Take-Two Interactive Software Inc (TTWO) 2017 Q3 法說會逐字稿

Greetings, and welcome to the Take-Two Interactive Software third-quarter fiscal year 2017 earnings conference call.

(Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications.

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 third quarter of fiscal year 2017 ended December 31, 2016.

Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer; Karl Slatoff, our President; and Lainie Goldstein, our Chief Financial Officer.

We will be available to answer your questions during the Q&A session following our prepared remarks.

Before we begin, I'd like to remind everyone that 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 most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled risk factors.

I'd also like to note that, unless otherwise stated, all numbers we will be discussing today are GAAP; and, unless otherwise stated, all comparisons are year-over-year.

Our press release and filings with the SEC may be obtained from our website at www.taketwogames.com.

And now I'll turn the call over to Strauss.

Thanks, Hank.

Good afternoon, and thank you for joining us today.

I'm pleased to report that Take-Two had a highly successful holiday quarter.

Consumer demand for our new releases and catalog was strong throughout the period, and players continued to engage significantly with our games after purchase.

As a result, we delivered better-than-expected bookings, including our best-ever quarter for recurrent consumer spending, along with double-digit growth in both net revenue and net cash provided by operating activities.

As of December 31, 2016, we had over $1.4 billion in cash and short-term investments on our balance sheet.

Grand Theft Auto V and Grand Theft Auto Online continue to outperform our expectations, as they have in every quarter since their release.

Grand Theft Auto V remains the highest-rated game of the current console generation, and the must-have title for gamers on both console and PC, with sell-in now surpassing 75 million units.

According to data from the NPD group that combines physical sales and full game downloads, Grand Theft Auto V is was the number-six selling game across all platforms in 2016.

In addition, Grand Theft Auto Online continues to deliver growth in both engagement and bookings, with a record number of players in December driven by the ongoing release of new content.

During the third quarter, Rockstar Games supported Grand Theft Auto Online with four significant updates: Bikers, Deadline, Import/Export, and Festive Surprise 2016.

And there's many more planned, going forward.

The sustained performance of Grand Theft Auto V and Grand Theft Auto Online is a remarkable achievement, and a testimony to Rockstar Games' tireless commitment to excellence, especially since these titles initially launched more than three years ago.

On October 7, 2K launched Mafia III.

Developed by 2K's newest studio, Hangar 13, Mafia III received critical praise for its deep storytelling and authentic period setting.

The title achieved the highest first week sell-in of any game in 2K's history, and was a popular choice for consumers during the holiday season.

To date, Mafia III has sold-in approximately 5 million units.

2K and Hangar 13 have continued to support Mafia III with numerous free content offerings, including character clothing, vehicle customization, racing challenges, and more.

The team is currently working on three exciting downloadable story expansions that will be released this year, which can be purchased individually or as part of the Mafia III Season Pass.

NBA 2K17 delivered growth during the holiday season and continues to delight both new and longtime fans of our industry-leading basketball series.

Launched in September, NBA 2K17 is the highest-rated sports title of the current console generation, and the highest-rated title in the history of the series, based on an average Metacritic score.

Today, NBA 2K17 has sold-in nearly 7 million units, up approximately 10% over last year's release, and is poised to become our highest-selling sports title ever.

Engagement with the brand continues to grow, with consumers already playing more than 1 billion games of NBA 2K17, up 27% over last year.

More than half of these were multiplayer, which increased 61%.

This strong engagement with both NBA 2K17 and the MyNBA2K companion app drove record bookings from recurrent consumer spending for the series, which grew 56% in the third quarter.

In addition, 2K and Visual Concepts continue to expand the brand's reach through emerging platforms and business models.

In November, 2K released the NBA 2K VR Experience, which provides the first virtual reality basketball game that immerses players in the new NBA environment, filled with mini games and challenges.

And in December, 2K commenced its second NBA 2K eSports tournament that will culminate this weekend during the NBA All-Star 2017, with the final teams competing for the championship prize of $250,000 plus tickets to the NBA All-Star game in New Orleans.

We're thrilled to expand our footprint in the evolving world of eSports, and look forward to continuing to blaze the trail in competitive sports gaming with NBA 2K.

On October 11, 2K successfully released WWE 2K17, the latest annual installment in our popular sports entertainment series that was developed collaboratively by Yuke's and Visual Concepts.

And today, 2K further expanded the audience for the title with its release for PC.

WWE 2K17 is being supported with a variety of which is downloadable add-on content, including the Season Pass.

We believe there remains a substantial long-term growth opportunity for the WWE 2K series by further leveraging the development and marketing expertise of 2K and Visual Concepts, which are responsible for the tremendous success of NBA 2K.

On October 21, 2K launched Sid Meier's Civilization VI, the latest offering from our award-winning, turn-based strategy series that has sold-in nearly 40 million units worldwide.

Civilization VI received stellar reviews, and is the fastest-selling title in the history of the series, with sell-in already surpassing 1.5 million units.

2K is supporting Civilization VI with a rich array of additional content, and already has released two paid downloadable add-on content packs as well as a variety of free content for the title.

Later this month, Sid Meier will be honored at the Entertainment Software Association's annual gala in San Francisco celebrating his legendary career and contributions to our industry and art form.

During the third quarter, we delivered record digitally delivered bookings driven by growth in both full game downloads and recurrent consumer spending.

We continue to benefit as consumers buy a growing percentage of games through digital download.

And for the current fiscal year, we are seeing more than 25% of our current-generation console titles purchased digitally.

More importantly, recurrent consumer spending grew 55% to its highest level ever, and accounted for 50% of digitally delivered bookings, or 23% of total bookings in the third 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.

In the free-to-play category, WWE SuperCard delivered its best quarter ever, with bookings nearly doubling, and total downloads for the title now exceeding 13 million.

During the third quarter, we released Season 3 updates that significantly enhanced this popular card game.

In addition, NBA 2K Online grew bookings, and remains the number-one PC online sports game in China with 34 million registered users.

And bookings from downloadable add-on content also grew, led by offerings for Sid Meier's Civilization, WWE 2K17, XCOM 2, and Battleborn.

Last week we announced a key strategic acquisition for our organization, reflecting our strategy to deploy our capital resources prudently and to take measured risks to provide immediately accretive opportunities for our business and the potential for long-term growth.

We acquired Social Point, a highly successful, free-to-play mobile game developer based in Barcelona.

With this acquisition, we further diversified our business, expanded our portfolio of owned intellectual property, and significantly enhanced our position in the fast-growing free-to-play mobile gaming space which is the world's highest-grossing gaming segment, with revenues in excess of $40 billion in 2016, according to IDG estimates.

The experienced team at Social Point shares our commitment to delighting consumers with high-quality entertainment.

And we believe that Social Point's deeply engaging mobile offerings will be a perfect complement to our business.

Moreover, Social Point is one of the few mobile game developers that has a proven track record of growing revenues and delivering multiple hits.

Since 2014, Social Point has been one of only six mobile publishers to have at least two games consistently in the top 100 grossing mobile games in the US.

We are thrilled to have the team at Social Point join our organization.

Looking ahead, fiscal 2018 promises to be another growth year for both bookings and cash flow, driven by a release slate led by Rockstar Games' eagerly anticipated launch of Red Dead Redemption 2.

While interactive entertainment has captivated audiences for more than 40 years, we are only just beginning to see the vast potential of today's most immersive and dynamic art form.

Our ability to engage audiences around the world across a myriad of experiences and platforms has never been greater, and continues to evolve and shape the way that we create and deliver our entertainment offerings.

Take-Two is exceedingly well positioned to capitalize on these opportunities, strategically, creatively, and financially; and to deliver returns for our shareholders over the long-term.

I will now turn the call over to Karl.

Thanks, Strauss.

I'd like to begin by congratulating our teams on delivering a strong holiday quarter.

Our consistent ability to release high-quality, engaging entertainment experiences across multiple platforms and distribution channels is both a distinguishing characteristic of our organization and a key driver of our success.

Creativity and innovation are among Take-Two's core tenets, and those principles inform and inspire our work on a daily basis.

As we continue to diversify our business, we aim to broaden our portfolio with offerings that captivate and engage players in new and exciting ways.

To that end, I'm extremely pleased to welcome Social Point to Take-Two.

Social Point's three co-founders -- Andres Bou, Horacio Martos, and Marc Canaleta --have worked together for over six years.

And its senior leadership team has an aggregate of nearly 100 years of experience in the mobile games business.

Like Take-Two, Social Point produces high-quality entertainment that can attract and retain a loyal, highly-engaged player base, and delivers sustainable results.

Social Point focuses on mid-core games that have greater gameplay depth than casual games.

And the company's titles typically monetize and retain players at higher rates than its competitors in this segment.

Social Point currently has multiple profitable games in the market.

Its two most successful games, Dragon City and Monster Legends, have been downloaded more than 180 million times.

Dragon City launched on mobile in 2013 and is a simulation game involving breeding, building, and battling, in which players create and expand their city and can collect more than 500 unique dragons.

The title consistently has been among the top 100 grossing mobile games, and top 20 grossing simulation games in the United States.

Monster Legends also launched in 2013, and is an RPG involving breeding, building, and battling with nearly 400 monsters.

The title consistently has been among the top 75 grossing mobile games, and top 15 grossing RPGs in the US.

Social Point also has strong growth prospects.

The company has a number of exciting games planned for launch over the next two years.

Furthermore, its current titles have not yet been released in Asia, which is the world's largest mobile games market and represents an additional growth opportunity.

In addition to strong mobile IP, Social Point brings an experienced data analytics team and a cutting-edge proprietary data analytics platform that it built internally.

This custom platform enables Social Point to optimize revenues and profits by predicting user actions, future monetization, and lifetime customer value based on historical data and behavior patterns within hours of acquiring a user.

Social Point will operate with as a new division within Take-Two, and will continue to be based in Barcelona, Spain.

We look forward to working with the team at Social Point, and to expanding our presence in the free-to-play mobile market.

Turning to Take-Two's front line releases, 2K today launched WWE 2K17 for PC.

And we will have additional add-on content offerings for our recent releases, including Mafia III, during the fourth quarter.

Last month, 2K announced that it will release NBA 2K18 for the Nintendo Switch when the title launches this fall on console and PC.

NBA 2K18 will be our first offering for the Switch, and we are pleased to support Nintendo's new platform and to expand the audience for our industry-leading brands.

Looking ahead, we have a robust long-term development pipeline; and our creative teams across both of our labels will continue to explore new and innovative ways to drive engagement with our titles and growth in the current consumer spending.

I'll now turn the call over to Lainie.

Thanks, Karl, and good afternoon, everyone.

Today I'll discuss fiscal third-quarter results, share some details regarding our acquisition of Social Point, and then review our financial outlook for the remainder of the year.

As mentioned by Strauss and Karl, Take-Two had a strong holiday quarter.

Sales of our offerings significantly exceeded our expectations, with total bookings growing 51% to $719 million.

Of this amount, 47% were digitally delivered bookings, which grew 66% to $336.3 million, a new record.

The upside to total bookings was driven primarily by the better-than-expected performance of Grand Theft Auto V, as well as recurrent consumer spending on Grand Theft Auto Online and NBA 2K17.

Our better-than-expected bookings converted into strong net cash provided by operating activities, which grew 72% to $291 million.

We deployed $6.1 million on capital expenditures; and as of December 31, our cash and short-term investments balance was $1.44 billion.

While the performance of our business exceeded our expectations, as reflected in our strong bookings and cash flow growth, this outperformance is not reflected in our GAAP net revenue and net loss, primarily for three reasons.

First, our bookings outperformance was driven by titles that we are required to defer.

And, therefore, our revenues and profits won't benefit from these bookings until future periods.

Second, because of the better-than-expected performance of Grand Theft Auto V and Grand Theft Auto Online, we recorded higher-than-forecasted internal royalties which are calculated using results that are adjusted to exclude the impact of deferrals; and, unlike certain other cost of goods sold, are not deferred.

And third, during the third quarter, we recognized higher development costs for Mafia III than forecasted, due to timing.

These costs will be offset by lower development costs in the fourth quarter.

Turning to some details from our third-quarter income statement.

Net revenue grew by 15% to $476.5 million.

Growth was driven primarily by the launch of Sid Meier's Civilization VI and the recognition of previously deferred revenues from Grand Theft Auto Online and NBA 2K.

Net revenue was reduced by a $268.3 million change in deferred net revenue.

This change was driven primarily by Mafia III, which is being deferred into the fourth quarter as a result of announced free additional content that was not released until the fourth quarter.

The change in deferred net revenue was higher than our forecast due to the better-than-expected performance of Grand Theft Auto V and Grand Theft Auto Online.

Digitally delivered net revenue grew 64% to $240.2 million, and was reduced by a $117.2 million change in deferred net revenue.

Cost of goods sold increased by 21% to $311.1 million, driven primarily by development costs related to our third-quarter releases, as well as higher internal royalties.

Cost of goods sold was reduced by a $118.1 million change in deferred cost of goods sold, and included $6 million in stock-based compensation.

Operating expenses decreased by 10% to $193.8 million, due primarily to the absence of business reorganization costs recorded last year, partially offset by higher marketing expense to support our extensive holiday release slate.

Operating expenses included $16.1 million in stock-based compensation and $300,000 in acquisition-related expense.

The net loss was $29.8 million or $0.33 per share, which included the following pretax items that we use internally, along with our management reporting tax rate of 22%, to adjust our GAAP financial results in order to evaluate our operating performance: a $150.2 million reduction from the net effect from deferral of net revenue and related cost of goods sold; $22.1 million of stock-based compensation; $300,000 in acquisition-related expense; and $4.9 million in amortization of convertible notes.

Note that since we reported a GAAP loss, our net loss per share was calculated using our basic share count of 90.4 million.

For management reporting purposes, we calculate diluted net income per share using our fully diluted share count of 115.3 million; and we add back to net income interest expense on our convertible notes, net of tax, of $1.2 million.

On January 31, Take-Two further diversified its business through the acquisition of Social Point.

We acquired the company for $250 million, comprised of $175 million in cash and approximately 1.48 million shares of our common stock.

The cash portion was paid using our offshore cash on hand.

And, following the transaction, approximately 90% of our cash and short-term investments is now held in the US.

The three founders of Social Point are also eligible to receive earnout considerations of up to an aggregate of $25.9 million, contingent on the business delivering substantial EBITDA growth over the next two years.

The transaction is expected to be immediately accretive to net revenue and net cash provided by operating activities; and to be accretive to net income per share, excluding transaction costs and amortization of intangible assets in fiscal 2018.

Social Point's high-quality, deeply engaging mobile offerings are expected to provide consistent revenue from recurrent consumer spending throughout the year, which will meaningfully enhance and further diversify our existing revenues from recurrent consumer spending and help to continue to mitigate the variability of our results.

During the past three calendar years, Social Point's net revenue has experienced minimal seasonality, and exceeded $20 million in all four quarters of calendar 2016.

The company has been consistently profitable since 2013, with EBITDA margins of approximately 20%; and grew net revenue at a 29% CAGR from 2013 through 2016.

For the trailing 12 months ended December 31, Social Point generated net revenue of $90.8 million, and EBITDA of $19.9 million.

Given its exciting development pipeline, we expect Social Point's business to continue to grow in fiscal 2018 and beyond.

I would like to join Strauss and Karl in welcoming the team at Social Point to our organization, and also thank the team at Take-Two for all of their hard work in successfully completing this transaction.

Now I will review the highlights of our financial outlook.

Further details are contained in our press release.

Starting with the fiscal fourth quarter, we expect total bookings to range from $295 million to $345 million.

The largest contributors are expected to be NBA 2K17, Grand Theft Auto V, and Grand Theft Auto Online, WWE 2K17, Civilization VI, and Mafia III.

We expect GAAP net revenue to range from $542 million to $592 million.

Net revenue is expected to be increased by a $225 million change in deferred net revenue, due primarily to the recognition of previously deferred revenues for Mafia III.

We expect cost of goods sold to range from $248 million to $278 million, which is expected to be increased by a $120 million change in deferred cost of goods sold; and includes $3 million of amortization of intangible assets, and $1 million of stock-based compensation.

Operating expenses are expected to range from $140 million to $150 million.

At the midpoint, this represents an 18% increase over (technical difficulty) year, due primarily to higher professional fees and stock-based compensation.

Operating expenses include $17 million of stock-based compensation, $2 million of amortization of intangible assets, and $1 million of acquisition-related costs.

And we expect GAAP net income to range from $139 million to $148 million, or $1.23 to $1.31 per share, which includes the following pre-tax items that we use internally along with our management reporting tax rate of 22% to adjust our GAAP financial results in order to evaluate our operating performance: a $105 million increase from the net effect from deferral of net revenue and (technical difficulty) cost of goods sold; $18 million of stock-based compensation; $5 million of amortization of intangible assets; $1 million in acquisition-related expense; and $3 million in amortization of convertible notes.

Turning to our outlook for the full fiscal year, as a result of our better-than-expected third-quarter bookings and strong outlook for the remainder of the year, we are raising the midpoint of our bookings outlook by $100 million.

We now expect total bookings to grow by 16% at the midpoint of our outlook, and to range from $1.72 billion to $1.77 billion.

In addition, we now expect digitally delivered bookings to grow by around 20%, driven by growth in both the current consumer spending and full game downloads, as we now expect Grand Theft Auto Online to be up for the full fiscal year.

The largest contributors are expected to be NBA 2K17 and NBA 2K16, Grand Theft Auto V and Grand Theft Auto online, Mafia III, WWE 2K17, and Sid Meier's Civilization VI.

We expect the bookings breakdown from our labels to be roughly 65% 2K, and 35% Rockstar Games.

And we expect the geographic booking splits to be about 60% United States and 40% international.

We expect to generate net cash provided by operating activities of approximately $350 million, up about 34% over last year.

And we plan to deploy approximately $35 million for capital expenditures.

Our increased outlook for bookings does not translate into a higher forecast for GAAP net revenues, because most of the increase is being driven by sales of titles that we are required to defer.

In addition, GAAP net income is impacted by higher internal royalties resulting from the continued outperformance of Grand Theft Auto V and Grand Theft Auto Online.

We expect GAAP net revenue to range from $1.75 billion to $1.8 billion, which is expected to be reduced by a $65 million change in deferred net revenue.

We expect cost of goods sold to range from $956 million to $986 million, which includes no change in deferred cost of goods sold, $17 million in stock-based compensation, and $3 million of amortization of intangible assets.

Total operating expenses are expected to range from $660 million to $670 million.

At the midpoint, this represents a 9% increase over the prior year, driven primarily by marketing expenses for our fiscal 2017 and 2018 release slate, as well as higher R&D expense and professional fees, partially offset by the absence of a business reorganization charge recorded last year.

Operating expenses include $57 million of stock-based compensation, $2 million of amortization of intangible assets, and $1.5 million of acquisition-related expenses.

We expect net income to range from $108 million to $117 million, or $1.15 to $1.25 per share, which includes the following pre-tax items that we use internally, along with our management reporting tax rate of 22% to adjust our GAAP financial results in order to evaluate our operating performance: a $65 million reduction from the net effect from deferral of net revenue and related cost of goods sold, $74 million of stock-based compensation, $5 million of amortization of intangible assets, $1.5 million in acquisition-related expense, a $2 million gain on long-term investments, and $21 million in amortization of convertible notes.

As we enter the final months of fiscal 2017, Take-Two is more diversified and better positioned for long-term success than at any time in our Company's history.

Our results to date have been achieved through our creative leadership, innovation, and disciplined focus on operational excellence.

Going forward, we will strive to further broaden the way that we entertain and engage with our audiences, and to generate growth and margin expansion for our shareholders.

Thank you.

Now I will turn the call back to Strauss.

Thanks, Karl and Lainie.

On behalf of our entire management team, I'd like to thank our colleagues for delivering another strong quarter.

And to our shareholders, I want to express our appreciation for your continued support.

We'll now take your questions.

Operator?

(Operator Instructions).

Ben Schachter, Macquarie.

(technical difficulty) on continued execution.

A few questions.

One, can you remind us what the unit sales were for the previous Red Dead in its first year, and how you're thinking about the potential for the next iteration in FY 2018?

And then Lainie, in the past you had said that OpEx should increase this year, this fiscal year, for some promotional activity for next year.

Have we seen that?

Or should we expect anything in the next couple of months?

And then finally on Social Point, how should we be thinking about how that may impact Rockstar or 2K's mobile offerings over time?

Thanks.

The first year for Red Dead's last release was 8.5 million units, and lifetime to date is around 15 million units.

We're not talking about our expectations, except obviously we're incredibly excited about the title -- not just Red Dead; also the online offering to come.

So Rockstar will talk more about the title.

But obviously we are -- there is a great anticipation, both on the part of ourselves and consumers.

Lainie is going to talk about your second question.

Sure.

So, marketing expense for the year, we did talk at the beginning of the year that it would be up for the whole year to support our fiscal 2017 titles and also some of our fiscal 2018 titles.

And we've seen that throughout the year, and we'll continue to see that through Q4.

And then with regards to Social Point, look, we acquired Social Point because we see it as a strong, stand-alone company that's expert in the mobile and free-to-play market.

And they have owned intellectual property in a multiplicity of hits, and they know how to engage with consumers and then to monetize that engagement.

We want them to keep doing what they are doing, and keep growing the business.

We obviously have high expectations.

We love the fact that the deal is accretive to bookings and to cash flow from operations immediately, and expect it to be accretive to net income in fiscal 2018, without regard to amortization and transaction costs.

In terms of potential engagement with the other labels, it's too early to say.

One thing that we pride ourselves on is that our enterprise is comprised of creatively independent entities, where people can pursue -- not only can, but are encouraged -- to pursue their passion.

We all work together collectively, but the cooperation that occurs will be organic.

It won't be driven by the center.

Eric Handler, MKM Partners.

Two questions for you.

First, with regards to fiscal 2018: I think at the beginning of the year, you talked about the release slate for fiscal 2018 being one that's more normalized than what we've seen in fiscal 2017 or fiscal 2016, which would seem to suggest we'll get a couple 2K studio titles to still be announced.

Is that still the case, that it will be a quote-unquote normalized release type of year?

And then secondly, with the Social Point acquisition, you did include some stock in there.

Is there any particular reason why you didn't do an all-cash deal, and why you included some stock?

So in terms of our comments, which have been limited about fiscal 2018, I think the only thing that we've said, or at least recall saying, is that we expect to see growth in bookings and cash flow.

And all we've said about the release schedule so far is, of course, reflecting Rockstar's announcement about Red Dead Redemption 2, and the fact that we expect to have our normal annual releases.

And then, of course, you would expect to see our recurrent consumer spending opportunities and catalog sales.

But we haven't talked about anything else yet.

And in terms of Social Point, the idea of making sure some of the consideration was in stock is to align interest to make sure that the principles of Social Point have a stake in our enterprise and that the enterprise continues to perform.

They benefit from that.

And to make sure that all of our interests are aligned.

Great, thank you.

Mike Hickey, The Benchmark Company.

Great quarter, congratulations.

Curious about GT Online.

It continues to grow, and it looks like a big piece of that is the content that continues to come into the game.

And so as much as you can, Strauss, I was sort of curious if we can expect a similar level of content moving forward.

And it looks like there's also a fair amount of player-created content.

I'm curious how that's contributing to the growth overall of that digital piece of your business.

And the second question: wondering, as you sort of ramp into the release of Red Dead, if you feel that GTA and Red Dead can sort of coexist or find a harmony; or if anything, there is a net positive.

I guess sort of intuitive that perhaps Red Dead might disrupt a little bit the GTA Online player base, given that there's probably some overlap in players.

Thanks, guys.

We obviously believe (technical difficulty) continued engagement with GTA Online is driven at least partially by the ongoing content creation, which people love.

And Rockstar has said they will continue to support GTA Online with more content to come.

Anything more specific, of course, will come in due time from Rockstar.

I don't really have a point of view on player-created content to share.

And on Red Dead, I'm fond of saying entertainment is an unusual animal in that entertainment properties don't really compete with other entertainment properties, in that you never need entertainment.

Entertainment is something that you want to have; but it's not a need to have.

If nothing in the market appeals to you at some time, there's no reason to go and get it.

And if multiple things appeal to you, avid consumers will consume all of those things.

So I don't think there is any competitive dynamic with any of our upcoming releases, apart from the fact that our success is driven by quality.

So, I think the success of Red Dead, which is highly anticipated, will be driven by its quality.

And I think the ongoing success of Grand Theft Auto Online is driven by its extraordinary quality.

Thanks, Strauss.

Doug Creutz, Cowen and Company.

Based on what you said, and one of your competitors who has already reported said, it does feel like the consumer adoption of digital full-game downloads is moving along at a pretty rapid pace.

Is that creating any pressure in the retail channel?

Are you getting any -- are you seeing any pushback?

Does it cause any concerns on your part that that disruption may be coming?

Thank you.

The channel remains healthy.

Our primary source of distribution remains physical distribution, at 75% of our new-generation console sales.

But you are right; it is -- digital distribution is growing.

That is a benefit to consumers, and we actually do derive a gross margin benefit from it.

And we can't deny that.

But retail remains a very important partner.

That hasn't changed, and we don't expect that to change anytime soon.

Okay.

Thank you.

Tim O'Shea, Jefferies.

Strauss, you touched on the brand-new online multiplayer experience for Red Dead 2. So I was just hoping you might expand on that; what it might entail.

And should we think about this as being analogous to GTA Online or maybe something else?

And then quickly, second, what kind of marketing support should we expect for Red Dead 2?

The reason I ask is because looking back, when you announced Red Dead back in October, it kind of seems like you set the gaming world on fire.

And all it took was basically one tweet and one image added to Rockstar's website.

So, just curious if you think you can drive any leverage using various online tools and social platforms.

Thank you.

So, in terms of the online experience, Rockstar will announce more in due time.

And that's not something we typically talk about on these calls, except to say that we are really excited about what is to come.

In terms of marketing support, we support all of our releases very significantly.

We were incredibly proud of our marketing teams throughout the Company.

And our support is quite significant for all of our releases.

Social media is a big part of our marketing plans today.

Digital media is a big part of all of our marketing plans today.

Outdoor remains a big part of our plans.

So I think you should expect to see, with regard to all of our releases, very significant marketing support.

(Operator Instructions).

San Phan, Mizuho.

Just on your previous is comments regarding mobile, was there anything in particular that basically may help evolve your perspective on the mobile opportunity for Take-Two, when you decided to acquire Social Point?

And then second question: was just hoping to get your latest thoughts on Nintendo Switch, and whether we could expect to see exclusive titles in the platform; or just ports of planned releases, like NBA Live, for now?

Thanks.

Our perspective on mobile hasn't changed at all.

We are aware of the size of the business.

It's a $40 billion market, and we found it exciting.

And we are [relatively] significant participants in mobile and in free-to-play now, through titles like the NBA 2K companion app, WWE SuperCard, and other forms of supporting our titles that are reflected in recurrent consumer spending.

We had a record quarter for bookings related to recurrent consumer spending.

So obviously it's an important part of our strategy.

What we love about Social Point is that it addressed the exact criteria we were looking for in an acquisition in the space, in that they owned their intellectual property; in that they have a track record of creating multiple hits, not just one hit; in that they have real scale; in that they are profitable; and in that their team has a great culture, and a culture that fits well with ours, we believe.

We were also looking for an acquisition that would be immediately accretive to bookings and to cash flow from operations, and this one will be.

So our thinking hasn't changed.

What changed with the announcement of Social Point was an opportunity to bring a company into our enterprise that meets all of the criteria we were seeking, and that's what makes it so exciting.

With regard to Switch, we are excited about Switch.

We are supporting Switch with NBA 2K18.

We've said we are supporting the platform.

I've said over and over again that when Nintendo comes to market, you never want to count them out.

So we are excited about it.

The only thing we've announced so far is the basketball title.

Okay, great.

Thank you.

There are no further questions at this time over the audio portion of the conference.

I would now like to turn the conference back over to management for closing remarks.

On behalf of all of our colleagues and our entire management team, we want to thank you for joining us today.

Thanks to our shareholders.

Mostly thanks to the people at this Company all over the world -- many of whom are listening now -- for their incredible contributions, their great creative work; the passion with which they pursue their jobs; the great job they do at marketing, at distribution, accounting, at cash management, investor relations.

We all work together here in every part of our business to achieve these results.

It's a shared victory, and we couldn't be more pleased.

So thank you, everyone.

This concludes today's conference.

Thank you for your participation.

You may disconnect your lines at this time, and have a wonderful rest of your day.