TTWO
#Greetings and welcome to the Take-Two Interactive Software second-quarter fiscal-year 2016 earnings call.
At this time, all participants are in a listen-only mode.
(Operator Instructions) It is now my pleasure to introduce your host, Mr.
<UNK> <UNK>, Senior Vice President of Investor Relations and Corporate communications for Take-Two Interactive.
Thank you, Mr.
<UNK>.
You may begin.
Good afternoon.
Welcome and thank you for joining Take-Two's conference call to discuss its results for the second quarter of fiscal year 2016 ended September 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 your questions during the Q&A session following our prepared remarks.
Before we begin, I would 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; and Form 10-Q for the fiscal quarter ended June 30, 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.take2games.com.
And now I will turn the call over to <UNK>.
Thanks, <UNK>.
Good afternoon and thank you for joining us today.
I am pleased to report that during the second quarter we delivered better-than-expected revenue and earnings growth.
Our results were led by the blockbuster launch of NBA 2K16, continued robust demand for Grand Theft Auto V, and strong growth in recurrent consumer spending.
The launch of NBA 2K16 was the most successful in the history of the series, with over 4 million units sold-in during its first week, including strong digitally delivered sales that approximately doubled year-over-year.
According to the NPD Group, adjusting for days in market, NBA 2K16 had the best launch month of any sports game during this new console cycle.
The title also has been a hit with critics and is the highest-rated sports game of 2015 on Xbox One, according to Metacritic.
Virtual currency for the NBA 2K brand continues to exceed our expectations and has been a significant contributor to revenue growth.
During the second quarter, recurrent consumer spending on NBA 2K grew by nearly 120% year-over-year, benefiting both from online play and the My NBA 2K companion app.
With the holiday season approaching, demand for NBA 2K16 remains strong, and consumer engagement has been outstanding, with more than triple the number of games played online versus last year's release.
I would like to congratulate the teams at 2K and Visual Concepts for once again surpassing their high standards for excellence and delivering a stellar addition to our industry-leading basketball series.
More than two years after their initial launch, Grand Theft Auto V and Grand Theft Auto Online continue to exceed our expectations, particularly as the installed base of new-gen consoles expands.
During the second quarter, Grand Theft Auto Online was once again the single largest contributor to recurrent consumer spending.
Rockstar Games continues to support this vast online world with rich array of new content ---+ most recently the release of Ill Gotten Gains Part 2, Freemode Events, Lowriders and the Halloween Surprise.
This ongoing release of new content has been a key driver of players' strong engagement with Grand Theft Auto Online and has significantly enhanced recurrent consumer spending.
Grand Theft Auto Online now has over 8 million active users per week, which is more than it had at the same time last year.
These results underscore the continued strength and vibrancy of this unique and groundbreaking entertainment experience.
A variety of other titles from our diverse portfolio also contributed to our second-quarter results, led by NBA 2K15 and offerings from the Borderlands and WWE 2K series.
During the second quarter, digitally delivered revenue grew 57% to $141 million, driven by better-than-expected growth in both full-game downloads and recurrent consumer spending.
Recurrent consumer spending grew 39% year-over-year and accounted for 20% of our net revenue in the second quarter.
In addition to virtual currency for Grand Theft Auto Online and NBA 2K, recurrent consumer spending was enhanced by a variety of other offerings.
These included downloadable add-on content, particularly for the Borderlands series, Evolve, and WWE 2K15; WWE 2K SuperCard, which was updated with new content; and NBA 2K online, which remains the number-one PC online sports title in China and continues to generate profits every month.
Digitally delivered revenue, especially recurrent consumer spending, remains a high-margin growth opportunity and a key strategic focus for our organization.
We expect digitally delivered revenue to grow in fiscal 2016, driven both by higher full-game downloads and recurrent consumer spending.
As a result of our outperformance in the second quarter, we are increasing our financial outlook for the full fiscal year.
Our holiday season already is off to a great start, and we anticipate a strong back half to fiscal 2016.
Today, Take-Two's long-term potential to generate revenue growth, margin expansion, and returns for our shareholders is greater than ever.
Our Company's strength reflects our unparalleled creative assets, sound financial foundation, and unwavering commitment to delivering the highest quality interactive entertainment experiences.
I will now turn the call over to <UNK>.
Thanks, <UNK>.
I would like to begin by congratulating 2K and Visual Concepts for their record-breaking launch of NBA 2K16, which once again raised the bar for our annual basketball series.
In addition to delivering even more true-to-life NBA experience, the team has done an exceptional job keeping consumers highly engaged with the title after their initial purchase.
I will now discuss our recent releases and pipeline for the remainder of fiscal 2016.
On October 8, 2K and Cat Daddy Games extended our portfolio of action-packed mobile entertainment experiences with the release of NHL SuperCard.
This collectible card battle game challenges players to build teams of current and legendary NHL players, train them, and test their skills in exhibition, season, and rivals-based action.
On October 9, 2K and Firaxis Games launched Sid Meier's Civilization: Beyond Earth ---+ Rising Tide, a massive expansion pack for the sci-fi title from our award-winning Civilization series, which has captivated fans for nearly a quarter of a century.
Rising Tide has earned rave reviews from top critics, including a 9 out of 10 from both Game Informer and GameSpot.
The pack enriches the Beyond Earth experience by offering a robust array of expansion content with even more strategic ways to shape humanity's future on an alien planet.
On October 27, 2K released WWE 2K16, the latest installment in our popular sports entertainment series.
The title enjoyed a successful launch, including significantly higher review scores versus last year's release.
For example, IGN scored WWE 2K16 an 8.8 out of 10, stating that the title is as close to a fusion of performance and competition as a wrestling game has ever gotten.
WWE 2K16's strong reviews are among the best ever received by the series, and reflect Yukes's and Visual Concepts's ongoing commitment to improve its quality with each annual release.
In keeping with our focus on driving recurrent consumer spending, WWE 2K16 is being supported with a robust array of downloadable add-on content, and we are already seeing strong attach rates for its season pass.
We have had an excellent start to the holiday season, and our marketing campaigns are in full swing.
Whether it is physical or online retailers, we will have a significant presence at all key points of purchase.
We believe that interactive entertainment will be a must-have category during this holiday season, and we expect the installed base of new-gen consoles to continue to grow.
With our industry-leading portfolio of offerings, Take-Two is well positioned to capitalize on these positive trends.
Looking ahead to our fourth quarter, on February 5, 2K will launch XCOM 2 for PC, the sequel to the 2012 Game of the Year award-winning strategy title XCOM: Enemy Unknown.
Developed by Firaxis Games, XCOM 2 will feature deep replayability and offer a high level of modding support.
Last month, the title was featured at the second annual Firaxicon event in Baltimore, where the development team hosted panels and unveiled more of the game's aliens and enemies.
Consumers who pre-purchase or preorder XCOM 2 will receive the Resistance Warrior Pack that provides increased soldier customization options.
An important component of our strategy is to promote consumer engagement with our brands, and we intend to support virtually all of our upcoming titles with innovative offerings designed to drive recurrent consumer spending.
We also released new content for recent titles, including additional free updates for Grand Theft Auto Online.
Turning to our online initiatives in Asia, we continue to make progress on Civilization Online, our free-to-play mass multiplayer online game developed in partnership with renowned South Korean-based studio XLGames.
The title is expected to enter open beta shortly, which will help to usher in its commercial launch during the current fiscal year.
In addition to Korea, we plan to bring Civilization Online to Taiwan, Hong Kong, Macau, and China through our publishing partnerships with GameFirst and Shihu 360.
Looking ahead to next fiscal year, significant buzz is already building for Mafia III, the next installment in our successful organized crime series.
Last month, the title was featured on the cover of Game Informer magazine, which included an in-depth 12-page story that highlighted the game's key characters, evocative New Orleans settings, and bold new direction for the series.
Mafia III currently is in development at 2K's Hangar 13 studio and is planned for release during fiscal 2017.
2K and Hangar 13 will reveal more details about the title in the coming months.
In addition, we announced today that Battleborn, a groundbreaking new first-person shooter from 2K and Gearbox Software, the creators of Borderlands, is now planned for launch on May 3, 2016.
We believe that extending development by a few months will allow the team enough time to fully realize the creative vision for Battleborn and enable them to deliver the best entertainment experience possible.
2K recently revealed Battleborn's competitive five-on-five multiplayer modes, which will complement the game's cooperative story mode.
Early next year, Battleborn will have an open beta across all platforms, for which PlayStation 4 owners will receive early access.
We very much appreciate consumers' interest anticipation for Battleborn, and we are confident that the game will be well worth the extra wait when it launches in May.
In addition, our worldwide development teams are working on numerous unannounced projects, including new intellectual properties and offerings from our established franchises.
Our robust development pipeline extends years into the future and promises to captivate audiences and set new benchmarks for creative excellence.
Quality remains our watchword and is the foundation of our relationship with our consumers.
Everything that we do is based upon this commitment, which has been and continues to be our path to 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 delivering another strong quarter for our Company; and, to our shareholders, I want to express our appreciation for your continued support.
We will now take your questions.
Operator.
Well, we have talked about some upcoming releases.
We talked about Battleborn, of course; we talked about Mafia III.
And we have titles that we have been bringing in every year, NBA 2K and WWE 2K.
And, of course, we have recurrent consumer spending in our catalog.
So the market has a lot more visibility into our Company than ever before.
We have also said that we expect to be profitable on an ongoing basis, and we've been overdelivering compared to our expectations for some time pretty regularly.
So I hope that gives the market some confidence about our view of our business on a going-forward basis.
Also, since 2007 we have successfully launched one new hit property every year in addition to bringing back our beloved franchises over and over again.
And while there is no guarantee we will be able to do that, it certainly is our goal to continue to launch a new titles, and new hits, and new franchises in addition to bringing back sequels of existing franchises.
Today we have 11 titles that ---+ with one individual release that has sold at least 5 million units.
We have over 40 titles that have sold at least a couple million.
So we think it is the best collection of owned intellectual property in the business.
So I guess I probably have to use the caveat: past performance is no guarantee of future success.
On the other hand, our strategy speaks for itself.
And while we do allow our labels to make product announcements, and our product announcements are tailored to marketing, not to analyst calls, we are very proud of our past success, and we think we are well positioned going forward.
Yes, they ought to be, for a couple of reasons.
Recurrent consumer spending is by definition a higher-margin business.
The shift to digital distribution is a higher-margin business.
And so those two things matter; and, obviously, catalog is a higher-margin business.
And as catalog becomes a more reliable and a more important part of our business, that is higher-margin.
So <UNK> talked about a margin expected in the upper 40s.
That is a very significant change from what this Company looked like just a few short years ago.
The effect of new content is it increases engagement.
And when we have more engagement, we have more recurrent consumer spending.
I guess that stands to reason.
We don't release the actual statistics around that, the actual data around that.
But we do have 8 million or more active users weekly for Grand Theft Auto Online.
So it is continuing to outperform our expectations, and we are very gratified by those results.
To your question about the percent of purchases that come through digital distribution, for frontline it could be 20% of our revenue, could be a bit more than that.
For catalog it is a much higher figure.
For PC it is a much higher figure.
In terms of potential areas like eSports or VR, obviously they are very different ---+ we were an early ---+ we made an early bet on eSports.
We have a position in Twitch, which was sold to Amazon.
It was a very small investment for us, but it was quite successful.
We have made our games available for eSports competition, but that has been more a marketing experience than it has been revenue-generating.
We think it is a very exciting space.
It remains to be seen what the nature of monetization can be for companies like ours.
But it is certainly a good thing, and creating another form of engagement just speaks to the robust nature of this entertainment experience.
And it is just another reflection of how important interactive entertainment is today to consumers.
I have talked about virtual reality before.
There will be virtual reality headsets hitting the market.
There will be software hitting the market.
It does remain to be seen how consumers feel about that, what the nature of an interactive entertainment experience is in VR, and how comfortable that experience is.
We have said that we are involved in R&D in the space.
We find it really fascinating.
Our creative folks find it fascinating.
But there is not much to be said until we see how that market develops.
If the market develops in a way that is consistent with the kind of intellectual property we have, we expect to be there, and we expect to well in it.
But I think it is too early to call.
And finally, in terms of WWE, it continues to develop well.
I would just like to make the note that the Metacritic scores are significantly higher this year than last.
That is gratifying, because we are focused on improving the quality of the title.
It seems to be doing very well and certainly exceeding our expectations.
I think the answer is both businesses are stable and successful.
We are really not talking about changes except to say that Grand Theft Auto Online continues to perform well and continues to exceed expectations.
And NBA 2K Online in China also continues to perform well and is generating revenue and profits.
But we are not giving more detail than that.
Yes, this is <UNK>.
In terms of the industry dynamics that really are vivid for us, I would say it's that there is ---+ when you deliver a title that excites consumers, they seem to like to stay engaged.
That engagement can be monetized in recurrent customer spending if you do it right.
So we are driven by the idea of delighting consumers, and then we focus on monetization, not the other way around.
We think it is crucial for a high-quality entertainment company.
That is our compact with our consumer.
There is no question, though, that the market is now open-minded with regard to ongoing engagement and ongoing spending, even after an initial release.
The second dynamic that is relevant is the shift to digital distribution, which does generate more margin dollars for us and does mean that there is an opportunity for catalog to remain vivid, even if it doesn't make sense to have discs on shelves.
So those are both good things.
And then <UNK> will talk about taxes.
The $20 million tax benefit is a new addition to our guidance for the third quarter and for the year.
And you also asked about WWE; it is <UNK>.
Look, obviously the game is ---+ we are thrilled the way WWE has launched this year.
The game is better than last year.
I think both the critics and the consumers are acknowledging that.
It's is really too early.
We obviously have not announced anything about how we are doing, but we are very excited about it.
And WWE 2K15 grew 40% over WWE 2K14.
And we think this is a better game, so we're obviously very hopeful and excited about this year.
So our convert, we have a ---+ the $250 million convert matures in December of 2016.
So right now, it doesn't make economic sense to take it out.
But we will evaluate it when it matures and see what the Company's position is with our cash, and what our potential uses are for it, and we will make a decision at that time on how we want to close out that convert.
The other question on Battleborn ---+ we don't without specific title-by-title numbers in our guidance.
But our guidance overall went up.
We have the tax credit, as we just previously mentioned.
But our second-quarter did much better than we had expected.
Also the forecast for our other titles for the remainder of the year is very strong, and that more than offset the Battleborn move out of the year.
Yes, obviously there is enormous learning to be had in our experience with NBA 2K Online in China, but I was not sure I could capture it in a few short sentences on this call.
But we had no experience in massive multiplayer, no experience in China, and no experience in free-to-play before we launched that title.
Now we have a great deal of experience.
And we developed in partnership with a phenomenal Company, Tencent.
So I would hope that we would apply all of that learning to the launch of Civilization Online.
And we are feeling pretty good about it as we head to an open beta.
It remains to be seen, but it is looking pretty good.
In terms of our commitment to Asia, it remains very strong.
It is a growth area.
And what's exciting about it is businesses which may be not that interesting in the US ---+ for example, massive multiplayer games are very tough, very competitive, very expensive business in the US ---+ can be very interesting opportunities in Asia, which is why we are pursuing them over there.
And then with success, we do have the opportunity to bring those around the rest of the world, potentially even including the US.
So we think that strategy remains sensible.
We have done exceedingly well throughout Asia since we opened our headquarters in Singapore a number of years ago.
We were in the same position, which is we have a significant amount of cash.
We've got a very strong balance sheet.
So in addition to returning capital to the shareholders, and we just did that ---+ we just bought back about 1 million shares of stock on what now, in today's market, looks like favorable terms.
We have the ability to support organic growth, which has really been the story around here.
We have grown very significantly organically.
And, of course, we can support inorganic growth as well to the extent that we maintain our discipline and we focus on accretion to shareholder value.
We are very focused on accretion.
So there is no update to the strategy.
The strategy remains the same.
We remain open-minded on the one hand and disciplined on the other.
We are not giving any more detail, except to say that the title of GTA V and GTA Online continues to do well and continues to exceed our expectations.
<UNK>, we don't comment on allocation of any of our resources.
We are pleased that we had another great quarter.
We attribute it to continued tight focus on our strategy of being the most creative, the most innovative, and the most efficient Company in our business.
And our results are driven first and foremost by the creativity of thousands of developers who we are lucky to have here in the shop and by the many people who support those activities to make sure that we do a great job marketing and distributing their titles, and also running our business day-to-day.
So, once again, thanks to our colleagues.
Thanks to our shareholders, and thanks to those who joined the call today.
We appreciate it.
