Greetings, and welcome to the Take-Two Second Quarter 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, Mr. Hank Diamond. Thank you. Mr. Diamond, 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 2018 ended September 30, 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 note that, as previously announced, we have changed the name of our operational metric from net sales to net bookings. Our definition of net bookings is identical to our previous definition of net sales. I'd also like to remind everyone that the 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 our positive momentum continued in the second quarter, enabling Take-Two to deliver another period of better-than-expected operating results. The extraordinary performance of our business is driven by growth from both Grand Theft Auto Online and Grand Theft Auto V, along with the successful launch of NBA 2K18. Grand Theft Auto Online delivered another record quarter, exceeding our net bookings expectations, and remains the single largest contributor to recurrent consumer spending. Rockstar Games has continued to sustain an increased engagement through the ongoing release of a rich array of free additional content, most recently the Smuggler's Run update and subsequent themed content drops, including the Motor Wars and Stockpile modes, Transform Races and multiple new vehicles. Rockstar Games will support Grand Theft Auto Online with additional new content going forward. The second quarter marks the fourth anniversary of the initial launch of Grand Theft Auto V, and net bookings from the game grew during the period, confirming that Grand Theft Auto V remains the must-have title, especially as the installed base of current-generation consoles continues to expand. Grand Theft Auto V has now sold in more than 85 million units. And according to The NPD Group, the title has achieved 42 top 10 chart appearances during the 50 months since its release, the most by any single title in reported history. Grand Theft Auto V is now the all-time best-selling video game, both in revenues and units, based on combined U.S. digital and physical sales across PC, console and portable. As a result of these titles' better-than-expected performance in the quarter and increased outlook for the remainder of the year, we now expect combined net bookings from Grand Theft Auto Online and Grand Theft Auto…

Thanks, Strauss. Today, I'll discuss our recent releases and then review our lineup for the remainder of this fiscal year. On October 13, 2K successfully launched WWE 2K18, the latest installment in our popular simulation-based WWE series. Co-developed by Yuke's and Visual Concepts, WWE 2K18 received positive review scores, including an 84 out of 100 from GEO -- COGconnected and an 8.3 out of 10 from Forbes. Critics are praising the title for its brand-new graphics engine, the largest roster of playable superstars in the series' history and a host of game play additions and improvements. According to Forbes, "WWE 2K18 is now the standard bearer in visual excellence in sports-themed video games." WWE 2K18 already is off to a solid start. And later this fall, 2K will release the title for Nintendo Switch, marking the first time in 5 years that a WWE game had been available on a Nintendo platform. In keeping with our focus on driving engagement and recurrent consumer spending, WWE 2K18 is being supported with a series of postlaunch downloadable content, including a Season Pass. The worldwide popularity of WWE is as vibrant as ever, and we believe that there remains a substantial long-term opportunity to grow our WWE 2K series by leveraging further the development and marketing expertise of 2K and Visual Concepts. On October 19, 2K and Firaxis Games released Sid Meier’s Civilization VI: Khemer & Indonesia Civilization scenario pack. We've introduced 2 new leaders representing civilizations from Southeast Asia. This content was made available automatically at no extra cost for purchases of the Civilization VI - Digital Deluxe edition. Turning to the balance of our lineup for fiscal year 2018. On November 14, Rockstar Games will release new versions of their blockbuster detective thriller, L.A. Noire, to the Nintendo Switch, PlayStation 4…

Thanks, Karl. Good afternoon, everyone. Today, I'll discuss our second quarter results and then review our financial outlook for the third 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. I'd also like to note that, as we announced last week, we've changed the name of operational metric from net sales to net booking. We have made this change to avoid confusion with the net sales captions used by some companies in their GAAP financial statements and to be consistent with operational metrics provided by our peers. The definition of net bookings is identical to our previous definition of net sales. As mentioned by Strauss, we had an outstanding second quarter from an operating perspective, driven by the continued outperformance of Grand Theft Auto Online and Grand Theft Auto V as well as the stronger-than-expected launch of NBA 2K18. Total net bookings grew 20% to $577 million. Of this amount, 62% were digitally delivered net booking, which grew 52% to $356 million. Our digitally delivered net bookings were driven by record recurrent consumer spending, along with growth in full game downloads. While the operating performance of our business exceeded our expectations, this outperformance was not fully reflected in our GAAP results for 3 reasons. First, our better-than-expected net bookings were driven by titles that we have are required to defer, and therefore, our GAAP revenues and profits will not fully benefit from these sales until future periods. Second, because of the better-than-expected performance of Grand Theft Auto V and Grand Theft Auto Online, we recorded higher-than-forecasted internal royalties, which are calculated using results that are…

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 Justin Post with Merrill Lynch.

I guess, 2. Strauss, one industry question. There were some concerns about NBA, and we hear with other games about maybe too much monetization opportunities for [ MTX ] taking away from the game. It clearly doesn't seem to be happy with NBA. But just give me your high-level thoughts on that. And then second, on Take-Two specifically. You haven't raised your outlook for '19. Clearly, all your digital trends are way above where you thought 6 months ago when you gave that guidance. How do you think about next year given the strength in digital this year?

Thanks, Justin. Look, we take consumer feedback very, very seriously, indeed. And you're right, there has been some pushback about monetization in the industry. The good news is the title was reviewed extraordinarily well. People love it. And the other news is entertainment is a want-to-have business, not a must-have business. And people, though, ultimately with the usage -- and the usage on the title is up 30% in terms of average daily users. The title itself -- say unit sales were up 20% year-over-year. So people, clearly, are voting that they love NBA 2K18, and the reviews reflect that as well. That said, we are concerned about any perception, any negative feedback, and we're focused on it. We're taking it really seriously. And Lainie will talk about next year.

Sure. For 2019, we are reiterating the guidance that we've given so far on that year. We continue to look at it. We said that we're going to exceed $2.5 billion and exceed $700 million in operating cash flow. So in terms of giving out more detailed guidance and updating that information, I think we would probably look to do that on our May call with our year-end earnings.

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

GTA Online continues to impress. It's another record-breaking quarter. And as you mentioned, it's the fourth anniversary of GTA V. On prior calls, we've heard a bunch of questions asking when GTA Online would start to tail off. But given the continued record-breaking quarters, I'm just curious, how many more years of GTA Online -- how many more years GTA Online might continue to thrive? And how does the upcoming launch of Red Dead influence your thinking here? And then just secondly, you're obviously taking up your full year EPS outlook substantially. I was just hoping you might help us understand what's behind that optimism. How much of this is coming from GTA Online and how much from NBA?

Well, thank you. Look, GTA Online continues to delight consumers, and therefore, our results are also excellent. And Rockstar Games has said they will continue to support Grand Theft Auto Online with content going forward. And then undoubtedly, it's this ongoing robust content creation that continues to delight consumers. There's clearly a community of people who love Grand Theft Auto Online, and once again, we're having a record year. We can't say much more than that except that we're so extraordinarily pleased. And to look further into the future is impossible at this time. With regard to your question on Red Dead, though, I have a strong point of view, which is, look, entertainment competes with every activity and no activity. And to the extent that we are competitive, we compete with all of our own titles and everyone else's titles, too. So I don't think the launch of any new title specifically has a direct effect on an existing title. Any more than someone else launching a competitive title would affect, for example, how one of our titles is doing. If we have something great in the market and we continue to support great content, people will continue to show up. That's historically the case, and certainly that's our aim. So we think Red Dead stands alone. Naturally, we're incredibly excited. I think the whole market is and -- but it will stand alone and succeed on its own merits.

For the full year, when we look at raising our guidance, we looked at how much we beat the second quarter by, and then we also look at the remainder of the year, and it's reflecting higher expectations for Grand Theft Auto Online, Grand Theft Auto V as well as NBA 2K18.

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

Two questions. First, wondered if you'd be willing to dig in on NBA 2K a little bit in terms of -- for last year's games, as you look back the last 12 months, what percentage of revenue was attributable to the full game sale, be it retail and full game downloads? And what percentage of revenue was related to micro transactions? And then secondly, wondered if you could talk a little bit about Social Point. It looks like internationally, you're -- I don't know if it's beta or what type of tests you're running for a game, League of Dragons. And at what point do you think of going global with that launch? And sort of how do you think about that progressing over the next year?

I got it. So okay, Eric, we'll start with Social Point. So yes, we did actually launch -- we had a soft launch of a title called League of Dragons. And it was a very limited soft launch. A select market, that's typically how you do these things before you take a global launch. I think you're familiar with that strategy. Based on what we have seen and the KPIs associated with the title, we decided that it didn't make sense to move forward. So that title will not be getting a worldwide release. That being said, the 2 games that Social Point has right now in the market, Monster Legends and Dragon City, are both performing above our expectations and are growing quarter-over-quarter and also year-over-year. So they're very positive for us. And as we said in our opening remarks, Social Point has a number of games that they're getting ready for release over the next couple of years. We're very excited about this opportunity. Oh, and in terms of the NBA 2K, the percentages of -- that you wanted to hear about, we'll give that kind of detail by title in terms of micro transactions, full game downloads, et cetera.

Our next question comes from the line of Evan Wingren of Pacific Crest Securities.

Following up on NBA a little bit. I was wondering if you could share what percentage of the unit sales that you did disclose came from digital this quarter. And then secondarily, you mentioned the growth in recurrent spending in NBA. And I just wondered if you could break apart whether you're seeing growth in the component -- in all components or if it's just from new players.

Evan, for full game downloads on new console, we're seeing about 35%. We're not giving it specifically by title, but overall, that's what we're seeing in Q2 for the business. And that's what we would expect to see for the full year.

And in terms of the components on NBA, so like we said before, we are seeing growth in our users, the daily active users. And so that is up. And our unit growth is up in general. We haven't broken it down any more specifically than that.

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

So just a couple of questions. First, for GT Online. Last quarter, you -- I think you guided to a moderation in the back half of the year. Of course, you posted another record quarter in the fiscal 2Q. So do you continue to expect to see a moderation for that title in the back half? Or do you expect to see growth? And then just secondly, Lainie, I know you just mentioned, I think 35% was the expectation for digital download for the year. I think last quarter, you talked about a 30% expectation. So can you just talk about what sort of changed that, I mean, and how, if at all, your -- you started to really try to incentivize the gamers to download more?

Thanks, Chris. No, we do not expect moderation in Grand Theft Auto Online in the back half of the year. Looks like it's very strong. And as we said, it will be another record year, which is obviously very gratifying. And on the digital download side for full games, we are continuing to see growth in that area. Obviously, for PC titles, it's over 90%. And for non-PC titles, it's running around 35%, as Lainie said, across the board.

And our catalog is also running at about 50%, and there is a big mix of our catalog business throughout the remainder of the year.

So -- and it's a good thing for us. Naturally, we do make more dollars per unit sold digitally, and we have a higher percentage margin. That said, we are where the consumer is. And physical distribution still is the lion's share of our business.

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

As far as the NBA 2K League, do you have any plans for broadcast? Will it be primarily online? Or could there be also broadcast TV viewing opportunities? And will there be marketing for the league during traditional NBA games? Or how will you kind of tie those 2 together?

So we haven't given that detail yet. There will be a media right associated with the NBA 2K League, and that will be announced in due time. Our crew over there, led by Brendan Donohue, is doing a phenomenal job. We -- Karl talked a little bit about what's coming in 2018. We're super-excited to have teams, have a draft of teams and to have a season with 17 teams participating. More details to come. But obviously, there will be media available and not much more detail to give out right now.

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

With the success of Grand Theft Auto Online, are you thinking about adding any talent to increase the cadence of GTA Online updates over the coming year or 2?

We are always adding talent across the company. Our headcount grows, but our headcount grows only on the side of creating great games and great content. That's everywhere on our business. So we -- across the board, we are a growth enterprise, and we are always looking for best and brightest talent. Right now, we're really happy with the content that we're putting out across the board, and we have wonderful people who are responsible for doing that every day.

Got it. That's great. And also, a quick follow-up on talent. There has been some studio closures in the space, one public, and some layoffs at a private competitor today. Longer term, I guess, where are you saying talent availability? And do you see anything specific regarding domestic or within your current studios or whether that be in international new markets and new studios?

We -- as I said, we're in a growth mode, and we're blessed we get to work with the best and the brightest around the world. It's no secret that hiring phenomenal engineering and artistic talent in the United States is exceedingly challenging. And so we're open-minded about where we may open studios going forward, but we will go where the talent is. This is a worldwide business, and we have a worldwide footprint. So we're -- as I said, we're in growth mode. And I suspect we will be broadening our physical presence to make sure that we are where the talent is.

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

I guess, it's always, I think, hard for you to add too much color to the Rockstar team. But it looks like the -- as it relates to GTA Online, the marketing efforts from the team there as it relates to incremental content coming in seems to have intensified. Curious if that's true. And how impactful do you think that's been for the ongoing success of that game? I have a quick follow-up.

Sorry, Mike. I'm sorry, I missed the marketing part of that question.

Yes. That was a question. Just curious, the -- it looks like the marketing of additional content for GTA Online has intensified just in terms of some of the trailers and maybe the energy put behind them. Curious if that was true and if that's at all impactful to the success of that game.

Sorry, it took me -- sorry, I'm a little slow on the uptake today, Mike. The answer is that the marketing is related to the content drops. So as content drops come out as they're significant and meaningful, it's important that we let people know about them. I think the marketing is informative and entertaining, and certainly, we wouldn't do it if we didn't think it had a beneficial impact. But what drives consumption and delight is obviously the content itself.

Yes. Fair enough. Good. I guess, under the theme of extending your player base, Rockstar is obviously preparing to launch L.A. Noire for the Switch. Curious how you think about the opportunity for other Rockstar content on that platform. And then also, thinking about China, I think you've obviously been seemingly more optimistic over time in terms of getting content into that region. Curious, your thoughts on the potential opportunity of Red Dead being a commercial opportunity in China, especially that pay-to-play model seems to be working with other games.

Yes. So in terms of other titles for the Switch from Rockstar, Rockstar hasn't made any announcements yet. And of course, as you know, our labels make announcements about what's coming out. We don't tend to do that on these calls. But clearly, the installed base for Switch has grown rapidly, and it's potentially an exciting platform. We've already put out a title for basketball. So we are supportive of the platform corporately. And in terms of China, look, this is a massive market, as you know. It's also a market that is constrained in any number of ways. I'm hopeful that over time, those constraints will lessen. Intellectual property is a particularly challenging area in China, and we think there's great opportunity. We're thrilled to work with local partners. We're working with Tencent for a long time. They're a wonderful partner on NBA 2K Online, and we've had phenomenal results. So we're happy to work with local partners. I do think it is very important that we have reciprocity in markets, and our markets are wide open. And I think it's important that foreign markets become open. And America's second-biggest export category after aerospace is entertainment. We're not alone in these interests. I will say that we are ready when China is ready, and we think that providing the best quality entertainment on earth is always a benefit to a population. But of course, we feel that way.

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

A few questions for you. So what do you think are really the key lessons from GTA that you expect to bring to other titles in the future? And should we expect you to continue to move down the price curve on the full game in order to drive more players to GTA Online? And separately, on NBA 2K. Should we expect any meaningful revenue from the online tryouts this year? And then finally, on mobile. Beyond Social Point, should we expect intellectual property from other Take-Two areas to come to mobile in any meaningful way in FY '19 and beyond?

Thanks, Ben. Look, I think the key lesson from GTA online -- remember, we launched that title 4 years ago. So we certainly have learned a lot from what we knew 4 years ago. And one of the things that we learned is if we create a robust opportunity and a robust world in which people can play delightfully in a bigger and bigger way, that they will keep coming back and they will engage and if there's an opportunity to monetize that engagement. And we've announced that there will be an online component to Red Dead. And furthermore, we've said that we aim to have recurrent consumer spending opportunities for every title that we put out at this company. It may not always be an online model. It may not -- probably won't always be a virtual currency model. But there'd be some ability to engage on an ongoing basis with our titles after release across the board. And that's a sea change in our business. In the recurrent consumer spending, it's 42% of our net bookings in the quarter. It's been transformative for us. And the only reason that it's transformative for us is because it's transformative to our consumers. The business that, once upon a time, was a big, chunky opportunity to engage for tens of hours or perhaps 100 hours, has turned into ongoing engagement day after day, week after week. You fall in love with these titles, and they become part of your daily life. And that's immensely exciting, and it's the beginning of the maturation of interactive entertainment as a part of the audiovisual entertainment industry. I just saw a study. The American media day, average media day, is about 22 hours. Obviously, people are sleeping and eating. What it means is they're parallel…

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

So I guess, taking a step back from the quarter for a second. Clearly, you're on a trajectory for much higher profitability, and you have been for quite some time. So what do you feel has been the biggest difference for Take-Two achieving and then maybe sustaining the margins of your peers, let's call it, 30% plus range? And along those lines, what do you see over the next 2 to 3 years changing for Take-Two specifically that could get you guys there and more importantly keep you guys in that 30% plus range?

Right. So let's distinguish gross margins from operating margins. I assume you're referring to operating margins. On the gross margin side, we're highly competitive. And our gross margins continue to go up, and they're phenomenal. A couple of our competitors account slightly differently. And so it's not necessarily apples to apples. But on apples-to-apples basis, our gross margins are as high as, if not higher than anyone else's. On an operating level, you're absolutely right, our margin -- our operating margins are a bit lower than our 2 biggest competitors. And they need to grow, and it's a matter of scale. But obviously, you can't gain scale and sacrifice success. You have to have successful scale. We can't improve our margins with lost properties. So it's not as simple as just doing more; we have to do better and do more. And what we're focused on here entirely is do better, and that served us incredibly well. The good news is we're in a growth business. You've seen that with our net bookings this year. Lainie talked about our expectations for next year. We have to continue to grow. We have incredibly ambitious people here, both at the corporate level and emphatically at the label level. Everyone's pulling in the same direction. What will cause us to grow? It's continuing to build our collection of the best intellectual property, continuing to attract, retain and lead the best creative talent and continue to focus, first and foremost on, making the consumers happy and meeting consumers' needs. All good things will come from that path.

Great. And then maybe just one more follow-up on an earlier question. So when you think about the -- kind of the long-lived success of GTA Online and kind of the high-margin recurring nature of that, has that changed Rockstar's view in any way in terms of when they want to release another product in the franchise? Or in other words, do they still believe a stand-alone release makes sense versus continuing to support GTA Online with extra content?

We -- as you know, we don't speak for our labels. We're thrilled to have a setup here where our labels speak to consumers when they're ready. And I think all we can express here is enormous gratitude for the success of Grand Theft Auto Online and the belief in -- enormous belief from Rockstar's ongoing success.

Our next question comes from the line of Scott Krasik of Buckingham Research Group.

Two questions. I guess, first, can you just remind us what the last L.A. Noire did and if that's a good guide for what's in the guidance for this year? And then I know you don't talk about the GTA Online attach rates or how many people are playing it. But as you've added new users from GTA V, what has been the behavior of those? Do you -- have rate transfers at the same rate historically? And what's the opportunity for people maybe that you've lost over the last 3 or 4 years?

All right. So sorry, maybe someone unsatisfying. L.A. Noire has sold in about 7.5 million units over the course of the franchise across the various SKUs, which is terrific. We haven't singled it out going forward from a guidance point of view. We don't typically do that with our titles. And on Grand Theft Auto Online, we don't have any -- we don't share information on specific data around users or attach rates. So we, at this point, pretty much shared the data that we're going to be sharing on Grand Theft Auto Online today.

Well, less looking for data and more about behavior. Have people shifted as there are opportunities to reengage people who may have dropped off?

There is unquestionably an opportunity to reengage people based on content drops. And when we drop new content, we see results in terms of engagement, and engagement typically does drive revenue.

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

As Grand Theft Auto Online has inflected higher, can you maybe talk about whether you've been able to do that using the same resource base as you sort of had working on it for the last few years? Or have you been allocating more resources to it to drive the growth?

Rockstar is growing, 2K is growing, Social Point is growing to support the existing opportunities and the new opportunities. And I think we're having success across all of our label groups. We are definitely in growth mode. I'm probably not going to get more granular than that.

There are no further questions over the audio portion of the conference. I'd now like to turn the conference back over to Take-Two management for closing remarks.

Well, first of all, I'd just like to thank everyone for joining us today. I want to take a moment to thank our colleagues across the company who delivered these phenomenal results. And I want to thank our consumers who support us and are absolutely passionate about what we do. That drives us and excites us and makes us want to come to work every day. On behalf of the company, I'd like to wish all of you a happy and healthy holiday season and a great new year.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.