Take-Two Interactive Software Inc (TTWO) — Q2 2018 Transcript

Good afternoon. Welcome, and thank you for joining Take-Two's conference call to discuss its results for the second quarter of fiscal year 2018 ended September 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 note that, as previously announced, we have changed the name of our operational metric from net sales to net bookings. Our definition of net bookings is identical to our previous definition of net sales. I'd also 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 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 that our positive momentum continued in the second quarter, enabling Take-Two to deliver another period of better-than-expected operating results. The extraordinary performance of our business is driven by growth from both Grand Theft Auto Online and Grand Theft Auto V, along with the successful launch of NBA 2K18. Grand Theft Auto Online delivered another record quarter, exceeding our net bookings expectations, and remains the single largest contributor to recurrent consumer spending. Rockstar Games has continued to sustain an increased engagement through the ongoing release of a rich array of free additional content, most recently the Smuggler's Run update and subsequent themed content drops, including the Motor Wars and Stockpile modes, Transform Races and multiple new vehicles. Rockstar Games will support Grand Theft Auto Online with additional new content going forward. The second quarter marks the fourth anniversary of the initial launch of Grand Theft Auto V, and net bookings from the game grew during the period, confirming that Grand Theft Auto V remains the must-have title, especially as the installed base of current-generation consoles continues to expand. Grand Theft Auto V has now sold in more than 85 million units. And according to The NPD Group, the title has achieved 42 top 10 chart appearances during the 50 months since its release, the most by any single title in reported history. Grand Theft Auto V is now the all-time best-selling video game, both in revenues and units, based on combined U.S. digital and physical sales across PC, console and portable. As a result of these titles' better-than-expected performance in the quarter and increased outlook for the remainder of the year, we now expect combined net bookings from Grand Theft Auto Online and Grand Theft Auto V to grow during fiscal 2018. On September 15, Visual Concepts and 2K successfully launched NBA 2K18, cementing further the series' dominant position as the premier basketball simulation. NBA 2K18 received positive reviews from influential critics, including 91 out of 100 from Forbes, 9 out of 10 from Game Informer and 4.5 out of 5 from Digital Trends. Visual Concepts was lauded for the title's exciting new features, including the addition of Neighborhood, which, for the first time, enables gamers to explore and play in an immersive, wide world of NBA environment. To date, NBA 2K18 has sold in over 6 million units, and both sell-in and sell-through of the title have grown more than 20% over the prior year's release, including a significant increase in digitally delivered sales. In addition to versions for Xbox, PlayStation and PC, NBA 2K18 is our debut offering for the Nintendo Switch. So far, we're very pleased with the title's performance on this new platform, and we anticipate continued strong demand across all platforms heading into the holiday season. Along with growth in game sales, our NBA 2K series continues to benefit from increasing engagement and recurrent consumer spending. To date, total users and average daily users of NBA 2K18 on current-generation platforms is up nearly 30% over last year's release, and during the second quarter, current consumer spending on NBA 2K grew 57%, once again exceeding our expectations. We believe that NBA 2K18 will become our most successful sports title ever, both in terms of units sold and recurrent consumer spending. I'd like to congratulate Visual Concepts for their unparalleled skill in delivering consistently the authenticity of the NBA and all of its pop culture influences to our passionate community of fans. Our second quarter results also benefited from a number of other titles, including NBA 2K17, Social Point's mobile games and downloadable add-on content foreign sales of XCOM 2. We continue to drive increased engagement with our games. During the second quarter, net bookings from our current consumer spending, which are almost entirely digitally delivered, grew 84% to their highest level ever and accounted for 42% of total net bookings, in addition to virtual currency for Grand Theft Auto Online and NBA 2K, where current consumer spending was enhanced by a variety of other offerings. In the free-to-play category, Social Point continued to outperform our expectations with combined net bookings from its two biggest games, Dragon City and Monster Legends, growing both sequentially and year-over-year in the second quarter. We view Social Point as an important long-term growth opportunity for Take-Two. WWE SuperCard also continued to grow, with net bookings from our current consumer spending on the game up 40%. WWE SuperCard is 2K's highest grossing mobile game and has been downloaded more than 15 million times. And NBA 2K Online remains the number one PC online sports game in China with over 36 million registered users. In addition, net bookings from add-on content more than doubled, led by XCOM 2: War of the Chosen, the expansion pack for the 2016 award-winning strategy title from Firaxis Games, along with offerings from Mafia III and Sid Meier's Civilization. As a result of our stellar second quarter operating results and increased outlook for the balance of the year, we've raised our fiscal 2018 outlook for net bookings and net cash provided by operating activities. We now expect fiscal 2018 to be another year of net bookings growth as well as strong cash flow. And looking ahead, fiscal 2019 promises to be one of our best years ever, led by the launch of the Rockstar Games' Red Dead Redemption 2 and a highly anticipated new title from one of 2K's biggest franchises. Through the advent of new technologies, platforms and business models, our industry continues to evolve and grow, providing exciting new ways for our teams to create groundbreaking entertainment experiences that captivate and engage audiences throughout the world. Take-Two is better positioned than ever creatively, operationally, and financially to capitalize on our numerous opportunities, both in our core business and in emerging areas such as mobile and esports, and to deliver value to customers and returns for shareholders over the long term. I'll now turn the call over to Karl.

Thanks, Strauss. Today, I'll discuss our recent releases and then review our lineup for the remainder of this fiscal year. On October 13, 2K successfully launched WWE 2K18, the latest installment in our popular simulation-based WWE series. Co-developed by Yuke's and Visual Concepts, WWE 2K18 received positive review scores, including an 84 out of 100 from COGconnected and an 8.3 out of 10 from Forbes. Critics are praising the title for its brand-new graphics engine, the largest roster of playable superstars in the series' history and a host of gameplay additions and improvements. According to Forbes, 'WWE 2K18 is now the standard bearer in visual excellence in sports-themed video games.' WWE 2K18 is already off to a solid start. And later this fall, 2K will release the title for Nintendo Switch, marking the first time in five years that a WWE game has been available on a Nintendo platform. In keeping with our focus on driving engagement and recurrent consumer spending, WWE 2K18 is being supported with a series of post-launch downloadable content, including a Season Pass. The worldwide popularity of WWE is as vibrant as ever, and we believe that there remains a substantial long-term opportunity to grow our WWE 2K series by leveraging further the development and marketing expertise of 2K and Visual Concepts. On October 19, 2K and Firaxis Games released Sid Meier’s Civilization VI: Khmer & Indonesia Civilization scenario pack. We've introduced two new leaders representing civilizations from Southeast Asia. This content was made available automatically at no extra cost for purchases of the Civilization VI - Digital Deluxe edition. Turning to the balance of our lineup for fiscal year 2018. On November 14, Rockstar Games will release new versions of their blockbuster detective thriller, L.A. Noire, to the Nintendo Switch, PlayStation 4 and Xbox One. Following these three new console versions, in December comes L.A. Noire: The VR Case Files, featuring seven select cases from the original game rebuilt specifically for a virtual reality experience on the HTC Vive system. L.A. Noire takes place in the seedy and violent underbelly of 1940s Los Angeles as decorated veteran and newly minted detective, Cole Phelps, investigates an escalating series of cases inspired by real-world crimes. Utilizing a unique type of facial capture technology called MotionScan, L.A. Noire brings unprecedented realism into character performances, creating brand-new gameplay out of the art of interrogation. Originally released in May 2011, L.A. Noire has sold in over 7.5 million units. With the choice of spectacular virtual reality, stunning 4K, or the freedom of portable play, these new enhanced versions of L.A. Noire are a perfect opportunity for players to experience this richly detailed world in an entirely new way. During the fourth quarter, our independent development partner, Squad, will release the Kerbal Space Program: Making History Expansion for PC. Adding exciting new content, including the Mission Builder and History Pack, the expansion will enhance our recently acquired physics-based space simulation game. Mission Builder enables players to create and edit missions that can be shared with the game's vibrant online community. History Pack challenges players to relive historic missions from humankind's own space program, complete with the unique Kerbal Space Program twist. The new Kerbal Space Program has a new long-term franchise that complements our portfolio of owned intellectual property as we continue to capitalize on opportunities across the independent development landscape. The growing popularity of esports is an exciting trend in our industry. And both our team and the NBA are hard at work on preparing for the May 2018 launch of the NBA 2K League. Beginning in February, the league will introduce its online qualification system to identify the best NBA 2K players, which will be followed by a draft to fill each team's five-player roster. League team members will play the game using newly created avatars, and therefore, playing ability will be determined strictly by skill. NBA 2K League players will live in their team's market during the season, which we believe will create deeper and stronger team bonds and dynamics. We are thrilled that the NBA 2K League is taking shape and look forward to expanding our presence in competitive gaming, which has long-term potential to create deeper engagement with the player community and to be a meaningful driver of profits for our company. Social Point is also hard at work and has a number of exciting games planned for launch over the next two years. Looking ahead, we have a robust development pipeline across our labels, including new releases from our popular series and groundbreaking original intellectual property. We remain committed to providing our audiences with the highest-quality entertainment, including innovative offerings designed to drive growth and engagement and recurrent consumer spending. Coupled with our many opportunities for expanding our business through emerging platforms, business models, and geographies, there has never been a more exciting time for our company and industry. I will now turn the call over to Lainie.

Thanks, Karl. Good afternoon, everyone. Today, I'll discuss our second quarter results and then review our financial outlook for the third 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. I'd also like to note that, as we announced last week, we've changed the name of our operational metric from net sales to net bookings. We have made this change to avoid confusion with the net sales captions used by some companies in their GAAP financial statements and to be consistent with operational metrics provided by our peers. The definition of net bookings is identical to our previous definition of net sales. As mentioned by Strauss, we had an outstanding second quarter from an operating perspective, driven by the continued outperformance of Grand Theft Auto Online and Grand Theft Auto V as well as the stronger-than-expected launch of NBA 2K18. Total net bookings grew 20% to $577 million. Of this amount, 62% were digitally delivered net bookings, which grew 52% to $356 million. Our digitally delivered net bookings were driven by record recurrent consumer spending, along with growth in full game downloads. While the operating performance of our business exceeded our expectations, this outperformance was not fully reflected in our GAAP results for three reasons. First, our better-than-expected net bookings were driven by titles that we have to defer, and therefore, our GAAP revenues and profits will not fully benefit from these sales until future periods. 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. And third, we reported higher stock-based compensation expenses primarily due to the increase in our share price. Turning to some details from our second quarter income statement, GAAP net revenue exceeded our outlook and grew by 6% to $444 million. Cost of goods sold increased by 20% to $247 million. Operating expenses increased by 24% to $208 million due primarily to the inclusion of Social Point as well as higher stock-based compensation, bonus, and headcount expenses, which were partially offset by lower marketing expense. Our GAAP results reflect a $12 million tax benefit, which was driven primarily by tax deductions related to stock compensation expense. These additional tax deductions are due to the increase in our stock price from the dates that stock was granted to the dates of exercise. This benefit had no effect on our management reporting tax rate, which is 22%. We recorded a GAAP net loss of $3 million or $0.03 per share versus net income of $36 million or $0.39 per share in the prior year period. Now I will review the highlights of our fiscal 2018 financial outlook, starting with the fiscal third quarter. We expect net bookings to range from $610 million to $660 million. The largest contributors to net bookings are expected to be Grand Theft Auto Online and Grand Theft Auto V, NBA 2K18, and WWE 2K18. We expect GAAP net revenue to range from $440 million to $490 million and cost of goods sold to range from $262 million to $291 million. Operating expenses are expected to range from $220 million to $230 million. At the midpoint, it represents a 16% increase over last year, driven by the inclusion of Social Point as well as higher R&D and stock compensation expense. We expect a GAAP net loss to range from $29 million to $40 million or $0.25 to $0.35 per share. Turning to our outlook for the full fiscal year. As a result of our better-than-expected second quarter operating results and the improved forecast for the remainder of the year, we are increasing our outlook for net bookings and net cash provided by operating activities. We now expect net bookings to range from $1.93 billion to $2.03 billion, up from our prior outlook of $1.65 billion to $1.75 billion and up from $1.9 billion last year. Net bookings are expected to increase in fiscal 2018, driven by growth from NBA 2K and Grand Theft Auto as well as inclusion of a full year net booking from Social Point, partially offset by a lighter release slate. We now expect net bookings from recurrent consumer spending to increase approximately 50%, and we expect digitally delivered net bookings to grow around 25%. The largest contributors to net bookings are expected to be Grand Theft Auto Online, Grand Theft Auto V, NBA 2K, and WWE 2K18. We expect the net bookings breakdown from our label to be roughly 50% 2K, 45% Rockstar Games and 5% Social Point and other. And we expect the geographic net bookings split to be about 60% United States and 40% international. We now expect to generate approximately $300 million in net cash provided by operating activities, up from our prior outlook of $200 million. And we plan to deploy approximately $60 million for capital expenditures. Turning to our income statement, we expect GAAP net revenues to range from $1.74 billion to $1.84 billion and cost of goods sold to range from $893 million to $944 million. Total operating expenses are expected to range in the $805 million to $825 million. At the midpoint, it represents a 22% increase over the prior year, driven by the inclusion of Social Point, higher R&D expense, and higher stock-based compensation expense. Although our operating performance is exceeding expectations, we are increasing our fiscal 2018 outlook for net bookings and net cash provided by operating activities. We are reducing our forecast for GAAP net income. This is due to two factors. First, because of the strong ongoing performance of Grand Theft Auto, we expect to record higher internal royalties, which, unlike certain other costs of goods sold, are not deferred. And second, we now expect higher stock-based compensation due primarily to the increase in our share price. As a result, we now expect GAAP net income to range from $63 million to $91 million or $0.55 to $0.80 per share. In closing, we are very pleased with our operating results for the first half of fiscal 2018, which is poised to be another year of net bookings growth and strong cash flow for our organization. However, we believe that fiscal 2019 will be a record year for both net bookings and net cash provided by operating activities, which are expected to exceed $2.5 billion and $700 million, respectively. With industry-leading creative assets, a commitment to operational excellence, and a strong financial foundation, Take-Two is well-positioned to generate growth and margin expansion over the long term.

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

I guess, two. Strauss, one industry question. There were some concerns about NBA, and we hear with other games about maybe too much monetization opportunities for microtransactions taking away from the game. It clearly doesn't seem to be the case with NBA. But just give me your high-level thoughts on that. And then second, on Take-Two specifically. You haven't raised your outlook for '19. Clearly, all your digital trends are way above where you thought six months ago when you gave that guidance. How do you think about next year given the strength in digital this year?

Thank you, Justin. We take consumer feedback very seriously. You're correct that there has been some pushback regarding monetization in the industry. The good news is the title has received outstanding reviews and people really love it. Additionally, entertainment is more of a want-to-have than a must-have, but usage is up 30% in terms of average daily users. Unit sales of the title increased by 20% year-over-year, indicating that people clearly enjoy NBA 2K18, and the reviews support this. That being said, we are concerned about any negative perceptions or feedback, and we are addressing it seriously. Lainie will discuss next year further.

Sure. For 2019, we are reiterating the guidance that we've given so far on that year. We continue to look at it. We said that we're going to exceed $2.5 billion and exceed $700 million in operating cash flow. So in terms of giving out more detailed guidance and updating that information, I think we would probably look to do that on our May call with our year-end earnings.

GTA Online continues to impress. It's another record-breaking quarter. And as you mentioned, it's the fourth anniversary of GTA V. On prior calls, we've heard a bunch of questions asking when GTA Online would start to tail off. But given the continued record-breaking quarters, I'm just curious, how many more years GTA Online might continue to thrive? And how does the upcoming launch of Red Dead influence your thinking here? And then just secondly, you're obviously taking up your full-year EPS outlook substantially. I was just hoping you might help us understand what's behind that optimism. How much of this is coming from GTA Online and how much from NBA?

Well, thank you. Look, GTA Online continues to delight consumers, and therefore, our results are also excellent. And Rockstar Games has said they will continue to support Grand Theft Auto Online with content going forward. And then undoubtedly, it's this ongoing robust content creation that continues to delight consumers. There's clearly a community of people who love Grand Theft Auto Online, and once again, we're having a record year. We can't say much more than that except that we're so extraordinarily pleased. And to look further into the future is impossible at this time. With regard to your question on Red Dead, though, I have a strong point of view, which is, look, entertainment competes with every activity and no activity. And to the extent that we are competitive, we compete with all of our own titles and everyone else's titles, too. So I don't think the launch of any new title specifically has a direct effect on an existing title. Any more than someone else launching a competitive title would affect, for example, how one of our titles is doing. If we have something great in the market and we continue to support great content, people will continue to show up. That's historically the case, and certainly that's our aim. So we think Red Dead stands alone. Naturally, we're incredibly excited. I think the whole market is excited, but it will stand alone and succeed on its own merits.

For the full year, when we look at raising our guidance, we looked at how much we beat the second quarter by, and then we also look at the remainder of the year, and it's reflecting higher expectations for Grand Theft Auto Online, Grand Theft Auto V as well as NBA 2K18.

Two questions. First, could you provide some insight on NBA 2K regarding the last year's games? Specifically, what percentage of revenue came from full game sales, including retail and full game downloads? Additionally, what percentage of revenue was generated from microtransactions? Secondly, could you share some details about Social Point? It appears you are conducting tests internationally for a game called League of Dragons. At what point do you plan to launch it globally, and how do you envision its progression over the next year?

I understand. So, Eric, let's begin with Social Point. We recently had a soft launch of a title called League of Dragons, which was very limited to a select market, as is typically done before a global launch. Based on our observations and the KPIs for the title, we concluded that it wouldn’t be viable to proceed further, so it will not be released worldwide. On a positive note, the two games currently available from Social Point, Monster Legends and Dragon City, are exceeding our expectations and showing growth both quarter-over-quarter and year-over-year. We're optimistic about this. Additionally, as mentioned earlier, Social Point has several games lined up for release in the coming years, and we are very excited about these opportunities. Regarding NBA 2K, we will provide detailed information about the percentages you requested concerning microtransactions, full game downloads, and so on for each title.

Following up on NBA a little bit. I was wondering if you could share what percentage of the unit sales that you did disclose came from digital this quarter. And then secondarily, you mentioned the growth in recurrent spending in NBA. And I just wondered if you could break apart whether you're seeing growth in all components or if it's just from new players.

Evan, for full game downloads on new console, we're seeing about 35%. We're not giving it specifically by title, but overall, that's what we're seeing in Q2 for the business. And that's what we would expect to see for the full year.

And in terms of the components on NBA, so like we said before, we are seeing growth in our users, the daily active users. And so that is up. And our unit growth is up in general. We haven't broken it down any more specifically than that.

I have a couple of questions. First, regarding GTA Online, last quarter you mentioned an expectation for a moderation in the second half of the year. However, you reported another record quarter in fiscal Q2. Do you still anticipate a slowdown for that title in the latter half, or do you foresee growth? Secondly, Lainie, I recall you mentioned that the expectation for digital downloads for the year is now 35%. Last quarter, you indicated a 30% expectation. Can you explain what led to this change and whether you have started to incentivize gamers to download more?

Thanks, Chris. No, we do not expect moderation in Grand Theft Auto Online in the back half of the year. Looks like it's very strong. And as we said, it will be another record year, which is obviously very gratifying. And on the digital download side for full games, we are continuing to see growth in that area. Obviously, for PC titles, it's over 90%. And for non-PC titles, it's running around 35%, as Lainie said, across the board.

And our catalog is also running at about 50%, and there is a big mix of our catalog business throughout the remainder of the year.

It's a positive development for us. We earn more revenue per unit sold digitally and enjoy a higher margin. However, we remain focused on where the consumer is, and physical distribution still constitutes a significant portion of our business.

As far as the NBA 2K League, do you have any plans for broadcast? Will it be primarily online? Or could there be also broadcast TV viewing opportunities? And will there be marketing for the league during traditional NBA games? Or how will you kind of tie those two together?

We haven't provided that detail yet. There will be a media right related to the NBA 2K League, and that will be announced at the appropriate time. Our team, led by Brendan Donohue, is doing an excellent job. Karl mentioned some of the developments for 2018, and we are very excited to have teams, conduct a draft, and hold a season with 17 teams participating. More information will be available soon, but at this moment, we don't have much more detail to share.

With the success of Grand Theft Auto Online, are you thinking about adding any talent to increase the cadence of GTA Online updates over the coming year or two?

We are continuously bringing in talent throughout the company. Our headcount is increasing, but it's focused on developing exceptional games and content. This is true across our entire business. We are a growth-oriented company and are always in search of top talent. Currently, we are quite pleased with the content we are producing consistently, thanks to the amazing individuals responsible for it every day.

Got it. That's great. And also, a quick follow-up on talent. There have been some studio closures in the space, one public, and some layoffs at a private competitor today. Longer term, I guess, where are you seeing talent availability? And do you see anything specific regarding domestic or within your current studios or whether that be in international new markets and new studios?

We are in a growth mode and are fortunate to work with exceptional talent from around the globe. It is well-known that attracting top engineering and artistic professionals in the United States is quite difficult. Therefore, we are open to where we might establish new studios in the future, as we will go where the talent is available. This is a global business, and we have an international presence. As I mentioned, we are in growth mode, and I anticipate we will expand our physical locations to ensure we are situated where the talent resides.

I think it's difficult to provide too many details about the Rockstar team. However, it seems that the marketing efforts related to GTA Online, particularly regarding the addition of new content, have increased. I'm curious if that's accurate and how significant you believe this has been for the ongoing success of the game. I have a quick follow-up.

Sorry, Mike. I'm sorry, I missed the marketing part of that question. The answer is that the marketing is related to the content drops. So as content drops come out, as they're significant and meaningful, it's important that we let people know about them. I think the marketing is informative and entertaining, and certainly, we wouldn't do it if we didn't think it had a beneficial impact. But what drives consumption and delight is obviously the content itself.

Yes. Fair enough. Good. I guess, under the theme of extending your player base, Rockstar is obviously preparing to launch L.A. Noire for the Switch. Curious how you think about the opportunity for other Rockstar content on that platform. And then also, thinking about China, I think you've obviously been seemingly more optimistic over time in terms of getting content into that region. Curious your thoughts on the potential opportunity of Red Dead being a commercial opportunity in China, especially that pay-to-play model seems to be working with other games.

Yes. So in terms of other titles for the Switch from Rockstar, Rockstar hasn't made any announcements yet. And of course, as you know, our labels make announcements about what's coming out. We don't tend to do that on these calls. But clearly, the installed base for Switch has grown rapidly, and it's potentially an exciting platform. We've already put out a title for basketball. So we are supportive of the platform corporately. And in terms of China, look, this is a massive market, as you know. It's also a market that is constrained in any number of ways. I'm hopeful that over time, those constraints will lessen. Intellectual property is a particularly challenging area in China, and we think there's great opportunity. We're thrilled to work with local partners. We're working with Tencent for a long time. They're a wonderful partner on NBA 2K Online, and we've had phenomenal results. So we're happy to work with local partners. I do think it is very important that we have reciprocity in markets, and our markets are wide open. And I think it's important that foreign markets become open. And America's second-biggest export category after aerospace is entertainment. We're not alone in these interests. I will say that we are ready when China is ready, and we think that providing the best quality entertainment on earth is always a benefit to a population. But of course, we feel that way.

A few questions for you. So what do you think are really the key lessons from GTA that you expect to bring to other titles in the future? And should we expect you to continue to move down the price curve on the full game in order to drive more players to GTA Online? And separately, on NBA 2K. Should we expect any meaningful revenue from the online tryouts this year? And then finally, on mobile. Beyond Social Point, should we expect intellectual property from other Take-Two areas to come to mobile in any meaningful way in FY '19 and beyond?

Thanks, Ben. I believe the main takeaway from GTA Online is that we've gained significant insights since its launch four years ago. One key lesson is that by creating an engaging and expansive world for players, they are likely to return and interact, which opens up monetization opportunities. We’ve announced that Red Dead will also feature an online component, and we have plans to include recurring consumer spending opportunities in every title we release. This won't always take the form of an online model or virtual currency, but there will be chances for ongoing engagement with our games after their release. This shift marks a significant change in our business. Currently, recurrent consumer spending accounts for 42% of our net bookings in the quarter, which has been transformative for us. This transformation is largely due to how it resonates with consumers. What used to be a lengthy engagement with a game has evolved into ongoing daily involvement. Players can develop a strong attachment to these titles, making them a part of their everyday lives. This is incredibly exciting and signals the evolution of interactive entertainment in the audiovisual industry. I recently came across a study showing that the average American media consumption is about 22 hours a day, although this includes time spent sleeping and eating. Within those 22 hours, only about 1.5 hours are dedicated to interactive entertainment, indicating significant growth potential ahead. This is just the starting point. Regarding the pricing strategy for Grand Theft Auto, we haven’t discussed it much, but our business has largely remained full-priced, which is very promising. When it comes to revenue from the NBA 2K League, we’ll allow the league management to address that when appropriate. We have not factored in or provided guidance on revenues or profits from the NBA 2K League, as our focus is on developing a new business and expanding our presence in basketball to engage with consumers more effectively. I believe there is a potential for revenue and profit, but we are not ready to provide further details at this stage. Lastly, concerning mobile and free-to-play ventures, we see select opportunities beyond Social Point within our broader company. Our success has been strongest when we have taken a selective approach. We’ve seen great success with the NBA 2K app and WWE SuperCard, and we believe additional opportunities will emerge from established intellectual properties. We now have a strong combination of both new IP from Social Point and well-known properties from the rest of our company, which is very exciting for us.

So I guess, taking a step back from the quarter for a second. Clearly, you're on a trajectory for much higher profitability, and you have been for quite some time. So what do you feel has been the biggest difference for Take-Two achieving and then maybe sustaining the margins of your peers, let's call it, 30% plus range? And along those lines, what do you see over the next two to three years changing for Take-Two specifically that could get you guys there and more importantly keep you guys in that 30% plus range?

Let's clarify the distinction between gross margins and operating margins. I believe you're asking about operating margins. On the gross margin front, we remain highly competitive, and our gross margins are improving and are outstanding. Some of our competitors measure their margins slightly differently, making it difficult to compare directly. However, when making a fair comparison, our gross margins are as strong as, if not stronger than, anyone else's. Regarding operating margins, you are correct that ours are somewhat lower than our two largest competitors. We need to see those margins increase, and achieving that requires scale. However, it's crucial to recognize that we cannot achieve scale at the expense of quality. We must achieve successful growth. Improving our margins while losing properties isn't feasible. It's not just about increasing output; we need to enhance our performance and do more. Our primary focus is on improving quality, which has proven very effective for us. The positive aspect is that we are in a growing industry, as evidenced by our net bookings this year. Lainie shared our expectations for next year. It's essential for us to keep growing. We have a highly ambitious team at both the corporate and label levels, all working towards the same goals. To drive our growth, we must continue to build an excellent collection of intellectual property, attract, retain, and lead top creative talent, and prioritize consumer satisfaction and needs. Following this path will yield positive outcomes.

Great. And then maybe just one more follow-up on an earlier question. When you think about the long-lived success of GTA Online and its high-margin recurring nature, has that influenced Rockstar's perspective on when to release another product in the franchise? In other words, do they still believe that a stand-alone release is viable compared to continuing to support GTA Online with additional content?

We don't speak for our labels. We're excited to have a situation where our labels communicate with consumers when they are ready. We can only express our immense gratitude for the success of Grand Theft Auto Online and the strong belief in Rockstar's continued success.

Two questions. First, could you remind us what the last L.A. Noire achieved and if that serves as a good reference for this year's guidance? Secondly, I understand you don't disclose the GTA Online user attachment rates or player counts. However, as you've gained new users from GTA V, how have they engaged? Do they transfer at the same historical rates? Also, what opportunities exist for those players you may have lost over the past three or four years?

L.A. Noire has sold approximately 7.5 million units throughout the franchise across various platforms, which is great. We haven't specifically included it in our future guidance, as we generally do not disclose such information for our titles. Regarding Grand Theft Auto Online, we do not share specific data on user counts or attach rates. At this point, we have provided all the information we plan to share about Grand Theft Auto Online.

Well, less looking for data and more about behavior. Have people shifted as there are opportunities to reengage people who may have dropped off?

There is unquestionably an opportunity to reengage people based on content drops. And when we drop new content, we see results in terms of engagement, and engagement typically does drive revenue.

As Grand Theft Auto Online has inflected higher, can you maybe talk about whether you've been able to do that using the same resource base as you sort of had working on it for the last few years? Or have you been allocating more resources to it to drive the growth?

Rockstar is growing, 2K is growing, Social Point is growing to support the existing opportunities and the new opportunities. And I think we're having success across all of our label groups. We are definitely in growth mode. I'm probably not going to get more granular than that.

Well, first of all, I'd just like to thank everyone for joining us today. I want to take a moment to thank our colleagues across the company who delivered these phenomenal results. And I want to thank our consumers who support us and are absolutely passionate about what we do. That drives us and excites us and makes us want to come to work every day. On behalf of the company, I'd like to wish all of you a happy and healthy holiday season and a great new year.