Take-Two Interactive Software Inc (TTWO) — Q3 2019 Transcript

Good morning. Welcome, and thank you for joining Take-Two's conference call to discuss its results for the third quarter of fiscal year 2019 ended December 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, unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons are year-over-year. Additional details regarding our actual results and 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 morning, and thank you for joining us today. I'm pleased to report that during the third quarter, Take-Two delivered better-than-expected results driven primarily by the record-breaking launch of Red Dead Redemption 2 as well as the strong performance of NBA 2K19. We generated significant cash flow and ended the period with $1.6 billion in cash and short-term investments after deploying $109 million to repurchase 1 million shares of our stock. On October 26, Rockstar Games launched Red Dead Redemption 2, which set numerous records, including achieving the biggest opening weekend in the history of entertainment with over $725 million in sell-through during its first 3 days. In fact, Red Dead Redemption 2 sold-in more units in its first 8 days than its predecessor sold in its first 8 years. The title has exceeded our expectations and to-date has sold-in over 23 million units worldwide. According to the NPD Group, based on combined physical and digital sales in the U.S., Red Dead Redemption 2 was the best-selling video game of 2018. A testament to Rockstar Games' unparalleled ability to create the highest quality entertainment experiences, Red Dead Redemption 2 received near-perfect critical reviews and multiple Game of the Year awards. The title is tied with Grand Theft Auto V as the highest-rated title on PlayStation 4 and Xbox One with a 97 Metacritic score. In late November, Rockstar Games launched the Red Dead Online beta, a new multiplayer experience set against the backdrop of Red Dead Redemption 2's enormous and vibrant open world. Free with the purchase of Red Dead Redemption 2, the Red Dead Online beta is an evolution of the classic multiplayer experience in the original Red Dead Redemption, blending narrative with competitive and cooperative gameplay in fun new ways. Rockstar Games continues to refine the vast world of Red Dead Online and will deliver ongoing updates to grow and evolve this experience. I'd like to congratulate the entire team at Rockstar Games for the phenomenal, critical and commercial success of Red Dead Redemption 2. Grand Theft Auto Online and Grand Theft Auto V remain significant contributors to our results more than 5 years after their launch. During the third quarter, Rockstar Games supported Grand Theft Auto Online with the Arena War update as well as Festive Surprise 2018, Halloween-themed content and more. During December, combined monthly active users across Grand Theft Auto Online and Red Dead Online took Rockstar to a new record. Rockstar Games will continue to support both products with innovative new content in order to drive engagement and recurrent consumer spending. We're very excited for the future of these two highly robust ongoing living game worlds. Turning to our industry-leading basketball simulation, NBA 2K19 exceeded our expectations in the third quarter, driven primarily by strong growth and recurrent consumer spending. Sales of the game also surpassed our outlook. We now expect lifetime unit sales of NBA 2K19 to be slightly up over the prior year's release. According to the NPD Group, based on combined physical and digital sales in the U.S., NBA 2K19 was the best-selling sports title in 2018 and the third best-selling game overall. In addition, 2018 marks the third consecutive year that an NBA 2K title was the best-selling sports game of the year. An important part of NBA 2K19's success has been the increasing engagement over the prior year's release. NBA 2K19 has generated more than 50% growth in online multiplayer games per day, and both daily active users and the number of games that they play have also increased meaningfully. We've also seen significant increases in engagement with the MyTeam mode for NBA 2K19, with daily average users up 28% and games played up 46%. On average, nearly 12 million games of NBA 2K19 have been played daily, which reflects the many enhancements the 2K and Visual Concepts introduced this year. As a result of this strong engagement, recurrent consumer spending on NBA 2K grew 39% in the third quarter to a new record and was the largest single contributor to recurrent consumer spending in the period. We expect the net bookings from NBA 2K19, including recurrent consumer spending, will be the highest ever for a 2K sports title. On January 15, 2K announced a significant multiyear partnership expansion with the NBA and the players association. The NBA has been an outstanding partner, and we're thrilled to be in business with Adam Silver and Michele Roberts and their teams, and we're very pleased with the terms of our partnership expansion, which enables NBA 2K to continue to grow and be highly profitable, both for Take-Two and the NBA. We have a broad range of basketball offerings across console, PC, mobile, online in China and eSports. And I'm confident that we'll continue to find new and innovative ways to captivate and engage fans and expand further the success of the NBA 2K brand. In early October, 2K launched WWE 2K19, the latest installment in our popular sports entertainment series. Developed collaboratively by Yuke's and Visual Concepts, the title received improved reviews and has been supported with a series of downloadable content, including the Season Pass. The WWE brand continues to expand worldwide, and we believe there remains a substantial long-term opportunity to grow our WWE 2K series by leveraging further the development expertise of 2K and Visual Concepts. Our third quarter results were also enhanced by a variety of other offerings, led by Social Point's mobile games; Sid Meier's Civilization VI for the Nintendo Switch, which significantly exceeded our expectations; and WWE SuperCard. At Take-Two, our goal is to serve our audiences by delivering the highest quality entertainment that exceeds expectations in terms of the value they receive from both the money and time that they spend on our products. If we deliver on that goal consistently, we'll engage our customers and drive returns for our shareholders over the long term. A hallmark of our approach is finding new and exciting ways to drive engagement through creativity and innovation. The execution of this philosophy results in our audiences remaining immersed in our titles well after their initial launch and has been a key driver of our ongoing success. This is reflected in the strong growth in engagement and recurrent consumer spending on our titles over the past several years. During the third quarter, recurrent consumer spending exceeded expectations, growing 31% to a new record and accounting for 22% of total net bookings. The biggest contributors to this outperformance were strong sales of the Red Dead Redemption 2 special edition and ultimate edition, which included additional content that is allocated to recurrent consumer spending, along with robust growth in recurrent consumer spending at NBA 2K. In addition, recurrent consumer spending was enhanced by a variety of other offerings. In the free-to-play category, Social Point once again was a significant contributor to our results through its two biggest mobile titles: Dragon City and Monster Legends. During the third quarter, combined net bookings from these titles grew sequentially. Recurrent consumer spending on WWE SuperCard grew double digits net of platform fees, and 2K released the fifth season of its popular card battle game and several content updates. WWE SuperCard has now been downloaded nearly 18.5 million times, and it's 2K's highest grossing mobile title. And net bookings from NBA 2K Online in China more than doubled, driven by the launch of NBA 2K Online 2 in August. Total combined registered users for NBA 2K Online 2 and its predecessor currently stands at 43 million, and the franchise remains the number one PC online sports game in China. Asia remains a significant long-term growth opportunity for our business. We're very encouraged by recent developments in China. Add-on content grew 9%, led by offerings for Sid Meier's Civilization, WWE 2K19, and XCOM 2. As a result of our strong performance in the third quarter, we're increasing our outlook for fiscal 2019. Our long-term success has been the result of our creative team's ability to connect deeply with audiences across a myriad of platforms and offerings. As our industry continues to embrace new technologies that enhance consumer experiences with and access to interactive entertainment, we remain focused on broadening the reach of our content and expanding further globally. Take-Two is in a better position than ever creatively, strategically, and financially to capitalize on the vast opportunities that will shape the future of our business and our industry.

Thanks, Strauss. Today, I'll begin by discussing our recent and upcoming releases for the balance of fiscal 2019. On January 31, Social Point launched Tasty Town, our latest free-to-play mobile offering for iOS and Android devices. This all-new game enables players to fulfill their culinary dreams of designing and managing their own restaurant. In Tasty Town, players embark on an incredible journey from farm to table, to build their gastronomic empire, including experiencing the joy of growing their own ingredients, hiring the best chefs, creating delectable dishes, creating and managing their own restaurant, and racing against the clock to serve meals with their food truck. In addition to Tasty Town, Social Point is focused on its robust pipeline of other exciting new games in development. On February 14, 2K and Firaxis Games will release Sid Meier's Civilization VI: Gathering Storm, the second expansion pack for the critically acclaimed and award-winning PC strategy game. Gathering Storm, the largest civilization expansion that Firaxis has ever created for any civilization game, will allow fans to explore and master the franchise's rich and strategic gameplay in all-new ways. Gathering Storm also adds nine new leaders from eight new civilizations, a new diplomatic victory condition, and a variety of new units, districts, wonders, buildings and more. This spring, 2K and Cat Daddy Studios will bring NBA 2K mobile to Android devices. Downloadable for free, NBA 2K mobile was released for iOS on November 19 and delivers console-quality graphics and lifelike NBA action on the go like never before. NBA 2K mobile lets gamers experience their favorite NBA movements, collect player cards to build dream teams and step onto the court in 5-on-5 matchups, including season play and a variety of game modes. The team at Cat Daddy Studios strived to match the quality bar set by our industry-leading basketball series, and we are excited to deliver this rich mobile experience to basketball fans around the world. Rockstar Games will continue to release an array of new content for both Red Dead Online and Grand Theft Auto Online. Given Rockstar Games' unique ability to keep consumers engaged by delivering innovative content and exciting new modes of play, we believe Red Dead Online is positioned to deliver continued growth in player engagement over both the short and long term. Turning to eSports, preparations are underway for the second season of the NBA 2K League that will kick off this spring. Last month, qualifying rounds began with more than 7,000 players across North America and Europe vying for a spot in the combine and draft. This past weekend, in a league first, an Asia Pacific tournament was held in Hong Kong to identify five elite players from the region who will be eligible for the 2019 draft coming soon. With 21 teams competing in the season, we're very excited about 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. Now I'd like to discuss our fiscal 2020 pipeline. At The Game Awards in December, Private Division announced The Outer Worlds, an upcoming new IP from Obsidian Entertainment that is coming to PC, PlayStation 4 and Xbox One. The Outer Worlds marks the reunion of Tim Cain and Leonard Boyarsky, the original creators of Fallout, for this new single-player sci-fi RPG from the renowned team behind Fallout: New Vegas, Star Wars: Knights of the Old Republic II, South Park: The Stick of Truth, and the Pillars of Eternity franchise. The announcement trailer for The Outer Worlds has tallied more than 12.6 million views, and the game is featured on this month's cover of Game Informer magazine. Also at The Game Awards, Private Division announced that Ancestors: The Humankind Odyssey will launch digitally on PC, PlayStation 4 and Xbox One in calendar 2019. Following The Game Awards, Private Division partnered with GameSpot to debut the first 25 minutes of the game, which has been viewed more than 2.4 million times on GameSpot's YouTube channel. Ancestors is being developed by Panache Digital Games, an independent studio of 35 talented developers in Montreal, cofounded by Patrice Désilets, original creative director of Assassin's Creed. In addition, Private Division will continue to release updates for new content for the Kerbal Space Program Enhanced Edition for Xbox One and PlayStation 4 as well as for the PC version. Going forward, 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. In addition, the unannounced title from one of 2K's biggest and most beloved franchises remains on track for launch during fiscal 2020. 2K will have more to share in the coming months. In furtherance of our goal to expand our development capabilities across our labels, on Monday, 2K announced the formation of a new development studio based in Silicon Valley. Industry veteran Michael Condrey will serve as President of this yet-to-be-officially-named new studio. Michael is best known for co-founding Sledgehammer Games and leading development for the Call of Duty franchise, including Call of Duty: Modern Warfare 3. Michael also served as Chief Operating Officer and Director at Visceral Games, where he played an integral role in establishing the popular Dead Space franchise. We are very pleased that Michael has joined our team to lead development on a new unannounced project. We are confident that Michael's creative, production, and leadership expertise will help position 2K for future success. Looking ahead, our labels had a strong development pipeline, which includes titles from our renowned franchises and groundbreaking new intellectual properties. We will continue to support virtually all of our titles with additional content designed to enhance players' gameplay experience and drive engagement. This is an incredibly exciting time for our company and industry. The promise of new technology, more powerful platforms and emerging distribution and business models, such as streaming and subscription services, all have the potential to enhance our growth rate and provide incremental margin expansion opportunities. We remain highly enthusiastic about our future and believe that, with our industry-leading creative assets and commitment to innovation, we are well positioned to capitalize on the many positive trends in our industry and to provide value to our customers and returns for our shareholders over the long term.

Thanks, Karl, and good morning, everyone. Today, I'll discuss our third quarter results and then review our financial outlook for the fourth quarter and fiscal year 2019. Please note that additional details regarding our actual results and outlook are contained in our press release. As Strauss mentioned, our business delivered better-than-expected results in the third quarter. Total net bookings grew 140% to $1.57 billion, a new quarterly record, and exceeded our outlook range of $1.4 billion to $1.45 billion due primarily to the outperformance of Red Dead Redemption 2 and NBA 2K19. Digitally delivered net bookings also exceeded our forecast, growing 85% to a new quarterly record of $704 million and accounted for 45% of the total. During the third quarter, 31% of our sales of current generation console games were delivered digitally, up from 26% last year. Turning to some details from our third quarter income statement, GAAP net revenue increased to $1.25 billion and cost of goods sold increased to $898 million. Operating expenses increased by 46% to $299 million due primarily to higher marketing spend. And GAAP net income was $180 million or $1.57 per share, up from $25 million or $0.21 per share in the prior year period. Net income included a $109 million tax benefit resulting from the release of certain valuation allowances on the company's deferred tax assets. Without the release of these valuation allowances, the GAAP tax benefit would have been $11 million. This had no effect on our management reporting tax rate, which is 20%. Our strong performance converted into significant cash flow. During the nine months ended December 31, non-GAAP adjusted operating cash flow grew 188% to $587 million. During that same period, we deployed $262 million to repurchase 2.6 million shares of Take-Two stock. And as of December 31, we have $1.6 billion in cash and short-term investments. Now I will review the highlights of our fiscal 2019 outlook, starting with the fiscal fourth quarter. We expect net bookings to range from $450 million to $500 million, up from $411 million in the fourth quarter last year. The increase has been driven primarily by ongoing sales of Red Dead Redemption 2, recurrent consumer spending on Red Dead Online, and growth from NBA 2K, partially offset by lower results from Grand Theft Auto Online and Grand Theft Auto V. The largest contributors to net bookings are expected to be NBA 2K19, Red Dead Redemption 2 and Red Dead Online, Grand Theft Auto Online and Grand Theft Auto V, Social Point's mobile offerings and WWE 2K. We expect both recurrent consumer spending and digitally delivered net bookings to increase by around 10% each. Our forecast assumes that 44% of our current generation console game sales will be delivered digitally. We expect GAAP net revenue to range from $530 million to $580 million, and cost of goods sold to range from $248 million to $274 million. Operating expenses are expected to range from $205 million to $215 million. At the midpoint, this represents a 21% increase over last year driven primarily by higher marketing expense. And GAAP net income is expected to range from $76 million to $89 million or $0.67 to $0.77 per share. Turning to fiscal 2019. We are increasing our outlook primarily as a result of our stronger-than-expected third quarter results, partially offset by the following factors. We believe that some of the forecasted sales of Red Dead Redemption 2 were accelerated into the third quarter, and we've adjusted our fourth quarter expectations accordingly. Even with this adjustment, we expect fiscal 2019 sales of Red Dead Redemption 2 to be significantly higher than our forecast prior to launch. We expect new content releases for Red Dead Online to accelerate in the first quarter of fiscal 2020, and therefore, we are shifting some of our net bookings expectations for the title into that period. And we have increased our marketing spend forecast for the fourth quarter. We are increasing our net bookings range from $2.89 billion to $2.94 billion from our prior outlook of $2.8 billion to $2.9 billion. At the midpoint, this represents a 46% 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 results from Grand Theft Auto V and Grand Theft Auto Online. The largest contributors to net bookings are expected to be Red Dead Redemption 2 and Red Dead Online, NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, WWE 2K, and Social Point's mobile offerings. Expect the net bookings breakdown from our labels to be roughly 60% Rockstar Games, 35% 2K and 5% Social Point and other. And we forecast a geographic net bookings split to be about 55% United States and 45% International. We are increasing our recurrent consumer spending outlook to growth in the mid-teen, and we are maintaining our 30% growth outlook for digitally delivered net bookings. We forecast that 37% of our current generation console games will be delivered digitally, up from 34% last year. We expect to generate approximately $740 million in adjusted operating cash flow, up $10 million from our prior outlook, and we plan to deploy approximately $60 million for capital expenditures. We've increased our GAAP net revenue outlook to range from $2.66 billion to $2.71 billion, and we expect cost of goods sold to range from $1.51 billion to $1.54 billion. Total operating expenses are forecasted to range from $921 million to $931 million. At the midpoint, this represents a 22% increase over the prior year driven primarily by higher marketing, personnel, IT, and R&D expenses. And we have increased our GAAP net income forecast to a range from $354 million to $367 million or $3.07 to $3.18 per share. For management reporting purposes, we expect our tax rate to be 20%. In closing, Take-Two is on pace to deliver one of its best years ever, highlighted by record operating results. Looking ahead with our world-class creative teams focused on operational excellence and strong financial foundation, our company is exceptionally well positioned to deliver growth and margin expansion for our shareholders over the long term.

I guess, first on recurrent consumer spending, it grew 31% in the quarter versus your guidance for flat, so clearly several products outperformed, and your GTA Online and NBA 2K amongst them. So can you talk about the deceleration in 4Q? I know you mentioned Red Dead Online a little bit of that shifting to fiscal '20. But I'm curious why you wouldn't come out maybe a little bit more optimistic around that business, given how well it performed? And then second, if I may, I believe you said Red Dead sold-in 23 million units, and that's probably as of today. So with roughly 2 months left in the quarter, what should we expect in terms of reorder demand? Or how is the channel looking at this point?

So for recurrent consumer spending in Q3, the outperformance was driven by the strong sales of Red Dead Redemption 2 special and ultimate editions, which included additional content that was allocated to recurrent consumer spending as well as growth from NBA 2K's virtual currency. In terms of Q4, we still expect NBA 2K to continue to grow, and that's being offset by lower GTA Online sales that we've talked about being lower this year, and it was lower in Q3 and in Q4. Now for Red Dead Redemption, we still have strong sales and strong demand for the title. The 23 million units in Q3 was higher than what we expected. And based on that, we accordingly adjusted Q4.

My question is just about business models, especially free-to-play. EA just launched Titanfall, Apex Legends. It's the same free model that Fortnite uses. And I'm just curious if you could help us understand how full price games can perform in an environment where AAA content is being given away for free? And as you look at your portfolio, what do you think is the right mix of business models going forward in terms of subscription and free-to-play, full price, etc.? Just love to get an updated -- hear your updated thoughts on that?

Well, I appreciate it. Look, just in terms of our console title being made available free-to-play, remember that Fortnite came about in a roundabout way. It was originally developed as a AAA game. And the free-to-play version that became such a huge hit and continues to perform well was actually originally a mode and then was developed into what it is now. I think that's sort of a stand-alone experience. I think it's hard to replicate, and it would probably be ill-advised to try to replicate it. The truth is that what you deliver an amazing AAA experience, consumers show up for it, and you've seen that with us over and over again, and you see it in these results with the extraordinary results of Red Dead Redemption 2, the continuing amazing result of Grand Theft Auto V and these results of our catalog which sell pound-for-pound better than anyone else's catalog, which I say units sold per SKU. We're the best in the business or, more recently, NBA 2K19. So what we found is you give consumers what they want, and that's often reflected in reviews and Metacritic scores. Red Dead Redemption 2 tied Grand Theft Auto V with a 97 score. They'll show up and they show up in quantity. So I'm not worried at all about someone else establishing a free-to-play approach as long as our quality continues to be stellar, and that's a very big 'as-long-as.' That's what we have to execute against every day. Consumers aren't actually super price-sensitive where entertainment is concerned. Or said another way, if we put out something that people don't want, you can kind of price it whatever price you want, they're not going to show up for it. I wish it were different, but it's not like selling groceries or commodities. And when you give someone something that's phenomenal, it's our job to deliver vastly more value than what we charge, but price sensitivity declines. So I think this is all about quality. That's our approach, and that's why we're delivering these extraordinary results.

I have 3 questions: one for Strauss, one for Karl and one for Lainie. First, Strauss, I was just wondering if you can comment on the new development CEO in Silicon Valley? Is there a rule of thumb in terms of how long it takes for a studio like that to ramp up? And when could we start seeing content coming out of that studio? And then for Karl, I was just wondering if you could comment on the promotional environment during the holiday. Was Red Dead more promoted than expected in the quarter? And then lastly, for Lainie, I think the previous full year RCS growth was for low teens. And based on the expectation for flat this quarter, I think that would have implied over 30% growth for the March quarter. Could you just talk about what changed from then to the updated view of 10% growth this quarter?

Mike, this is Karl. I'll like the first question. So we are very excited to bring Michael Condrey onboard for us. I mean, he really follows our pattern of trying to attract and retain and develop the best content -- the best talent in the industry. That's obviously something that's a very important part of our strategy. And we've been able to do that to-date, and it's not by accident. So Michael joining us is, in my opinion, one of our best hires in a very long time. And we're really excited about what he's going to do with the new studio. In terms of timetable, we're not talking about timetables. And frankly, every studio is different and every game is different. So it wouldn't really help much anyway if I said something now because it won't end up being that way. But just rest assured that this is something that's very exciting for 2K and for our company.

Yes, on the second question, look, Red Dead is flying off the shelves. We sold in over 23 million units. It's performing vastly better than our expectations. It's continuing to sell. It's a massive hit. We definitely have marketed the title. But if by promoted, you mean discounted, we did not step in and have to price promote the title. The title is, generally speaking, being sold at full price.

And for the Q4, on recurrent consumer spending, as I mentioned previously, we look Red Dead Online, we expect their new content releases to accelerate into the first quarter, so we shifted some of the net bookings expectation for Red Dead Online into that period.

A couple on Red Dead. First, congrats on the great launch. When you look at sales since launch and the first couple weeks, how have they trended versus other Rockstar titles? And I'm really trying to get at the reorder potential next year. And then online with Red Dead, are you seeing incremental players to GTA? You mentioned in your prepared remarks the total high has grown as far as the number of players. Can you maybe give more color on that? And how do you feel about the online potential as you look at 2020 as part of recurrent spend for the title based on the users you're seeing today?

So we wouldn't really compare Red Dead to the last release, which is Grand Theft Auto. Grand Theft Auto stands alone. It is the most important product in entertainment history, the highest-grossing product in entertainment history, and it's just phenomenal. Red Dead Redemption 2 is also phenomenal in its own way and the sales have vastly exceeded our expectations. But I don't think we'd learn much by tracking those sales to sales of any other release. Our expectations remain exceedingly high. Consumers are highly engaged. The title is continuing to sell actively. In terms of online -- and I'm sorry, in terms of the outlook, this is, again, vastly exceeding our expectations, and we expect it to continue. Of course, that's very hard to call. And that'd be driven by the customers, but we feel great about it. In terms of online players that we've seen so far, remember Red Dead Online is in beta. It's really early days. It seems to be developing incredibly well for early days, but it is early days. We have no reason to believe that the overlap between Grand Theft Auto Online players and Red Dead Online players is necessarily substantial, certainly nothing approaching 100%, which is implied in your question. So the answer is absolutely, there are plenty of new players, and we expect that to continue as well. And as we mentioned in our prepared remarks, in December, Rockstar Games had the highest level of monthly active users it ever had between Grand Theft Auto Online and Red Dead Online. So I think that tells you just how powerful this offering is. Look, stay tuned because the title comes out of beta, obviously. We got a lot of content to come, and we expect to pick up activity with content drops and then naturally monetization should follow accordingly in fiscal 2020.

Just a follow-up on Red Dead Online. I mean, obviously, as you keep saying, it's still in beta. Can you talk about what you're seeing in the beta? What changes need to be made before you really launch the online game and how you compare the player behavior to GTA so far? And then I have a follow-up.

Yes, thanks. Look, Rockstar is going to talk about that in more detail. But I think as you'd expect, what's great about being in beta is you get feedback from your consumer and you're able to make improvements. And we've made no bones about the fact that this is a work in progress. Grand Theft Auto Online was a work in progress. We listen to the market. We listen to consumers. And we develop a great offering. One of the most exciting things about the way our business has evolved from what it was 5, 6 years ago, you work really hard. You make a title. You launch the title. And you get great results, good results, bad results, but you're done. There's very little you can do. In an online environment, we can engage with the consumer, and we can get better and better and better. And you've seen the effects of that with Grand Theft Auto Online. Five years after its initial launch, it continues to show enormous engagement, and therefore, it also delivers net bookings to us and drives profitability. So we have high hopes and expectations for Red Dead Online. It's super early to say that, and more details will be forthcoming from the label. So remember, streaming is a distribution technology. Subscription is a business model, but completely different animals. We can have a subscription program right now. You could do with physical discs. That's, after all, how Netflix started with physical discs. So there is nothing magical about new technology with regard to a subscription business model. Will that business model develop? It will develop if it's really good for consumers and it's really good for people who create product. That -- it has to be good for both. And remember, people consume video games differently than they consume linear programming. So the average American household consumes about 5 hours of linear programming, what we used to call television programming, but through all sources a day, about 150 hours a month. And currently, they consume about 1 hour and 20 minutes of interactive entertainment programming a day, so about 45 hours a month. Very big difference. And of course, the biggest differences with regard to linear programming, you're very unlikely to watch something twice. So in a given month, at 5 hours a day, you could be watching 75, 100 or, depending on the length, maybe more than that different products. In the case of the video game business, people may play the same title for the entire month. Maybe they play two or three titles, but they're not engaging with 75 or 100 titles. So you have to ask yourself whether a subscription model really applies to a video game consumer versus the possibility of engaging with a free-to-play title and paying as you go or engaging with a title for which you pay, for example, like NBA 2K19, where you pay a meaningful price in the U.S. about $60 at retail, a little bit more outside of the U.S., but you might play that game for a year. And we have people stay engaged for a year. And it's a terrific deal if you stay engaged for that. So jury's out on subscription models, but I would observe our strategy is to be where the consumer is. So subscription models do make sense. It could be an opportunity for us, but they need to make sense for everyone involved.

First of all, I apologize for the fact that we lost you for a few minutes there, and we'll make sure that never happens again. Look, we're proud of the quarter that we just reported on. We're incredibly excited that our outlook says we're going to have a record year for net bookings and adjusted cash flow provided by operations. We feel like we're firing on all cylinders, and the outlook is very strong. So we thank you so much for joining us today. I know it was a long call. Thanks for your support.