Q2 2020 Earnings Call

Greetings and welcome to take to interactive software Q2 fiscal year 2020 earnings call at this time.

Listen only mode.

Question and that's essential follow the formal presentation.

<unk> operator assistance during the conference. Please press Star Zero on your telephone Keypad. Please don't just conference is being recorded I would now like turn the converts over to host Mr., Hank Diamond Senior Vice President Investor Relations I 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 fiscal year 2020.

And at September Thirtyth 2019.

Today's call will be led by strong zelnick take two's, chairman and Chief Executive Officer.

Carl slate, all our president and Leeny Goldstein, our Chief Financial Officer.

We will be available to answer your questions during the Q when they fashion 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 belief our management.

As well the assumptions made by an information currently available to us.

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 FCC, including the company's most recent annual report on Form 10-K , and quarterly report on Form 10-Q , including the rest summarized in the section entitled risk factors.

I'd also like to note that unless otherwise stated all numbers, we will be discussing today, our gap 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 are management uses internally to adjust for GAAP financial results.

In order to evaluate our operating performance.

In addition, we have posted to our web site in flight deck that visually presents our results and financial outlook.

Our press release and filings with the FCC may be obtained from our website at www Dot take two games still dot com.

And now I'll turn the call over time from thanks, and good afternoon. Thank you for joining us today.

I'm pleased to report the takes is positive momentum.

Continued in the second quarter.

Enabling our company to generate operating results significantly exceeded our expectations.

We delivered strong net bookings cash flow and earnings growth fueled by the performance of MBS UK Borderlands, three Grand theft auto online and Grand theft Auto five and Red dead redemption to and read that online.

Once again, our strategy of creating the highest quality entertainment in the industry translated into outstanding results.

On September 13th two K. and gearbox software launch borderlands Threed the latest installment in our jar defining sooner or later series.

Total has exceeded our expectations and sold more than 5 million units within its first five days of watch, making it the fastest selling title into case history and the high setting selling title for the label on T.C.

Within its first five days and Mark at retail sell through Borderlands, two was up more than 50 per cent compared to its predecessor, and 70% of units were purchased digitally setting a new record for a two k. cross platform title.

Borderlands favorite save resoundingly positive critical acclaim with Forbes RG and shock, there's just struck toward a marriage station all scoring the title nine out of time.

Today's borderlands three has sold and nearly 7 million units worldwide.

I'd like to congratulate the teams a gearbox and two k. on a stellar launch and taking this bill Lovette series to New Heights.

Carl where share details about our post launch concept platinum key players engaged in a world of Borderlands series.

Our industry, leading basketball series continues to grow during the second quarter.

Net bookings up approximately 9% quite a difficult comparison driven by the successful September six launch of MBS UK 20.

According to the empty degree MBS UK 20 is the best selling game of 2019 today [laughter] delivered the highest watch month sales for any sports game in history and the Mds. Your K series is now the sixth largest video game franchise in the industry based on dollar sales.

Demand for MBK 20 remained strong at a title and sold in nearly 6 million units today generating growth over the prior years really during the second quarter recurrent consumer spending at MD educate grew 32% to a new record I remain the single largest contributor to that category of our business.

Engagement with M.D.A.T.K. 20, also increase driven by a consistent it's new content schedule with daily active users up almost 20% compared to the MBS UK nice Jamie.

And my career or my team going by more than 30% and 150% respectively.

We expect lifetime net bookings from MBK 20 to set a new record for the series.

In addition to K recently announced the MBK 20, a Nike game or exclusive program and innovative first of its kind of gaming and sneaker partnership.

This program provides players with the opportunity to unlock virtual Nike Gamer exclusive sneakers for their my player to where in game and to purchase real life versions of the same shoes from Nike.

I'd like to congratulate UK and visual concepts are once again redefining what it's possible that sports gaming.

Capturing superbly every nuance or the M.B.A. and the pop culture that develops.

Grand Theft auto aligning Grand theft auto five once again exceeded our expectations delivering the best quarter, yet with respect to daily weekly monthly active users and our best summer ever in terms of new online users and new users overall recurrent consumer spending I grabbed thought on line grew 23% through a new record.

Driven by the July release of the dynamic casino and resort update.

This update was grand theft auto on like the 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 titles better than expected performance fiscal year to date and improved outlook for the balance of the year. We now expect Grand theft auto one life to grow in fiscal 2020.

Grand Theft auto five remains a standard bearer for excellence, our industry and what are the most revered and successful entertainment experiences of all time. The title continues to expand its audience around the world and is now sold in more than 115 million units.

Right that 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 10th the world of Red Dead on line evolve further with the release of the frontier pursuits update this update introduced three specialists roles, including tracking down wanted criminals.

The bounty hunter searching the world for treasure another exotic items to sellers are collector and building a business as a trader.

Rockstar games intends to add more new roles in the future, enabling players fully doing a habit their characters as a carve out a life on the frontier.

Rockstar games also introduced the popular outlaw pass away 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 in line 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 on line to be meaningful driver recurrent consumer spending. In addition, red dead redemption to continues to grow its audience and todays has sold in almost 26 and a half 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 of new content additions for the game story mode and more.

On August 27, private division lots ancestors, the humankind Odyssey for digital download on PC. The title. The first release from the National Digital games. The studio co founded by Patrice does allay the original creative director of the assassins Creed franchise ancestors. The humankind Odyssey was lauded by the media for its sophistication.

And unique approach to the survival category.

And we'll be available for digital download on Playstation four Xbox one on December sex.

Our second quarter results were also enhanced by social Point's mobile games Wwb to create franchise and Sid Meier's civilization sex.

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 Openworld two additional chapters in content, we aim to provide consumers, though with the highest quality offerings that meaningfully add to their overall gameplay experience to that end during the second quarter recurrent consumer spending.

Significantly exceeded our expectations growing 39% and accounted for 45% Bartolom that bookings.

In addition of virtual currency for MBK Grand theft auto in line and read that online recurrent consumer spending was enhanced by a variety of other offerings, including.

Sales of the borderlands three 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 towards mobile titles Dragons City Mostra lessons World shop, 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.

Wwb Supercard has now been download it nearly 20 million times and remains to case highest grossing mobile title.

And recurrent consumer spending on the MBS UK online on on Mds, Your Carolina, China outperformed our expectations.

Growing 27% in the second quarter. The title remains the number one PC online sports game in China with more than 47 million registered users.

Lastly, I don't content grew more than 60% led by offerings for Sid Meier's civilization sex and the borderlands franchise.

As a result of are better than expected second quarter operating results were 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 far biggest franchises as well as exciting new IP.

In addition, we're actively investing in emerging markets platforms in business models, such as mobile streaming direct to consumer <unk> 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 cabot's on which to achieve their vision and set new bank.

Marks for excellence take two is exceedingly well positioned to generate growth and margin expansion for our shareholders over the long term I'll now turn the call over to car.

Thanks Ross.

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 22nd two K. launch Wwb, two k. 20, the latest offering and our flagship Wwb franchise, Playstation four Xbox one and PC.

I'll buy visual concepts Wwb two k. 20 feature several new gameplay modes that celebrate the WWDC thriving women division as well as an array of fan favorite Superstars legend.

And match types.

Earlier this year to paying now philanthropic partnership, but they'll Kenya and lymphoma society in conjunction with WWD Superstar Roman range. It with other came into survivor that helps raise awareness and $500000 for this important cause.

Well, we're disappointed with reviews and consumer feedback for W. W. Two K. 20 last week visual concepts released a patch that should address many of the concerns and they will continue to make further enhanced that's it became player experience.

The WWD brand continues to expand worldwide and we believed there remains a substantial long term opportunity to grow our W. W. Two K series by improving the quality of the game.

On October 25th Private Division lost the outer World Xbox One Playstation four and PC.

Develop I am sitting entertainment the outer worlds marks the reunion of Tim Kaine and then it by our ski the original craters a fall out well introduce an entirely new single player satisfy RPG experience.

A critical and commercial success the out of wells is exceeding our expectations and reviews have been outstanding Gamespot, giving the game nine out of 10 game Informer 9.25 out of 10 and ATM a perfect five out of five.

In early 2020, the outer worlds will be released for Nintendo switch.

As noted by Strauss in November 5th across our games launched a red dead redemption to for PC, which is the first title and the Red dead Siri to be offered on PC.

The release of the game also market today view of rock Star games larger 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 this based titles, including purchases from other digital stores managed cloud saves and more.

Players will also be able to use the launch or to shop for new Rockstar games PC titles.

The introduction of the Rockstar games launch or underscores our commitment to investing to deliver great entertainment experiences in new ways to our audiences.

[noise] later this month borderlands three MB two k. 20, and Red dead redemption to will be available as part of the of Google Stadia initial offerings at full price games.

You mean represents an exciting opportunity and has the potential to become a compelling distribution channel for our industry I could expand our market and increase our margins.

On November 22nd Sid Meier's civilization, six well come to Playstation four Xbox one marking the first time since 2008 that a civilization game has been available for Playstation four Xbox councils.

In addition to came for access games will launch the separate Civilisations six expansion bundle, which includes all content from the rise or fall and gathering storm expansion packs.

Civilizations six is the fastest selling title in the history of the series, let's sell at the date of nearly 6 million units worldwide.

Rounding out our holiday lineup will be private divisions December Sixthree, Lisa ancestors humankind Odyssey for digital download on Playstation four Xbox one.

Throughout fiscal 2020, we will continue to support our titles with innovative post launch content designed to drive engagement and player growth.

Putting many more updates from Rockstar games for both Red dead online and Grand Theft Auto online.

On October 24, two can gearbox software it launched the bloody harvest free seasonal event for borderlands three the first offering in the robust post launch content plans for the title.

We will continue this last three with free seasonal content updates and rate like events called take downs.

In addition to can gearbox plans are released four major downloadable campaign expansions available collectively with the purchase of the season pass or individually on release.

The first of the DLC packs is scheduled to launch this winter.

In December private Division will launch the cripple space program breaking ground expansion Playstation four Xbox one which was previously released for PC in may and throughout the year to cable continues to release additional content for WWD, two k. 20, and other titles.

Well also continue to broaden our slate for mobile devices, including the November 13th launch of seasoned six of our popular W.W., We Supercard series.

Looking ahead to fiscal year 2021, private division announced that disintegration, a new sites I first person shooter will launch in calendar 2020.

In disintegration players commander trips as they battle through a thrilling single player campaign and compete in frenetic multiplayer against other pilots and their crews.

Integration is being developed by he won interactive a new independent studio co founded by markets late though former creative director and Bungie and co creator of Halo.

Also for private Division couple space program to the sequel to the loved original space and is now planned for launch on PC, Playstation four Xbox one in fiscal 2021 in order to allow more times to make the experience as terrific if possible.

The original couple of based program has sold and over 3.5 million units and earned a Metacritic rating of 88 and his team user score of 91%.

Private division will have more exciting news and announcements in the coming months.

Turning to E sports qualifying rounds for season three of the MD 82, Kaylee, our joint venture with the end BA well conclude this week followed by the combine that will end in December and the official player draft and started the season in the spring.

The NVH, who came they announced that Genji the global E Sports organization will launch a new franchise from Shanghai that will join the Lee 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 two new teams for season, three bringing the lead total to 23 franchises.

We're very excited about the continued progress and growth at the lead which has a long term potential to enhance engagement and to be a driver 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 immerse and engage 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.

Now I'll turn the call overly any thanks, Carl and good afternoon, everyone today, well discuss our second quarter results and then we feel our financial outlets for the third quarter fiscal year 2020.

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

That's draft mentioned, our positive momentum continued in the second quarter, enabling us to generate operating results that's significantly exceeded our expectation.

Total net bookings grew 63% to $951 million, that's compared to our outlook at $860 million to $910 million. This outperformance is driven primarily by better than expected result, I'm glad that satisfied and Grand theft auto online and borderlands three.

The current consumer spending grew 39% and accounted for 45% of total net bookings as compared to our outlook, although over 20% growth occurring consumer spending.

Patients due primarily to the outperformance of Grand theft Auto online.

Digitally delivered net bookings grew 63% and accounted for 73% the telecom as compared to our allocable, 40% growth. This is all exceeded our expectations due to the outperformance ever current consumer spending and a higher than forecasted Miss a digital south of borderlands three Grand theft Arafat.

During the second quarter, 51% of current generation console.

Gains were delivered digitally up from 47% last year.

Turning to some details from our second quarter income C. 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.

GAAP net income was $72 million or 63 cents per share as compared to $25 million or 20 cents per share in the second quarter fiscal 2019.

Adjusted unrestricted operating cash flow for the six months ended September Thirtyth 2019 increased to $41 million and we ended the paired with 1.5 billion in cash and short term investments.

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.

Largest contributors to net bookings are expected to be MBK 20, Grand theft auto nine and grant that satisfied that debt redemption to and bad debt online the outer wear off borderlands, three and the WWD to K 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 to premium additions last year growth is expected to be driven by Grand theft auto online bed that online excluding last year's allocation and Mds UK currently projecting single centric.

In recurrent consumer spending MDACC. Okay. Do you did this strength of the title in the third quarter last year.

We expect digitally delivered net bookings increased by about 5%.

Forecast assumes that 50% of our current generation console game will be delivered digitally up from 31% in the same period last year.

We expect gotten that revenue to range from 915 to 965 million dollar and cost of goods sold to range from $425 million to $452 million.

Operating expenses are expected to range from 300 and dropped advantage in $22 million.

At the midpoint. This represents a 6% increase over last year, driven primarily by higher R&D personnel costs, partially offset by lower marketing.

GAAP net income is expected to range from 159 $270 million or $1.39 cents to $1.49 cents 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, they're raising our operating Alex as a result of are better than expected second quarter operating result, and improved net bookings outlets to the balance of the here.

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.

The increase the on the second quarter beat is driven primarily by improved expectation for Grand theft Auto online and grant that satisfied and borderlands three partially offset by the most of carpal space program to into fiscal 2021.

The largest contributor to net bookings are expected to be MBK Grand theft Auto mine in Grand theft Auto five borderlands, three red dead redemption to embed that online the out of World Sid Meier's civilization sick and the WWD to K series.

That's a net bookings break down from our labels to be roughly 60% UK, 30% Rockstar games, and 10% private division social point and other.

And we forecast our geographic net bookings, but to be about 60% United States.

40% International.

We now expect recurrent consumer spending to increased by 25% I from our prior outlook of mid teens.

<unk>, primarily by higher expectations for that that's out of online. We now expect wrap if that online to grow in fiscal 2020 as a result, it's 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 south of borderlands, three and Grand theft at a five.

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 and adjusted unrestricted operating cash flow and we now plan to deploy approximately $75 million the capital expenditures.

Expect GAAP net revenue to range from $2.93 billion to $3.3 billion impossible that 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 $460 million or 3038 cents to $3.63 per share.

We have not flow through the entire second quarter management reporting if he asked me to our implied management reporting as outlet for fiscal 2020 do you do marketing expenses that shifted from the second quarter into balance of the or higher forecast for marketing I see an R&D expense and the move a favorable space program to into fiscal 2000.

And 21.

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 test.

Our positive momentum continues and with our industry, leading creative assets, coupled with our management focus on operational excellence and sound Financial Foundation.

And he is a perfectly positioned to deliver strong results our shareholders over the long term. Thank you I'll now turn the call back to shop. Thanks My name Carl.

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 well now take your questions operator.

Thank you at this time, we will be conducting a question answer session. If you like that's question. Please press star one on your telephone keypad, a confirmation to indicate your line is and the question Q.

You mean per start to fuel the term move your question from the Q.

For participants using speaker equipment, and maybe lesser to pick up your handset before person the starkey.

Our first question comes from London, Eric Handler with MKM Partners. Please proceed with your question.

Good evening and thank you for the questions.

Two quick things first.

With our World I believe you said it was tried 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.

Online wondered.

Obviously, you don't talk about revenue on a for that game, but.

Wondered if you might be able to lease talk about some of the trajectory how it compares to.

Rcs for other games or how you felt how you are found that came to be trucking.

Hey, Eric good strides on outer world, we're not releasing any specific numbers, yet it's outperforming our expectations handily garden 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 Dot online. We did say that were up sequentially in the quarter. We've a lot of momentum the new content is definitely performing people really like at their engage with it we feel great about and that's pretty much you know that were out at the moment.

Okay. Thank you very much.

Our next question comes on line of Alex Jim.

Jefferies. Please proceed with your question.

Hey, this is David on Oh drinks, taking the question.

I'm, hoping to get a little bit of color on social.

Last quarter, you said that you I tend to move games and development is that still the number should be thinking about it was that changed at all thanks.

Yeah. Thanks for your question I think couple notes about social 0.1st of all there are five live games that are doing well in the market. So dragon city in Mostra legends, but also world chef Tasty town and word life. So that's super exciting and in any given time, we have eight to 10 new titles in development at social point.

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

Once again, if you like to ask questions. Please press star one on your telephone keypad. Once again, if you look that's question. Please press star one on your telephone keypad one moment. Please as we pull for more question.

Since our 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 in the business and in fact in the entertainment business I'm more often than not our creative teams succeeded that 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 on them and 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.