Take-Two Interactive Software Inc (TTWO) 2012 Q2 法說會逐字稿

Greetings, and welcome to the Take-Two Interactive fiscal second quarter 2012 results conference call.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

(Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications for Take-Two Interactive.

Thank you.

Mr.

Diamond, 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 2012 ended September 30, 2011.

Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer, Karl Slatoff, our Chief Operating Officer 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'm obliged to review our Safe Harbor Statement by reminding everyone that the statements made during this call that are not historical facts are considered forward-looking statements under Federal Securities laws.

The 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, 2011.

These documents 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.

Our results for the second quarter marked the eighth consecutive period in which we've met or exceeded our financial outlook.

Fiscal 2012 is on track to be another profitable year for Take-Two on a non-GAAP basis, and more importantly, fiscal 2013 is poised to be one of the Company's best years ever.

During the second quarter, we delivered net revenue of $107 million.

We also generated significant cash flow, ending the quarter with approximately $270 million in cash.

The principal drivers of our second quarter results were strong sales of catalog titles and digitally delivered content.

Catalog sales were led by the Grand Theft Auto franchise, Red Dead Redemption and Borderlands.

Our creative team's ability to produce games that are consistently among the highest rated in the industry enables our titles to enjoy prolonged demand from consumers, which translates into stronger catalog sales and more predictable, stable revenues and profits for our Company.

Our new releases, including Nicktoons, MLB and an array of other titles also contributed to our second quarter results.

In particular, we continue to benefit from LA Noire, which has been our most successful new release so far in fiscal 2012.

This ground breaking title from Rockstar has set a new standard for video games of cinematic art and has become an important franchise for the Company.

Digitally delivered content accounted for 25% of our net revenue in the second quarter.

The biggest contributors were add-on content for our top-selling catalog titles and full downloads of Sid Meier's Civilization V.

We also expanded our digital offerings with successful new add-on content for LA Noire and Carnival Games Monkey See, Monkey Do, and Sid Meier's Pirates for the iPad, which received an 88 rating on Metacritic and was among the top 10 paid apps for the iPad following its release.

Our strong digital revenue demonstrates that add-on content increases consumer engagement with our titles and enhances the longevity and value of our franchises.

Growing our digital offerings, including add-on content for our front line titles, continues to be an important focus for Take-Two.

Over the past several months, we've executed a number of strategic and operational initiatives, which we believe position our Company for even greater success.

In July, we launched our first social network game, Sid Meier Civilization World for Facebook.

Sid World is one of the deepest interactive entertainment offerings currently available on that platform and has received strong critical acclaim.

The project has been an invaluable learning experience for Take-Two, and we expect to apply this knowledge to drive success in our future social gaming initiatives.

In October, our labels launched their redesigned online store fronts, the Rockstar Warehouse and the 2K Store.

These web stores enable consumers to purchase games directly from the Company and will also offer branded merchandise that we anticipate will resonate with gamers' passion for our titles and enhance our franchises.

And last month, we took advantage of a favorable credit market conditions and our strong financial profile to renew for 5 years our undrawn credit facility on significantly improved terms, nearly 1 year ahead of its scheduled expiration.

With our $270 million cash balance, undrawn credit facility and robust cash flow outlook, we have ample liquidity to pursue our numerous growth opportunities.

The second half of fiscal 2012 is already off to a solid start, with the October launches of the NBA 2K12 and Red Dead Redemption - Game of the Year edition.

NBA 2K12 has received numerous awards and accolades, including a 91 rating on Metacritic, the highest in both the history of our basketball franchise and 2K sports.

The title also includes our first mobile version of the franchise, which is our tenth offering for Apple's IOS platform.

I would like to congratulate the team at Visual Concepts and 2K Sports for delivering and marketing such a stellar title, given the high bar set by NBA 2K11, it's truly an outstanding achievement.

While the ongoing NBA lockout has had some negative impact on sales of NBA 2K12, we are seeing solid demand in the overall performances within our expectations to date.

That said, it remains to be seen what effect a prolonged lockout may ultimately have on sales of the title.

Momentum is building for our upcoming third and fourth quarter releases, including ground breaking new titles from our portfolio of hit franchises.

We remain enthusiastic about our holiday and fourth quarter outlook.

Looking beyond fiscal 2012, we have the strongest lineup in Take-Two's history, which Karl will discuss shortly.

The breadth of our portfolio of AAA franchises illustrates the ongoing diversity and strength of our enterprise, our ability to produce the highest quality interactive entertainment experiences and enhance their value with innovative features and add-on content is the core strategy and competitive advantage that makes Take-Two a leading global entertainment company today.

In addition to executing that core strategy, we have an extensive pipeline of online, social and mobile gaming projects in development.

Our goal is to remain platform agnostic, delivering our games to consumers on any and all devices, whether in their homes or on the go.

We'll have more to share on these initiatives in the coming months.

In closing, we're successfully executing on all fronts, creatively, operationally and financially.

We've consistently delivered results in line or ahead of our expectations over the past couple of years.

Our development team's portfolio of intellectual property are the best in the business, and we're focused on producing the highest quality interactive entertainment that sets new standards for creativity and innovation.

Our management team is committed to ensuring that we convert our products into growing profits and returns for our shareholders over the long-term.

I'll now turn the call over to Karl.

Thanks, Strauss.

I'll begin by discussing our lineup of new releases and then provide an update on our online initiatives.

Today Rockstar released LA Noire - The Complete Edition, which offers PC gamers an opportunity to experience this critically acclaimed title, including all previous released add-on content.

The complete edition will also be available for the Xbox 360 and PS3 on November 15.

This fall, Rockstar will honor the 10th anniversary of Grand Theft Auto 3 with a release of a mobile version of the legendary title.

This will be our first offering for the Android platform and will also be available for select IOS devices.

Grand Theft Auto 3 was the highest rated PlayStation 2 game of all time, with a Metacritic rating of 97 and the number 1 selling console video game during the year of its release.

This is yet another example of how we're bringing our industry-leading IP to emerging gaming platforms.

2K Play has 3 family-friendly titles for the third quarter.

Let's Cheer launched yesterday on the Xbox 360 and features use of Kinect voice technology.

Nickelodeon Dance, which was released today, is our fourth title for Kinect and is also available for the Wii.

And our first title for Nintendo 3DS Carnival Games Wild West 3D -- excuse me, Wild West 3D is coming November 21.

On February 7, 2K Games plans the release The Darkness II.

This title sets itself apart to its proprietary evolution engine, which powers graphic noire visuals in a comic book come to life environment.

Combat is fast and intuitive as players orchestrate their own symphony of violence across the game's beautiful, hyper-stylized world.

IGN said it best when they told its readers to keep it on your radar.

In March, 2K Sports plans to release MLB 2K12, which will feature Detroit Tigers' ace pitcher, Justin Verlander, on the cover.

This will be our last release under our legacy MLB license agreements, which expire in calendar year 2012.

Rounding out the year, Rockstar expects to launch Max Payne 3, our most anticipated new title for fiscal 2012.

With its highly advanced shooting mechanics and deep characterization, Max Payne 3 promises to be the most sophisticated and seamless action shooter to date.

Running on a new iteration of the Rockstar advanced game engine, Max Payne 3 features ground breaking advances in targeting and animation and offers audiences a nonstop cinematic experience.

In addition to an expansive single-player campaign, Max Payne 3 will be the first title in the series to introduce a unique and addictive multiplayer experience.

We believe this will be a must-have for both existing and new fans of the Max Payne franchise.

Beyond this fiscal year, we have the strongest lineup in Take-Two's history.

Rockstar recently announced that Grand Theft Auto 5 is currently in full development.

The next title in the celebrated franchise will take gamers in a bold new direction and open a world of freedom, story telling, mission-based game play and online multiplayer game play.

Grand Theft Auto 5 focuses on the pursuit of the almighty dollar, in the reimagined present day southern California city of Los Santos, as well as it's surrounding hills, countryside and beaches.

It promises to be the largest and most ambitious game Rockstar has ever created.

2K has a slate of exciting titles arriving in fiscal 2013, led by highly anticipated sequels from genre-defining franchises including BioShock Infinite, Borderlands 2 and NBA 2K13.

In addition, we will expand our portfolio of new IP with the expected launches of Spec Ops - The Line and X-COM.

We also have an extensive pipeline of announced and unannounced online and mobile projects currently underway.

We continue to make substantial progress on our online initiatives in Asia, which are proceeding according to plan.

For example, our online version of NBA2K, which is being developed in partnership with Tencent for the Chinese market, entered closed beta testing last month with thousands of consumers currently participating.

We are incredibly excited about the potential for our online initiatives.

Successful, these projects will be significantly accretive to our future revenues and earnings growth and will also provide a more predictable and recurring revenue stream to complement our core release schedule.

We look forward to updating you further on these, and other, online and mobile projects going forward.

Thanks, and I would now like to turn the call over to Lainie.

Thanks, Karl, and good afternoon, everyone.

Today I'll review our results for the second quarter and then provide some details around our outlook for the third quarter and full year fiscal 2012.

Note that all the numbers I'll be providing today are non-GAAP results from continuing operations unless otherwise stated.

Our press release provides reconciliations of our GAAP to non-GAAP measurements.

For the second quarter of fiscal 2012, we delivered better than expected net revenue of $107 million, driven by strong sales of catalog and digital offerings.

This compared to $245 million for the second quarter last year, which benefited from the releases of Mafia 2 and Sid Meier's Civilization V, as well as the strong post-launch performance of Red Dead Redemption.

Catalog sales for this year's second quarter were led by Grand Theft Auto Franchise, Red Dead Redemption, Borderlands, Sid Meier's Civilization V, Midnight Club Los Angeles and NBA 2K11.

Other key contributors to revenue in the quarter were continued sales of LA Noire and MLB2K11 and the September release of Nicktoons MLB.

Revenue from digitally delivered content was $27.3 million and accounted for 25% of our net revenue for the period.

Our gross margin for the quarter was approximately 31%.

It was lower year-over-year due to the higher mix of catalog sales in the second quarter of fiscal 2012, which are at lower price points than our newer titles.

Operating expenses were approximately $69 million for the second quarter, down about $20 million versus the prior year's period, primarily as the result of lower selling and marketing expense, due to fewer new launches in the second quarter of this year.

Interest and other expense increased year-over-year due to the absence of a foreign exchange gain that benefited the second quarter last year.

Our better than expected revenue and tight cost management enabled us to exceed the high end of our financial outlook for the second quarter and report a non-GAAP net loss of $39 million, or $0.47 per share.

Our GAAP loss from continuing operations was $47 million, or $0.57 per share.

Turning to some key items from our balance sheet as compared to the first quarter, we ended the second quarter with a cash balance of $270 million, up $21 million as we generated positive cash flow during the quarter.

Our accounts receivable balance declined to $20 million, reflecting collections on first quarter sales and fewer new releases during the second quarter.

Inventory increased to $45 million as we had NBA 2K12 inventory on hand for its October release.

Software development costs and licenses increased to $273 million, reflecting the significant development efforts around our pipeline of upcoming releases.

Now, I'll review our financial outlook for the full year and third quarter of fiscal 2012, which is all provided on a non-GAAP basis.

For the full year, we are reiterating our previous financial outlook.

We continue to expect revenue to range from $1 billion to $1.1 billion and non-GAAP net income to range from $0.10 to $0.35 per share.

I would like to note that we are currently trending towards the lower end of that range.

This outlook reflects a better than expected second quarter result and strong prospects for the second half of the year, balanced against X-COM's release date moving into fiscal 2013.

For the full year, we now expect the revenue breakdown from our label to be roughly 54% from Rockstar, 20% from 2K games, 21% from 2K Sports and 5% from 2K Play.

We now expect our geographic revenue split to be about 60% North America and 40% international.

Excluding our sports business, our geographic split is now expected to be approximately 55% North America and 45% international.

We continue to expect gross margins in the high 30s to low 40s.

We now expect total operating expenses to increase by about 10% year-over-year, primarily driven by higher selling and marketing expense to support our new releases.

And we continue to project interest and other expense of approximately $8.5 million, tax expenses of about $9 million and diluted shares of approximately 90 million, which includes 6.5 million of participating shares for our unvested restricted stock ramp.

Turning to our outlook for fiscal third quarter of 2012, we expect to deliver revenue ranging from $225 million to $275 million and non-GAAP net income ranging from $0.20 to $0.30 per share.

The majority of our revenue in the third quarter is expected from NBA 2K12, followed by Red Dead Redemption - Game of the Year Edition and LA Noire - The Complete Edition.

We expect third quarter gross profit margins in the mid- to upper-40s.

Total operating expenses for the third quarter should decrease by approximately 5% year-over-year, driven by modest decreases in selling and marketing expense, R&D expense, and depreciation and amortization expense.

Our third quarter outlook also reflects forecasted interest and other expense of approximately $2 million, tax expense of approximately $2 million, and an estimated share count of approximately 103 million, which includes 6.5 million of participating shares for unvested restricted stock grants and [13] million shares related to the potential dilution from the convertible notes.

Our fiscal outlook assumes the following upcoming release schedule.

During the fiscal third quarter, we expect to release LA Noire - The Complete Edition for Xbox 360 and PlayStation 3 and Carnival Games Wild West 3D.

During the fiscal fourth quarter, we expect to release Max Payne 3, The Darkness 2 and Major League Baseball 2K12.

In summary, we are pleased with our performance for the first half of fiscal 2012 and continue to deliver non-GAAP profits for the full year.

As noted earlier, our development pipeline is the strongest in Take-Two's history.

We anticipate that fiscal 2013 will be one of the Company's best years ever, with non-GAAP net income in excess of $2 per share.

We are incredibly excited about our many long-term opportunities to create additional value for both our consumers and shareholders.

Now, I'll turn the call back to Strauss.

Thanks, Karl and Lainie.

We look forward to sharing our progress with you in the coming months.

I would like to thank our colleagues for their dedication and hard work, which enables us to keep building an even stronger Take-Two for tomorrow.

We'll now take your questions.

Operator?

(Operator Instructions) Mike Hickey, National Alliance Capital Markets.

Is it possible that you could update us on LA Noire ship?

I think the last one was over 4 million units.

And with that game, you introduced Rockstar season pass, and I was curious how that worked out for you and if you expect that could be a feature in future Rockstar games.

I think we've announced that we've sold in 4 million units, a little bit above that.

In terms of the season pass, we're not offering any details on that and certainly don't have any marketing announcements going forward.

But we continue to try to create opportunities from a marketing point of view that delight consumers and engage them in our products on an ongoing basis, and I think that's what the pass did.

On the GTA 5 trailer, I looked on YouTube, looks like it's gotten 6 million hits since it's come out.

Do you have any data on the unique total hits that that trailer's gotten and maybe comparable to when GTA 4 was released?

It's obviously a terrifically sound and exciting result, but we don't have any comparative data that we're prepared to share.

Obviously, we're all absolutely thrilled and consumers seem to be thrilled.

And if you pay attention to the comments on Twitter and Facebook and the like, there's a great deal of excitement.

Any particular reason why you announced the timing of GTA 5 when you did?

Well, we didn't announce any timing.

Do you mean why we released the trailer?

Yes.

Yes, I think the Rockstar folks thought that it was the right time to show off where we're at in terms of development of the game, and these decisions are largely marketing decisions.

(Operator Instructions) Brian Fitzgerald, UBS.

I want to know if I can get an update on the traction you're seeing with Sid World on Facebook, maybe some color around the levels of monetization there you're seeing and to what degree you're seeing cross-platform growth or cross-pollination.

I.e., is Sid 5, are those users becoming Sid World users, becoming Sid Pirate users, that type of thing?

We actually can't really track that very easily.

As you know, there's not a lot of data around the consumers with the console product that's available.

However, the reasoning is sound, which is we have these very strong franchises.

I think 32 of them at the Company now that have sold multimillion units.

We try to launch a new franchise every year.

We've launched 7 new franchises since 2007.

And the Sid franchise is extraordinarily powerful to consumers and for our Company.

The update really is the same, in that the Metacritic rating on Sid World for Facebook was very high.

All of the anecdotal evidence was very strong, and we learned a great deal from the project.

So, we're really happy with the way it turned out.

And stay tuned, we expect to have a lot more to say about social gaming in the coming months.

Arvind Bhatia, Sterne Agee.

Hey, guys, Brett Strauser in for Arvind.

What was your catalog sales during the quarter?

Our catalog sales for the quarter were 83%.

Our catalog performed extremely well through the quarter and includes our digitally delivered offerings that are in our catalog as well.

How is the NBA title performing in light of the lockout?

We're obviously thrilled with the launch.

With a 91 Metacritic rating, this is the highest rated basketball title in our history, the highest rated title in the history of 2K sports.

It's a superb title.

We tried to be as thoughtful as possible about the marketing of the title, given the risk of the lockout.

We're thrilled with the launch in every metric you can imagine.

We are seeing some impact from the lockout, and it's not a positive impact.

That said, we're well within our expectations for the title to date.

Justin Post, Bank of America.

This is Ryan Gee calling for Justin Post.

I was wondering if you can help us with the building blocks for next year and your guidance for the $2 plus in EPS.

Is it just going to come from simply new franchises, or is there improvement you see on franchises coming out this year?

What's going to get you to the $2, and how many titles do you guys have in there?

We're not providing a great deal of detail.

The good news is that we have a fixed enough view of our release schedule going forward that we're able to be transparent about that period, and we want to be as transparent as we can be.

What's gratifying is we were highly profitable last year.

We're showing an outlook of profitability this year.

And we're able to talk about a very profitable year next year.

There are a number of things on the horizon and we haven't given a lot more color, but there is some color in the marketplace.

We have a lot of franchises on our plate, and lot of titles in development that we have talked about, for example, BioShock Infinite.

We also have the MLB deal sunsetting, and that obviously creates a benefit for us.

And Brian, as I said in the prepared comments, we do have a mix of titles.

We've announced a few titles already, and some of them are actual sequels, like BioShock Infinite and Borderlands 2 and our Sports franchises as well as others that we consider really more new IT with Spec Ops in Line and X-COM.

And then maybe going back to NBA 2K, if you guys can't quantify how sales are tracking year-over-year, maybe you could talk about how much of the fact that you guys are tracking towards the low end of your fiscal '12 guidance is due to NBA?

Or is it other factors?

The evidence that we may be heading towards the low end of the range is a result of everything that we've seen so far this year, and that's how we're seeing it right here.

We have a lot more to do this year and a lot more time left in the year.

We'll let you know as more develops.

Mr.

Zelnick, we have no further questions at this time.

I would now like to turn the floor back over to you for closing comments.

Thank you so much for joining us, and we'll look forward to keeping you updated on our progress going forward.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation, and have a wonderful day.