Take-Two Interactive Software Inc (TTWO) 2015 Q1 法說會逐字稿

Greetings and welcome to the Take-Two Interactive Software first-quarter fiscal year 2015 earnings 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 first quarter of fiscal year 2015 ending June 30, 2014.

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 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, 2014.

I'd 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 Strauss.

Thanks, Hank.

Good afternoon and thank you for joining us today.

Take-Two's fiscal year 2015 is off to a solid start with the first quarter marking our eighth consecutive period of better-than-expected results.

I'm especially pleased to report that we are able to deliver non-GAAP revenue growth without the benefit of any major new releases, driven by our expanding portfolio of digitally delivered offerings, continued growth in our NBA 2K franchise and persistent demand for Grand Theft Auto V.

NBA 2K14 continues to expand its global audience and has become our first sports release to cross the 7 million unit selling mark.

The title has captivated gamers on both current and next gen platforms, surpassing both FIFA and Madden as the third highest unit selling title of any genre on PlayStation 4 and Xbox One in the United States.

Over its past five releases, the NBA 2K franchise has grown at a compound annual rate of 25%, reflecting the consistent ability of 2K and Visual Concepts to raise the bar for excellence and build this series into one of our Company's most important and durable franchises.

Last September Grand Theft Auto V delivered the most successful launch in the history of entertainment, achieving $1 billion in retail sales in only three days.

Nearly a year later, the title continues to attract new audiences on Xbox 360 and PlayStation 3 with worldwide sales now surpassing 34 million units.

Fans can look forward to Rockstar Games release of the PlayStation 4, Xbox One and PC versions this fall, which Karl will have more to share about shortly.

During the first quarter, digitally delivered revenue grew 43% year over year to $106.4 million.

Nearly 90% of its growth came from our current consumer spending, which accounted for approximately 60% of our digitally delivered revenue during the period.

The remainder came from full game downloads across console, PC and mobile platforms.

The largest contributor to recurrent consumer spending was virtual currency for Grand Theft Auto Online and NBA 2K14.

Grand Theft Auto Online continues to outperform our expectations and was once again the single largest contributor to digitally delivered revenue.

During the first quarter, Rockstar Games released several updates, including the Capture Creator, Highlight pack, I'm Not a Hipster pack and the limited time Independence Day Special, which contributed to players' ongoing strong engagement with Grand Theft Auto Online.

We are highly enthusiastic about the future of Grand Theft Auto Online, including its upcoming fall launch on PlayStation 4, Xbox One and PC.

Recurrent consumer spending for NBA 2K also continued to grow during the first quarter with revenues up 150% year over year.

Online play, including multiplayer gaming, has become an important enhancement to most players' engagement with our industry-leading basketball franchise.

Downloadable add-on content for our front-line titles is also a key contributor to recurrent customer spending.

During the first quarter, we broadened our offerings with the release of Borderlands 2 and Headhunter 5.

Recurrent consumer spending was also enhanced by our free-to-play online games in Asia, in particular NBA 2K Online, which we launched in partnership with Tencent in China, continues to deliver growth in revenues and player engagement.

Gamers in Asia can also look forward to the commercial launch of Civilization Online, our massively multiplayer online game based on our successful Sid Meier's Civilization franchise, which is being developed by MMO design luminary Jake Song and his team at XLGAMES in Korea.

Catalog sales accounted for nearly 55% or $82.7 million of our first-quarter revenue, led by the Grand Theft Auto series, Borderlands 2, which is now sold in more than 10 million units, Sid Meier's Civilization 5, which has now sold in over 6 million units, and BioShock Infinite, which is now sold in nearly 7 million units.

Our Company continues to benefit from creating the highest quality titles that attract new audiences well after their initial launch.

For the calendar year to date through June, K2 was the number one third-party publisher in the United States in terms of catalog unit sales per SKU across Xbox One, Xbox 360, PlayStation 4 and PlayStation 3.

Take-Two had phenomenal success at this year's E3 show in Los Angeles, which featured the first reveal of Rockstar Games' Grand Theft Auto V for Playstation 4 and playable demos from 2K's extraordinary lineup.

Our booth attracted thousands of attendees each day who waited hours to experience 2K's titles, which in total won more than 100 editorial awards and honors.

Evolve won more than 50, including the coveted Best of Show Award.

We are incredibly proud of this achievement and believe that it bodes well for the title's February launch, which Karl will discuss shortly.

I would like to congratulate both Rockstar Games and 2K on their stellar performances at E3.

Fiscal 2015 is poised to be another strong year of revenues and profits for our organization, highlighted by a diverse array of new AAA releases and innovative digitally delivered offerings.

With six new titles we have announced to date, we have disclosed our complete front-line release schedule for the current fiscal year.

There are no longer unannounced titles assumed in our guidance.

The outlook for our lineup is stronger than ever, which, coupled with our better-than-expected first-quarter results and current business trends, enables us to maintain our guidance for the full fiscal year.

Our ability to project these strong results illustrates how our Company has been transformed into a diversified interactive entertainment enterprise with numerous successful franchises and meaningful profits from recurrent consumer spending.

Looking beyond the current year, Take-Two has the four key attributes that should enable us to maintain our positive momentum -- the best creative talent in the business, the strongest portfolio of intellectual property, leading edge technology and ample cash.

We have numerous titles in development, including both groundbreaking new intellectual properties and offerings from our established franchises.

As a result, we are well-positioned to deliver non-GAAP profits every year for the foreseeable future and returns to our shareholders over the long-term.

I will now turn the call over to Karl.

Thanks, Strauss.

Today I will provide an update on our release schedule for the remainder of fiscal 2015.

On October 7, Visual Concepts will step onto the court to continue our NBA 2K franchise's reign as the number one basketball game in our industry.

NBA 2K15 promises once again to set new benchmarks for sports realism and gameplay on both current and next gen consoles and PCs.

Oklahoma City Thunder superstar, four-time NBA scoring champion and 2014 NBA Most Valuable Player, Kevin Durant, will make his solo debut as the game's cover athlete, and this year's release will include more teams and players from the Turkish Airlines Euroleague.

In addition, internationally renowned music artist and producer, Pharrell Williams, will curate the most extensive and unique soundtrack compilation in NBA 2K franchise history.

2K and Pharrell will unveil the soundtrack later this summer.

On October 14, 2K will release Borderlands: The Pre-Sequel for Xbox 360, PlayStation 3 and PC.

For the first time in the series, Borderlands: The Pre-Sequel will transport players to Pandora's moon, where they will experience intense gravity-bending gunfights using an array of all new weapons and loot.

Co-developed by Gearbox Software and 2K Australia, the title takes place in between the stories of the original Borderlands and Borderlands 2 and will continue the franchise's tradition of innovative, cooperative multiplayer action.

The Borderlands universe has become one of our Company's most popular series, and we are thrilled to provide fans with even more ways to experience its incredible gameplay.

On October 24, 2K will build on the successful Civilization franchise, which has entertained audiences for nearly a quarter of a century and sold in more than 25 million units worldwide, with the release of Sid Meier's Civilization: Beyond Earth for PC.

The title will feature the core and tactical elements for which the series is famous while propelling players beyond the traditional timeline of a Civilization game by displaying humanity's future on an alien world.

Beyond Earth generated tremendous buzz at E3, winning more than 18 awards globally, including Best Strategy Game honors from the E3 game critics, Game Informer, IGN, Destructoid and Game Revolution.

On October 28, 2K's WWE franchise will make its next gen debut with the release of WWE 2K15, which promises to take the series to new heights.

15-time WWE World Champion John Cena will be the cover athlete, and Sting, one of wrestling's most beloved competitors, will play a key role in the title's preorder campaign.

This fall Rockstar Games will launch the blockbuster hit, Grand Theft Auto V on PlayStation 4, Xbox One and PC, bringing across-the-board graphical and technical enhancements to the game's already breathtaking open world experience.

The current community of players will have the ability to transfer the Grand Theft Auto Online characters and progression to their choice of either PlayStation 4, Xbox One or PC.

All content and gameplay created for both Grand Theft Auto V and Grand Theft Auto Online will also be available for the PlayStation 4, Xbox One and PC, with more to come.

Rockstar Games will continue to support both Grand Theft Auto V and Grand Theft Auto Online with new offerings throughout the year, including regular content drops and limited-time event updates.

The launch of Evolve coming from 2K has been moved to February 10, 2015.

When we first acquired Evolve, we believe that Turtle Rock was creating something truly unique which was poised to redefine the shooting genre.

Coming out of E3, our instincts were proven correct, and the reaction to Evolve, including its numerous awards, speaks volumes about its potential in the market.

We are encouraged by the overwhelmingly positive response from press and fans and believe that extending development by a few months will allow the team enough time to fully realize its creative vision for Evolve while enabling us to take advantage of a favorable release window.

We very much appreciate consumers' anticipation for Evolve, and we are confident that they will be well rewarded when the game launches in February.

Our robust development pipeline extends far beyond fiscal 2015.

We have numerous titles planned for release during fiscal 2016 such as 2K's Battleborn, an all-new intellectual property developed for next gen and PC by Gearbox Software, the creative team behind our Borderlands franchise.

Battleborn is a highly stylized blended genre game, which combines frenetic first-person shooting, cooperative combat and an expansive collection of diverse characters to deliver a never-before-played hero shooter experience.

The title was featured on the cover of the August issue of Game Informer, which provided an in-depth first look at the game.

2K will have more to share about Battleborn in the coming months.

Next week 2K will have a major presence at GamesCom, Europe's largest annual interactive entertainment event, which attracts more than 300,000 attendees, including media and consumers.

We will also have playable demos of NBA 2K15, WWE 2K15, Borderlands: The Pre-Sequel, and Evolve, as well as private press and retail showings of Sid Meier's Civilization: Beyond Earth.

Heading into this holiday season, we will fully leverage our long-lived marketing and distribution expertise to create must have moments at retail and also continue to complement our core titles with innovative, digitally delivered offerings.

Rockstar Games and 2K will roll out campaigns that span all forms of traditional and online media to usher in what we believe is one of our most diverse and strongest lineups ever.

In closing, I would like to join Strauss in thanking all of our colleagues around the world for their contributions in delivering a strong start to the year.

I will now turn the call over to Lainie.

Thanks, Karl.

Good afternoon, everyone.

Today I will review our results for the fiscal first quarter and then discuss our outlook for the fiscal second quarter and full-year 2015.

All of the numbers I will be providing today are non-GAAP results from continuing operations, and all comparisons are year over year unless otherwise stated.

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

Starting with our results for the fiscal first quarter, net revenue increased 5% to $151.6 million.

This exceeded our outlook range of $120 million to $135 million, due primarily to the continued strong performance of Grand Theft Auto V and Grand Theft Auto Online.

Digitally delivered revenues grew 43% to $106.4 million.

The largest contributors were the Grand Theft Auto series, the NBA 2K franchise and offerings of Borderlands 2. Approximately 60% was derived from recurrent consumer spending, including virtual currency, add-on content and online games.

Catalog sales accounted for $82.7 million in net revenue, led by the Grand Theft Auto series, Borderlands 2, Sid Meier's Civilization V and BioShock Infinite.

Gross margin increased 22.7 percentage points to 58.1%, due to the absence of the $29 million impairment of capitalized software development costs, which was recognized during the first quarter last year.

Operating expenses were $95.8 million, up by $2.2 million due to higher personnel expense and depreciation.

Interest in other expense was $2.3 million, and non-GAAP net loss narrowed to $11.2 million or $0.14 per share as compared to a loss of $47.1 million or $0.54 per share in fiscal first quarter of 2014.

This result was better than our projected loss of $0.25 to $0.35 per share.

On a GAAP basis, we reported revenue of $125.4 million and a loss from continuing operations of $35.4 million or $0.45 per share.

Turning to some key items from our balance sheet at June 30, 2014 as compared to March 31, 2014, our cash and short-term investments balance decreased to $841.4 million.

Our Accounts Receivable balance decreased to $43.2 million, primarily reflecting the collection of receivables from our fourth quarter and holiday sales.

Inventories decreased to $23.1 million, due primarily to continued sales of Grand Theft Auto V.

And software development costs and licenses increased to $265.6 million, reflecting the development efforts around our pipeline of upcoming releases.

Now I will review our financial outlook for the second quarter and fiscal year 2015, which is provided on a non-GAAP basis.

Starting with the full year, we are reiterating our financial outlook, including non-GAAP net revenue of $1.35 billion to $1.45 billion and non-GAAP net income per share of $0.80 to $1.05.

The majority of our revenue is expected to come from new releases, including NBA 2K15, Grand Theft Auto V for PlayStation 4, Xbox One and PC, Evolve, WWE 2K15, Borderlands: The Pre-Sequel, and Civilization: Beyond Earth, and catalog sales led by the Grand Theft Auto series.

We expect the revenue breakdown from our labels to be roughly 40% from Rockstar Games and 60% from 2K.

We expect our geographic revenue split to be about 60% United States and 40% international.

We expect gross margins in the mid-40s.

Total operating expenses are expected to increase by approximately 4%, driven primarily by rent for our largest studio locations, personnel expense due to increased headcount and higher depreciation expense.

Selling and marketing expense is expected to be about 17% of net revenue based on the midpoint of our outlook range, and we project interest and other expense of approximately $9 million, tax expense of about $37 million and weighted average fully diluted shares of approximately 114 million.

And just on the convertible note, net of tax is approximately $7.4 million, which will be added to net income to calculate net income per share under the if converted method.

As a result of working capital needs, we continue to expect our operations to use a modest amount of cash in fiscal 2015.

However, we expect to generate cash from operations in fiscal 2016 and to be net cash flow positive over these two fiscal years.

Turning to the second quarter, we expect non-GAAP net revenue to range from $95 million to $110 million and non-GAAP net loss per share to range from $0.60 to $0.70.

Revenue in the second quarter is expected to be driven by catalog sales, led by the Grand Theft Auto series, NBA 2K14 and Borderlands 2. We expect second-quarter gross margins in the low to mid-60s, due to our higher mix of digitally delivered revenues in the period.

Total operating expenses are expected to decrease by approximately 27%, primarily due to lower marketing expense of Grand Theft Auto V as compared to the second quarter last year.

Selling and marketing expense is expected to be about 55% of net revenue, based on the midpoint of our outlook range.

Our second-quarter outlook also reflects interest in other expense of approximately $2 million, tax benefit of $2 million and weighted average shares of approximately 80 million.

Additional details about our financial outlook are in the press release reporting our first-quarter results, which was issued shortly before this call.

In closing, we are pleased that fiscal 2015 is off to a solid start with better-than-expected first-quarter results.

Our industry-leading creative and intellectual property assets, coupled with an ample reserve of cash, provides Take-Two with a strong foundation to continue to execute our proven strategy and deliver positive results both this year and over the long-term.

Thank you and now I will turn the call back to Strauss.

Thanks, Karl and Lainie.

On behalf of our entire management team, I would like [to thank our employees] for their hard work.

To our shareholders, I would like to express our appreciation for your continued support.

We will now take your questions.

Operator?

(Operator Instructions).

Drew Crum, Stifel.

Good afternoon, everyone.

So I want to understand what the impact of moving Evolve from the fall to the February timeframe is on revenue guidance.

You guys beat your first-quarter guidance, but you are reiterating for the full year.

So I just want to understand what impact that has on how you are thinking about revenue for the year.

Well, Evolve -- we don't give out our guidance on a title-by title basis.

The title did move, but we had a lot of movement in our guidance this quarter versus when we previously gave out our initial guidance, and we beat Q1.

We also adjusted our estimates for our titles for our pipeline that's coming out in fiscal 2015.

And there was also some other -- there were some changes to our release schedule, as you mentioned.

Okay.

Fair enough.

And then some of your competitors have seen weakness on new releases on past gen systems.

I just want to get a sense as to what you are anticipating for Borderlands, which will not be available on next gen systems.

Yes.

We have definitely seen others' reports on -- largely on catalog, and I think our view is that if you give consumers what they want, they come out for it.

Our catalog sales have done very well.

That's what we announced in this quarter.

It's one of the key reasons that we were able to peak in the quarter.

And we have a lot of faith in the Borderlands franchises.

There's a still a huge installed base of consumers, and Borderlands is beloved.

It has sold something -- Borderlands 2 has sold something like 10 million units to date, and so we have very high hopes for the Pre-Sequel for current gen platforms and PC.

Indeed.

But it will be reliant on quality, and we expect to deliver a really high quality game.

And I think one of the differences is that we have from our competitors is this is a fresh new experience that's not just for -- that's built for this current gen system, which has not been the case with our competitors, particularly the weakness that the competitors have seen us on -- when you are coming out with both titles on current gen and next gen, and there is not necessarily a distinction between the two.

Got it.

And then one last question, and I apologize if I missed this in your remarks, Karl.

But is there anything contemplated in the fiscal 2015 guidance with respect to DLC for Grand Theft Auto V?

We don't have anything in there for our Grand Theft Auto V. There may be some free downloadable content that's given out during the year.

But anything that brings revenue to the top line hasn't been --- there has been nothing announced to date.

Thanks, guys.

Edward Williams, BMO Capital Markets.

This is Tom Andrews standing in for Edward tonight.

Just a couple quick questions.

One, can you go into a little bit of detail about the revenue breakdown in terms of what was generated from your 2K portfolio versus what was generated by the Rockstar portfolio?

And then just one housekeeping item.

Can you go through the individual stock option expense lines for the quarter?

We wouldn't normally go through that kind of detail on the call.

You can follow up separately with Hank, if you wish, and Lainie can respond to the 2K versus Rockstar split in the quarter.

For Q1 Rockstar was approximately 45% and 2K was 55%.

Great.

Thank you very much.

(Operator Instructions).

Brian Fitzgerald, Jefferies.

When you look at the nice digital revenue you had plus 43% year over year, you mentioned in the release it was driven by GTA, NBA and Borderlands.

Could you maybe give us some of the mix there?

I know you highlighted GTA virtual currency and NBA, but maybe some color on mix split, including Borderlands?

And then, Strauss, you've had great success with NBA 2K.

You highlighted the 7 million benchmark.

How do you think about entering additional sports categories going forward?

And obviously, you are doing very well with WWE right now.

Thanks.

Yes, we appreciate the question.

We don't break out how the titles are doing specifically.

And I know people would like that kind of color, but we are still in the middle of exploiting these titles and delivering these fantastic experiences to consumers.

So it's still a work in progress.

However, we are very pleased with how all of it is going -- very, very pleased with our current consumer spending in general, very pleased with virtual currency sales, very pleased with Grand Theft Auto Online's metrics across the board and very pleased with how NBA 2K is doing.

So it's an excellent story across the board.

We don't break it out title by title.

In terms of our sports business, thank you for the compliment disguised as a question.

I'm happy to have it.

And naturally we are trying to grow the business, and we are doing so selectively.

What we found is that when we are a leader in the space, we do really, really well.

When we are an also ran in the space, we don't do well.

And one of the things that we tried to do around here is start from the point of delighting audiences and putting out the highest-quality products and then thinking about making money.

But equally, we really, really object to losing money.

The bulk of what we do around here is owned intellectual property.

By definition, the sports business is a licensed property.

So we have to be exceedingly selective in our licenses, and the Company has had some history around that.

So generally speaking I think this is a very disciplined, sometimes to a fault, management team, and that applies to the sports business.

But I don't want that to be confused with a lack of ambition because, indeed, we are very, very ambitious to grow the enterprise.

Great.

Thanks, guys.

(Operator Instructions).

[Zachary Eric], [Sunvest].

Could you tell us the reason for the delay, the pushback in the release date for Evolve?

Thank you.

Yes, absolutely.

We primarily decided that the title deserves and should have more time to be published, so it can reach its absolute optimal state before we release it.

Historically, we've always benefited from giving the creative teams more time to polish the titles.

We've never regretted it.

It's not a meaningful amount of time; the title is still coming out in the fiscal year.

And we are really excited about the title.

Coming out of E3, where we won Best of Show, it felt like the right thing to do to make absolutely sure this title can be it's very best.

At the same time, I do believe February is a pretty terrific release window.

It's not at all clouded, and we will benefit from the fact that there are a lot of holiday sales of consoles.

So the installed base will be bigger, and it should be a pretty open time to release.

And if you look at our history over the past seven years, we are a Company that has often released major titles outside of the holiday season.

In fact, we typically are not very active in the traditional holiday season.

So having such a robust release schedule for October is somewhat unusual for us.

We are really excited about it.

But I, for one, am glad that we have Evolve coming in February for any number of reasons.

Thank you.

Justin Post, Merrill Lynch.

This is Ryan calling in for Justin.

I just wanted to go back to GT Online real quick.

If you could talk about maybe what's the content that's probably coming out in the next quarter or for the rest of the year that we should maybe keep an eye on?

And if you could, talk about GT Online and what that could be as a piece of that 40% of revenue that will come from Rockstar this year.

And then I have one follow-up.

Yes, we are not really able to give much more color on GT Online.

It's not for want of excitement.

We have a great deal of excitement.

But when we start getting into content and marketing announcements, that's really driven by the label.

What we have said, though, and I want to reiterate that the release of GT Online has been extraordinarily favorable for consumers and for us, and we are immensely grateful to Rockstar for the incredible product that they delivered, the incredible consumer experience.

And we remain optimistic about what GT Online can be both for current gen and for next gen.

Okay.

That's fair.

And then for Lainie, maybe, can you remind us what you said about the quarterly run rate for the recurring revenue in GT Online and whether it's reasonable to expect that once it comes out on next gen if that quarterly run rate should be a step function up or not?

We didn't give out specifically for GT Online.

We did say that 60% of the overall digital came from the recurrent consumer spending, and that includes our virtual currency, add-on content and online games.

So we are not making any projections about the run rate of anything that we've put out before.

Okay.

Great.

Thank you, guys.

Mr. Zelnick, it appears we have no further questions at this time.

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

Well, thank you so much for joining us.

Obviously, we are thrilled to have beaten our projected outlook for something like eight quarters in a row.

And to reiterate our financial guidance for the year, we have a lot of great things coming up, and we are grateful to the shareholders for their support.

Thanks for joining us today.

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.