Greetings, and welcome to the Take-Two Interactive Software's Q2 Fiscal Year 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Hank Diamond. Thank you. 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 2017 ended September 30, 2016. Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer; Karl Slatoff, our President; and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q&A session following our prepared remarks. Before we begin, I'd like to remind everyone that the statements made during this call that are not historical facts are considered forward-looking statements under federal securities law. 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 in 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. Our press release provides a reconciliation of our GAAP to non-GAAP measurements and further explanation. And on our website, we have provided additional details regarding the non-GAAP components of our cost of goods sold and operating expenses. 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 business continued to outperform during the second quarter, enabling us to deliver strong net revenue and better-than-expected bookings growth. Our outstanding results were driven by the launch of NBA 2K17, ongoing robust demand for Grand Theft Auto V and increased recurrent consumer spending, including growth and bookings from Grand Theft Auto Online. NBA 2K17 launched to stellar reviews, quickly becoming the top-rated annual sports game of the current console generation and the highest-rated release in the history of our industry-leading basketball series based on average Metacritic score. NBA 2K17 had the strongest launch in the history of the series and has continued to grow over last year's release, with sell-in to date of more than 4.5 million units. Moreover, during the second quarter, bookings from recurrent consumer spending on NBA 2K grew by 160%, driven by both online play and the MyNBA 2K mobile companion app. Sales of virtual currency for NBA 2K has continued to grow with each new release and remain the largest contributor to recurrent consumer spending next to Grand Theft Auto Online. I'd like to congratulate the team at Visual Concepts for once again raising the bar for excellence by delivering an incredible experience that perfectly captures the authenticity of pro basketball and the passion of our audience for both the sport and its pop culture connection. Grand Theft Auto V and Grand Theft Auto Online also continued to exceed our expectations as they have in every quarter since their release. More than 3 years after its initial launch, Grand Theft Auto V remains the must-have title for gamers on both console and PC, with sell-in now surpassing 70 million units. In addition, Grand Theft Auto Online once again…

Thanks, Strauss. Today, I'll discuss our recent releases and pipeline for the remainder of fiscal 2017. On October 7, 2K launched Mafia III, a highly immersive and action-packed addition to our popular organized crime series. Developed by 2K's newest studio, Hangar 13, Mafia III received critical praise for its deep storytelling and epic setting. For example, Forbes called Mafia III fantastic, while IGN said, "Its writing and performances are some of the best of this entire generation and New Bordeaux is a fantastic setting." Mafia III is the fastest-selling game in 2K's history, with week 1 sell-in of more than 4.5 million units and ongoing strong demand. We are also witnessing very high interest in the game beyond just sales with more than 88 million YouTube views of Mafia III in just its first week. The team at Hangar 13 departed from traditional mobster story that Mafia fans were accustomed to and leaned into the racially charged tensions of the time rather than shying away from them. Their creative approach has paid off with a tremendous story-driven experience that sets a new bar for storytelling video games. 2K and Hangar 13 are only just getting started and have more content planned for Mafia III in the near future. On October 11, 2K released WWE 2K17 and brought our popular sports entertainment series to exciting new heights. WWE 2K17 received strong reviews from influential critics, including Forbes which scored it 8.6 out of 10 and called the game easily the best wrestling release in over a decade; and IGM, which scored the title 8.2 out of 10. We expect that sell-in of WWE 2K17 will be up over last year's release, continuing the trend that the series has delivered for every year since we acquired the license. WWE 2K17 is being…

Thanks, Karl, and good afternoon, everyone. Today, I'll discuss our fiscal second quarter results and financial outlets for the remainder of the year. As a reminder, we are no longer reporting non-GAAP financial measures that adjust for deferrals of net revenue and related cost of goods sold. All comparisons are year-over-year unless otherwise stated. Our press release provides a reconciliation of our GAAP to non-GAAP measurements. We have provided additional details regarding the non-GAAP components of our cost of goods sold and operating expenses on our website. As mentioned by Strauss, we had an outstanding second quarter, both from a business and financial perspective. Sales of our offering significantly exceeded our expectations, with total bookings growing 28% to $452.8 million. The upside of bookings is driven by the stronger-than-expected performance of Grand Theft Auto V and Grand Theft Auto Online, NBA 2K17 and BioShock: The Collection. Digitally delivered bookings grew 59% to $210.8 million and accounted for 47% of total bookings. Our better-than-expected digitally delivered bookings were driven by growth in the current consumer spending and Grand Theft Auto Online and NBA 2K, along with increased full game downloads. Turning to our reported financials. We delivered net revenue and non-GAAP net income towards the high end of our outlook. Our better-than-expected bookings did not drive upside to revenues and net income because most of the outperformance was driven by sales of titles that we are required to defer. In addition, earnings upside was muted by higher internal royalties. Internal royalties are calculated using results that are adjusted to exclude the impact from deferrals, and unlike certain other cost of goods sold, internal royalties are not deferred. Turning to the details of our P&L. Second quarter net revenue grew by 21% to $420.2 million. Growth was driven primarily by the recognition…

Thanks, Karl and Lainie. On behalf of our entire management team, I'd like to thank all of our colleagues for delivering another strong quarter. And to our shareholders, I want to express our appreciation for your continued support. We'll now be happy to take your questions. Operator?

[Operator Instructions] Our first question comes from the line of Justin Post with Merrill Lynch.

Two quick ones. First, congratulations on the NBA 2K ratings. People have noticed that the Mafia kind of reviews that are out there, do you think that's affecting game sales? And do you think those are off at all? And then secondly, just thinking about the sustainability of this year's earnings. Obviously, we can layer in Red Dead for next year, but when you think about the 30% that's Rockstar this year, how do you -- and I'm assuming a lot of that's GTA, how do you think about the sustainability of that going forward?

Justin, thanks for your questions. Yes, we're really excited about the performance of NBA 2K17, it’s the strongest launch in the history of the franchise, and we had record first week sell-in and 160% increase year-over-year in virtual currency sales. So it's looking really good. And obviously, the reviews and scores are great, too. On Mafia, we've got great news on the revenue side that you alluded to, first week fastest sell-in title in 2K's history with 4.5 million units sold-in. And in terms of the reviews and scores, sort of an odd anomaly, you're right, the scores are lower than we would have liked, but there are a lot of stellar reviews. And I think the most prominent reviewers really loved it and recognized that what we're doing here, from the story, art, character and excitement perspective, is really unmatched in the marketplace. So I think we and our competitors are seeing some anomalies in the review system. We take them as they are. We don't argue with it. But I think we do have an enormous number of exceedingly favorable reviews. And most importantly, consumers love the title and they're buying it hand over fist. And at the end of the day, that's how we're judged. In terms of sustainability of earnings, we are looking for another strong year in 2018. We're thrilled that Rockstar has announced Red Dead Redemption 2 for the fall. Obviously, we're going to give guidance in the normal course as we would, and that's a time when I think we can dig further into your questions. The truth though is in the history of the company for really the past that we can recall, this company has been performing across our labels regularly, both in terms of new releases and in terms of catalog, and the results are directionally sound. Things are good and getting better, and that's probably what we're most excited about now. So we'll get into more detail about how each of the labels is doing when we give more specific information and when we do give initial guidance for the year. We're not there yet.

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

On Red Dead 2, I realize it's a long ways away, but is there anything you can share on how Rockstar will monetize the game with digital content? Specifically, do you anticipate some form of kind of Red Dead online offering in order to replicate the success that you've had with GTA online? And then secondly, related to GTA Online, I just want to make sure I heard it right, did you say that it grew year-over-year in the quarter? Can you say how it compared to the June quarter and how it did sequentially?

Yes. In reverse order, we are expressing year-over-year growth, and we haven't said anything about quarter-over-quarter. It's not really the way we feel we ought to look at it. We're looking at it year-over-year, and it continues to outperform our expectations. In terms of Red Dead 2, Rockstar has announced that there'll be an online component. We're excited about that. We haven't talked about monetization schemes nor do we expect to. The approach of our company in both of our labels is delight the consumer first and the revenue and profits will take care of themselves and proven to be a very good strategy and one I expect will repeat.

Our next question comes from the line of Eric Handler with MKM Partners.

Two questions for you. First, with -- at the beginning of the year, you guys spoke of elevated marketing costs in the first -- in the fourth quarter of fiscal '17. And given Red Dead Redemption is going to be in the fall of '17, are those marketing costs still going to be elevated in this year's fourth quarter ahead of potential new releases in the first quarter? Or are those marketing costs now shifted out? And then secondly, wondered if you could talk about Civilization Online in Korea. I've heard that the game has actually been stopped and it's being revamped and hopefully relaunched. Just wonder if you could talk about some of the statistics around that game and how meaningful this is.

It's Lainie. For the marketing costs, we never said that they were going to be in the fourth quarter. We just said that the full year was going to be up from the previous year to support our overall pipeline for 2017 and also for some titles for 2018. So we still have a robust marketing expense category to this year, and that hasn't changed.

And Eric, it's Karl. I'll answer your question on Civ Online. So we launched it in December of 2015 in Korea. And as you know, we partnered with XLGAMES on that initiative. We have suspended the game in Korea at this point, but we have plans to bring Civ Online to Taiwan, Hong Kong, Macau and China through our publishing partnership with Game First and Qihoo 360. So stay tuned for more results in the future.

Our next question comes from the line of Brian Fitzgerald with Jefferies.

WWE launch for the Season Pass, we were wondering maybe what the traction looks like there and maybe any notable differential dynamics with respect to Season Pass adoption across titles or genres.

Brian, it's Karl. We don't have any Season Pass information to share with you on WWE. On WWE, we typically don't give specifics about that. And I'm sorry, what was the second part of your question?

Does the Season Pass adoption -- do you think differential dynamics -- or differing dynamics between Season Pass on NBA versus WWE versus other genres of games?

Yes, I mean, I think every game, even within genres, are very different in terms of Season Pass pickup, and it's really just a question of what our -- ultimately, what our DLC offering is going to be. And some products, we don't even do Season Passes. So it really varies game by game. And I wouldn’t say that anything specific is genre to genre.

[Operator Instructions] Our next question comes from the line of Doug Creutz with Cowen and Company.

You mentioned that you had some of these outperformance with the BioShock Collection. Obviously, that's an older title, a high-quality title that you were able to remaster. I think we also saw Skyrim recently has relaunched and has done well. I think I asked you this question 6 months ago. But I'm just wondering, given some of these titles coming into the market, these remasters and doing exceptionally well, does that increase your appetite to want to do that with some of your other catalog games?

Potentially yes. I mean, doesn't -- anytime we have something that goes well or doesn't go well, it definitely informs our decision-making. While we don't have anything specific to announce, those announcements would come from our labels. The good news is we have a rich trove of intellectual property, and there definitely are more things that will be brought to the market in the future. And -- but nothing that we would announce on today's call.

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

Just curious on -- just to clarify on GTA Online. For your Q3, I think you said that you expect that to moderate, and I think that's obviously a year-over-year perspective, which you clarified earlier. Curious why you think that is, if you're just being conservative or is that sort of content-related. And I guess that dovetails into a question on Rockstar and their ability to create content ongoing with the full development now of Red Dead Redemption 2. And I have a quick follow-up.

Yes. Thanks, Mike. It's Strauss. We've been saying for some time that we expected Grand Theft Auto Online to moderate, and so far, we're able to report year-over-year growth in the quarter. The title is over 3 years old. It continues to delight consumers. We're thrilled with its performance. Over time though, the expectation remains that it will moderate. And obviously, we can't call it more specifically than that. It's not actually formulaic. And Rockstar Games has enormous bandwidth to work on a multiplicity of opportunities simultaneously. And I think we all can be really proud of their ability to do so and to delight consumers while delivering experiences that critics resoundingly rate as perfect or very nearly perfect. So we have an enormous amount of confidence in that label and their performance, and we're incredibly excited about what is to come.

Absolutely. I guess, just as sort of a reach, but on GTA Online, I think it was last year, it was announced that there was 8 million weekly players. I know that bookings are up. Are player -- is the player count up, too, or is that just a higher ARPU?

A fair question. Those are not the statistics we tend to give out. And again, I think the reason that we don’t give them out is that we're not describing this title as the kind of title where those metrics would be all that useful to you. But we have said that it's performing great year-over-year and that we do expect the results to moderate somewhat in the coming quarters. And that's -- we think that, that tells investors what they ought to be looking for.

Okay. Fair enough. The last one from me. Obviously, we have a little bit of a sketch of your fiscal '18 and Red Dead Redemption 2, which obviously is seemingly a big catalyst for you guys. But I'm also sort of curious when we look outside of that in your -- I guess, your perennial games, NBA 2K and WWE 2K, looking at your full slate. Should we sort of expect something size-wise or title count-wise that we saw in fiscal '17? And I'm also wondering how you're thinking about new IP. Obviously, you guys have been very forward in pushing and trying to create new franchises, and I'm just curious if you still plan to do that.

All good and fair questions. This is early for us to give insight into the future. It's something we know investors have asked for and that we're trying to do. And you're right, there's plenty to come in fiscal '18 that we'll talk about in the future. We're not going to give more specifics than that right now. It definitely would be premature. We have said that we expect bookings growth. We have said that we expect cash flow growth. And as you know, we don't say things like that without being exceedingly thoughtful about what we're saying. As far as new intellectual property, look, every year, since this management team took over the company, nearly every year, we've launched successful new IP, not every year, but nearly every year. And we do think that any solid entertainment company is constantly creating new hits in addition to bringing beloved franchises back to market. You're absolutely right. It's very challenging to do that, and it is risky to do that. And we're not always successful at it. It remains a key part of our strategy on an ongoing basis. And when I say that though, I probably should put a very fine point on our selectivity for that to work, given the amount of investment that's required that we have to be incredibly disciplined. And what that means is that our creative teams are encouraged to focus on something they are highly passionate about. And then I would say, we are all -- everyone at this company is laser-focused on quality. And again, even that doesn't always work out according to plan, but more often than not, it does.

Our next question comes from the line of San Phan with Mizuho Securities.

We saw some higher-priced SKUs for NBA [indiscernible] retail. Just curious to get your thoughts. And like what sort of digital -- like how do you see digital content being provided in the point of purchase versus maybe like follow-on DLC content? Like how do you balance on providing that content?

Are you talking about the limited-edition launches? I assume you are?

Yes.

Yes, I mean...

Some of it is just the content that comes with...

Right. If we have a point of view about delivering something to consumers that's really exciting, that belongs in a limited edition, what we found is that it can be appropriate to charge a higher price point for that, and we've been very excited by the demand that we've seen for it. It's not really -- we don't feel that this is a trade-off. We can do all of the above. We can offer additional digital content in a limited edition. We can also offer it post-launch, either free or paid. We have the ability to do all of that. And I think what you'll see is -- the focus of this company is over-delivering to our consumers. And with Mafia III, for example, there will be free content updates coming. And Rockstar Games has launched a lot of free content for GTA Online. And our focus here, as I said earlier, is not trying to extract the last nickel from our consumers. To the contrary, our focus is to deliver vastly more value than what we charge for. And we think that creates extraordinary loyalty for our brands, for our labels and for our company's products. And ultimately, over-delivering for consumers equilibrates with over-delivering for shareholders.

At this time, I'm showing no further questions. So I will turn it back to Mr. Zelnick for closing remarks.

We’d just like to thank you all for joining us today. Obviously, we're incredibly proud of the results this quarter. Those results are driven by over 2,000 highly creative folks at this company who every day take enormous creative risk to deliver the best entertainment properties in the business. And then they're, in turn, supported by nearly 1,000 people who work in the business side, publishing side of this organization to try to bring those properties to market worldwide in the best possible light. We're incredibly gratified by the results, incredibly proud of what the company has achieved and yet we do believe we're just scratching the surface. Interactive entertainment is the fastest-growing part of the audiovisual entertainment industry, and it's going to stay that way for a long time to come. We and our competitors, in fairness, have the wind at our collective backs. Now it's our job to execute. We're proud of what we've done to date, and we know we have to get up tomorrow and do it all over again. Thanks so much for joining.

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