass. On August 29, 2K and Firaxis Games will release XCOM 2: War of the Chosen. The expansion pack for the 2016 award-winning strategy title for Windows PC, PlayStation 4, and Xbox One. XCOM 2: War of the Chosen greatly expands upon XCOM 2's campaign and also includes new enemies, missions, environments, and increased depth of strategic gameplay. In the coming months, 2K and Firaxis Games will release an additional civilization and scenario packs for Sid Meier's Civilization VI, that will introduce 2 new leaders representing civilizations from Southeast Asia. This content will be available automatically at no extra cost for purchasers of the Civilization VI - Digital Deluxe edition. Social Point is also hard at work. It has a number of exciting games planned for launch over the next 2 years. Looking ahead, we have an exceptional development pipeline across our labels, including new releases from our popular series and groundbreaking original intellectual property. In addition, we remain focused on finding new and innovative ways to increase consumer engagement and drive recurrent consumer spending as well as enhance our growth through emerging platforms, business models, and geographies. The long-term opportunities for both our company and industry are more exciting than ever. I'll now turn the call over to Lainie.

Thanks, Karl, and good afternoon, everyone. Today, I'll discuss our first quarter results and then review our financial outlook for the second 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 first quarter provided an excellent start to the year. Sales of our offerings exceeded our expectations, due primarily to the continued outperformance of Grand Theft Auto V and Grand Theft Auto Online, as well as recurrent consumer spending on NBA 2K17. Total net sales grew 28% to $348 million. Of this amount, 81% were digitally delivered net sales, which grew 47% to $281 million as we continue to benefit from growth in recurrent consumer spending as well as our industry's ongoing transition to full-game downloads. While the operating performance of our business exceeded our expectations, this outperformance is not reflected in our GAAP results for 2 reasons. First, our better-than-expected net sales was driven by titles that we have acquired to defer, and therefore, our GAAP revenues and profits will not benefit from these sales until future periods. 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 first quarter income statement. GAAP net revenue grew by 34% to $480 million, and cost of goods sold increased by 2% to $195 million. Operating expenses increased by 9% to $173 million, due primarily to higher stock-based compensation, reorganization costs, and inclusion of Social Point, partially offset by lower marketing expense. And GAAP net income increased to $60 million, or $0.56 per share, up from a net loss of $39 million or $0.46 per share. In the first quarter, we recognized a $60 million GAAP tax benefit related to tax deductions from stock compensation expense. These additional tax deductions were due to the increase in our stock price from the date that stock was granted through the dates that it vested. Previously, these excess benefits were recorded in additional paid-in capital. The new accounting guidelines require that they now be recognized in income tax expense. This benefit had no effect on our management reporting tax rates, which is 22%. Now I will review the highlights of our fiscal 2018 financial outlook, starting with the fiscal second quarter. We expect net sales to range from $465 million to $550 million. At the midpoint, this represents a 2% growth versus the prior year. The largest contributor to net sales is expected to be NBA 2K18, along with Grand Theft Auto V and Grand Theft Auto Online. We expect GAAP net revenue to range from $400 million to $450 million, and cost of goods sold to range from $194 million to $222 million. Operating expenses are expected to range from $185 million to $195 million. At the midpoint, this represents a 14% increase over last year, driven by the inclusion of Social Point as well as higher R&D and stock compensation expenses. And we expect GAAP net income to range from $17 million to $27 million or $0.15 to $0.25 per share. Turning to our outlook for the full fiscal year. As a result of our better-than-expected first quarter operating results and improved forecast for the remainder of the year, we are increasing our outlook for both net sales and net cash provided by operating activities. We now expect net sales to range from $1.65 billion to $1.75 billion, up from our prior outlook of $1.42 billion to $1.52 billion. Net sales are expected to be down from fiscal 2017 due to fewer new releases and moderating sales from Grand Theft Auto V, partially offset by growth in sales from NBA 2K and Grand Theft Auto Online as well as the acquisition of Social Point. We now expect digitally delivered net sales to grow in the high single digits, driven by approximately 30% growth in the current category. The largest contributor to net sales is 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 label to be roughly 55% 2K, 39% Rockstar Games, and 6% Social Point and other. And we expect our geographic net sales split to be about 65% United States and 35% international. We now expect to generate approximately $200 million in net cash provided by operating activities, up from our prior outlook of approximately $150 million. And we plan to deploy approximately $60 million for capital expenditures. Although our operating performance is exceeding expectations and we are increasing our fiscal 2018 outlook, we are reducing our forecast for GAAP net revenue and net income. This is due to 2 factors. First, as a result of the continued success of Grand Theft Auto Online, we have determined that it is necessary to extend the life of Grand Theft Auto V and Grand Theft Auto Online for purposes of calculating deferrals. This change has no effect on our net sales, cash flow, or management reporting results, but it does extend the period over which we recognize GAAP net revenue. And second, because of this strong ongoing performance of Grand Theft Auto, we expect to report higher internal royalties, which unlike certain other costs of goods sold are not deferred. As a result, we now expect GAAP net revenues to range from $1.62 billion to $1.72 billion, and cost of goods sold to range from $732 million to $781 million. Total operating expenses are expected to range from $770 million to $790 million. At the midpoint, this represents a 17% increase over the prior year, driven by the inclusion of Social Point and higher R&D expenses. And we now expect GAAP net income to range from $112 million to $140 million or $1 to $1.25 per share. In closing, we are very pleased with the start to fiscal 2018, which is poised to be another strong year for our organization. And we believe that fiscal 2019 will be a record year for both net sales and net cash provided by operating activities, which are expected to exceed $2.5 billion and $700 million, respectively. Over the long term, Take-Two is well positioned to capitalize on our many exciting opportunities around the world, and to generate growth and margin expansion for our shareholders. Thank you. Now I'll turn the call back to Strauss.

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

I have a quick question about GTA Online. The first quarter was the best ever, but are you expecting declines in the second, third, and fourth quarters, or is it safe to say that this game continues to grow significantly each quarter? Also, could you share some numbers regarding the growth we're seeing in NBA 2K's digital sales?

I will begin with GTA Online, which has performed exceptionally well. In the first quarter, it exceeded our expectations. As we move into the second quarter, we anticipate it will also be better than last year. However, we expect a slight moderation in the third and fourth quarters. Overall, we anticipate an increase for the full year. As for the NBA information, we haven't disclosed that level of detail.

Okay. You can't give like a directional number, double digits or anything along that line.

Recurrent consumer spending, as we mentioned, was up 64%.

So by my math, you guys are increasing full year non-GAAP EPS outlook by around 30% to 41% from the outlook that you provided last quarter. So just given the relatively light release slate, it does seem like this growth is coming from recurrent consumer spending. And I know that Strauss spoke about how GTA Online should grow this year, given the record MAU levels in June and July, and obviously, NBA also sounds very strong. But I'd just love to hear your thoughts on what's driving this level of optimism around this non-GAAP EPS outlook?

So for the full year, we are looking at the increased outlook due to our Q1 beat and then our improved outlook for the reminder of the year, which is driven by the improved forecast for GTA 5, GTA Online and NBA 2K. And we also increased our marketing expense for certain titles, GTA Online and some of the rest of the titles that are in our pipeline.

I have 2 questions, if I could. First, as we're talking about here, GTA Online, obviously, continues to beat expectations. Just curious what, if anything, do you think could slow it down? Is there a reason to believe that the launch of Red Dead is actually maybe the largest threat to GTA Online engagement? And then second, you mentioned full-game downloads exceed expectations. Can you share what percent of current-gen sales or full-game downloads and what you would expect that to be by year-end?

I think 4 years after its initial release, we're immensely gratified that Grand Theft Auto V continues to sell, sold in more than 80 million units and that it looks like Grand Theft Auto Online will have another record year. Beyond that, we're not making any projections. However, we have observed that when Rockstar Games drops additional robust content, people are enthusiastic about playing the game and monetization follows appropriately. And that's kind of how we look at the world. In terms of the competitive landscape going forward, look, our view is that all entertainment titles compete against every other, possible use of your time. And they don't compete specifically against our games or anyone else's games. They compete against everything, against text messaging, going to the movies, reading a book, doing your work, whatever else can occupy your time. Entertainment is a nice to have, not a must-have. However, when there is more than one title in the marketplace that compels people, the market also expands to take advantage of it. So the marketplace can be competitive, but it's rarely directly competitive title, whether that's a title that comes out under the Take-Two umbrella or any of our competitors or anything else for that matter. That's sort of a roundabout way of saying, we're really looking forward to the release of Red Dead Redemption 2. We're really excited and enthusiastic, of course. We don't think that has anything to do at all with how Grand Theft Auto and Grand Theft Auto Online will perform.

Yes. For Q1, our full-game downloads for the new consoles were at 40%, which is higher than our usual rate because we focused heavily on our catalog titles during the quarter. However, for the full year, we anticipate it to be around 30%.

I have a couple of questions. I'm interested in understanding the online monthly active users for Grand Theft Auto in relation to new game sales. Do you anticipate that ratio changing significantly as you sell more units of GTA 5 and monitor your online user base? Will that ratio remain relatively stable? Additionally, is there still significant potential for growth in the online universe based on the game sales? Lastly, do you have any updates on Red Dead for next year? What insights are you gaining from GTA that might be applicable to the Red Dead online universe?

Yes. We haven't shared many statistics regarding the connection between purchases and users and how that has evolved, except to mention that we've reached another record and anticipate achieving a record result this fiscal year, which Lainie detailed. And, I'm sorry, what was your second question?

Just any update on Red Dead and how do you think about that online universe, given what's going on with GTA?

Yes. There are no updates apart from our enthusiasm about the release in spring of 2018. And what Rockstar Games has said is there will be an online component; no more details have been given. We've said as a company that our hope and expectation is that all of our significant releases offer consumers an opportunity to stay engaged after the initial release. And it's our belief that if you surprise, delight, and excite consumers, then monetization can't be far behind, and that's been our experience. Beyond that, we're not giving out any more details.

I have a few questions. Strauss, I would like to hear your overall thoughts on exclusive content for the different platforms. It appears that recently, there hasn't been much in terms of exclusives, but as app stores and possibly new services gain importance, do you think that will change? Additionally, regarding AR versus VR, I know you've expressed skepticism about the growth of virtual reality. So far it hasn't made much of an impact. I'm curious about your opinions on augmented reality. Lastly, just to clarify, I consider Borderlands to be a 2K title; is that correct? Or should I not think of it as a 2K title since it is developed by Gearbox?

Yes, Borderlands is a 2K title. It's published by 2K and developed by Gearbox. Regarding platform exclusivities, we don't prioritize that too much. Our main goal is to ensure that our products are available on as many platforms as possible. While there might be specific reasons for certain levels of exclusivity, we don't have a strategic focus on increasing or decreasing that in the future.

Ben, it's Strauss. When it comes to augmented reality versus virtual reality, they provide completely different user experiences. The concerns I have regarding virtual reality don't apply to augmented reality. You don't need to wear glasses or a headset to have an augmented reality experience, and you're not restricted to a specific location. The discomfort factor isn't necessarily present either. We've already witnessed a very successful augmented reality title with Pokemon GO. There's a lot to discuss about its trajectory, especially how it peaked relatively quickly, but I have no doubts about the potential for augmented reality. The key lies with the developers—are they passionate about an idea, and can they bring that idea to life in a spectacular, exciting, and compelling way? I believe there is significant opportunity, but it's yet to be seen if the technology itself will drive that opportunity. This entertainment industry is unique because it's a blend of technology and how that influences gameplay, characters, stories, and graphics. It's rare to have so many moving parts at any moment, and throughout the history of this industry, as one aspect advances, others tend to follow. Therefore, predicting what will excite consumers is quite challenging, and we don’t aim to forecast that from a corporate perspective. However, our 2,200 creative professionals are dedicated to this task, and our strategy revolves around being the most creative, innovative, and efficient. I think what you're discussing relates to innovation, and we're proud of the innovations that our creative teams are focused on daily. More will come, but I remain optimistic, especially about augmented reality technology.

The first question would be if there is any change to your initial 2019 outlook, given the increase in guidance for this year?

As I mentioned in my prepared remarks, we do not have a change. We are reiterating what we said last quarter, with net sales above $2.5 billion and cash from operations above $700 million.

Got it. And I think you may have mentioned some marketing timing being put back into this year. Is that a timing shift or just additional marketing for your properties that you're trying to take end users for? And then separately, how are you guys thinking about your mix of marketing, whether that be from social influencers, whether that be from retail or whether that be more media-related ad spots?

So the marketing expense being higher that I mentioned in our new outlook, that is additional marketing for some of our titles.

We are observing a shift in our marketing mix. This does not imply that we lack opportunities in traditional marketing avenues like television and outdoor advertising. In fact, we are identifying more ways to enhance our marketing efficiency. Social media offers a variety of new and intriguing opportunities. However, I would not characterize these changes as significantly impacting your models or expectations.

Yes, Strauss, I think you may have touched on this. I'm going to ask anyway. When you look at GTA Online and the record monthly active users in June and July, new content is clearly important and seems to be the case this quarter. I'm wondering how you balance new content with continued catalog sales. Both appear to be significant drivers, but you might expect catalog sales to slow over time. I have a quick follow-up.

One would expect that catalog sales would slow over time, certainly. And we also when we outlined our expectations for Grand Theft Auto Online for this fiscal year, we felt that sales would moderate, has not turned out to be the case in the first quarter. We're not expecting it to be the case in the second. But as Lainie said, we are expecting sales to moderate in the third and fourth quarters, would still yield a record year. And of course, we have to see how it pencils out. But yes, unit sales of the full game would normally decline over time.

Okay. Regarding GTA Online, considering the monetization structure, we are experiencing record performance and record monthly active users. Is the revenue primarily driven by the growth in the player base, or are there also improvements in the paid conversion rate or ARPU? Additionally, looking ahead to the medium to long term, where do you see the greatest opportunities for the game, in terms of geography or platform?

We're not giving out more color in terms of conversion and ARPPU or ARPU on the title except for the information that we already gave in terms of where the game is going. Rockstar Games has said that there is more content to come for Grand Theft Auto Online and we're excited about that, and I think consumers are too. Beyond that, in terms of where the title goes creatively or where any franchise goes creatively, as you know, Mike, we leave those discussions and announcements to our labels.

Yes. When I'm thinking about the size of the beat in the quarter and particularly in a quarter where you didn't have any new releases and where you were, I think, 7 weeks deep in the quarter when you gave guidance. I'm just trying to wrap my head around, was there something that just really inflected positively in the back half of the quarter that you didn't expect? Was it more a case of you expected things to sort of really slow down in the back half of the quarter and they didn't? And then if you could let us know what your catalog net sales were in the quarter, that would be helpful too?

So we did have a very successful release of the Gunrunning update in the quarter, and that generated a lot of enthusiasm and net sales reflected that enthusiasm. So I think you properly capture that. And in terms of your question regarding catalog, Lainie will take that one.

The catalog sales are about 94% in the quarter.

94% of the total?

Yes. So it was $326.2 million of net sales.

I was just curious, as you look ahead to Red Dead, is there any reason you think the geographic mix for that game would differ from what you're seeing with GTA or perhaps even the last Red Dead game from the previous launch?

I understand why you're posing the question given the theme. We had a great worldwide result with the Red Dead Redemption. We expect it'll have a similar geographical mix to any titles of that scale. We pride ourselves on our worldwide marketing and distribution organization. The international markets continue to develop for us and for our competitors. We're incredibly excited, for example, about what's going on in Asia, where there's a lot of growth. So no, we don't have any reason to believe that geographical mix will differ.

Strauss, can you share your initial expectations for the NBA eLeague? Is this a key factor in your confidence regarding next year's guidance for record sales, or is it not significant? Also, you mentioned that a few games are in development from Social Point and will be released in the next two years. Will any of this be included in the fiscal '18 guidance? Lastly, regarding Red Dead, is there any thought to making that game available on PC?

Let's clarify our excitement for the NBA eLeague in relation to our financial outlook, as we have not included any expected results from it. This doesn't indicate a lack of interest or enthusiasm, which we certainly have in abundance. Our approach is to avoid declaring success before it materializes. We work hard to develop our projects and only share the outcome afterward, honestly. We believe this is a significant opportunity with the NBA as a strong partner. Brandon is doing an excellent job assembling a team to take advantage of this opportunity. We have a schedule set for 2018, with 17 teams committed to participate. However, the business model in this space remains uncertain, as I've mentioned before. Currently, there is only one game in this area generating substantial revenue. We see a great opportunity ahead, but it's not yet something we can include in our financial results. Regarding the Social Point games in development, those are part of our outlook and, even though the deal is relatively new, they are performing significantly better than we anticipated, with net sales increasing by double digits this quarter.

And Red Dead on PC, Strauss, any update there?

Any updates about any of our titles will come from our labels.

So Strauss and Lainie, when the business was completely physical discs, you were in a position where you had to predict the number of units sold, but now you not only have to predict units, but you also have to predict consumer engagement and monetization. So where the business is now, is it inherently more predictable or unpredictable? As I guess, another way to ask the question is, as the cycle of new content drops, the rise in engagement and the monetization that follows, is that a pretty predictable business?

I actually don't think it's any more or less predictable. The uncertainties of creative businesses are well known to us all. When launching the next iteration of a beloved franchise, we generally get close to our projections based on the existing customer base and our past experiences with the franchise. One of the biggest advantages of transitioning to digital is that we don't face economic order quantity concerns. We don’t need to worry about how many units to produce, nor do we have to deal with overproduction or underproduction since a digital game is always available. Additionally, our catalog benefits greatly because titles that aren't selling well physically might not be on shelves, but they are always available in digital form. Furthermore, our margins, both in percentage and dollars, are higher with digital distribution. This situation presents mostly good news. Perhaps the only downside is that when you purchase a digital version of a game, you won’t have the option to trade in a used title later. From a consumer's perspective, this might make buying a new title seem more expensive. How do we address that? We weren't particularly impacted by used game sales because we take pride in offering the highest quality titles in the market; people generally don’t trade in our games. Therefore, from our company's perspective, the shift to digital, which we have no control over, is essential. We aim to meet consumers where they are and respond to their needs. Nevertheless, the move to digital distribution is undoubtedly beneficial for our company and for the industry as a whole.

Stephen, when it comes to engagement, which relates to recurring consumer spending, it doesn't necessarily affect our predictability. It's more about the product's lifespan and our ability to monetize more effectively and over a longer time. When we identify a hit and engagement levels are high, we anticipate better results for an extended period. So, it’s not really a question of predictability; it’s primarily about our monetization effectiveness.

Can you address two platform questions? How important is PC as a platform for your major titles moving forward compared to a few years ago?

The answer really depends on the specific title. Some titles, like Civilization and XCOM, are heavily weighted towards PC, while others are less so. Therefore, it's assessed on a title-by-title basis. The good news is that the PC market is very strong for us. It's a significant and core market with highly engaged consumers. It's mainly a digital market, which reduces friction for ongoing consumer engagement. For our company, the PC market is crucial, exciting, and a key area of focus.

Okay. And then secondarily, obviously, you're supporting the Switch. Can you maybe just give us an idea of how your perspective on that platform has evolved over the past, call it, 6 months and where you see its potential?

We were excited six months ago and supportive, and we are excited now. We have NBA 2K and WWE 2K coming for Switch. The sales have been great, and we expect them to continue to be great. We're very optimistic about the platform and supportive of Nintendo. The only thing that's changed in the last six months is that our initial belief has been reinforced by the early strong results.

Thank you all for joining us. Thanks for your questions. Really appreciate it. We're really pleased with and proud of the results from the quarter, and as always, we appreciate your attention and your support. Thank you very much.