Greetings. Welcome to the Take-Two Interactive Software Q2 Fiscal Year 2020 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications. Thank you, sir. You may begin. .

Good afternoon. Welcome, and thank you for joining Take-Two's Conference Call to discuss its results for the second quarter of fiscal year 2020 ended September 30, 2019. 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 unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons are year-over-year. .

Additional details regarding our actual results and 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 Take-Two's positive momentum continued in the second quarter, enabling our company to generate operating results that significantly exceeded our expectations.

We delivered a strong net bookings, cash flow and earnings growth, fueled by the performance of NBA 2K, Borderlands 3, Grand Theft Auto Online and Grand Theft Auto V, and Red Dead Redemption 2 and Red Dead Online. .

Once again, our strategy of creating the highest-quality entertainment in the industry translated into outstanding results. On September 13, 2K and Gearbox Software launched Borderlands 3, the latest installment in our genre-defining shooter-looter series.

The title has exceeded our expectations and sold more than 5 million units within its first 5 days of launch, making it the fastest selling title in 2K's history and the highest selling title for the label on PC.

Within its first 5 days in market, retail sell-through Borderlands 3 was up more than 50% compared to its predecessor, and 70% of units were purchased digitally, setting a new record for a 2K cross-platform title. .

Borderlands 3 received resoundingly positive critical acclaim with Forbes, IGN, Shacknews, Destructoid, and Meristation, all scoring the title 9 out of 10. Today, Borderlands 3 has sold-in nearly 7 million units worldwide. I'd like to congratulate the teams at Gearbox and 2K on a stellar launch in taking this beloved series to new heights.

Karl will share details about our post-launch content plan that will keep players engaged in the world of Borderlands 3. .

Our industry-leading basketball series continued to grow during the second quarter. With net bookings up approximately 9% despite a difficult comparison, driven by the successful September 6 launch of NBA 2K20.

According to The NPD Group, NBA 2K20 is the best-selling game of 2019 to date, delivered the highest launch month sales for any sports game in history. And the NBA 2K series is now the sixth largest video game franchise in the industry based on dollar sales. .

Driven demand NBA 2K20 remained strong and the title has sold in nearly 6 million units to date, generating growth over the prior year's release. During the second quarter, recurrent consumer spending in NBA 2K grew 32% to a new record, and remained the single largest contributor to that category of our business.

Engagement with the NBA 2K20 also increased driven by a consistent new content schedule with daily active users up almost 20% compared to NBA 2K19. And MyCAREER or MyTeam growing by more than 30% and 150% respectively. .

We expect lifetime net bookings for NBA 2K20 to set a new record for the series. In addition, 2K recently announced the NBA 2K20 x Nike Gamer Exclusive Program, an innovative first-of-its-kind gaming and sneaker partnership.

This program provides players with the opportunity to unlock virtual Nike gamer exclusive sneakers for their MyPLAYER to wear in-game and to purchase real-life versions of the same shoes from Nike.

I'd like to congratulate 2K and Visual Concepts for, once again, redefining what is possible in sports gaming and catching superbly every nuance of the NBA and the pop culture that envelops it. .

Grand Theft Auto Online and Grand Theft Auto V, once again, exceeded our expectations, delivering the best quarter yet with respect to daily, weekly and monthly active users and our best summer ever in terms of new online users and new users overall.

Recurrent consumer spending on Grand Theft Auto Online grew 23% to a new record, driven by the July release of The Diamond Casino & Resort update. This update was Grand Theft Auto Online's biggest content launch ever, delivering record player engagement across daily, weekly and monthly active users in July and then again in August. .

As a result of the title's better-than-expected performance fiscal year-to-date and improved outlook for the balance of the year, we now expect Grand Theft Auto Online to grow in fiscal 2020. Grand Theft Auto V remains the standard bearer for excellence in our industry and one of the most revered and successful entertainment experiences of all time.

The title continues to expand its audience around the world and has now sold in more than 115 million units. .

Grand Theft Auto Online continues to gain momentum and grew sequentially during the second quarter. Following the massive content drop in May when the title exited its beta phase, on September 10, the world of Red Dead Online evolved further with the release of the Frontier Pursuits update.

This update introduced 3 specialist roles, including tracking down wanted criminals as a Bounty Hunter, searching the world for treasure and other exotic items to sell as a Collector, and building a business as a Trader.

Rockstar Games intends to add more new roles in the future, enabling players fully to inhabit their characters as they carve out a life on the Frontier. .

Rockstar Games also introduced the popular Outlaw Pass, a way for Red Dead Online players to pay to access a wide array of ongoing upgrades, items and perks at a discounted value.

Throughout the year, Rockstar Games will continue to support both Red Dead Online and Grand Theft Auto Online, with many more updates in order to drive engagement and player growth. We remain as excited as ever about the long-term opportunity for Red Dead Online to be a meaningful driver of recurrent consumer spending.

In addition, Red Dead Redemption 2 continues to grow its audience, and to date, has sold an almost 26.5 million units worldwide.

Earlier this week, the title launched on PC with an array of features designed specifically for that audience, including numerous graphical enhancements, a fully featured photo mode, new content additions for the game's story mode, and more. .

The Humankind Odyssey was lauded by the media for its sophistication and unique approach to the survival category and will be available for digital download on PlayStation 4 and Xbox One on December 6. .

Our second quarter results were also enhanced by Social Point's mobile games, the WWE 2K franchise and Sid Meier's Civilization VI. One of our key strategic priorities is to find new and innovative ways to drive growth and engagement with our titles after their initial purchase.

From free-to-play open worlds to additional chapters and content, we aim to provide consumers with the highest-quality offerings that meaningfully add to their overall gameplay experience. .

To that end, during the second quarter, the recurrent consumer spending significantly exceeded our expectations, growing 39% and accounting for 45% of our total net bookings.

In addition to virtual currency for NBA 2K, Grand Theft Auto Online and Red Dead Online, recurrent consumer spending was enhanced by a variety of other offerings, including sales of the Borderlands 3 premium additions, which include additional content that is allocated to recurrent consumer spending.

In the free-to-play category, Social Point remains a meaningful contributor to our results through its mobile titles, Dragon City and Monster Legends, World Chef and Tasty Town and Word Life. During the quarter, Social Point added new content, challenges and updates to these games. .

Our Barcelona-based studio continues to invest in its broad pipeline of new games planned for launch in the coming years. WWE SuperCard has now been downloaded nearly 20 million times and remains 2K's highest grossing mobile title.

And recurrent consumer spending on NBA 2K online in China outperformed our expectations, growing 27% in the second quarter. The title remains the #1 PC online sports game in China with more than 47 million registered users. .

Lastly, add-on content grew more than 60%, led by offering for Sid Meier's Civilization VI and the Borderlands franchise. As a result of our better-than-expected second quarter operating results, we're once again raising our operating outlook for fiscal 2020. Looking ahead, we have the strongest development pipeline in our history.

We're continuing to grow our portfolio with the highest-quality entertainment experiences, including sequels from our biggest franchises as well as exciting new IP. .

In addition, we're actively investing in emerging markets, platforms and business models such as mobile, streaming, direct-to-consumer and subscription in order to expand our audience around the world.

With the promise of new consoles and continuous technological advances, our creative teams have an increasingly robust canvas on which to achieve their vision and set new benchmarks for excellence. Take-Two's exceedingly well positioned to generate growth and margin expansion 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 strong quarter that exceeded our expectations. I'll now discuss our recent and upcoming releases. .

On October 22, 2K launched WWE 2K20, the latest offering in our flagship WWE franchise for PlayStation 4, Xbox One and PC. Developed by Visual Concepts, WWE 2K20 features several new gameplay modes that celebrate the WWE's thriving women's division, as well as an array of fan-favorite superstars, legends and match types.

Earlier this year, 2K announced the philanthropic partnership with Leukemia & Lymphoma Society, in conjunction with WWE Superstar Roman Reigns, who is a leukemia survivor that helps raise awareness and $500,000 for this important cause. .

While we are disappointed with the reviews and consumer feedback for WWE 2K20, last week, Visual Concepts released a patch that should address many of the concerns, and they will continue to make further enhancements to the gameplay experience.

The WWE brand continues to expand worldwide, and we believe there remains a substantial long-term opportunity to grow our WWE 2K series by improving the quality of the game. .

On October 25, Private Division launched The Outer World for Xbox One, PlayStation 4 and PC. Developed by Obsidian Entertainment, The Outer Worlds marks the reunion of Tim Cain and Leonard Boyarsky, the original creators of Fallout, who have introduced an entirely new single player, sci-fi, RPG experience.

A critical and commercial success, The Outer Worlds is exceeding our expectations and reviews have been outstanding, with GameStop giving the game 9 out of 10; Game Informer, 9.25 out of 10; and EGM, a perfect 5 out of 5. In early 2020, The Outer Worlds will be released for Nintendo Switch. .

As noted by Strauss, on November 5, Rockstar Games launched Red Dead Redemption 2 for PC, which is the first title in the Red Dead series to be offered on PC.

The release of the game also marked the debut of Rockstar Games Launcher, a new Windows desktop application that enables consumers to quickly and easily access their Rockstar Games PC collection in a single place across both digital and disk-based titles, including purchases from other visual stores, managed cloud saves and more. .

Players will also be able to use the Launcher to shop for new Rockstar Games PC titles. The introduction of the Rockstar Games Launcher underscores our commitment to investing to deliver great entertainment experiences in new ways for audiences. .

Later this month, Borderlands 3, NBA 2K20 and Red Dead Redemption 2 will be available as part of Google Stadia's initial offering as a full-priced games. Streaming represents an exciting opportunity and has the potential to become a compelling distribution channel of our industry that could expand our market and increase our margins. .

On November 22, Sid Meier's Civilization VI will come to PlayStation 4 and Xbox One, marking the first time since 2008 that a Civilization game has been available for PlayStation or Xbox consoles.

In addition, 2K for-access games will launch the separate Civilization VI expansion model, which includes all content from the Rise and Fall and Gathering Storm expansion packs. Civilization VI is the fastest selling title in the history of the series, with sell-in to date of nearly 6 million units worldwide. .

The Humankind Odyssey, for digital download on PlayStation 4 and Xbox One. .

Throughout fiscal 2020, we will continue to support our titles with innovative post-launch content designed to drive engagement and player growth, including many more updates from Rockstar Games for both Red Dead Online and Grand Theft Auto Online.

On October 24, 2K and Gearbox Software launched the Bloody Harvest, free seasonal event for Borderlands 3, the first offering in the robust post-launch content plans for the title. We will continue to support Borderlands 3 with free seasonal content updates and raid-like events called takedowns.

In addition, 2K and Gearbox plan to release 4 major downloadable campaign expansions, available collectively with the purchase of a season pass or individually upon release. .

Breaking Ground expansion to PlayStation 4 and Xbox One, which was previously released for PC in May. And throughout the year, 2K will continue to release additional content for WWE 2K20 and other titles. .

We also continue to broaden our slate for mobile devices, including the November 13 launch of season 6 of our popular WWE SuperCard series. .

Looking ahead to fiscal year 2021, Private Division announced that Disintegration, a new sci-fi, first-person shooter will launch in calendar 2020. In Disintegration, players command their troops as they battle through a thrilling single-player campaign and compete in frenetic multiplayer against other pilots and their crews.

Disintegration is being developed by V1 Interactive, a new independent studio cofounded by Marcus Lehto, former creative director at Bungie, and co-creator of Halo. .

Also from Private Division, Kerbal Space Program 2, the sequel to the beloved original space sim, is now planned for the launch on PC, PlayStation 4 and Xbox One in fiscal 2021, in order to allow more time to make the experience as terrific as possible.

The original Kerbal Space Program has sold in over 3.5 million units and earned Metacritic rating of 88 and a Steam user score of 91%. Private Division will have more exciting news and announcements in the coming months. .

Turning to eSports. Qualifying rounds for season 3 of the NBA 2K league, our joint venture with the NBA, will conclude this week followed by the combine that will end in December, and the official player draft and start of the season in the spring.

The NBA 2K League announced that Gen.G, the global eSports organization, will launch a new franchise from Shanghai that will join the League for the upcoming season, marking the first team from outside of North America. .

The team will join the previously announced Charlotte Hornets Venom GT as the 2 new teams for season 3, bringing the League total to 23 franchises. We are very excited about the continued progress and growth of the League, which has a long-term potential to enhance engagement and to be a driver of profits for our company. .

In closing, we remain focused on delivering the highest-quality entertainment and providing new and innovative ways for our consumers to stay immersed and engaged with their favorite experiences.

We are investing heavily in opportunities to grow our scale, increase our presence in mobile and capitalize on emerging distribution channels and business models. The successful execution of this strategy will provide value to our customers and generate strong returns for our shareholders. .

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

Thanks Karl, good afternoon, everyone. Today we'll discuss our second quarter results and then review our financial outlook for the third quarter and fiscal year 2020. Please note that additional details regarding our actual results and outlook are contained in our press release. .

As Strauss mentioned, our positive momentum continued in the second quarter, enabling us to generate operating results that significantly exceeded our expectations. Total net bookings grew 63% to $951 million as compared to our outlook of $860 million to $910 million.

This outperformance is driven primarily by better-than-expected results from Grand Theft Auto V and Grand Theft Auto Online and Borderlands 3. Recurrent consumer spending grew 39% and accounted for 45% of total net bookings as compared to our outlook of over 20% growth.

Recurrent consumer spending exceeded our expectations due primarily to the outperformance of Grand Theft Auto Online. .

Digitally delivered net bookings grew 63% and accounted for 73% of the total as compared to our outlook of over 40% growth. This result exceeded our expectations due to the outperformance of recurrent consumer spending and the higher than forecasted mix of digital sales of Borderlands 3 and Grand Theft Auto V.

During the second quarter, 51% of current generation console games were delivered digitally, up from 47% last year. .

Turning to some details from our second quarter income statement. GAAP net revenue grew to $858 million and cost of goods sold increased to $468 million. Operating expenses increased by 36% to $315 million, due primarily to higher marketing, personnel and R&D costs.

And GAAP net income was $72 million or $0.63 per share as compared to $25 million or $0.22 per share in the second quarter of fiscal 2019. Adjusted unrestricted operating cash flow for the 6 months ended September 30, 2019, increased to $41 million, and we ended the period with $1.5 billion in cash and short-term investments. .

Now I will review the highlights of our fiscal 2020 financial outlook starting with the third quarter. We project net bookings to range from $860 million to $910 million.

The largest contributor to net bookings are expected to be NBA 2K20, Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online, The Outer Worlds, Borderlands 3 and the WWE 2K series. We project recurrent consumer spending to grow by approximately 5%.

This growth is affected by the difficult comparisons due to the allocation from the Red Dead Redemption 2 premium edition last year. .

Growth is expected to be driven by Grand Theft Auto Online, Red Dead Online, excluding last year's allocation, and NBA 2K. We are currently projecting single-digit growth in recurrent consumer spending from NBA 2K due the strength of the title in the third quarter last year. We expect digitally delivered net bookings to increase by about 5%.

Our forecast assumes that 50% of our current generation console games will be delivered digitally, up from 31% in the same period last year. .

We expect GAAP net revenue to range from $915 million to $965 million, and cost of goods sold to range from $425 million to $452 million. Operating expenses are expected to range from $312 million to $322 million.

At the midpoint, this represents a 6% increase over last year driven primarily by higher R&D, the personnel costs, partially offset by lower marketing expense. And GAAP net income is expected to range from $159 million to $170 million or $1.39 to $1.49 per share.

For management reporting purposes, we expect our tax rate to be 17% throughout fiscal 2020. .

Turning to our outlook for the full fiscal year. We are raising our operating outlook as a result of our better-than-expected second quarter operating results and improved net bookings outlook for the balance of the year. We now expect net bookings to range from $2.75 billion to $2.85 billion, up from our prior outlook of $2.6 billion to $2.7 billion.

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The increase beyond the second quarter beat is driven primarily by improved expectations for Grand Theft Auto Online and Grand Theft Auto V and Borderlands 3, partially offset by the move of Kerbal Space Program 2 into fiscal 2021.

The largest contributor to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Borderlands 3, Red Dead Redemption 2 and Red Dead Online, The Outer Worlds, Sid Meier's Civilization VI and the WWE 2K series.

We expect the net bookings breakdown from our labels to be roughly 60%, 2K; 30%, Rockstar Games; and 10%, Private Division, Social Point and other. And we forecast our geographic net bookings split to be about 60%, United States; and 40%, international. .

We now expect recurrent consumer spending to increase by 25%, up from our prior outlook of the mid-teens growth, driven primarily by higher expectations for Grand Theft Auto Online.

We now expect Grand Theft Auto Online to grow in fiscal 2020 as a result of its better-than-expected performance, fiscal year-to-date and improved outlook for the balance of the year. .

We project digitally delivered net bookings to grow by nearly 30%. This is up from our prior outlook of high-teens growth due primarily to our increased forecast for recurrent consumer spending and a higher mix of digital sales of Borderlands 3 and Grand Theft Auto V.

Our outlook assumes that 57% of current generation console games will be delivered digitally, up from 38% last year. .

We expect to generate more than $450 million in adjusted unrestricted operating cash flow, and we now plan to deploy approximately $75 million for capital expenditures. We expect GAAP net revenue to range from $2.93 billion to $3.03 billion, and cost of goods sold to range from $1.39 billion to $1.43 billion.

Total operating expenses are expected to range from $1.12 billion to $1.14 billion. At the midpoint, this represents a 20% increase over the prior year, driven primarily by higher marketing, R&D and personnel costs. .

And we expect GAAP net income to range from $388 million to $416 million or $3.38 to $3.63 per share.

We have not flowed through the entire second quarter management reporting EPS beat to our implied management reporting EPS outlook for fiscal 2020, due to marketing expenses that shifted from the second quarter, and to balance of the year, a higher forecast for marketing, IP and R&D expense and the move of Kerbal Space Program 2 into fiscal 2021. .

In closing, our strong performance during the second quarter has enabled us to increase further our operating outlook for fiscal 2020, which is poised to be another great year for Take-Two.

Our positive momentum continues and with our industry-leading creative assets, coupled with our management focus on operational excellence and sound financial foundation, our company is in the perfect position to deliver strong results for shareholders over the long term. .

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

Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to thank our colleagues for their dedication, their hard work, their commitment to excellence. And to our shareholders, I'd like to express our appreciation for your continued support. .

We'll now take your questions.

Operator?.

[Operator Instructions] Our first comes from the line of Eric Handler with MKM Partners. .

Two quick things.

First, with Outer Worlds, I believe you said it was selling ahead of expectations, wonder if you might be able to put some actual numbers to that, if you don't mind? And then secondly, with Red Dead Online, wondered -- obviously, you don't talk about revenue for that game, but wondered if you might be able to at least talk about the some of the trajectory, how it compares to RCS for other games? Or how you have found that game to be tracking?.

Eric, it's Strauss. On Outer Worlds, we're not releasing any specific numbers yet. It's outperforming our expectations handily. It got amazing reviews, we're super excited about it. But it's very, very early. So as we learn more, we'll disclose more. .

And on Red Dead Online, we did say that we're up sequentially in the quarter. We have a lot of momentum. The new content is definitely performing. People really like it, they're engaged with it. We feel great about it, and that's pretty much where we're at, at the moment. .

Our next question comes from the line of Alex Giaimo with Jefferies. .

This is David on for Alex. Hoping to get a little bit of color on Social Point. Last quarter, you said you had 10 number of games in development.

Is that still the number we should be thinking about or that changed at all?.

Yes. Thanks for your question. I think a couple of notes about Social Point. First of all, there are 5 live games that are doing well in the market. So Dragon City and Monster Legends but also World Chef, Tasty Town and Word Life. So that's super exciting. And at any given time, we have 8 to 10 new titles in development at Social Point.

So yes, that's roughly correct. We're really excited about what is coming to us in the future. .

[Operator Instructions] Since there are no further questions left in the queue, I would like to turn the floor back over to management for any closing remarks. .

Obviously, we've had a great quarter. We raised our outlook for the year. We're really excited about how the company is doing. This company is all about creativity, innovation and efficiency. Our goal is to make the highest-quality entertainment in the business and, in fact, in the entertainment business.

More often than not, our creative teams succeed at that, and we couldn't be more grateful to them than we are. So thank you so much for joining us today. We're looking forward to the rest of our fiscal year and then beyond that as well. .

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day..