TTWO
#Greetings and welcome to the Take-Two Interactive first-quarter fiscal year 2016 earnings call.
(Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Mr.
<UNK> <UNK>.
Thank you, sir.
You may begin.
Good afternoon.
Welcome and thank you for joining Take-Two's conference call to discuss its results for the first quarter of fiscal year 2016, ended June 30, 2015.
Today's call will be led by <UNK> <UNK>, Take-Two's Chairman and Chief Executive Officer, <UNK> <UNK>, our President, and <UNK> <UNK>, our Chief Financial Officer.
We will be available to answer questions to answer your questions during the Q&A session following our prepared remarks.
Before we begin, I'd like to remind everyone that the statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws.
These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us.
We have no obligation to update these forward-looking statements.
Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.
These important factors are described in our filings with the SEC including the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2015, including the risks summarized in the section entitled Risk Factors.
I would also like to note that, unless otherwise stated, all numbers we will be discussing today are non-GAAP.
Please refer to our earnings release for a GAAP to non-GAAP reconciliation and further explanation.
Our earnings release and filings with the SEC may be obtained from our website at www.taketwogames.com.
And now I will turn the call over to <UNK>.
Thanks, <UNK>.
Good afternoon and thank you for joining us today.
I'm pleased to report that during the first quarter, we delivered strong revenue and earnings growth driven by robust demand for our recent releases and catalog, as well as better than forecasted recurrent consumer spending.
Our solid earnings converted into significant cash flow and at quarter end, we had approximately $1.2 billion in cash and short-term investments.
Nearly two years after its record-shattering launch, Grand Theft Auto V continues to outperform expectations.
On April 14, Rockstar Games brought this groundbreaking title to PC with a number of enhancements, generating stellar reviews and strong digitally delivered sales.
In addition, we benefited from ongoing demand for the console versions of Grand Theft Auto V, particularly as the installed bases of Playstation 4 and Xbox One expand.
Today, Grand Theft Auto V has sold in more than 54 million units worldwide.
And Rockstar Games is successfully driving engagement with the title in meaningful incremental profits through the release of new content for Grand Theft Auto Online, which I will discuss shortly.
NBA 2K15 continues to broaden its global audience and build on the franchise's trend of annual growth.
The sell-in of the title has crossed the 7 million unit mark and surpassed NBA 2K14 during the same period after launch.
And NBA 2K15 has generated substantial revenue growth over last year's release, driven in part by high margin recurrent consumer spending.
Our first-quarter results were also enhanced by a diverse array of other recent releases and catalog titles.
Standouts include the Borderlands series, particularly The Handsome Collection, WWE 2K15, and Evolve.
We continue to capitalize on our industry's transition towards digital distribution.
During the first quarter, our digitally delivered revenue increased 139% to $254 million and represented 69% of our total net revenue.
This result was driven by growth in full game downloads and recurrent consumer spending, both of which exceeded our outlook.
Recurrent consumer spending represented a significant component of our overall business mix accounting for 25% of our total net revenue in the first quarter.
Grand Theft Auto Online was once again the single largest contributor as Rockstar Games has driven sustained engagement through the ongoing release of free content updates, most recently the Ill-Gotten Gains Updates Part 1 and Part 2 which were launched in June and July, respectively.
Roughly 70% of Internet connected Grand Theft Auto V users have played Grand Theft Auto Online and the active user base continues to grow with average monthly active users for calendar 2015 to date up more than 40% versus calendar 2014.
In addition, virtual currency for NBA 2K was an important part of our digitally delivered success.
Revenues grew by 54% year over year, benefiting both from online console play and strong engagement with the MyNBA2K15 companion add.
Downloadable add-on content is also a key element of recurrent consumer spending.
The leading contributors in the first quarter were offerings for the Borderlands series and Evolve.
Finally, our results benefited from the enduring popularity of WWE SuperCard, which has been downloaded more than 7.5 million times and sustained growth from NBA 2K Online in China which now has 27 million registered users and continues to be the number one PC online sports title in China.
Expanding our revenue from recurrent consumer spending is a key strategic focus for our organization and an important high margin growth opportunity.
We now anticipate the revenue from recurrent consumer spending will grow in fiscal 2016 and represent increased percentage of our total business mix versus last year.
Fiscal 2016 is off to a solid start and promises to be another year of substantial non-GAAP earnings and positive cash flow for Take-Two.
Our ability to project significant profits this year with a lighter release schedule reflected our Company is now structurally a higher margin enterprise than in any time in our history.
Today, Take-Two is a global interactive entertainment leader with the industry's top creative talent, a diverse portfolio of critically acclaimed and commercially successful franchises, and a solid financial foundation.
We are better positioned than ever to deliver growth and margin expansion in future years and returns for our shareholders over the long term.
I will now turn the call over to <UNK>.
Thanks, <UNK>.
Today I will discuss our pipeline for the remainder of fiscal 2016 and beyond.
On September 29, 2K will continue their illustrious basketball legacy with the launch of NBA 2K16.
This year's release will define the ultimate intersection of sports and pop culture with three unique game covers featuring NBA All-Star Stephen Curry, James Harden, and Anthony Davis, as well as an all-new MyCareer mode, written and directed by acclaimed filmmaker Spike Lee.
NBA 2K16 will also feature the most extensive soundtrack in NBA 2K history, including more than 50 tracks by notable artists such as The Ramones, Nas, Jay-Z, MIA, Calvin Harris, and Drake.
On October 27, 2K will release WWE 2K16, which will further leverage the development expertise and visual concepts and promises to take this beloved sports entertainment franchise to exciting new heights.
Stone Cold Steve Austin, a 2009 WWE Hall of Fame inductee and winner of 21 championships throughout his career will be the cover superstar.
In addition, 2K recently announced that action movie icon and WWE Hall of Fame inductee Arnold Schwarzenegger will make his series debut in WWE 2K16.
Consumers who preorder the title at participating retailers will receive his two famous characters from the films, The Terminator and Terminator 2: Judgment Day, and compete in the squared circle against the games roster of WWE superstars.
In November, 2K will launch XCOM 2, the sequel to the 2012 game of the year award-winning strategy title XCOM: Enemy Unknown.
Developed by Firaxis Games, XCOM 2 will introduce procedurally generated maps for deep replayability and will offer a higher level of modding support.
XCOM 2 will include a diverse collection of new enemies, aliens, and weapons and will provide greater story, strategy, and tactically driven combat.
This month, the title will be on the cover PC Gamer Magazine, which features an all-new detailed look at the game and interviews with the development team.
Also in development at Firaxis Games is Sid Meier's Civilization: Beyond Earth: Rising Tide, a thrilling in-depth expansion pack from the hit franchise that has sold in over 31 million units worldwide.
Rising Tide expands Beyond Birth to new frontiers on the planet's surface and beneath its seas, adding even more choices and diplomatic options as players continue to build a new vision for the future of humanity.
2K plans to launch the title this fall.
Fans of Firaxis Games can also look forward to the Second Annual Firaxicon, an event celebrating the studio's games and players which will be held at the Baltimore Convention Center on October 3.
Firaxicon will provide consumers with an opportunity to meet members of the development team, attend panel discussions, and experience both Rising Tide and XCOM 2 prior to their releases.
On February 9, the release of Battleborn promises to continue our proven track record of launching successful new intellectual properties.
Currently in development by Borderlands creators, Gearbox Software, Battleborn is a first-person shooter with 25 unique characters that grow and level up as players progress through the game.
Battleborn will include a cooperative story mode featuring a variety of heroic adventures as well as three different competitive multiplayer modes full of intense online team-based action.
2K will hold an open beta for Battleborn prior to its release and we'll have more to share about its details later this year.
Also during fiscal 2016, consumers in Asia will experience Civilization Online, our free to play mass multiplayer online game developed in partnership with renowned South Korean-based studio, XL Games.
2K recently completed its second closed beta test for the title and consumer response was extremely positive.
We believe this bodes well for the game's forthcoming commercial launch in Korea which represents another important milestone in building our online business in Asia.
We also plan to bring Civilization Online to Taiwan, Hong Kong, and Macau through a publishing partnership with GameFirst and recently announced a deal with to launch the title in China, the world's largest PC online game market, through online publishing powerhouse, Shihu 360.
In keeping with our focus on providing ongoing engagement, we plan to support virtually all of our upcoming titles with innovative offerings designed to drive recurring consumer spending.
We will also continue to release offerings for many of our current titles including additional free content for Grand Theft Auto Online.
Over the past several months, 2K has presented impressive exhibitions at a number of high-profile events that have enabled consumers, in-flowers, and press to get hands-on time with the upcoming releases.
From E3 in Los Angeles to Comic-Con in San Diego and Gamescom in Germany, the reaction to our titles has been incredibly positive and anticipation for their launches continues to grow.
In the months ahead, we will build on that momentum to reinforce our strong outlook for this year.
Heading into and throughout this holiday season, we will deploy our worldwide marketing and distribution expertise to drive sales and create must-have moments at retail.
Our teams execute well-coordinated global campaigns that leverage every relevant form of media, both traditional and social, to turn our product launches into [tentpole] events.
Whether on discs or through digital download, we will ensure that our products are available to consumers whenever and wherever they want them.
Looking ahead, our robust development pipeline extends far beyond fiscal year 2016.
Last week, 2K announced that Mafia III, the next installment in our successful organized crime franchise, is currently in development for Xbox One, Playstation 4, and PC at Hangar 13, 2K's new development studio.
Planned for release during fiscal year 2017, the story of Mafia III introduces a new playable protagonist, Lincoln Clay, an African-American Vietnam War veteran who is determined to take revenge on the Italian mob for betraying and murdering his black Mafia family.
Players will choose their path to revenge and build their own crime empire in a fictionalized New Orleans circa 1968.
Mafia III combines the best of cinematic storytelling with a dynamic narrative structure that responds to player choice, situated in a city that changes based on their actions.
In addition, we have numerous unannounced games in development that are planned for release in future years, including both groundbreaking new intellectual properties and offerings from our established franchises.
With our industry-leading creative assets and focus on operational excellence, Take-Two is well-positioned for the long-term success.
I will now turn the call over to <UNK>.
Thanks, <UNK> and <UNK>.
On behalf of our entire management team, I would like to thank our colleagues for their hard work and a solid start to the year.
And to our shareholders, I would like to express our appreciation for your continued support.
We will now take your questions.
Operator.
Are you looking at the GAAP financials or the non-GAAP financials.
We don't show that but the GAAP the way the internal royalties is calculated a little different than what we're doing with the non-GAAP where the non-GAAP financials and the EPS associated with that is going to follow along with the overall profitability of the business and the internal royalties to be calculated, based on the overall profitability of the business and that profit share at that point in time.
Hi <UNK>, it's <UNK>.
You obviously all of those titles have significant ---+ are significant contributors towards our digital sale, both as digital download and in recurrent consumer spending.
We don't have any details to provide you specifically across game to game, but we can tell you in general it's growing across all of our franchises.
So for the accelerated amortization of the capitalized development expenses that we talked about, the amount is about half of what the margin effect was in the quarter.
So we're not talking about what specific title that is for, but that's the amount.
And what's driving that is on each quarter, we look at the estimates of lifetime titles of our sales, and it will adjust the capitalized development cost ---+ the amortization for it, based on what those estimates are, whether it's up or down.
And <UNK>, regarding the M&A environment, I think we see that as unchanged.
As you know, market prices are robust for certain companies in our space; and I think that reflects the fact that this is a growth area in the entertainment business and certain companies are doing very well indeed.
We tend to be very disciplined.
We are looking for accretive opportunities, and we are very focused on value.
But we don't really see any changes there.
From our point of view in terms of cash, we increased our cash balance this quarter.
We [consolidated] operations, generated free cash flow.
That's certainly good news.
We're reporting roughly $1.2 billion in cash.
We account for our converts as though they will be satisfied with equity, so on that basis, preferably it's all net cash as well.
So our view on that is that cash in our business can be a strategic asset.
It allows for one to be opportunistic and it supports the Company that operates within a business that does offer some risk.
So we do see it as a strategic asset that will allow us to avail ourselves of both internal and external growth opportunities as they come about.
In terms of use of cash, we've said there will be three potential uses first to support organic growth.
This Company story is an organic growth story largely.
Second, to avail ourselves of inorganic opportunities ---+ I just addressed that.
And third, to return capital judiciously to shareholders and we do have an open authorization for a buyback from our Board.
So I think it will fall within those three buckets.
This is obviously a high-class problem to have.
Hi <UNK>, it's <UNK>.
I think first and foremost, the intention of all the labels in our studios is to create product that people really want to enjoy and that will delight consumers.
So, that's first and foremost.
Whenever we are thinking about a development pipeline it's how can we create franchises.
The best way to create a franchise is to create great product.
That being said, I would say pretty much across the board, every one of our releases on a go-forward basis should have some kind of recurrent consumer spending opportunity.
There may be some puddles where it doesn't make sense, but again, that's a creative decision as much as it is a business decision, but there is no ---+ I don't think there are any specific genres where it doesn't play well.
If you look at some of the titles today from which we are generating recurrent consumer spending, they could be more diverse, so I think it's fair to say that that's a focus for us across all of our titles and I don't think that there's any set rules in terms of genres, etc.
In terms of Battleborn, again, our ---+ whenever we take a release window for any of our titles, it's really two ---+ it's two specific things.
It's when the title is ready, when is the best time for us to optimize it from a creative perspective, and then when do we think the right window is for that title, given what's in the market and also given the natural consumer patterns of purchasing patterns over the years.
I would say that it's really more the former.
The most important decision that we make is, is the title ready.
Is it the best creative ---+ are we putting our best creative foot forward when we are releasing a title.
That's always primary.
And then we will look at it and we will say, is there an open window.
Given that, is there an open window that we can utilize.
And I think pretty much across the board, there aren't many months in the year where we feel uncomfortable releasing a title.
Most of our titles stand amongst themselves.
We don't necessarily need a holiday to drive our spending because these are very high-quality AAA titles that are tentpole releases in and of themselves.
And then in terms of DLC for GTA V, we don't have anything to say about that today.
That's NBA 2K Online in China and it's based on 27 million users.
Well, on your first question on the digital business we do expect the margins to continue to grow as we continue to get our digital business getting bigger and bigger, but what percentage that's going to be, it's a little early to say, but we expect it to continue to grow over the long term.
And in terms of the percentage of our business, reflected by digital downloads as opposed to physical sales, we do see that growing over time.
The first quarter was disproportionately high because of the release of Grand Theft Auto V for PC, which tends to be heavily downloaded format, but we also see the percentage growing for consoles over time.
I don't think we are quoting a specific figure.
We are blessed that we have two distinct labels at this Company and most of the studios have a lot of talent.
We do not have a tech sharing environment ---+ very congenial company, but we don't think that's the best way to get ---+ to get the best out of our development folks.
That's not the way it works around here.
Mafia III is a completely different experience.
I would not compare it to anything else out there.
The reveal was great, but it stands alone.
And no, we don't use any other game in the same sentence as Grand Theft Auto.
It is the industry standard bearer and it's not up for comparison.
So no, I think it's flat or (inaudible) that may be the case but it's not.
It's early in the year.
We are really ---+ we are very happy with the way the first quarter penciled out.
We have a lot of other cards to turn over.
We have got obviously a big release in the second quarter with NBA 2K16.
We're really excited about that, but it is early days yet.
But thanks, it's a really good start and we continue to believe we have a lot of work to do.
We also have a great deal of opportunity.
We would like to thank everyone who attended the call today for their attention, for the great questions, and we do appreciate your continued support, thanks so much.
