Greetings and welcome to the Take-Two Q3 Fiscal Year 2018 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, Senior VP of Investor Relations and Corporate Communications. Please go ahead. .

Good afternoon. Welcome and thank you for joining Take-Two's conference call to discuss its results for the third quarter of fiscal year 2018 ended December 31, 2017..

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. 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 holiday quarter, Take-Two benefited from high consumer demand for our offerings, enabling our company to deliver both strong net bookings and net cash provided by operating activities..

Our results were highlighted by record recurrent consumer spending on Grand Theft Auto Online and NBA 2K18, robust ongoing sales of Grand Theft Auto V and the successful launch of WWE 2K18. As a result of our outstanding third quarter performance and increased fourth quarter forecast, we've raised our fiscal 2018 outlook for net bookings..

2017 was the best year yet for Grand Theft Auto Online, capped off by an epic December that saw more players in the game than ever before. During the fiscal third quarter, Grand Theft Auto Online substantially exceeded our expectations and remained the single largest contributor to recurrent consumer spending.

Rockstar Games has driven sustained engagement through the ongoing release of a rich array of free new content, led by the massive Doomsday Heist, which is the biggest update for Grand Theft Auto Online to date, as well as Festive Surprise 2017, special Halloween content and additional themed content drops for Smuggler's Run..

Also, Rockstar Games released the Criminal Enterprise Starter Pack, which gives players access to a wide range of the most exciting and popular additions to Grand Theft Auto Online plus $1 million in GTA virtual currency. Rockstar Games will continue to support Grand Theft Auto Online with more new content going forward..

Although, we launched over 4 years ago, during 2017, Grand Theft Auto V was the #3 selling game in units and #6 selling game in revenue based on combined U.S. digital and physical sales across PC, console and portable according to The NPD Group.

The title remains the must-have video game especially, as the installed base of current generation consoles continues to grow and is now sold in more than 90 million units.

The unparalleled longevity and success of Grand Theft Auto V and Grand Theft Auto Online is a testament to Rockstar Games' ability to deliver entertainment experiences that set new creative benchmarks and appeal to a broad range of audiences around the world..

Turning to our annual sports releases. NBA 2K18 delivered better-than-expected net bookings during the holiday quarter. The title was sold in over 8 million units to date, up nearly 25% over the prior year's release. And digitally delivered sales have increased significantly.

NBA 2K18 was the second highest selling game of 2017, both in revenue and units based on combined U.S. digital and physical sales across PC, console and portable according to The NPD Group. Our NBA 2K series also continues to benefit from growth and engagement and recurrent consumer spending.

To date, total users and average daily users of NBA 2K18 on current generation platforms are up more than 20% over last year. And during the third quarter, recurrent consumer spending on NBA 2K grew 33%. We expect NBA 2K18 to become our most successful sports title ever, both in terms of units sold and recurrent consumer spending.

Even with its tremendous success, we believe there remains a substantial worldwide growth opportunity for NBA 2K. .

In October, 2K successfully launched WWE 2K18, the latest installment of our popular WWE simulation-based series. The title has been supported with an array of postlaunch downloadable content, including a season pass.

The WWE brand is as popular as ever, and we believe there's a substantial long-term opportunity to grow our WWE 2K series by leveraging further the development and marketing expertise of 2K and Visual Concepts..

The VR Case Files for the HTC VIVE system, which is now one of the industry's top-rated virtual reality experiences and winner of UploadVR's best Vive Game award for 2017..

Today, the highest quality entertainment experiences must provide new and innovative ways for audiences to stay captivated and engaged for longer periods of time.

We're committed to this strategy and its successful execution has enabled us to deliver better-than-expected net bookings from recurrent consumer spending, which grew 44% to a new record and accounted for 40% of total net bookings in the third quarter..

In addition to 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 continue to be a meaningful contributor to net bookings through its two biggest titles; Dragon City and Monster Legends.

We view Social Point as an important long-term growth opportunity for Take-Two. Recurrent consumer spending on WWE SuperCard grew 25% and the game has now been downloaded more than 16.5 million times. 2K released a Season IV update, which features 250 new cards, additional tiers and more.

And NBA 2K Online remains the #1 PC online sports game in China with over 36 million registered users..

Also, net bookings from add-on content grew more than 20%, led by WWE 2K18, Sid Meier's Civilization and XCOM 2. Rockstar Games has announced that Red Dead Redemption 2 will launch on October 26, 2018.

We continue to expect to deliver both record net bookings and record net cash provided by operating activities in fiscal 2019 in excess of $2.5 billion and $700 million, respectively, led by the launches of Red Dead Redemption 2 and a highly anticipated new title from one of 2K's biggest franchises..

Interactive entertainment has captured the imagination of audiences for decades. And is one of today's most exciting and popular art forms.

Advances in technology as well as new platforms and business models continue to enhance our team's ability to express their creative visions and to provide connected experiences that drive vast consumer engagement..

Whether AAA titles from Rockstar Games and 2K, exciting new IP from independent developers or offerings within emerging area such as mobile and eSports, Take-Two is incredibly well positioned to provide value to customers and returns for shareholders over the long term..

I'll now turn the call over to Karl. .

Thanks, Strauss. In December, Take-Two announced an important initiative, the formation of Private Division, a new publishing label that is dedicated to bringing titles from top independent developers to market.

Our groundwork for Private Division began over 2 years ago, and its mission is to empower independent studios to develop games about which they're passionate, while providing the support they need to make their titles critically and commercially successful on a global scale.

There are a growing number of independent studios in the industry that have top talent and are focused on creating high-quality new IP. Private Division was formed to enable our company to benefit from this trend by partnering with the best independent developers to bring incredible experiences to gamers around the world..

The Humankind Odyssey from Panache Digital Games led by Assassin's Creed creator, Patrice Désilets, an unannounced RPG currently codenamed Project Wight from The Outsiders led by David Goldfarb, who was formerly a senior game designer at DICE and Starbreeze Studios, an unannounced RPG from Obsidian Entertainment led by Tim Cain and Leonard Boyarsky, co-creators of Fallout, and an unannounced sci-fi first-person shooter from V1 Interactive, a studio founded by Halo co-creator, Marcus Lehto.

In addition, Private Division is the publisher of Kerbal Space Program, which we acquired in May 2017. We're very excited about the long-term potential for Private Divisions to be a meaningful contributor to revenues and profits. .

I will discuss our recent releases and development pipeline. On January 16, Private Division, Squad and BlitWorks released Kerbal Space Program Enhanced Edition, a new console version of the beloved space simulation game for digital download on PlayStation 4 and Xbox One.

Kerbal Space Program Enhanced Edition was built from the ground up to include reworked and console-optimized UI, a new control scheme exclusively for consoles and more ways to enjoy launching spaceships into orbit. Sales of the title are outperforming our expectations..

Making History Expansion for PC, adding rich new content to the series, including a mission builder and history pack. We view Kerbal Space Program as a long-term franchise that complements our portfolio of owned intellectual property..

Rise and Fall brings new choices and strategies for players as they guide a civilization through Dark Ages and Golden Ages with the help of Governors and the new Loyalty systems.

With this expansion's array of new features, players will be both challenged and rewarded in ways never before seen during the 26-year history of the Civilization franchise..

This quarter, Social Point will release significant updates for its two biggest games; Dragon City and Monster Legends, and is also working on a number of exciting new titles planned for launch over the next 2 years..

Turning to eSports. Both our team and the NBA continue to prepare for the May 2018 launch of the NBA 2K League. Last month, 72,000 players from around the world participated in the League's qualifying round and fulfilled the 50 Pro-Am game requirement.

This month, the League will complete its registration process and then we'll host a series of in-game events during February's combine. This will determine the best NBA 2K players in the world, who will be available in the March draft for 17 teams participating in the inaugural season.

We're very pleased with the progress of the NBA 2K League and look forward to expanding our presence in competitive gaming, which has a long-term potential to enhance engagement and to be a meaningful driver of profits for our company..

Looking ahead, we've a strong development pipeline across our labels, including both new releases from our industry-leading portfolio and groundbreaking original intellectual property. We remain committed to delivering the highest quality entertainment experiences and supporting them with innovative offerings designed to drive audience engagement.

These are incredibly exciting times for both our company and our industry. Take-Two is better positioned than ever to capitalize on our many opportunities 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 third quarter results and then review our financial outlook for the fourth quarter and fiscal year 2018.

Please note that 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..

As Strauss mentioned, we delivered outstanding results in the third quarter driven by the better-than-expected performance of Grand Theft Auto Online and NBA 2K, continued robust sales of Grand Theft Auto V and the successful launch of WWE 2K18..

Total net bookings were $654 million, near the high end of our outlook range. Of this amount, 58% were digitally-delivered net bookings, which grew 6% to $380 million.

Our digitally-delivered net bookings were driven by record recurrent consumer spending, which was partially offset by lower full game downloads due to this year's lighter holiday release slate..

We generated strong cash provided by operating activities of $203 million, and we deployed $50 million for capital expenditures. As a result of favorable market conditions, we were able to spend $110 million to repurchase 1.06 million shares of our stock at an average price of $103.54.

As of December 31, we had more than $1.3 billion in cash and short-term investments..

Turning to some details from our third quarter income statement. GAAP net revenue exceeded our outlook and grew to $481 million. Cost of goods sold decreased by 14% to $268 million.

Operating expense increased by 5% to $204 million due primarily to the inclusion of Social Point as well as higher stock-based compensation and headcount expenses, which were partially offset by lower marketing expense. Operating expenses were lower than our expectations due primarily to the timing of marketing campaigns.

And GAAP net income exceeded our outlook, increasing to $25 million or $0.21 per share..

Our GAAP results reflect a $30 million net tax benefit, which was driven primarily by changes in valuation allowance, release of unrecognized cap benefits due to statute expirations and the net effective changes resulting from the Tax Cuts and Jobs Act. Tax benefit had no effect on our management reporting tax rate, which is 22% for fiscal 2018.

We are in the process of evaluating whether the recent tax legislation will reduce our management reporting tax rate in fiscal 2019. We expect to provide more clarity on our fourth quarter earnings call..

Now I'll review the highlights of our fiscal 2018 financial outlook, starting with the fiscal fourth quarter. We expect net bookings to range from $410 million to $460 million. At the midpoint, this represents 7% growth over the prior-year period.

The largest contributor to the net bookings outlook are Grand Theft Auto Online and Grand Theft Auto V, NBA 2K18 and WWE 2K18. We expect GAAP net revenue to range from $450 million to $510 million and cost of goods sold to range from $196 million to $225 million. Operating expenses are forecasted to range from $190 million to $200 million.

At the midpoint, this represents a 34% increase over last year driven by the inclusion of Social Point as well as higher marketing and R&D expense. And we expect GAAP net income to range from $87 million to $99 million or $0.73 to $0.83 per share..

Turning to our outlook for the full fiscal year. As a result of our strong third quarter results and improved forecast for the remainder of the year, we are increasing our outlook for net bookings. We now forecast net bookings to range from $1.99 billion to $2.04 billion, up from our prior outlook of $1.93 billion to $2.03 billion.

At the midpoint, this represents 6% growth over the prior year despite a lighter release slate driven primarily by growth from NBA 2K and Grand Theft Auto as well as inclusion of a full year of net bookings from Social Point.

We continue to expect net bookings from recurrent consumer spending to increase approximately 50% and digitally-delivered net bookings to grow around 25%. The largest contributor to our net bookings outlook are Grand Theft Auto Online and Grand Theft Auto V, NBA 2K and WWE 2K.

We expect the net bookings breakdown from our label to be roughly 50% 2K, 45% Rockstar Games and 5% Social Point and Other. And we forecast our geographic net bookings split to be about 60% United States and 40% international..

We continue to expect to generate approximately $300 million in net cash provided by operating activities. And we plan to deploy approximately $60 million for capital expenditures..

Turning to our income statement. We are increasing our outlook for both GAAP net revenue and GAAP net income. We expect GAAP net revenue to grow to a range of $1.8 billion to $1.85 billion and cost of goods sold to range from $905 million to $934 million. Total operating expenses are forecasted to range from $776 million to $786 million.

At the midpoint, this represents a 17% increase over the prior year driven by the inclusion of Social Point, higher R&D expense and higher stock-based compensation expense. And we expect GAAP net income to range -- to increase to a range of $170 million to $181 million or $1.50 to $1.60 per share..

In closing, the continued positive momentum of our business reflects Take-Two's ability to exceed its goal, to a firm commitment, to creative leadership, innovation and operational excellence.

As we near the close of fiscal 2018, which will be another year of net bookings, revenue and earnings growth for our organization, we remain focused on our many opportunities to expand our business and increase profit.

To that end, we expect fiscal 2019 to be a record year for both net bookings and net cash provided by operating activities, and the long-term future of our company has never been more promising..

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 strong quarter 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 comes from the line of Eric Handler with MKM Partners. .

Actually, 2 questions for you. Strauss, just as you look into fiscal '19 and using your guys' words, I mean, you have a highly anticipated gain from the 2K studio. One would presume that is a game that's well known, either BioShock or Borderlands -- a new Borderlands title, many people are thinking Borderlands.

Given that you have decent lead times for these games from a marketing perspective, that would seem to suggest it's a back half of the year title. Then it becomes a question of would you want it to compete in the December quarter against Red Dead and assuming probably not, then it becomes a March quarter title.

And you think about the March quarter versus an October quarter, which would be fiscal -- or December quarter, sorry, which would be fiscal '20.

Can you talk about how you feel about some of these games coming in a March quarter versus coming in the holiday quarter and how you think about that with some of the big 2K games? And then secondly, it was good to see capital being returned to shareholders, $100 million in the share buyback.

Just curious why you think that this quarter was a good use of that capital versus prior quarters, when the share price was lower?.

We've released titles all over the calendar year. And the only period of time that we tend to avoid a big frontline release would be sort of the dog days of July. And so -- otherwise, our release dates are driven by when a title is ready, and when a title is ready to us is when we -- our studios believe they've optimized the quality of what we can do.

And that's how we'll continue to look at it going forward. More specific information will come from our labels as always. And in terms of a buyback, we've always said that we would look to do a buyback at deep value. And that is in the eye of the beholder -- the management teams' audit by buying back over $100 million of stock at $103 a share.

And in terms of why we might have or might not have done it earlier, we have done buybacks earlier. We bought back about 300, a little less than $300 million worth of stock in the past several years, admittedly at lower prices.

With the benefit of hindsight, we should have bought as much as we possibly could buy when the stock was lower -- and actually would you have that benefit prospectively.

And we're always balancing our perception of the value of the enterprise with the solidity of our balance sheet and do have other uses for cash, supporting organic growth, which has really been the story around here, supporting inorganic growth, and we did a meaningful acquisition last year.

And of course, returning capital to the shareholders appropriately. So I wouldn't say that we've optimized perfectly. I think that's very hard to do. I wouldn't say that we see ourselves as stock pickers or even stock price pickers even with regard to home security. And our focus is heads down building this business.

We do run a very, very disciplined operation, particularly on the financial side. Thanks to Lainie and the team. As you know, we do everything we can to mitigate risk, and that includes the nature of our balance sheet. .

And just as a quick follow up to that, given that you're buying -- you were buying back some stock.

Is that a reflection at all that there's just not a lot to buy right now in the M&A market?.

No, we still think there's plenty of opportunity. We're very selective about those opportunities. We've talked about this in the past. And I think we worked -- we have a terrific corporate development team. We look at everything that's potentially available.

And one of the things you ask yourself is as I look back, and we've been around here for a better part of 10 years. As I look back, are there things I wish I would have done prior to which they got done. And I suppose there are couple of transactions that we're falling to that category, but precious few. .

Our next question comes from the line of Chris Merwin with Goldman Sachs. .

I just had a couple. So I was wondering if you could talk a little bit about the growth in recurrent consumer spend is still obviously a very impressive number on an absolute basis, but it did slow up significantly from fiscal 2Q.

So just was wondering if you could talk about what the main cause of that was, maybe just large numbers, but any color there would be appreciated? And just a second question on Social Point.

I think you mentioned that asset continued to perform really well, I was just wondering if you could update us on its contribution to total revenue or growth rate there? And then just as a related question, if you see an opportunity to take any of your IP from Rockstar, Take-Two and leverage Social Point developers to release that on mobile?.

In terms of recurrent consumer spending, it is continuing to grow for us. It is the a focus for us in all of our games. For instance, for GTA Online, Q3 was our biggest quarter ever and it's up significantly over last year. So we're still very focused on it. We think there's a lot more opportunity there.

And we're focused on our NBA game as well for recurrent consumer spending. .

Right, the changes in between quarters, we're not -- it's a very hard to comp quarter-to-quarter because titles expand and certain times contract even in the context of continued growth. And there is seasonality -- little bits of seasonality in our business.

So you wouldn't -- you can't really comp quarter-to-quarter or even quarter -- same quarter over prior-year quarter. Those comps just don't make sense. For example, our third quarter was quite different this year -- this fiscal than the prior fiscal because we had a different release schedule. On your question about Social Point.

Social Point and the Private Division games, I think, represent around 5% of our revenue. So it's still a relatively small percent of our revenue. We're excited about the potential growth in that area. In terms of intellectual property, Social Point's mission is to create and build endemic made-for-mobile properties.

And those are the properties that tends to do best in the mobile space. And it is true, 2K has done really well with WWE SuperCard. We've done well with our NBA App, and we expect to continue to support titles like that through the 2K division.

Social Point certainly has the ability to work with both internal labels and external labels, unlicensed properties. But generally speaking, we think the best way to go is to make titles that are meant for the business channel, the consumer channel at hand and to own that intellectual property. .

Our next question comes from the line of Justin Post with Merrill Lynch. .

A couple questions. First, it looks like your recurrent consumer spending in your prepared remarks was better than expected. But you're kind of in the range this quarter versus the last few quarters beat.

So I was just wondering if anything kind of missed your expectations or was below forecast on the packaged goods or other revenue side? And then Lainie, I just wanted to -- it looks like the balance sheet, the convertibles off the balance sheet, just want to confirm that? And what's a good share count to you? Is the 118 million non-GAAP reported in the quarter a good fully diluted share count to use?.

Yes. No, everything is going better than expected. We obviously did much better than expected in the quarter, pretty much across the board where it counts. And we were at the very high end of our range in terms of net bookings and obviously, the cash flow provided by operating activities is meaningfully better than expectations.

And we've guided up for the year. So we're excited about how things continue to unfold. NBA 2K is up 25% year-over-year, and was the #2 selling title in 2017. And Grand Theft Auto V, 4 years after its initial release, was actually the #3 selling title according to The NPD Group in terms of units in 2017.

We had more users than ever playing Grand Theft Auto Online in the third quarter. We're expecting another record year for Grand Theft Auto Online. So everything is going better than expected. And we do have pretty high expectations around here. Lainie will talk about the share count. .

So for the convert that's left on the balance sheet, so we still have debt of about $13.8 million, and it represents about a little bit approximately 500,000 shares that are left. All the shares have been moved into the share count.

So for Q4, you see our press release, we have 118.5 million shares in the count and for the full year 119.5 million shares. Sorry, it's 118 for the full year. .

And Justin, that's all laid out in our press release. .

Our next question comes from the line of Ryan Gee with Barclays. .

I appreciate the color on GTA Online players. I just wanted to ask about revenue. Did you say in your prepared remarks that GTA Online spend is also a record for this quarter? And then when you think about the Doomsday Heist, that obviously launched late in December.

So could we expect that content to be in an even larger tailwind for [ RCS ] as we move into fiscal 4Q and into fiscal '19? And then I have just one follow up. .

Yes, you're right, that things have gone really well for Grand Theft Auto Online in the third quarter. It performed better than expected. And we think a big part of that performance is Rockstar's ongoing content drops, which have been nothing short of phenomenal.

And Rockstar Games has said they intend to support Grand Theft Auto Online with more content going forward. And we did have a record number of users. .

We had a record quarter in Q3. .

And then is there any new content updates for GTA Online implied into the guidance for fiscal 4Q at all?.

In fiscal -- in Q4, we included higher GTA online revenues over last year, but not as high as Q3 because that was a record quarter for us. .

Our next question comes from the line of Mike Olson with Piper Jaffray. .

I had a couple questions on NBA 2K. Wondering if you could talk about what kinds of tactics you're using in NBA 2K18 to drive the significant growth in recurrent consumer spend? And then secondly, on eSports.

Do you view the NBA 2K League as more of a potential revenue driver or more of a marketing halo for increased engagement in the game?.

Yes, remember, our strategy is always to captivate and engage consumers. And the revenues are a function of that strategy. It's not the other way around. And, however, we can keep consumers excited and make them happier. That's how we do it. And it is true that the effect of doing that has been that we've had really great results.

But we don't -- our strategy is driven by the goal of making great entertainment and the world has changed. It used to be that once upon a time, we put out a title, people engage and then it was over and you went on to the next title. Now if you do it right, there's an opportunity to keep people engaged. And having an online cohort does exactly that.

And basketball has been succeeding mightily with recurrent consumer spending up, I think, 30% year-over-year. And obviously, Grand Theft Auto Online also reflects extraordinary engagement. We know the economic impacts. We talked about economic results.

But the most exciting thing is that we had a record number of people playing in the third quarter, that's what's really exciting. Turning to the NBA 2K League, the goal is to build the first professional sports league that's built on a professional sport. And we know that people love basketball, we know the NBA itself is incredibly successful.

And we think it's just a natural to build a league around video gaming that in and of itself will be a successful sport, a successful occupation for consumers. So we expect it to stand alone and to be successful on its own and to be profitable on its own.

We do think if we do it right, it will also help the NBA brand overall and it will help the NBA 2K brand. .

Our next question comes from the line of Brian Nowak with Morgan Stanley. .

I've two. Just the first one on GTA Online. You mentioned the record number of players, and the strong monetization.

I am curious to hear about how you're driving new payers to come into the ecosystem? Are you still seeing growth in the number of people who are paying digitally? What do you think is driving that? And just talk about some of the digital mechanics that you've used to kind of bring new payers into the ecosystem, if that is the case? And then just going back to NBA 2K eSports, can you just walk us through some of the business side signposts that we should look for whether it is the potential to sign streaming rights deals, sign affiliates, understanding the draft, coming in the combines coming, but talk us through some of the business steps to happen as we get to the launch?.

Yes, I appreciate it. Look, we're focused on players, not payers. We're focused on captivation and engagement. And if we get that right, everything else will follow. And the way we get it right is continuing to give people what they want, which is great free content. And that's the strategy of Rockstar Games.

They've done it just remarkably well, which is why the game remains so successful and such an important part of consumer culture. So the focus is on the players and on the player experience, and the monetization will take care of itself if we do that right.

On the NBA 2K League, some of the business drivers that you will be interested in to hear about naturally are sort of how the draft turns out, what do those teams look like, how does the first season go, how do the games actually look, how do people feel about the experiences.

And naturally and purely in the business side, what do the media rights look like and what a sponsorship look like. And all of that is information to come. .

Our next question comes from the line of Ben Schachter with the Macquarie Group. .

Two questions. One for Lainie and then two for Strauss. Lainie, when we're modeling for next year, how do we -- how should we think about the potential of cannibalization of GTA Online and Red Dead? Anything in particular we should be thinking about there? And then Strauss, two things.

One, as reported today that Google is exploring some type of streaming service, and I understand you guys are largely platform agnostic, but how would the entry of new streaming platforms impact how you think about the business? And then secondly, when you think about the scale of the business versus some of your larger competitors, do you think you can optimize margins at your current scale? Or do you think you need an acquisition or potentially merge with someone else?.

Thanks, Ben. Let me -- I'm actually going to take the point on cannibalization because I've addressed it before. We think every game and every entertainment experience stands on its own.

And entertainment experience competes internally, it competes externally and it competes with unrelated experiences because entertainment is a want-to-have activity, not a must-have activity.

To the extent that there were a competitive threat, one would assume that competitive threat is realized by properties outside of our company, first and foremost. And so far, Grand Theft Auto Online is just doing phenomenally well. We are having another record year. So we think each title stands alone.

And Rockstar Games is continuing to support Grand Theft Auto Online and the results reflect that. I'm not going to comment on any particular news or potential launch, except to say that our policy is to support broad distribution because we want to be where the consumer is.

That said, it is important that everything we support is consistent with our creative approach and with our business model, and we'll look at it through that lens. And finally, in terms of margins, we have seen our margins grow, they grow with success. The more hits we have, you know this, of course, the higher our margins are.

If we have fewer hits, the lower our margins are. And of course, as we grow scale, as long as we grow that scale and maintain the same profitability levels, you're going to see our operating profits go up. So could gross margins go up? Yes, they can as we shift more to digital distribution, which, I think, we're all seeing inexorably occur.

Our gross margins go up and our operating margins will also go up, our scale will help us achieve that. We've shown an ability to grow scale meaningfully, organically. We see it as a challenge to continue doing so. And we're bound and determined to meet that challenge.

Equally, accretive acquisitions that build scale will naturally act in service of higher operating margins as well. .

Our next question comes from the line of Ray Stochel with Consumer Edge Research. .

Big picture question.

How should we be thinking about companion apps within your business for your two major labels? And do you view companion apps as a standalone revenue generator or more as something that is just a way to drive engagement back into the base game?.

I think what we're seeing with WWE SuperCard and with the NBA is that mobile games as a standalone, has great experiences and that's how we're focused on. I think the days of companion apps for marketing purposes or even engagement purposes perhaps are gone. And every offering to a consumer has to stand alone as a powerful offering. .

Our next question comes from the line of Mike Hickey with The Benchmark Company. .

Two. If I can ask this correctly, Strauss, thinking about the battle royale genre, obviously, two major incumbents, your PUBG, Fortnite and you look similar mode I guess, within GTA online that, I think, has gotten some success. I'm just curious how you see the market opportunity there overall for new entrants.

And also, if you feel that, that sort of mode could offer your IP a bridge to Asia, assuming you have a PC-based view? And I have a follow-up. .

I think more detail on game mechanic specifics really comes at the label level. But I would just observe that someone else's success is really interesting. And we're obviously informed by what our competitors do. But our goal is to be as innovative as possible.

And titles, even really good titles that are derivative, never seem to do as well as innovations that are unexpected.

So when we came out with the first Red Dead Redemption, the conventional wisdom was Westerns don't work and it had been an awfully long time since a Western-themed video game had come out, and Rockstar took a massive period of risk and the result was extraordinary. So I don't see our labels being super-excited about being derivative.

That said, of course, we play in the world, and we're informed by what's going on. And it is our job to bring consumers what they want. And because you alluded to Asia, Asia remains an enormous area of focus. We built a great business in Asia, and we continue to be very interested in growing that business in and outside of China. .

The last question, obviously, you have -- it appears to be a strong working relationship with Vince McMahon of WWE, also appears to be some mutual respect there for what it's worth.

But when -- I'm sure you saw when Vince announced the relaunch, I guess, of the XFL, there appeared to be sort of an eSports theme -- it was my impression on watching the video stream. And of course, you guys have a history of long time ago, now I guess history of making a very respected football game.

So I'm just sort of curious how you think about the possibilities of creating a football game, eSports angled into the launch of the XFL?.

Well, we have enormous respect for the entire WWE organization. We are thrilled to be in business with them. And if Mr. McMahon is going to pursue a new venture, we're rooting for a success enthusiastically, whether we'd be fortunate enough to gain an opportunity from that remains very much to be seen. .

Our next question comes from the line of Evan Wingren with KeyBanc. .

Just two quick ones. Just to clarify on the buyback.

Were you viewing that as more opportunistic or is that something that we should assume as more of a regular contributor in terms of the go forward, just given the visibility you have into next year? And then the second question, just with the additional time for Red Dead, does that potentially change your perspective in the near term about potentially porting the game to additional platforms? Or was the move perhaps not related to that at all?.

supporting organic growth, which is really our bread-and-butter; supporting inorganic growth, which has been necessary lately as we acquired Social Point and we are interested in potentially broadening the enterprise in that way; and returning capital to shareholders, which obviously, we've just done with a meaningful buyback.

We'll continue to pursue all 3 as and when they make sense. So there's no change in our strategy. And in terms of Red Dead, any announcements about platform support will properly come from Rockstar Games. .

Our next question comes from the line of Tim O'Shea with Jefferies. .

So on Red Dead, can you walk us through the decision to delay Red Dead for a second time? Is this a case of wanting to add some final polish to the game? Are you reworking gameplay? Just love to hear your thoughts and what's the level of confidence in the October 26 release date? And then just curious how the holiday launch window compares to Spring? How you think about the competitive environment or holiday spending, again, love to hear your thoughts guys?.

We've said repeatedly, and we've put our money where our mouth is that the entire focus of this organization is on delivering highest quality entertainment experiences of any kind. And more often than not we feel proud that we're able to do that. All of our labels are focused on releasing a title when they reach that apex of effort and perfection.

And in this instance, Rockstar Games felt more polish was required and naturally, we're in favor of that decision. The date of October 26 is set, and I'm confident that, that will be the release date and incredibly excited about it. We've released titles all over the calendar, the only time we cannot do would be when it's super hot in July.

But otherwise, we've been in every other quarter. Holidays, heading into the holiday season can be a particularly powerful time. And I'd observe that even though there are some competitive releases, it's a lot more of an open field today than it was, say, 10 years ago. There's plenty of opportunity to go around.

So we're really excited about both the launch and the timing related to the launch. .

And just one more, if I may. You guys have now raised your full year outlook every quarter all year and you're guiding to over $2 billion of revenue, $3.23 of EPS at the midpoint. And my question is just at a high level.

How much of this is truly recurring? I mean, how much might we expect to get back next year? And I know you've previously said and you reiterated in this release that the fiscal '19 revenue could exceed $2.5 billion, but we're already at $2 billion this year with a very light release slate and next year, we have two major game launches that weren't in this year's plan.

So just love to hear your thoughts on how much you think is truly recurring?.

It's a great question. We haven't given any color on fiscal '19 apart from what we said already. Naturally, in the coming months, we will do so, and we'll get a bit more granular about it. You're absolutely right that we used the phrase recurrent consumer spending, but nothing is forever, or typically nothing is forever.

And we have to show up and create new content for consumers for every experience that we offer them. And not everything always goes perfectly. We are having a great year. We've had a great number of years, we're immensely grateful for that, that is all driven by the creative quality of the work done by our labels.

And while we hope that, that will continue and so far we've been very fortunate. You're absolutely right to imply, this is not recurrent in the way, say, interest payments on a AAA-rated municipal bonds are recurrent. .

Our next question comes from the line of Doug Creutz with Cowen and Company. .

It looks like you lowered your operating expense guidance for the year by a few tens of millions of dollars.

Just wondering if how much of that might have been due to the Red Dead 2 delay and potentially less of a marketing campaign for that in this fiscal year?.

The majority of the lowering of the OpEx is due to the timing of marketing campaigns and it is for Red Dead Redemption, but also some of our other titles. .

Our next question comes from the line of Drew Crum with Stifel. .

Karl, just want a point of clarification, did you say the NBA eLeague will launch in May? And if so, my understanding was, this was originally supposed to start in the fall. So if that's true, why the change? And then separately, L.A. Noire is a test case on the Switch.

Can you talk about the prospects or opportunities to put other games on the Switch such as Grand Theft Auto where you've got a 90 million base of players at this point?.

So just to take the NBA eLeague, that was -- it was never intended for launch, there was no change, May is our launch date and that's when we plan to do it. So that actually -- just to clarify, that was not a change. In terms of bringing other titles to Switch, obviously, we've done a few titles already. We have done NBA, WWE, L.A. Noire.

We look at this just like any other platform opportunity to the extent that we look at our development costs, there is a game right for the platform, what does the audience look like, what's the installed base. So when we do believe that there's an opportunity to do something on Switch, then you'll hear it from the labels.

We do -- we are impressed with the growth, we're impressed with the units that have been sold into the market so far. So we're very sanguine at this point, but we've nothing more to announce specifically at this point. .

Our next question comes from the line of Brandon Ross with BTIG. .

Two questions. First on GTA Online.

How should we think of the pacing of content releases this year? Should we expect it to be similar to what it was last year? And will that at all be affected by the coming release of Red Dead? And how if all do you intend to use the GTA Online funnel to drive Red Dead sales and players in Red Dead online? And then another Fortnite related question.

Fortnite has been pretty successful with a free-to-play strategy, especially, with recurrent consumer spending being what it is, do you see a big opportunity in free-to-play on console?.

We don't really talk about pacing of content, and I'm not even sure we really think about it that way. We create great entertainment experiences and when they're ready, we deliver them to consumers. And so we don't have any kind of metronome quality to the creation of any of our entertainment experiences here.

Rockstar Games has said they intend to continue to support Grand Theft Auto Online. And that support of Grand Theft Auto Online has nothing to do with the launch of Red Dead Redemption 2. These are different projects and they stand independent of one another.

In terms of my own views on free-to-play console, I think, there are potentially opportunities there. We have a free-to-play experience in China. NBA 2K Online in China is a PC experience could be -- certainly could be a console experience.

And naturally, when people are involved with our online games, in many ways, those look like free-to-play experiences, yes, you had to purchase titles that become involved, but if you involve years later, it's hard to imagine that there's much difference between sort of the emotional caliber of that experience and a free-to-play experience.

If your question is whether the business model moves in that direction? I would say it probably can't because in a free-to-play -- true free-to-play environment, 10-ish percent of your consumers maximum are paying you and that's not going to support the very significant investment that a AAA title requires here and in our competitors' shops.

And we think consumers understand that. And I think to the extent people want to continue to have big AAA experiences and they do, they are prepared to pay what ultimately is a very low price given the massive number of hours that one can spend enjoying the titles. .

Our final question comes from the line of Andrew Uerkwitz with Oppenheimer. .

I just have two quick ones here. Strauss, when you look back at GTA, I doubt that anybody internally thought it'd have quite a success it's having now, it's record quarters now, 4 years later.

Is there 1 or 2 things that you guys look at as you play Monday morning quarterback that you think has really been the difference that's made this title what it is? And if so, how do you guys think about translating that to future titles across the portfolio?.

Thank you. And it's the last question of the day, so I particularly like ending on a high note. I don't think there is a much of a magical answer to the question. Of course, we ask ourselves that and it's just further recognition that the best quality wins.

And in the case of Grand Theft Auto V and Grand Theft Auto Online, and I have to hold myself back from overpromoting because it's not our style. But I do think that the title became the standard bearer for not just the generation, but in many ways for the modern video game business.

And in other past iterations of the franchise, I think, there were potentially a couple of other extraordinary titles that clustered around it competitively. And that hasn't seemed to been the case here with 90 million units sold and record results for Grand Theft Auto Online 4 years after its release.

Is there a secret sauce? Yes, the secret sauce is it's a really extraordinary experience that people love and it was created and delivered and now supported by a label that never ever rests on the past and is utterly focused on innovation and breaking barriers with an eye towards an amazing entertainment experience.

And that's easy for me to say those words, exceedingly hard to do, and I would argue impossible for others to replicate. But what we mostly feel around here is a sense of enormous gratitude to our colleagues at Rockstar Games for creating and supporting and delivering this experience over now what is very many years.

And I suppose it is that experience that leads us to be so enthusiastic about the future, when your strategy is guided by a true genuine appreciation for our mission, which is to entertain people. And a genuine, not financially driven commitment to quality comes first. It's just comes first.

And then thankfully we run, what we believe is a highly rational, exceedingly disciplined business environment, which gives people, who are creative, a very safe place to do their very best work. Anyway that's our goal, and we think that's why things are going pretty well. .

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks. .

Thanks so much for joining us today. We're really thrilled with the results of the quarter. Incredibly pleased for the outlook for the remainder of the year and the early outlook for fiscal '19. I want to thank you for joining us today and for your continued support. .

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..