Take-Two Interactive Software Inc (TTWO) — Q4 2018 Transcript

Good afternoon. Welcome, and thank you for joining Take-Two's conference call to discuss its results for the fourth quarter and fiscal year 2018 ended March 31, 2018. Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer; Karl Slatoff, our President; and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q&A session following our prepared remarks. Before we begin, I'd like to remind everyone that 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. 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. In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at www.take2games.com. And now I'll turn the call over to Strauss.

Thanks, Hank. Good afternoon, and thank you for joining us today. I'm pleased to report that during the fourth quarter, Take-Two delivered growth in net bookings, driven by increased recurrent consumer spending, including better-than-expected results from Grand Theft Auto Online. Our solid performance marked the completion of another outstanding year for Take-Two, highlighted by growth in net bookings, earnings, and cash flow along with margin expansion. And of course, our fiscal 2018 operating results greatly surpassed the initial outlook that we provided at the start of the year. During fiscal 2018 and the first quarter fiscal 2019, we returned $308 million to our shareholders through the repurchase of 3.1 million shares of our stock at an average price of approximately $99 per share. At fiscal year-end, we had over $1.4 billion in cash and short-term investments. Grand Theft Auto V and Grand Theft Auto Online continued to exceed our expectations in fiscal 2018, as they have every year since their release, with combined net bookings from the titles growing year-over-year. Grand Theft Auto Online broke monthly audience records in June, July, and December, added more new users than in the prior year, and delivered its biggest year yet for virtual currency sales. During the fourth quarter, Grand Theft Auto Online generated better-than-expected year-over-year net bookings growth. Rockstar Games achieved these results through the ongoing release of a wide array of free additional content, including during the past fiscal year 4 significant updates coupled with a weekly schedule of new content offerings, and they have much more planned going forward. Grand Theft Auto V is now sold in 95 million units worldwide, reflecting its status as the highest-rated title of the current console generation and a must-have game for purchasers of PlayStation 4 and Xbox One. The incredible ongoing success of Grand Theft Auto V and Grand Theft Auto Online underscores Rockstar Games' unparalleled skill at producing iconic entertainment experiences that attract and engage new audiences for years after release. We're confident that Rockstar Games will again set new benchmarks for creative excellence with the October 26 launch of Red Dead Redemption 2, which is their first title developed from the ground up for the current console generation. Turning to our flagship basketball series, NBA 2K18 continues to expand its audience and is now our highest-selling sports title ever, with sell-in to date of over 9 million units, up 17% over last year's release. In addition, our NBA 2K series continues to benefit from the growing engagement of recurrent consumer spending. During fiscal 2018, average revenue per user, revenue per hour, and unique multiplayer users all increased double digits. And recurrent consumer spending in NBA 2K grew 34% to a new record. We believe there remains a substantial worldwide growth opportunity for NBA 2K, both through traditional and emerging platforms and business models. To that end, earlier this month, the NBA 2K League commenced its inaugural season, which Karl will discuss. Our fiscal 2018 results were also enhanced by a number of other recent releases and catalog titles, including WWE 2K18 and WWE SuperCard, NBA 2K17, Social Point's mobile games, Sid Meier Civilization VI and its add-on content and L.A. Noire. We remain highly focused on our strategy to deliver innovative ways to drive consumer engagement. During fiscal 2018, recurrent consumer spending grew 48% to a new record and accounted for 48% of total net bookings. In addition to virtual currency for Grand Theft Auto Online and NBA 2K, recurrent consumer spending was enhanced by a variety of other offerings. In the free-to-play category, Social Point's mobile games contributed meaningfully to net bookings through its 2 biggest titles, Dragon City and Monster Legends. During the current quarter, we have significant updates planned for both. We view Social Point as an important long-term growth opportunity for Take-Two. Recurrent consumer spending on WWE SuperCard grew over 20%, and the game has now been downloaded nearly 17 million times. During the last fiscal year, 2K released the Season 4 update, which enhanced our popular WWE card battling game with more than 250 new cards, additional tiers and more. And NBA 2K Online remains the #1 PC online sports game in China with over 37 million registered users. In addition, net bookings from add-on content grew more than 40%, led by offerings for Sid Meier's Civilization, particularly the Rise and Fall expansion pack; XCOM 2, particularly War of the Chosen; WWE 2K; and Mafia III. We expect fiscal 2019 to be another year of profitable growth for Take-Two, including both record net bookings and record net cash provided by operating activities, led by the launch of Red Dead Redemption 2 along with new annual releases from NBA 2K and WWE 2K. We will also continue to support our titles with offerings designed to drive engagement and recurrent consumer spending. The highly anticipated title from one of 2K's biggest franchises that has been planned for release in the current fiscal year is now planned for launch during fiscal 2020 to allow for additional development time. We remain as excited as ever about this title and expect it to enhance our results next fiscal year. I'd like to take a moment to acknowledge that this year marks the 25th anniversary of Take-Two. Over that time, we've built our company into a diversified and profitable enterprise. In particular, I'm extremely proud that Take-Two is home to our industry's best talent, whose passionate and creative vision consistently captivate and engage audiences around the world. Take-Two is exceedingly well positioned to capitalize on the vast opportunities in our industry, including advances in hardware, the ability to drive ongoing engagement through connected experiences and additional content and the continued proliferation of mobile platforms and emerging business models. As a result, Take-Two is poised to deliver growth and returns for our shareholders over the long term. I'll now turn the call over to Karl.

Thanks, Strauss. I'd like to begin by thanking our teams for delivering another great year of creative and financial results for our organization. It's your passion and commitment that drives Take-Two and is reflected in our terrific fiscal 2018 operating results and record net bookings and cash flow outlook for the current year. Turning to our recent and upcoming releases. Last month, Rockstar Games released the Grand Theft Auto V Premium Online Edition for PlayStation 4, Xbox One and PC. This comprehensive offering features the complete Grand Theft Auto V story experience, the ever-evolving world of Grand Theft Auto Online and all existing gameplay upgrades and content, including the Doomsday Heist, Gunrunning, Smuggler's Run, Bikers, and much more. In addition, purchasers received the Criminal Enterprise Starter Pack, which provides access to a huge range of content, including properties, vehicles, weapons, and more. On October 26, Rockstar Games will launch Red Dead Redemption 2, the eagerly awaited sequel to one of the label's more critically acclaimed and beloved titles. Two weeks ago, Rockstar Games unveiled a beautiful cinematic trailer for the game that set the stage for what is shaping up to be another massive entertainment event. Player reaction to the trailer was phenomenal. And last month, Rockstar Games hosted select media outlets at their Rockstar North studio for an extended look at the game. We have been delighted by their first impressions. We couldn't be more excited about the upcoming launch of Red Dead Redemption 2. Rockstar Games will have additional details to share about the game in the coming months. This fall, the next annual installment of NBA 2K will return to the hardwood court with the series' signature style and deep authenticity. This year marks the 20th anniversary of our industry-leading basketball simulation, and we are confident that 2K and Visual Concepts will once again take the series to exciting new heights with the release of NBA 2K19. Also this fall, 2K's WWE series will be back with WWE 2K19, bringing gamers into the virtual squared circle with their favorite WWE superstars, gameplay modes, and a variety of hard-hitting ring action. Throughout fiscal 2019, we will continue to support our titles with additional content designed to deepen consumers' experience and drive engagement, including updates for Grand Theft Auto Online, WWE SuperCard, and others. In addition, Social Point and 2K will continue to broaden our offerings for mobile devices. Earlier this month, the NBA 2K League, our joint venture with the NBA, kicked off its inaugural season. 102 of the best NBA 2K players were drafted by 17 NBA teams and are competing in a 15-week season, which will conclude with NBA 2K League playoffs and finals in August. While each team is living and training together in their home market, all league play-in tournaments will take place in New York City. In addition, the league has been steadily building its portfolio of partnerships and sponsorships with high-profile brands. Dell is the league's official PC hardware and monitor partner, featuring its elite gaming brand, Alienware. And Intel is powering all PCs with its state-of-the-art 8th Gen processor. Throughout the partnership, Dell and Intel will work with the league to identify new opportunities to innovate and enhance gameplay as the latest technology evolves. Both companies have agreed to make significant marketing commitments, including sponsoring the league's halftime show. Twitch has signed on as the league's official live streaming partner for games throughout the season, including weekly matchups, three in-season tournaments, playoffs, and the NBA 2K League Finals. This live stream includes various talent providing commentary, analysis and additional league updates. And last week, the league announced two official sponsorships, Scuf Gaming controllers and HyperX gaming headsets. We look forward to watching the continued progress and growth of the league, which has the long-term potential to enhance engagement and to be a meaningful driver of profits for our company. China remains another long-term emerging growth opportunity for Take-Two. Building on the popularity of NBA 2K Online, 2K and Tencent are teaming up again to co-develop and release the title's highly anticipated successor, NBA 2K Online 2. This new game is based on the console edition of NBA 2K and features 2K's legendary gameplay, 27 customizable position types, new player trading systems, eSports-optimized features, localized commentary, and more. NBA 2K Online 2 is currently in closed beta testing and is planned for commercial release this fall. In addition, we are pleased to expand our successful partnership with Tencent with last month's announcement that Kerbal Space Program will be released on Tencent's WeGame distribution platform as a premium PC game at a date to be determined. We're excited about Tencent's WeGame platform and the opportunity to grow our business in China. We're also very enthusiastic about the long-term potential of Private Division, our new publishing label that is dedicated to bringing titles from top independent developers to market. Private Division currently has contracts to publish several upcoming titles based on new IP from renowned industry talent, including Panache Digital Games, The Outsiders, Obsidian Entertainment, and V1 Interactive. Private Division will seek to add to its already impressive roster of development partners throughout the world, and we look forward to its future announcements. Next month at E3 in Los Angeles, we will have a corporate booth 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 ahead, we have a strong development pipeline across our labels, which includes new releases from our popular series along with groundbreaking new IP. With our unwavering commitment to delivering the highest quality entertainment experiences that keep our audiences engaged, Take-Two is better positioned than ever to provide value to our customers and to generate growth and profits over the long term. I'll now turn the call over to Lainie.

Thanks, Karl, and good afternoon, everyone. Today, I'll discuss our fourth quarter and fiscal year 2018 results and then review our financial outlook for the first quarter and fiscal year 2019. Please note that additional details regarding our actual results and financial outlook are contained in our press release. As mentioned by Strauss, our solid fourth quarter results mark the completion of an outstanding fiscal 2018 for Take-Two, during which we delivered operating results that greatly surpassed the initial outlook we provided at the start of the year. These results were driven primarily by the sustained outperformance of Grand Theft Auto Online and Grand Theft Auto V, coupled with record results from NBA 2K. Starting with the fourth quarter, our operating metric total bookings grew to $411 million, and net cash provided by operating activities exceeded our expectations. Digitally delivered net bookings grew 12% to $333 million and accounted for 81% of the total. Turning to some details from our fourth quarter income statement, GAAP net revenue decreased by 21% to $450 million, and cost of goods sold decreased by 40% to $189 million. Operating expenses increased by 19% to $173 million, due primarily to higher R&D expense and a full quarter of expenses from Social Point, which we acquired in January 2017. And GAAP net income was $91 million or $0.77 per share as compared to $99 million or $0.89 per share in the prior year period. Turning to our fiscal 2018 results, total net bookings grew 5% to $2 billion, driven principally by growth from Grand Theft Auto Online and NBA 2K, along with the full year of results from Social Point, partially offset by a lighter release slate. Of this amount, 58% were digitally delivered net bookings, which grew 25% to a new record of $1.35 billion. Our digitally delivered net bookings were driven by record recurrent consumer spending, which is partially offset by lower full game downloads due to fiscal 2018's lighter release slate. Net cash provided by operating activities grew 19% to $394 million, which exceeded our most recent outlook of $300 million and was more than double our original outlook at the start of the year. And we spent $62 million on capital expenditures. At fiscal year-end, our cash and short-term investments balance was over $1.4 billion. As a result of favorable market conditions, we were able to repurchase 1.5 million shares of our stock for $155 million during fiscal 2018 and an additional 1.6 million shares for $153 million during fiscal first quarter 2019 to date. Turning to some details from our fiscal 2018 income statement, GAAP net revenue increased to $1.8 billion, and cost of goods sold decreased by 12% to $898 million. Operating expenses increased by 14% to $759 million, due primarily to a full year of expenses from Social Point as well as higher R&D, stock-based compensation and reorganization costs, which are partially offset by a lower marketing expense. And GAAP net income increased by 158% to $174 million or $1.54 per share. Now I will review the highlights of our fiscal 2019 financial outlook. Starting with the fiscal first quarter, we expect net bookings to range from $215 million to $265 million. The largest contributors are expected to be Grand Theft Auto Online and Grand Theft Auto V, NBA 2K18, and Social Point. We expect GAAP net revenue to range from $345 million to $395 million and cost of goods sold to range from $83 million to $109 million. Operating expenses are expected to range from $190 million to $200 million. At the midpoint, this represents a 12% increase over last year, driven by higher R&D and stock compensation expense. We expect GAAP net income to range from $62 million to $74 million or $0.53 to $0.63 per share. Turning to our outlook for the full fiscal year, we expect net bookings to range from $2.67 billion to $2.77 billion. At the midpoint, this represents a 37% increase over fiscal 2018, driven primarily by the launch of Red Dead Redemption 2 and expected growth from NBA 2K, which we forecast to be partially offset by lower net bookings from Grand Theft Auto V and Grand Theft Auto Online. We expect net bookings from recurrent consumer spending to increase modestly and digitally delivered net bookings to grow by 15% to 20%. The largest contributors to net bookings are expected to be Red Dead Redemption 2, NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, WWE 2K, and Social Point. We expect the net bookings breakdown from our label to be roughly 55% Rockstar Games, 40% 2K, and 5% Social Point and others. And we expect our geographic net booking split to be about 55% United States and 45% international. We expect to generate approximately $710 million in net cash provided by operating activities, up 80% over last fiscal year. And we plan to deploy approximately $60 million for capital expenditures. We expect GAAP net revenue to range from $2.5 billion to $2.6 billion and cost of goods sold to range from $1.41 billion to $1.43 billion. Total operating expenses are expected to range from $885 million to $925 million. At the midpoint, this represents a 19% increase over the prior year, driven by higher marketing, personnel, and IT expenses. We expect GAAP net income to range from $180 million to $211 million or $1.53 to $1.80 per share. For management reporting purposes, we expect our tax rate to be 20%, down 2 percentage points from the prior year due to the recent tax reform legislation. In closing, fiscal 2018 was another great year for Take-Two. Our ability to deliver growth in net bookings, earnings, and cash flow despite an unusually light release slate reflects the strength of our core franchises and our ability to drive engagement with and recurrent consumer spending on our titles for years after launch. We are very excited about our outlook for fiscal 2019, which is poised to be a record year for both net bookings and net cash provided by operating activities. Over the long term, our company has accretive assets, operational discipline, and a financial foundation to generate growth and margin expansion for our shareholders.

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

Did you say the GTA exceeded your expectations and grew year-over-year in the quarter? Or was that the full year fiscal '18? And if you were referring to the March quarter where it was the GTA exceeded your expectations, given bookings came in at the lower end of the March quarter guidance range, was there something else within the overall mix that disappointed versus your internal expectations?

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

It seems there won't be a new content release for GTA Online in the June quarter. Could this explain the difference between your guidance and the consensus? It might be best to view it as facing a tough comparison with the GTA Online content that was released in last year's June quarter.

Yes, you asked and answered your question correctly, which is to say, we have the Gunrunning update in last year's fourth quarter. It isn't a direct comp. And we said over and over again, it's very hard to look at this company from a quarter-by-quarter comping situation because we're driven by our content. Now we're very fortunate that we have such a strong catalog and we have such strong recurrent consumer spending. The company certainly looks a lot different than it used to look. But even so, we are beholden to what content we create. So period-to-period is not often a good comp. That's really the reason. We believe the consensus is off.

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

Okay. You probably want to take on the Fortnite part.

Sure. Tim, in response to your question about the fourth quarter, I need to correct myself; it was NBA 2K, not NBA 2K Online. It didn't meet our revised expectations for the quarter. In terms of the competitive landscape, there have definitely been some major hits in the market, particularly Fortnite and PUBG, which are significant successes. This has positive effects, as we believe it attracts new players to the market and highlights the strength of our industry. While we would prefer to have all the hits, that may not be a realistic expectation. It's challenging to assess the impact of competition since entertainment properties tend to compete with one another, as well as against themselves and even against other leisure activities. Entertainment is often seen as a nice addition rather than an essential need. Thus, it's hard to ascertain whether a specific title affected sales. However, we have noted that Fortnite has generated considerable activity. Concerning Grand Theft Auto Online, we achieved a record year and quarter, and the game continues to excel.

Could you provide some insights on Social Point? Last year, you indicated a target of around $100 million based on the percentage of net bookings. Have there been any updates on where Social Point ended up? Considering your net bookings guidance midpoint, it seems like it's around $136 million in revenue. Can you discuss some key factors driving Social Point this year? Are there more updates coming, any new games, and what are your expectations?

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

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

Okay. And then, Lainie, just as a follow-up for you. Looking at your numbers and the guidance, you're projecting a record operating cash flow number, but it doesn't seem like you're projecting a record EPS. I'm curious if there are any accounting reversals or factors affecting the difference between EPS and operating cash flow. What is impacting that?

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

I would like to focus on the guidance for next year. It appears that there may be an increase in recurring spending after the first quarter, along with a strong performance from Red Dead. Can you share your thoughts on whether you expect the growth in recurring spending to accelerate in your guidance? In addition to the 55% of bookings from Rockstar, are there any other insights you can provide regarding your expectations for Red Dead?

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

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

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

I had another one on the guidance for fiscal '19. It looks like non-GAAP gross margin guidance was just below 50%, which I think is down pretty significantly year-on-year. And of course, you've got Red Dead coming out in the December quarter. So does the full year guidance just reflect the higher software amortization that you called out? Or is it a higher SKU of physical revenue compared to last year? And maybe as a related question, what does your guidance assume for the digital download mix for Red Dead? And just a quick second one, curious if Fortnite has caused you to maybe think about the potential for cross-platform gameplay and which of your titles do you think might be well suited for the smaller screen? And then how long would it take to develop a game like that for mobile?

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

And regarding cross-platform availability, we already make many of our titles available on multiple platforms, including over time sometimes mobile platforms. It all depends on the title, or VR platform. So we take it on a case-by-case basis. But I wouldn't say there's anything about the Fortnite experience that would change our view about platforms, and we're obviously familiar with multiple platforms. We have plenty of games available on mobile platforms, most notably Social Point's games as well as WWE SuperCard and some other titles that come from other of our labels. And Rockstar Games has made titles available on mobile platforms as well. So it really depends on what the opportunity is title-by-title. But I wouldn't say that our outlook about making titles available where consumers are has changed. Our strategy is to be where the consumer is.

Two. Just the first one on the NBA eLeague, I appreciate the color on the sponsors and kind of the steps that they've taken. I guess I'd be curious to think about how you all are thinking about the timing need to really get a meaningful impact from monetization. What are the biggest drivers of monetization you see? And then Strauss, maybe kind of most recently, how do you think about the potential for eSports gambling, given the change in legislation? And then kind of bigger picture question on Fortnite. Strauss, what were your biggest learnings from kind of watching the Fortnite phenomenon sort of pop-up about the way you think about the potential future for gaming and the way players come into the game ecosystem?

You have several questions there. Regarding the NBA 2K League, we are just starting, and we are encouraged by the early experiences. There are many viewers on Twitch, and we see a significant opportunity. We've always stated that our risk profile is very low, and if things do not go as we hope, our actual exposure is minimal and certainly not material. We believe the potential upside is considerable. However, we have not factored any of that upside into our expectations. This is how we typically operate; we prefer to take carefully measured risks and report back when we have results, avoiding overpromising upfront. As for monetization, you might see expectations centered around sponsorships, which are progressing well, as well as media rights. In time, depending on our success, there could be revenue from events and merchandise among other sources. However, it's still early, and we are gaining valuable experience daily. In light of the recent Supreme Court ruling on sports gambling, this will now be up to the states. We view this as a positive development and believe it could have a significantly favorable impact on our business, though it is not something we are currently focusing on. We are simply aware that there may be future opportunities, and I would be surprised if sports gambling does not eventually intersect with our industry in the near future. Reflecting on the lessons learned from Fortnite, the primary takeaway is that remarkable successes are often unforeseen. Big hits are driven by innovation rather than by imitation. We take pride in our achievements, such as Red Dead Redemption, which defied the belief that Western themes do not succeed in gaming. Red Dead Redemption became a big hit, and we have very high expectations for Red Dead Redemption 2. Fortnite, which surprised the industry given its origins, exemplifies that if you innovate and meet consumer desires, outstanding results can follow. While we strive to achieve significant hits and see it as part of our responsibility, we cannot expect to have all the hits. It is essential not to assume that trends defined by others will redefine our business. If we altered our strategy to chase others' successes, we would always be in a position of catching up, which could put us at a disadvantage. Our continuous goal is to innovate, and this approach has greatly contributed to our success.

I have a few questions. Regarding Red Dead, will consumers be able to access and purchase additional content right after release, or will that take some time to develop? And about the NBA, Lainie, you mentioned we should anticipate growth in FY '19. What gives you the confidence in that growth? What factors contributed to the underperformance in the March quarter? Additionally, concerning the NBA 2K League, was there anything unexpected during the launch period? Lastly, in terms of amortizing the capital costs for Red Dead, considering GTA's long-term success, should we look at capitalizing those costs over a more extended period for both Red Dead and VC in the past?

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

We typically don't provide details on amortization for individual titles. However, if you consider how blockbuster titles like Grand Theft Auto have performed, that would influence our decision on the amortization period for that title. We usually assess what the expected lifespan of that title will be.

And then on Red Dead, obviously, Rockstar will give clarity on content drops and the like in due time. We're very excited about the October 26 release. Everyone who has experienced the trailer is also excited. And obviously, Rockstar will make further announcements in due time. In terms of NBA and recurrent consumer spending in the fourth quarter, we think there were any number of factors that affected the level of monetization of the title. And Visual Concepts has plans to address those factors in NBA 2K19. We think fiscal 2019 will be another year of growth for NBA 2K, including both unit sales and recurrent consumer spending. So our view is, look, we always have to get better. We pay attention to what the consumer says. We've had an amazing year for our basketball franchise, just amazing, and we expect it to get even better.

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

So in regards to the 2K title, it's simply because it needs more time for development at this point. And in terms of confidence level, when it's going to come out, we're highly confident that this title will certainly be coming out in fiscal year '20, which is what we've said in our statements today. So our confidence level is very high. In terms of Hangar 13, Hangar 13 is a long-standing studio for us, very talented group of folks. We are constantly spending time, figuring out where it is best to put our resources on which projects. And I see what you're seeing there is a reflection of that specifically. We're moving assets around from game to game all the time, and the movement that you're seeing is a reflection of just our view on where the best place to deploy our assets are.

In your 2019 guidance, are you planning any marketing spend in Q4 for the 2K new title release? And then also on the NBA 2K League, is Twitch paying for streaming rights? And if so, can you discuss some numbers there?

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

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

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

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

A quick question for Lainie. I think your guidance has called for aligned margins a couple of hundred basis points year-over-year, low 20s. And it sounds from mid-20s this year. So I was hoping you could maybe update us on the way you're thinking about potential margins are for your company.

Ryan, we can't hear you.

You're breaking out.

Okay, can you hear me now? I have a question for Lainie regarding the aligned margin. It seems that the guidance suggests a couple of hundred basis points increase year-over-year. Could you provide an update on the company's potential long-term operating margins, perhaps regarding the timeframe or milestones, and your thoughts on achieving that? Additionally, a quick follow-up on your NBA 2K franchise. You mentioned the new NBA 2K Online 2 in China with Tencent. Can you share how financially significant the original NBA 2K Online is for you, and what your expectations are once the new version is released?

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

And in terms of the NBA 2K franchise, we have very high hopes for the NBA 2K Online 2 title. We're obviously in business with Tencent. They're a phenomenal partner. It's a great market. NBA 2K Online has been the #1 T channel and sports title for some time. We have 37 million registered users. So we're phenomenally excited about the upcoming release. It's in closed beta now. It's planned for commercial release in the fall, so stay tuned.

Strauss, I appreciate your comments regarding Fortnite and your strategy around developing new games. But if you take a look at Fortnite and some of the other titles that have come out over the past couple of years, it seems that there's been an expansion of the market around casual gamers and getting casual gamers to play more and potentially spend more. And it seems like the Rockstar titles tend to focus more on the harder core players. Has some of these recent titles shaped the way you developed or think about developing games for a broader audience?

I believe the growth in the gaming market, while I hesitate to label it as casual since some may not consider Fortnite a casual game, is noteworthy. The free-to-play revolution, whether on mobile or console platforms, has significantly transformed our business and expanded its size. We are actively involved in the free-to-play sector across different platforms, including China, 2K, and Social Point, which are all part of a rapidly growing market. Additionally, many free-to-play games attract diverse demographics, including older players and women. Fortnite in particular seems to have drawn new players into the gaming community, though that’s more anecdotal. This trend is encouraging, which is why we acquired Social Point and are focusing on free-to-play titles to enhance our core business. However, we must also acknowledge the importance of our traditional strengths: high-quality console games that offer deep, immersive experiences at premium prices. Hardcore gamers are enthusiastic about offerings from Rockstar and 2K. Notably, Grand Theft Auto has surpassed 95 million units sold, making it one of the most profitable entertainment products in history. This title appeals not only to a small audience but to a vast one as well. Rockstar Games has skillfully crafted experiences in Grand Theft Auto and Grand Theft Auto Online that can be enjoyed by both hardcore and casual gamers, allowing for customizable and extensive gameplay. I don’t believe that this approach to entertainment will ever become obsolete; it reflects the essence of the entertainment industry. In summary, we recognize the need to cater to various audience segments, which influenced our acquisition of Social Point and the establishment of the Private Division to bring independent titles that fulfill audience demands. Our current position boasts a robust balance sheet coupled with a highly talented creative team.

Can you provide more details on the percentage of amortization you anticipate for Red Dead this year on a non-GAAP basis? Additionally, the media industry is currently experiencing significant consolidation, yet video game publishers have not engaged in this trend so far. What are your thoughts on this, and do you foresee any changes in this landscape in the near future?

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

Regarding consolidation, the trends we are observing in traditional media sectors are largely a response to stagnant growth and the necessity for scale, cost reduction, and efficiency. This situation, however, does not apply to a high-growth industry like ours. Historically, media and entertainment sectors that have seen consolidation often rely heavily on revenue from catalog content, which has already been amortized and incurs minimal additional costs for continued value creation. In contrast, technological advancements and the significance of new releases mean that catalog content remains a smaller part of our business compared to more mature entertainment industries. We might witness consolidation if we approach a technological plateau, where catalog revenue rises significantly year after year, particularly during large release periods. Our success with catalog content does not necessarily reflect the broader industry trends. Furthermore, in a frontline-driven business, consolidation could lead to unrealistic expectations about gaining significant shelf space, whether digital or physical. After a merger, there is still a need to invest in frontline production and marketing, which can be expensive. Therefore, it makes sense to anticipate entertainment consolidation as companies reach maturity and face stagnation or decline, none of which accurately reflects the interactive entertainment sector.

Do you think there's any merit whatsoever to putting together traditional media assets with video game publishers?

Potentially, although so far, we haven't seen it. But I definitely would have thought so. I think years ago, I said I expected such consolidation, and it didn't materialize. The facts forced me to change my outlook. I think when you look at the quality of the intellectual property created and owned by ourselves and some of our competitors, it's hard to imagine that there wouldn't be opportunities in other forms of entertainment. And indeed, some of our competitors have entered other forms of entertainment. So if it makes sense to enter other forms of entertainment at which some traditional media companies are already expert, you would imagine that, that kind of consolidation could have some industrial logic. But I would observe that not only has it not occurred, but that some legacy entertainment companies have in fact exited interactive entertainment of late.

You mentioned that you had 4 major GTA Online content updates in the last fiscal year. I was just wondering if you could talk about kind of how you're thinking about the content pipeline shaping up for the next fiscal year. Can you match that kind of cadence? And I think in the past several years, you typically had started the year assuming GTA Online would be down year-over-year. Did you build that kind of conservatism into your guidance as well this year?

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

Did 2K or Tencent develop NBA 2K Online 2 and will they also handle the distribution of this title outside of China? Additionally, do you have plans to release the game in non-console markets? It's also noted that there are successful content studios and intellectual properties that you might consider acquiring. However, it seems that deals are becoming less frequent. Has the environment for mergers and acquisitions become more challenging?

Thanks for your questions. With regard to the development of NBA 2K Online with Tencent, that's obviously an arrangement between Tencent and 2K, and both companies are actively involved in bringing that title to market. Social Point is not involved with bringing that title to market. With regard to potential acquisitions, we acquired the Kerbal Space Program intellectual property. We're continuing to develop and release around that title we're excited about. We acquired Social Point. And over the years, we've made numerous other selective acquisitions, typically when we can acquire intellectual property and the team that goes along with it. I don't think the environment is any more challenging than it's been. I think it's been challenging for quite some time because this has been a growth business for quite some time and there have been some hefty multiples paid. I think we feel that our discipline has really paid off. There are a few things that occur that we feel like we missed the boat on, but precious few. And we much more often dodged the bullet than missed the boat.

I'm curious, although it's a bit early to say, but there's been talk about a new PlayStation console possibly launching in 2020. I know you can't really comment on that, but I would like to understand your thoughts on the implications of having what seems to be a console cycle opportunity or challenge ahead. Additionally, I'm interested in your perspective on releasing GTA V at the end of the previous cycle and then quickly following up with the current generation. How do you view the strategic opportunities that might arise with a new PlayStation console in 2020?

Thank you, Mike. It’s always great to hear from you. As you might expect, I can’t provide comments on another company's plans, so you would need to address that with them. Over the past 11 years, we've handled transitions in consoles and platform launches quite successfully, and we're proud of that. Transitions can present significant challenges if you make the wrong decisions regarding what to support, whether that's new or old systems. Our success during these times is not just due to corporate strategy but because our labels produce high-quality properties that excel even during console transitions. For instance, during the last transition, there was a lot of talk about difficulties for catalog products, but we weren’t affected at all and performed exceptionally well. This was largely due to the high quality of our catalog, which sells better per SKU than any other company in the industry. Our limited selection of high-quality titles tends to thrive during these periods, reducing the risks we face. We also don’t have an overwhelming number of SKUs to manage. Because our titles are consistently high quality, they continue to perform well even as new platforms emerge. For example, Grand Theft Auto V, originally developed for the last generation, still sets the standard today, which is remarkable and something we are thankful to Rockstar for. If new platforms are introduced, we will decide what to support based on our assessment of their potential success. The PC platform has become increasingly important to us, particularly due to digital distribution, which was not a consideration for console titles a decade ago but is crucial now. However, I don’t believe this implies that the business is stagnating or that brand significance is diminishing. While I wouldn't dismiss the possibility of future console generations, we are moving toward a point where the industry can be platform agnostic, although we are not quite there yet.

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