Take-Two Interactive Software Inc (TTWO) 2018 Q4 法說會逐字稿

Greetings, and welcome to Take-Two Q4 FY '18 earnings call.

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

I would now like to turn the conference over to your host, Hank Diamond.

Please go ahead.

Good afternoon.

Welcome, and thank you for joining Take-Two's conference call to discuss its results for the fourth quarter and fiscal year 2018 ended March 31, 2018.

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 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 all numbers we will be discussing today are GAAP.

And unless otherwise stated, all comparisons are year-over-year.

Additional details regarding our actual results and financial outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance.

In addition, we have posted to our website a slide deck that visually presents our results and financial outlook.

Our press release and filings with the SEC 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 today.

I'm pleased to report that during the fourth quarter, Take-Two delivered growth in net bookings, driven by increased recurrent consumer spending, including better-than-expected results from Grand Theft Auto Online.

Our solid performance marked the completion of another outstanding year for Take-Two, highlighted by growth in net bookings, earnings and cash flow along with margin expansion.

And of course, our fiscal 2018 operating results greatly surpassed the initial outlook that we provided at the start of the year.

During fiscal 2018 and first quarter fiscal 2019, we returned $308 million to our shareholders through the repurchase of 3.1 million shares of our stock at an average price of approximately $99 per share.

At fiscal year-end, we had over $1.4 billion in cash and short-term investments.

Grand Theft Auto V and Grand Theft Auto Online continued to exceed our expectations in fiscal 2018, as they have every year since their release, with combined net bookings from the titles growing year-over-year.

Grand Theft Auto Online broke monthly audience records in June, July and December, added more new users than in the prior year and delivered its biggest year yet for virtual currency sales.

During the fourth quarter, Grand Theft Auto Online generated better-than-expected year-over-year net bookings growth.

Rockstar Games achieved these results through the ongoing release of a wide array of free additional content, including during the past fiscal year 4 significant updates coupled with a weekly schedule of new content offerings, and they have much more planned going forward.

Grand Theft Auto V is now sold in 95 million units worldwide, reflecting its status as the highest rated title of the current console generation and a must-have game for purchasers of PlayStation 4 and Xbox One.

The incredible ongoing success of Grand Theft Auto V and Grand Theft Auto Online underscores Rockstar Games' unparalleled skill at producing iconic entertainment experiences that attract and engage new audiences for years after release.

We're confident that Rockstar Games will again set new benchmarks for creative excellence with the October 26 launch of Red Dead Redemption 2, which is their first title developed from the ground-up for the current console generation.

Turning to our flagship basketball series.

NBA 2K18 continues to expand its audience and is now our highest selling sports title ever, with sell-in to date of over 9 million units, up 17% over last year's release.

In addition, our NBA 2K series continues to benefit from growing engagement of recurrent consumer spending.

During fiscal 2018, average revenue per user, revenue per hour and unique multiplayer users all increased double digits.

And recurrent consumer spending in NBA 2K grew 34% to a new record.

We believe there remains a substantial worldwide growth opportunity for NBA 2K, both through traditional and emerging platforms and business models.

To that end, earlier this month, the NBA 2K League commenced its inaugural season, which Karl will discuss.

Our fiscal 2018 results were also enhanced by a number of other recent releases and catalog titles, including WWE 2K18 and WWE SuperCard, NBA 2K17, Social Point's mobile games, Sid Meier Civilization VI and its add-on content and L.A. Noire.

We remain highly focused on our strategy to deliver innovative ways to drive consumer engagement.

During fiscal 2018, recurrent consumer spending grew 48% to a new record and accounted for 48% of total net bookings.

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, Social Point's mobile games contributed meaningfully to net bookings through its 2 biggest titles, Dragon City and Monster Legends.

During the current quarter, we have significant updates planned for both.

We view Social Point as an important long-term growth opportunity for Take-Two.

Recurrent consumer spending on WWE SuperCard grew over 20%, and the game has now been downloaded nearly 17 million times.

During the last fiscal year, 2K released the Season 4 update, which enhanced our popular WWE card battling game with more than 250 new cards, additional tiers and more.

And NBA 2K Online remains the #1 PC online sports game in China with over 37 million registered users.

In addition, net bookings from add-on content grew more than 40%, led by offerings for Sid Meier's Civilization, particularly the Rise and Fall expansion pack; XCOM 2, particularly War of the Chosen; WWE 2K; and Mafia III.

We expect fiscal 2019 to be another year of profitable growth for Take-Two, including both record net bookings and record net cash provided by operating activities, led by the launch of Red Dead Redemption 2 along with new annual releases from NBA 2K and WWE 2K.

We will also continue to support our titles with offerings designed to drive engagement and recurrent consumer spending.

The highly anticipated title from one of 2K's biggest franchises that have been planned for release in the current fiscal year is now planned for launch during fiscal 2020 to allow for additional development time.

We remain as excited as ever about this title and expect it to enhance our results next fiscal year.

I'd like to take a moment to acknowledge that this year marks the 25th anniversary of Take-Two.

Over that time, we've built our company into a diversified and profitable enterprise.

In particular, I'm extremely proud that Take-Two is home to our industry's best talent, whose passionate and creative vision consistently captivate and engage audiences around the world.

Take-Two is exceedingly well positioned to capitalize on the vast opportunities in our industry, including advances in hardware, the ability to drive ongoing engagement through connected experiences and additional content and the continued proliferation of mobile platforms and emerging business models.

As a result, Take-Two is poised to deliver growth and returns for our shareholders over the long term.

I'll now turn the call over to Karl.

Thanks, Strauss.

I'd like to begin by thanking our teams for delivering another great year of creative and financial results for our organization.

It's your passion and commitment that drives Take-Two and is reflected in our terrific fiscal 2018 operating results and record net bookings and cash flow outlook for the current year.

Turning to our recent and upcoming releases.

Last month, Rockstar Games released the Grand Theft Auto V Premium Online Edition for PlayStation 4, Xbox One and PC.

This comprehensive offering features the complete Grand Theft Auto V store experience, the ever-evolving world of Grand Theft Auto Online and all existing gameplay upgrades and content, including the Doomsday Heist, Gunrunning, Smuggler's Run, Bikers and much more.

In addition, purchasers received the Criminal Enterprise Starter Pack, which provides access to a huge range of content, including properties, vehicles, weapons and more.

On October 26, Rockstar Games will launch Red Dead Redemption 2, eagerly awaited sequel to one of the label's more critically acclaimed and beloved titles.

2 weeks ago, Rockstar Games unveiled a beautiful cinematic trailer for the game that set the stage for what is shaping up to be another massive entertainment event.

Player reaction to the trailer was phenomenal.

And last month, Rockstar Games hosted select media outlets at their Rockstar North studio for an extended look at the game.

We have been delighted by their first impressions.

We could be more excited about the upcoming launch of Red Dead Redemption 2. Rockstar Games will have additional details to share about the game in the coming months.

This fall, the next annual installment of NBA 2K will return to the hardwood court with the series' signature style and deep authenticity.

This year marks the 20th anniversary of our industry-leading basketball simulation, and we are confident that 2K and Visual Concepts will once again take the series to exciting new heights with the release of NBA 2K19.

Also this fall, 2K's WWE series will be back with WWE 2K19, bringing gamers into the virtual squared circle with their favorite WWE superstars, gameplay modes and variety of hard-hitting and ring action.

Throughout fiscal 2019, we will continue to support our titles with additional content designed to deepen consumers' experience and drive engagement, including updates for Grand Theft Auto Online, WWE SuperCard and others.

In addition, Social Point and 2K will continue to broaden our offerings for mobile devices.

Earlier this month, the NBA 2K League, our joint venture with the NBA, kicked off its inaugural season.

102 of the best NBA 2K players were drafted by 17 NBA teams and are competing in a 15-week season, which will conclude with NBA 2K League playoffs and finals in August.

While each team is living and training together in their home market, all league play-in tournaments will take place in New York City.

In addition, the league has been steadily building its portfolio of partnerships and sponsorships with high-profile brands.

Dell is the League's official PC hardware and monitor partner, featuring its elite gaming brand, Alienware.

And Intel is powering all PCs with its state-of-the-art 8th Gen processor.

Throughout the partnership, Dell and Intel will work with the League to identify new opportunities to innovate and enhance gameplay as the latest technology evolves.

Both companies have agreed to make significant marketing commitments, including sponsoring the League's halftime show.

Twitch has signed on as the League's official live streaming partner for games throughout the season, including weekly matchups, 3 in-season tournaments, playoffs and the NBA 2K League Finals.

This live stream includes various talent providing commentary, analysis and additional League updates.

And last week, the League announced 2 official sponsorships, Scuf Gaming controllers and HyperX gaming headsets.

We look forward to watching the continued progress and growth of the League, which has the long-term potential to enhance engagement and to be a meaningful driver of profits for our company.

China remains another long-term emerging growth opportunity for Take-Two.

Building on the popularity of NBA 2K Online, 2K and Tencent are teaming up again to codevelop and release the title's highly anticipated successor, NBA 2K Online 2. This new game is based on the console edition of NBA 2K and features 2K's legendary gameplay, 27 customizable position types, new player trading systems, eSports-optimized features, localized commentary and more.

NBA 2K Online 2 is currently in closed beta testing and is planned for commercial release this fall.

In addition, we are pleased to expand our successful partnership with Tencent with last month's announcement that Kerbal Space Program will be released on Tencent's WeGame distribution platform as a premium PC game at a date to be determined.

We're excited about Tencent's WeGame platform and the opportunity to grow our business in China.

We're also very enthusiastic about the long-term potential of Private Division, our new publishing label that is dedicated to bringing titles from top independent developers to market.

Private Division currently has contracts to publish several upcoming titles based on new IT from renowned industry talent, including Panache Digital Games, The Outsiders, Obsidian Entertainment and V1 Interactive.

Private Division will seek to add to its already impressive roster development partners throughout the world, and we look forward to its future announcements.

Next month at E3 in Los Angeles, we will have a corporate booth on the show floor.

We will not be showing any new products, but we will be holding business development, Investor Relations, media and sales meetings throughout the show.

Looking ahead, we have a strong development of pipeline across our labels, which includes new releases from our popular series along with groundbreaking new IP.

With our unwavering commitment to delivering the highest quality entertainment experiences that keep our audiences engaged, Take-Two is better positioned than ever to provide value to our customers and to generate growth and profits over the long term.

I'll now turn the call over to Lainie.

Thanks, Karl, and good afternoon, everyone.

Today, I'll discuss our fourth quarter and fiscal year 2018 results and then review our financial outlook for the first quarter and fiscal year 2019.

Please note that additional details regarding our actual results and financial outlook are contained in our press release.

As mentioned by Strauss, our solid fourth quarter results mark the completion of an outstanding fiscal 2018 for Take-Two, during which we delivered operating results that greatly surpassed the initial outlook we provided at the start of the year.

These results were driven primarily by the sustained outperformance of Grand Theft Auto Online and Grand Theft Auto V, coupled with record results from NBA 2K.

Starting with the fourth quarter.

Our operating metric total bookings grew to $411 million, and net cash provided by operating activities exceeded our expectations.

Digitally delivered net bookings grew 12% to $333 million and accounted for 81% of the total.

Turning to some details from our fourth quarter income statement.

GAAP net revenue decreased by 21% to $450 million, and cost of goods sold decreased 40% to $189 million.

Operating expenses increased by 19% to $173 million, due primarily to higher R&D expense and a full quarter of expenses from Social Point, which we acquired in January 2017.

And GAAP net income was $91 million or $0.77 per share as compared to $99 million or $0.89 per share in the prior year period.

Turning to our fiscal 2018 results.

Total net bookings grew 5% to $2 billion, driven principally by growth from Grand Theft Auto Online and NBA 2K, along with the full year of results from Social Point, partially offset by a lighter release slate.

Of this amount, 58% were digitally delivered net bookings, which grew 25% to a new record of $1.35 billion.

Our digitally delivered net bookings were driven by record recurrent consumer spending, which is partially offset by lower full game downloads due to fiscal 2018's lighter release slate.

Net cash provided by operating activities grew 19% to $394 million, which exceeded our most recent outlook of $300 million and was more than double our original outlook at the start of the year.

And we spent $62 million on capital expenditures.

At fiscal year-end, our cash and short-term investments balance was over $1.4 billion.

As a result of favorable market conditions, we were able to repurchase 1.5 million shares of our stock for $155 million during fiscal 2018 and an additional 1.6 million shares for $153 million during fiscal first quarter 2019 to date.

Turning to some details from our fiscal 2018 income statement.

GAAP net revenue increased to $1.8 billion, and cost of goods sold decreased by 12% to $898 million.

Operating expenses increased by 14% to $759 million, due primarily to a full year of expenses from Social Point as well as higher R&D, stock-based compensation and reorganization costs, which are partially offset by a lower marketing expense.

And GAAP net income increased by 158% to $174 million or $1.54 per share.

Now I will review the highlights of our fiscal 2019 financial outlook.

Starting with the fiscal first quarter.

We expect net bookings to range from $215 million to $265 million.

The largest contributors are expected to be Grand Theft Auto Online and Grand Theft Auto V, NBA 2K18 and Social Point.

We expect GAAP net revenue to range from $345 million to $395 million and cost of goods sold to range from $83 million to $109 million.

Operating expenses are expected to range from $190 million to $200 million.

At the midpoint, this represents a 12% increase over last year, driven by higher R&D and stock compensation expense.

We expect GAAP net income to range from $62 million to $74 million or $0.53 to $0.63 per share.

Turning to our outlook for the full fiscal year.

We expect net bookings to range from $2.67 billion to $2.77 billion.

At the midpoint, this represents a 37% increase over fiscal 2018, driven primarily by the launch of Red Dead Redemption 2 and expected growth from NBA 2K, which we forecast to be partially offset by lower net bookings from Grand Theft Auto V and Grand Theft Auto Online.

We expect net bookings from recurrent consumer spending to increase modestly and digitally delivered net bookings to grow by 15% to 20%.

The largest contributors to net bookings are expected to be Red Dead Redemption 2, NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, WWE 2K and Social Point.

We expect the net bookings breakdown from our label to be roughly 55% Rockstar Games, 40% 2K and 5% Social Point and other.

And we expect our geographic net booking split to be about 55% United States and 45% international.

We expect to generate approximately $710 million in net cash provided by operating activities, up 80% over last fiscal year.

And we plan to deploy approximately $60 million for capital expenditures.

We expect GAAP net revenue to range from $2.5 billion to $2.6 billion and cost of goods sold to range from $1.41 billion to $1.43 billion.

Total operating expenses are expected to range from $885 million to $925 million.

At the midpoint, this represents a 19% increase over the prior year, driven by higher marketing, personnel and IT expenses.

We expect GAAP net income to range from $180 million to $211 million or $1.53 to $1.80 per share.

For management reporting purposes, we expect our tax rate to be 20%, down 2 percentage points from prior year, due to the recent tax reform legislation.

In closing, fiscal 2018 was another great year for Take-Two.

Our ability to deliver growth in net bookings, earnings and cash flow despite an unusually light release slate, reflects the strength of our core franchises and our ability to drive engagement with and recurrent consumer spending on our titles for years after launch.

We are very excited about our outlook for fiscal 2019, which is poised to be a record year for both net bookings and net cash provided by operating activities.

Over the long term, our company has accretive assets, operational discipline and financial foundation to generate growth and margin expansion for our shareholders.

Thank you.

Now I'll 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 successful year for our organization.

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

We'll now take your questions.

Operator?

(Operator Instructions) Our first question is with Mike Olson with Piper Jaffray.

Did you say the GTA exceeded your expectations and grew year-over-year in the quarter?

Or was that the full year fiscal '18?

And if you were referring to the March quarter where it was the GTA exceeded your expectations, given bookings came in at the lower end of the March quarter guidance range, was there something else within the overall mix that disappointed versus your internal expectations?

Yes, Mike.

In fact, Grand Theft Auto Online was up year-over-year, was up in the quarter, another record year.

And we had previously expanded our guidance for the year.

We guided up.

And in the fourth quarter, NBA 2K Online didn't do quite as well as we expected when we had guided up.

Okay.

And then it sounds like there's not a new content drop for GTA Online in the June quarter.

So would that explain maybe the difference between -- obviously, you're not in control of what consensus does, but the difference between your guidance and consensus?

I guess, the best way to look at it that you essentially have a tough comp off of GTA Online content that hits last year's June quarter?

Yes, you asked and answered your question correctly, which is to say, we have the Gunrunning update in last year's fourth quarter.

It isn't a direct comp.

And we said over and over again, it's very hard to look at this company from a quarter-by-quarter comping situation, because we're driven by our content.

Now we're very fortunate that we have such a strong catalog and we have such strong recurrent consumer spending.

The company certainly looks a lot different than it used to look.

But even so, we are beholden to what content we create.

So period-to-period is not often a good comp.

That's really the reason.

We believe the consensus is off.

Our next question with Tim O'Shea with Jefferies.

Just looking at the recurrent consumer spending, is it possible to quantify the impact you saw this quarter from Fortnite?

Strauss, you mentioned NBA 2K Online didn't do as well.

I'm just curious if you attribute any of that to Fortnite.

And then maybe if you could just comment on GTA Online, specifically if there was anything you noticed with respect to engagement or monetization as Fortnite started to gain steam through the quarter?

Okay.

You probably want to take on the Fortnite part.

Sure.

Tim, sorry, with regard to your question about fourth quarter -- first of all, I misspoke earlier, it was NBA 2K, not NBA 2K Online.

That was not quite at our revised expectations for the quarter.

In terms of what the competitive landscape was, there's no doubt there are a couple of big hits in the marketplace, Fortnite and PUBG and their big hits.

That creates a lot of benefits.

We think it brings new players into the market.

And it just shows what a robust industry that we operate in.

Naturally, we would like to have all the hits.

I don't think that's necessarily a realistic goal.

It's pretty hard to determine what competitive landscape effects are, however, because entertainment properties compete with each other, with themselves and with nothing at all.

So entertainment is a nice-to-have, not a must-have good.

So it's impossible to determine whether a particular title had an impact, although I think we've all observed that Fortnite has created a lot of activity around it.

And in terms of your question around Grand Theft Auto Online, we had a record year, we had a record quarter and the title continues to perform extraordinarily.

Our next question is with Eric Handler with MKM Partners.

So wonder if you could talk a little bit about Social Point.

I remember in last year's guidance based on the percentage of net bookings, you were sort of looking for about $100 million.

I'm not sure if you ever updated it about where Social Point finished.

Now just sort of doing some back-of-the-envelope calculations based on the midpoint of your net bookings guidance, you're looking about $136 million of revenue.

Maybe you could talk about some of the key drivers for Social Point this year.

Are they -- is it -- are we getting more updates?

Are we getting any new games?

And what you expect there?

Yes.

I mean, Social Point is doing just fine.

Dragon City and Monster Legends are their 2 big hit titles in the market.

Those will continue to drive the bulk of their results.

In the fourth quarter, profits were up from Social Point.

The drivers this year will be how those games perform and potentially how some upcoming titles perform depending on the release schedule naturally.

Yes.

Also, for Social Point and some of our mobile titles, we have some change in accounting, where we need to gross up the accounting for it instead of showing it net.

So that's the difference that you're seeing in terms of the growth number for the net bookings.

Okay.

And then, Lainie, just as a follow-up for you.

Just looking at your numbers and the guidance, it's -- you're projecting a record operating cash flow number.

But it doesn't seem like you're projecting a record EPS.

So I'm just curious, is there any accounting reversals or puts -- when you think of the puts and takes, the difference between EPS and operating cash flow, is -- what's sort of impacting that?

So since our business mix is weighted a little bit towards the new releases, we're having some higher software development costs in the year and then also the marketing that's associated with it.

So it depends on the timing of the marketing and then also the software development costs.

The cash is behind us.

Our next question is with Justin Post with Merrill Lynch.

Great.

I'd like to focus a little on next year's guidance.

It definitely seems to imply you might have some acceleration in recurrent spend after the first quarter and then a big healthy number for Red Dead.

Can you talk about -- if you think some of the recurrent spend growth is going to accelerate in your guidance and besides the 55% of bookings from Rockstar, any other clues you can give us on kind of your expectations for Red Dead?

So for Red Dead, we don't share unit expectations.

But looking at recurrent consumer spending, we'll usually have bigger quarters in our second and third quarters of the year.

So you would start to see that be in line with what you've seen in previous years.

Got it.

And when you think about the quality of releases for Grand Theft Auto Online, the quantity of releases, I mean, do you feel like this year is going to compare well to last year?

Or how are you thinking about how much content is coming for that?

As you know, our labels comment on their upcoming releases and what they're going to look like, and we like it that way.

That said, Rockstar Games has said they have much more content coming for Grand Theft Auto Online and they will continue to support it.

And obviously, we just enjoyed another record year for Grand Theft Auto Online.

Our next question is with Chris Merwin with Goldman Sachs.

I had another one on the guidance for fiscal '19.

It looks like non-GAAP gross margin guidance was just below 50%, which I think is down pretty significantly year-on-year.

And of course, you've got Red Dead coming out in the December quarter.

So does the full year guidance just reflect the higher software amortization that you called out?

Or is it a higher SKU of physical revenue compared to last year?

And maybe as a related question, what does your guidance assume for the digital download mix for Red Dead?

And just a quick second one, curious if Fortnite has caused you to maybe think about the potential for cross-platform gameplay and which of your titles, do you think, might be well suited for the smaller screen?

And then how long would it take to develop a game like that for mobile?

So let me take the first one first.

When you're talking about next year in our margins, so you are correct that it is driven by the software development costs associated with a new title or a big new release.

And then also for our blockbuster titles, typically, they have had higher physical sales instead of digital.

So that's also going to move the margin as well.

And regarding cross-platform availability, we already make many of our titles available on multiple platforms, including over time sometimes mobile platforms.

It all depends on the title, or VR platform.

So we take it on a case-by-case basis.

And -- but I wouldn't say there's anything about the Fortnite experience that would change our view about platforms, and we're obviously familiar with multiple platforms.

We have plenty of games available on mobile platforms, most notably Social Point's games as well as WWE SuperCard and some other titles that come from other of our labels.

And Rockstar Games has made titles available on mobile platforms as well.

So it really depends on what the opportunity is title-by-title.

But I wouldn't say that our outlook about making titles available where consumers are has changed.

Our strategy is to be where the consumer is.

Our next question is with Brian Nowak of Morgan Stanley.

Two.

Just the first one on the NBA eLeague, I appreciate the color on the sponsors and kind of the steps that they've taken.

I guess I'd be curious to think about how you all are thinking about the timing need to really get a meaningful impact from monetization.

What are the biggest drivers of monetization you see?

And then Strauss, maybe kind of most recently, how do you think about the potential for eSports gambling, given the change in legislation?

And then kind of bigger picture question on Fortnite.

Strauss, what were your biggest learnings from kind of watching the Fortnite phenomenon sort of pop-up about the way you think about the potential future for gaming and the way players come into the game ecosystem?

So you've a number of questions there.

With regard to the NBA 2K League, we're a couple of weeks in.

We're excited by the early experiences.

There are a lot of people watching on Twitch, and we think there is a great opportunity.

We've said all along that our risk profile is exceedingly low, that the actual exposure if things don't work out the way we'd like is de minimis, certainly not material.

And the upside we believe is substantial.

However, we haven't included any of that upside in our outlook.

And that's sort of the way we tend to conduct business around here.

We want to take exceedingly measured risks, and then we report back on them when we have results, and we don't like to overpromote in advance.

In terms of where monetization can come from, I think you can -- your expectations would properly be sponsorship, which is going well, it's early days, but it's going very well and media rights also going well.

And then eventually, depending on the level of success, of course, you could imagine event-related revenue and merchandise and the like.

But again, it's early days and we're gaining new experience as every day passes.

In terms of the recent Supreme Court decision on the potential for sports gambling, this will now be left to the states.

We certainly think it's a good decision.

We think there may indeed be an influence in a positive -- meaningfully positive influence on our business.

However, it's not in our current sights.

We don't have any expectations right now.

Simply observing that there are potential opportunities in the future.

And I'd be very surprised if sports gambling didn't intersect with the industry at some point in the relatively near future.

In terms of learnings around Fortnite, look, as I said earlier, maybe the biggest learning is just reinforcement of the fact that hits -- big hits by their very nature are unexpected.

And then what drives a big hit is innovation, not derivation.

And -- I mean, so we're proud of it around here.

We put out Red Dead Redemption, the conventional wisdom was that Western titles don't work in the video game business.

And Red Dead Redemption was a big hit, and we have extremely high expectations for Red Dead Redemption 2. So I think the fact that Fortnite surprised everyone, particularly given where Fortnite came from, after all what is now in the market was based on a prior release that did not perform all that well.

It's just a reflection of the fact that if you innovate and give consumers what they want, you can get an extraordinary result.

And while we would love to corner the market in hits, and we certainly see it as our job to do so, we don't have all of the hits and we shouldn't expect to.

So -- but I don't think what one takes away from this properly is that a particular approach, a particular mode has suddenly redefined the business.

I don't believe that's the case.

And in fact, to the contrary, I think if one changed one's business to follow other people's big hits, you'd constantly be playing catch-up.

And to say that you wouldn't be in second place is an understatement.

You might remain in last place.

So it's our job always to innovate, and more often not, that has driven our success.

Our next question is with Ben Schachter with Macquarie group.

A few questions.

On Red Dead, should we expect that consumers will be able to access and purchase extra content immediately after release or it will take time for that to evolve?

And on the NBA, Lainie, I think you said we should expect growth from that in FY '19.

So what gives you the confidence that we should expect growth?

And what happened in the March quarter that drove the underperformance?

And then also just on the NBA on League, anything that you can say that was sort of different or unexpected during the launch period?

And -- sorry, one more, maybe just in terms of amortizing the capital cost for Red Dead.

Given how successful GTA has been over the long term, should we capitalize those costs over a longer period of time for Red Dead and VC historically?

So Lainie, why don't you take the last question first and then I'll dive in.

So we don't usually share on a title-by-title case amortization.

But you can -- if you think about blockbuster titles and how Grand Theft Auto has performed, it would be something that we would look at in terms of how long we would amortize the title over.

And we usually look at what our estimated life of that title is going to be.

And then on Red Dead, obviously, Rockstar will give clarity on content drops and the like in due time.

We're very excited about the October 26 release.

Everyone who has experienced the trailer is also excited.

And obviously, Rockstar will make further announcements in due time.

In terms of NBA and recurrent consumer spending in the fourth quarter, we think there were any number of factors that affected the level of monetization of the title.

And Visual Concepts has plans to address those factors in NBA 2K19.

We think fiscal 2019 will be another year of growth for NBA 2K, including both unit sales and recurrent consumer spending.

So our view is, look, we always have to get better.

We pay attention to what the consumer says.

We've had an amazing year for our basketball franchise, just amazing, and we expect it to get even better.

Our next question is with Ray Stochel with Consumer Edge Research.

Could you talk about the nature of the 2K property delay and anything that you could say to give us some confidence in that title after this delay?

Of course, any quantification would be helpful.

And then also under the 2K label, can you talk about all the changes that are happening at Hangar 13?

And what are your thoughts on that studio going forward?

So in regards to the 2K title, it's simply because it needs more time for development at this point.

And in terms of confidence level, when it's going to come out, we're highly confident that this title will certainly be coming out in fiscal year '20, which is what we've said in our statements today.

So our confidence level is very high.

In terms of Hangar 13, Hangar 13 is a long-standing studio for us, very talented group of folks.

We are constantly spending time, figuring out where it is best to put our resources on which projects.

And I see what you're seeing there is a reflection of that specifically.

We're moving assets around from game-to-game all the time, and the movement that you're seeing is a reflection of just our view on where the best place to deploy our assets are.

Our next question is with Gerrick Johnson with BMO Capital Markets.

In your 2019 guidance, are you planning any marketing spend in 4Q for the 2K new title release?

And then also on the NBA 2K League, is Twitch paying for streaming rights?

And if so, can you discuss some numbers there?

So for our marketing, we do expect to have some marketing and -- for the 2K release for fiscal year of 2020.

And with regard to the eLeague, our media rights are valuable.

And so it's appropriate to assume that there's an economic cost to media rights.

However, we're not talking about giving any specific media or sponsorship deals for the league.

And Lainie, you cut out, I didn't hear the first part of your answer on the margin spend.

Sorry.

So for the margin spend for the 2K release, we do expect to have some marketing in this fiscal year for the titles release next year.

Our next question is with Ryan Gee with Barclays.

A quick question for Lainie.

I think your guidance has called for aligned margins a couple of hundred basis points year-over-year, low 20s.

And it sounds from mid-20s this year.

So I was hoping you can maybe update us on the way you're thinking about potential margins are for your company.

Ryan, we can't hear you.

You're breaking out.

Okay.

Sorry.

Can you hear me now?

A question for Lainie on specific on the aligned margin.

It looks like the guidance is (inaudible) a couple of hundred basis points year-over-year.

And so I was hoping if you could just give us an update on what you think for the company the potential long-term operating margins are for you maybe for the timeframe or some milestones, how you're thinking about achieving that.

And then just a quick follow-up on your NBA 2K franchise.

You mentioned new NBA 2K Online 2 in China with Tencent.

Anything you can say as to how that -- how significant the original NBA 2K Online is there for you guys financially?

And then once that does come out, sort of your expectations around that?

Ryan, for our margins, we did talk about that, that for this fiscal year it will be slightly down since we have a big release.

So there's higher software development cost and marketing associated with the title.

But we expect our margins to expand over the long term.

And on a year-by-year basis, they're going to vary based on our release schedule.

And in terms of the NBA 2K franchise, we have very high hopes for the NBA 2K Online 2 title.

We're obviously in business with Tencent.

They're a phenomenal partner.

It's a great market.

NBA 2K Online has been the #1 T channel and sports title for some time.

We have 37 million registered users.

So we're phenomenally excited about the upcoming release.

It's in closed beta now.

It's planned for commercial release in the fall, so stay tuned.

Our next question is with Andrew Uerkwitz with Oppenheimer & Co.

Strauss, I appreciate your comments regarding Fortnite and your strategy around developing new games.

But if you take a look at Fortnite and some of the other titles that have come out over the past couple of years, it seems that there's been an expansion of the market around casual gamers and getting casual gamers to play more and potentially spend more.

And it seems like the Rockstar titles tend to focus more on the harder core players.

Has some of these recent titles shaped the way you developed or think about developing games for a broader audience and -- along those lines at all?

I think the explosion of -- I'm not sure casual is the right term, because I'm not sure people call Fortnite a casual title.

But I do think what you're alluding to is right in that the free-to-play revolution, if you will, whether that's mobile or fixed, has been transformative to the business.

It's massively increased the size of the business.

And we're in the free-to-play business, whether it's a mobile platform or a fixed platform.

We're in that business in China.

We're in that business at 2K.

We're in that business with Social Point.

And you're right, it's a huge growth business.

What we like about it is some free-to-play games, some particularly free-to-play mobile games speak more to an older demographic, some speak more to a female demographic.

There are a lot of people who believe that Fortnite has welcomed into our industry people who didn't previously play video games.

Some of that's anecdotal.

It's hard to know.

But I think, that's right.

So this is all good news, and it is news that is not lost on us, hence the Social Point acquisition and our emphasis on free-to-play titles as we grow our core business.

That said, what has historically been our stock and trade, the highest quality console games, deep, immersive, many hour experiences that are available at a premium price remains a terribly important business.

And while I think hardcore gamers are excited about both -- what both Rockstar and 2K bring to bear, it's worth noting, and forgive me for maybe being immodest about it on behalf of our company and Rockstar Games, but Grand Theft Auto has sold in over 95 million units.

And according to others, apart from us, it's the highest grossing, most profitable entertainment product ever made of any sort.

So it's not only exciting to a small core, it's exciting to a very, very broad audience.

And I think what Rockstar Games has uniquely shown the ability to do is to make the title easy to approach and difficult to master.

You can approach Grand Theft Auto and Grand Theft Auto Online in any number of ways.

And if you're a hardcore gamer, you can find it super-compelling.

And if you're somewhat more casual, you can find the experience super-compelling.

And there's so much there now, you can very much define your own experience and create that for many, many hours of wonderful entertainment.

And do I think that, that approach to the entertainment business ever becomes antique?

I do not.

I think that's the nature of the entertainment business.

So it's all sort of saying -- it's like in a multiple choice test, all of the above.

And that's how we view our obligations around here.

We need to be where the audience is.

That's one of the reasons that we did the Social Point acquisition, that's the reason that we started the Private Division group, which will bring independent titles to bear.

We hope meeting another audience need.

That's why we acquired Kerbal Space Program.

And that's why we find ourself in the position that we're in today with an incredibly strong balance sheet on the one hand and an incredibly strong creative team on the other.

Our next question is with Brandon Ross with BTIG.

A couple.

Another one on the margin side.

Can you get a little more granular on the percent of -- or give us any more color on the percent of amortization you expect to take on Red Dead this year on a non-GAAP basis?

And then just -- the media is undergoing a pretty massive consolidation wave right now, and the video game publishers have not participated to date in that.

Why do you think that is?

And do you expect that to change in the coming months or years?

So on the margin for the amortization of Red Dead, as I said, we don't give that out on a title-by-title basis.

But if you think about larger titles and what the lifetime potential of them are and how long they would spread out, that's the best way for you to take a look at that.

And on the consolidation point, I think the consolidation that you're seeing or expecting in traditional -- so-called traditional media businesses has been driven by a lack of growth, frankly, and a need to create scale, reduce cost, find cost synergies and the like.

And that -- I think that just doesn't apply to such a high-growth business, the one we find ourselves in and our competitors find theirselves in.

Historically, the media and entertainment businesses that have tended to consolidate are the ones where a massive portion of your revenue was driven by catalog that's already amortized and doesn't cost that much to continue to create value.

And in our business, because of technological change and the importance of frontline releases, catalog is still a relatively small part of the business compared to other mature entertainment businesses.

I think you'll start potentially seeing consolidation if and when there's -- we've reached a technological asymptote, and therefore, if and when catalog creeps up well over 50% year-in, year-out, including big frontline release years.

Now we performed particularly well on catalogs, so our numbers are necessarily reflective of the industry as a whole.

But I think the point stands.

And the other piece is, in a business that is frontline-driven, that means if you do consolidate, you are potentially arguing that you're going to have a much greater exposure to frontline shelf space, whether that's digital or physical, than it may be realistic to assume.

And of course, the day after you close, you still have to invest in frontline production, frontline marketing, which is costly.

So I think you -- as I said, I think you would look for entertainment consolidation as businesses mature and they're either not growing, flat or even potentially declining, and none of that describes the interactive entertainment business.

Do you think there's any merit whatsoever to putting together traditional media assets with video game publishers?

Potentially, although so far, we haven't seen it.

But I definitely would have thought so.

I think years ago, I said I expected such consolidation and it didn't materialize.

The facts forced me to change my outlook.

I think when you look at the quality of the intellectual property created and owned by ourselves and some of our competitors, it's hard to imagine that there wouldn't be opportunities in other forms of entertainment.

And indeed, some of our competitors have entered other forms.

So if it makes sense to enter other forms of entertainment at which some traditional media companies are already expert, you would imagine that, that kind of consolidation could have some industrial logic.

But I would observe that not only has it not occurred, but that some legacy entertainment companies have in fact exited interactive entertainment of late.

Our next question is with Doug Creutz with Cowen.

You mentioned that you had 4 major GTA Online content updates in the last fiscal year.

I was just wondering if you could talk about kind of how you're thinking about the content pipeline shaping up for the next fiscal year.

Can you match that kind of cadence?

And I think in the past several years, you typically had started the year assuming GTA Online would be down year-over-year.

Did you build that kind of conservatism into your guidance as well this year?

Yes, in terms of our content updates, Rockstar Games has said that much more content is coming for Grand Theft Auto Online.

And obviously, they intend to continue supporting the title.

And yes, our guidance does reflect an expectation that the results will moderate this year.

Our next question is with Stephen Ju with Crédit Suisse.

Strauss, did 2K or Tencent handle the development of NBA 2K Online 2 and consequently will be handling the distribution of title -- this title outside of the Chinese market?

And presumably, you may have plans to release the game in non-console territories.

And secondarily -- I mean, there is obviously now hits from studios not affiliated with yourself or some of your publisher peers.

So it is said that there are content studios and IP out there that you may think about acquiring and bringing in-house.

But deals seem to be pretty few and far between.

So has the M&A environment become more difficult?

Thanks for your questions.

with regard to the development of NBA 2K Online with Tencent, that's obviously an arrangement between Tencent and 2K, and both companies are actively involved in bringing that title to market.

Social Point is not involved with bringing that title to market.

With regard to potential acquisitions, we acquired the Kerbal Space Program intellectual property.

We're continuing to develop and release around that title we're excited about.

We acquired Social Point.

And over the years, we've made numerous other selective acquisitions, typically when we can acquire intellectual property and the team that goes along with it.

I don't think the environment is any more challenging than it's been.

I think it's been challenging for quite some time, because this has been a growth business for quite some time and there have been some hefty multiples paid.

I think we feel that our discipline has really paid off.

There are a few things that occur that we feel like we missed the boat on, but precious few.

And we much more often dodged the bullet than missed the boat.

Our next question is with Mike Hickey with Benchmark.

Curious still, I guess, a bit far away here, but there's been some speculation that we may have a new console from PlayStation in 2020.

Obviously, that's not something that you can talk to, but -- I think anyway.

But I'm just curious sort of your perspective on what it means to sort of have to still sort of a console cycle type opportunity or challenge.

And I'm also wondering how -- you released GTA V at the end of the prior cycle and that are obviously very strategic and opportunistic to release the current gen shortly thereafter.

So how you think about that sort of strategic opportunity potentially coming into maybe a new PlayStation box in 2020?

Well, thanks, Mike, always nice to hear from you, as you'd imagine.

I think you know this already, we don't -- we wouldn't have any ability to comment on another company's plans.

You'll have to ask them about that.

We've -- I think we've navigated transitions in consoles and console releases and other platform releases pretty well around here since we showed up roughly 11 years ago.

We're actually really proud of that, because historically, as you know, during a transition period, the challenges can be very significant if you bet wrong in terms of what you're up to, whether that's supporting something new or supporting something old.

But again, what's driven that is less corporate cleverness and much more than our labels create the highest quality properties that defy normal behavior and console transition period.

So in the last transition period, for example, there was a lot of noise in the marketplace about how challenging it was for catalog product.

And this is going back some time.

But you've been in the industry a long time, so you'll remember this as I do.

And we weren't challenged in the least.

We did exceedingly well.

Why?

Because, I believe, the quality of our catalog was so high and is so high.

And that's why, for example, our catalog sells more per SKU than, I think, any other company in the business.

So I think because we have a limited number of the highest quality releases and because our titles tend to do well as catalog titles, transition periods create somewhat less risk for us.

We're not the only one with a massive tonnage of SKUs that we have to make decisions about.

And because our titles are typically very, very high quality, they can continue to perform as new platforms are released.

So obviously, Grand Theft Auto V was developed for the last generation, and yet it remains the standard bearer for this generation, which is extraordinary and something that we are grateful to Rockstar for and incredibly proud of.

So in the event that there are new platforms, we'll make decisions about what to support based on our view of potential success.

I would observe that the PC platform has become a very, very important part of what we do, driven by digital distribution.

And that was not the case for so-called console titles 10 years ago, and it is the case now.

Does that mean that the business is flattening out and everything becomes open and we don't care what brand is on the box?

Not in the least.

I wouldn't rule out the possibility of more generations.

However, it does get us closer to a point where we truly can be platform agnostic as an industry.

And I would say we're not there yet, but that day will come.

Ladies and gentlemen, we have reached the end of our question-and-answer session.

And I would like to turn the call back over to management for closing remarks.

Well, we've kept you all long enough.

We're really proud of our results.

We're grateful to our creative colleagues, who drive these results.

We're grateful to our business colleagues, who keep the trains running on time.

We're grateful to our marketing and distribution colleagues, who we believe are the best in the business.

This company has a wonderful culture and enjoys terrific results on a consistent basis.

We're proud of that.

And for those of you attending the call today, our shareholders and those who follow us, thanks so much for your support and interest.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.