Greetings, and welcome to Take-Two Interactive Software Third Quarter Fiscal Year '19 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to Hank Diamond, Senior Vice President of IR and Corporate Communications. Please go ahead, Mr. Diamond.

Good morning. Welcome, and thank you for joining Take-Two's conference call to discuss its results for the third quarter of fiscal year 2019 ended December 31, 2018. 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 morning, and thank you for joining us today. I'm pleased to report that, during the third quarter, Take-Two delivered better-than-expected results driven primarily by the record-breaking launch of Red Dead Redemption 2 as well as the strong performance of NBA 2K19. We generated significant cash flow and ended the period with $1.6 billion in cash and short-term investments after deploying $109 million to repurchase 1 million shares of our stock. On October 26, Rockstar Games launched Red Dead Redemption 2, which set numerous records, including achieving the biggest opening weekend in the history of entertainment with over $725 million in sell-through during its first 3 days. In fact, Red Dead Redemption 2 sold-in more units in its first 8 days than its predecessor sold in its first 8 years. The title has exceeded our expectations, and to-date, has sold-in over 23 million units worldwide. According to the NPD Group, based on combined physical and digital sales in the U.S., Red Dead Redemption 2 was the best-selling video game of 2018. A testament to Rockstar Games' unparalleled ability to create the highest quality entertainment experiences, Red Dead Redemption 2 received near-perfect critical reviews and multiple Game of the Year awards. The title is tied with Grand Theft Auto V as the highest rated title on PlayStation 4 and Xbox One with a 97 Metacritic score. In late November, Rockstar Games launched the Red Dead Online beta, a new multiplayer experience set against the backdrop of Red Dead Redemption 2's enormous and vibrant open world. Free with the purchase of Red Dead Redemption 2, the Red Dead Online beta is an evolution of the classic multiplayer experience in the original Red Dead Redemption, blending narrative with competitive and cooperative gameplay in fun new ways. Rockstar Games continues to refine…

Thanks, Strauss. Today, I'll begin by discussing our recent and upcoming releases for the balance of fiscal 2019. On January 31, Social Point launched Tasty Town, our latest free-to-play mobile offering for iOS and Android devices. This all-new game enables players to fulfill their culinary dreams of designing and managing their own restaurant. In Tasty Town, players embark on an incredible journey, from farm to table, to build their gastronomic empire, including experiencing the joy of growing their own ingredients, hiring the best chefs, creating delectable dishes, creating and managing their own restaurant, and racing against the clock to serve meals with their food truck. In addition to Tasty Town, Social Point is focused on its robust pipeline of other exciting new games in development. On February 14, 2K and Firaxis Games will release Sid Meier's Civilization VI: Gathering Storm, the second expansion pack for the critically acclaimed and award-winning PC strategy game. Gathering Storm, the largest civilization expansion that Firaxis has ever created for any civilization game, will allow fans to explore and master the franchise's rich and strategic gameplay in all new ways. Gathering Storm also adds 9 new leaders from 8 new civilizations, a new diplomatic victory condition, and a variety of new units, districts, wonders, buildings and more. This spring, 2K and Cat Daddy studios will bring NBA 2K mobile to Android devices. Downloadable for free, NBA 2K mobile was released for iOS on November 19 and delivers console-quality graphics and lifelike NBA action on the go like never before. NBA 2K mobile lets gamers experience their favorite NBA movements, collect player cards to build dream teams and step onto the court in 5-on-5 matchups, including season play and a variety of game modes. The team at Cat Daddy studios strived to match the quality bar…

Thanks, Karl, and good morning, everyone. Today, I'll discuss our third quarter results and then review our financial outlook for the fourth quarter and fiscal year 2019. Please note that additional details regarding our actual results and outlook are contained in our press release. As Strauss mentioned, our business delivered better-than-expected results in the third quarter. Total net bookings grew 140% to $1.57 billion, a new quarterly record and exceeded our outlook range of $1.4 billion to $1.45 billion due primarily to the outperformance of Red Dead Redemption 2 and NBA 2K19. Digitally delivered net bookings also exceeded our forecast, growing 85% to a new quarterly record of $704 million and accounted for 45% of the total. During the third quarter, 31% of our sales of current generation console games were delivered digitally, up from 26% last year. Turning to some details from our third quarter income statement. GAAP net revenue increased to $1.25 billion and cost of goods sold increased to $898 million. Operating expenses increased by 46% to $299 million due primarily to higher marketing spend. And GAAP net income was $180 million or $1.57 per share, up from $25 million or $0.21 per share in the prior year period. Net income included $109 million tax benefit resulting from the release of certain valuation allowances on the company's deferred tax assets. Without the release of these valuation allowances, the GAAP tax benefit would have been $11 million. This had no effect on our management reporting tax rate, which is 20%. Our strong performance converted into significant cash flow. During the 9 months ended December 31, non-GAAP adjusted operating cash flow grew 188% to $587 million. During that same period, we deployed $262 million to repurchase 2.6 million shares of Take-Two stock. And as of December 31, we have…

Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to thank our colleagues for their hard work in delivering another successful quarter. 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 is coming from the line of Ryan Gee with Barclays.

I guess, first on recurrent consumer spend, it grew 31% in the quarter versus your guidance for flat, so clearly several products outperformed, and your GTA Online and NBA 2K amongst them. So can you talk about the deceleration in 4Q? I know you mentioned Red Dead Online a little bit of that shifting to fiscal '20. But I'm curious why you wouldn't come out maybe a little bit more optimistic around that business, given how well it performed? And then second, if I may, I believe you said Red Dead sold-in 23 million units, and that's probably as of today. So with roughly 2 months left in the quarter, what should we expect in terms of reorder demand? Or how is the channel looking at this point?

So for recurrent consumer spend in Q3, the outperformance was driven by the strong sales of Red Dead Redemption 2 special and ultimate editions, which includes additional content that was allocated to recurrent consumer spending as well as growth from NBA 2K's virtual currency. In terms of Q4, we still expect NBA 2K to continue to grow, and that's being offset by lower GTA Online sales that we've talked about being lower this year, and it was lower in Q3 and in Q4. Now for Red Dead Redemption, we still have strong sales and strong demand for the title. The 23 million units in Q3 was higher than what we expected. And based on that, we accordingly adjusted Q4.

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

My question is just about business models, especially free-to-play, EA just launched Titanfall, Apex Legends. It's the same free model that Fortnite uses. And I'm just curious if you could help us understand how full price games can perform in an environment where AAA content is being given away for free? And as you look at your portfolio, what do you think is the right mix of business models going forward in terms of subscription and free-to-play, full price, et cetera? Just love to get an updated -- hear your updated thoughts on that?

Well, I appreciate it. Look, just in terms of our console title being made available free-to-play, remember that Fortnite came about in a roundabout way. It was originally developed as a AAA game. And the free-to-play version that became such a huge hit and continues to perform well was actually originally a mode and then was developed into what it is now. I think that's sort of a stand-alone experience. I think it's hard to replicate, and it would probably be ill-advised to try to replicate it. The truth is that what you deliver an amazing AAA experience, consumers show up for it, and you've seen that with us over and over again, and you see it in these results with the extraordinary results of Red Dead Redemption 2, the continuing amazing result of Grand Theft Auto V and these results of our catalog, which sell pound-for-pound better than anyone else's catalog, which I say units sold per SKU. We're the best in the business or, more recently, NBA 2K19. So what we found is you give consumers what they want, and that's often reflected in reviews and Metacritic scores. Red Dead Redemption 2 tied Grand Theft Auto V with a 97 score. They'll show up and they show up in quantity. So I'm not worried at all about someone else establishing a free-to-play approach as long as our quality continues to be stellar, and that's a very big as-long-as. That's what we have to execute against every day. Consumers aren't actually super price-sensitive where entertainment is concerned. Or said another way, if we put out something that people don't want, you can kind of price it whatever price you want, they're not going to show up for it. I wish it were different, but it's not like selling groceries or commodities. And when you give someone something that's phenomenal, it's our job to deliver vastly more value than what we charge, but price sensitivity declines. So I think this is all about quality. That's our approach, and that's why we're delivering these extraordinary results.

The next question is from the line of Michael Ng with Goldman Sachs.

I have 3 questions: one for Strauss, one for Karl and one for Lainie. First, Strauss, I was just wondering if you can comment on the new development CEO in Silicon Valley? Is there a rule of thumb in terms of how long it takes for a studio like that to ramp up? And when could we start seeing content coming out of that studio? And then for Karl, I was just wondering if you could comment on the promotional environment during the holiday. Was Red Dead more promoted than expected in the quarter? And then lastly, for Lainie, I think the previous full year RCS growth was for low teens. And based on the expectation for flat this quarter, I think, that would have implied over 30% growth for the March quarter. Could you just talk about what changed from then to the updated view of 10% growth this quarter?

Mike, this is Karl. I'll like the first question. So we are very excited to bring Michael Condrey onboard for us. I mean, he really follows our pattern of trying to attract and retain and develop the best content -- the best talent in the industry. That's obviously something that's a very important part of our strategy. And we've been able to do that to-date, and it's not by accident. So Michael joining us is, in my opinion, one of our best hires in a very long time. And we're really excited what he's going to do with the new studio. In terms of timetable, we're not talking about timetables. And frankly, every studio is different and every game is different. So it wouldn't really help much anyway if I said something now because it won't end up being that way. But just rest assured that, this is something that's very exciting for 2K and for our company.

Yes, on the second question, look, Red Dead is flying off the shelves. We sold in over 23 million units. It's performing vastly better than our expectations. It's continuing to sell. It's a massive hit. We definitely have marketed the title. But if by promoted, you mean, discounted, we did not step in and have to price promote the title. The title is, generally speaking, being sold at full price.

And for the Q4, on recurrent consumer spending, as I mentioned previously, we look Red Dead Online, we expect their new content releases to accelerate into the first quarter, so we shifted some of the net bookings expectation for Red Dead Online into that period.

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

A couple on Red Dead. First, congrats on the great launch. When you look at sales since launch and the first couple weeks, how have they trended versus other Rockstar titles? And I'm really trying to get at the reorder potential next year. And then online with Red Dead, are you seeing incremental players to GTA? You mentioned in your prepared remarks the total high has grown as far as number of players. Can you maybe give more color on that? And how do you feel about the online potential as you look at 2020 as part of recurrent spend for the title based on the users you're seeing today?

So we wouldn't really compare Red Dead to the last release, which is Grand Theft Auto. Grand Theft Auto stands alone. It is the most important product in entertainment history, the highest-grossing product in entertainment history, and it's just phenomenal. Red Dead Redemption 2 is also phenomenal in its own way and the sales have vastly exceeded our expectations. But I don't think we'd learn much by tracking those sales to -- sales of any other release. Our expectations remain exceedingly high. Consumers are highly engaged. Titles continuing to sell actively. In terms of online -- and I'm sorry, in terms of the outlook, this is, again, vastly exceeding our expectations, and we expect it to continue. Of course, that's very hard to call. And that'd be driven by the customers, but we feel great about it. In terms of online players that we've seen so far, remember Red Dead Online is in beta. It's really early days. It seems to be developing incredibly well for early days, but it is early days. We have no reason to believe that the overlap between Grand Theft Auto Online players and Red Dead Online players is necessarily substantial, certainly nothing approaching 100%, which is implied in your question. So the answer is absolutely, there are plenty of new players, and we expect that to continue as well. And as we mentioned in our prepared remarks, in December, Rockstar Games had the highest level of monthly active users ever had between Grand Theft Auto Online and Red Dead Online. So I think that tells you just how powerful this offering is. Look, stay tuned because the title comes out of beta, obviously. We got a lot of content to come, and we expect to pick up activity with content drops and then naturally monetization should follow accordingly in fiscal 2020.

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

Just a follow-up on Red Dead Online. I mean, obviously, as you keep saying, it's still in beta. Can you talk about what you're seeing in the beta? What changes need to be made before you really launch the online game and how you compare the player behavior to GTA so far? And then I have a follow-up.

Yes, thanks. Look, Rockstar is going to talk about that in more detail. But I think as you'd expect, what's great about being in beta is you get feedback from your consumer and you're able to make improvements. And we've made no bones about the fact that this is a work in progress. Grand Theft Auto Online was a work in progress. We listen to the market. We listen to consumers. And we develop a great offering. One of the most exciting things about the way our business has evolved from what it was 5, 6 years ago, you work really hard. You make a title. You launch the title. And you get great results, good results, bad results, but you're done. There's very little you can do. In an online environment, we can engage with the consumer, and we can get better and better and better. And you've seen the effects of that with Grand Theft Auto Online. Five years after its initial launch, it continues to show enormous engagement, and therefore, it also delivers net bookings to us and drives profitability. So we have high hopes and expectations for Red Dead Online. It's super early to say that, and more details will be forthcoming from the label.

Okay. And then just bigger-picture industry question. We've seen some focus from the tech giants lately. Amazon, Google, obviously, a lot more from Microsoft on video game streaming and subscription. How do you expect their focus to affect content creators and publishers like yourself? And do you expect that they will look to acquire content?

So remember, streaming is a distribution technology. Subscription is a business model but completely different animals. We can have a subscription program right now. You could do with physical discs. That's, after all, how Netflix started with physical discs. So there is nothing magical about new technology with regard to a subscription business model. Will that business model develop? It will develop if it's really good for consumers and it's really good for people who create product. That -- it has to be good for both. And remember, people consume video games differently than they consume linear programming. So the average American household consumes about 5 hours of linear programming, what we used to call television programming, but through all sources a day, about 150 hours a month. And currently, they consume about 1 hour and 20 minutes of interactive entertainment programming a day. So about 45 hours a month. Very big difference. And of course, the biggest differences with regard to linear programming, you're very unlikely to watch something twice. So in a given month, at 5 hours a day, you could be watching 75, 100 or, depending on the length, maybe more than that different products. In the case of the video game business, people may play the same title for the entire month. Maybe they play 2 or 3 titles, but they're not engaging with 75 or 100 titles. So you have to ask yourself whether a subscription model really applies to a video game consumer versus the possibility of engaging with a free-to-play title and paying as you go or engaging with a title for which you pay, for example, like NBA 2K19, where you pay a meaningful price in the U.S. about $60 at retail, a little bit more outside of the U.S., but you…

The next question is from the line of Ray Stochel with Consumer Edge Research.

I'm trying to think about how we should think about your commentary related to Red Dead Online and whether the shift in bookings is more related to a content drop or more related to your expectations for Red Dead Online overall and how that's tracking? And then I would like any commentary if possible on if the recent content drops for GTA Online overall were better or worse than your expectations? And then overall, whether or not this content drop was actually meant to be a little bit smaller year-over-year when we take a look at it versus the Doomsday Heist? It seems as if it's a little bit less content, but we'd love any opinion on your end?

So first of all, Red Dead Online early days is going great. Our expectations for what will happen in 2020 are driven by enhanced content drops. We feel terrific about it. It is, however, early days. In terms of how GTA Online is doing, it's performing in line with our expectations. The only difference this year versus prior years is we've had expectations the title would moderate in prior years, and we were pleasantly surprised with the upside. We're still incredibly pleasantly surprised because GTA Online continues to perform so well. It is, however, moderating in accordance with our expectations. So I would say things are going certainly as good and, in most incidences, it's better than expected. In the case of the most recent content drops for GTA Online, that's going at least as well as expected.

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

I have 2. Just to ask sort of a broader-picture question, Strauss, about sort of the pipeline of the overall company and how you think about the potential of the sort of increase the breadth of the number of titles you put out and even maybe increase the cadence of content coming out of Rockstar, given the headcount you have, curious to see -- how you think about the next few years from a pipeline perspective. And then Lainie, I'd just -- a lot of questions of investors and shareholders just kind of really trying to fully understand the bookings shift. So I know -- as previously mentioned, how you imply 25%-plus RCS growth before. Now it's around 10%. Are there any other moving pieces there other than the Red Dead shift? Or is that the right way to think about the size of the shift?

Brian, it's Karl. In terms of our pipeline of company and -- look, we are highly focused on increasing our releases. And I think you'll see our efforts. First of all, our acquisition of Social Point and their robust pipeline going forward brings us a lot of opportunity to bring new releases in the near term. We've also got Private Division, which we've spent a lot of time talking about, which you're going to see the first couple releases coming out in the near-term future, but there's more to come as well. We talked about the new studio led by Michael Condrey. So just from a project-based perspective, we are highly focused on bringing more titles into the mix for us. And you're going to -- and look, not every title is going to come out in the next 12 months, but over time, you're going to see a higher release of cadence from our titles because that's a stated objective of ours. There's also -- obviously, we're focused on M&A as well, and there's always an opportunity to bring in new projects that way, and that's something that we've been focused on from day 1. And again, Social Point is one example of that.

So for Q4, we talked about that there were units from Red Dead Redemption 2 that were in Q3, so that shifted out of Q4. And it was also offset by higher NBA expectation. So that's the overall change in Q4. It's driven by those items from early.

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

This is for Lainie. I want to talk about the gross margin a little bit here. In the third quarter, your guidance sort of implied something around 45%. You came in a little below that by about 150 basis points. Was there anything in the gross profit or in the cost of goods sold that resulted in the margin coming in a bit below expectations? And I'm curious as far as the amortization of Red Dead Redemption 2, are you willing to say how much of that amortization remains?

So in terms of the margin in Q3, it's really driven by the business mix, and it was more weighted towards the new releases than we had expected. They have higher development costs associated with it and also higher internal royalties. So that is the difference in the gross margin. And we should see that for the full year as well. And then -- sorry, what was your second question? On the -- oh, the amortization of Red Dead. We don't share that on a title-by-title basis. But we are amortizing it in line with what the overall expectations are for the sales over a multiyear period.

Okay. And then just a quick follow-up. In terms of your deal with eSports and the NBA. There -- last year, when it entered its first season, there was no presence at all during any NBA games as far as I could tell. I'm just curious how some of the marketing plans are evolving for this season?

We're -- it's a very early days sort of thing. And we -- the first season was a work in progress, and we got great results. And we're going to continue to develop. Karl mentioned the fact that we have 4 more teams. We're heading into a draft. We're heading into all kinds of exciting opportunities around the second season, and stay tuned for more news on promotional opportunities as well.

The next question is from the line of Ben Schachter with Macquarie Group.

A few questions, if I could. First, can you just highlight how you think Fortnite is impacting the industry and yourselves? Second question, Strauss, the trade issues related to video games in China. Do you think any of these talks with the Trump administration could have a positive impact on how video games are brought to China? And then finally, on buybacks, you bought back stock at about $108. Stock is indicating below $100. Should we expect you -- to see you in the market in any more meaningful way than you have been in the past?

Thanks, Ben. In terms of Fortnite, I've been asked about this before. I would just observe. We continue to have stellar results despite the fact that there are competitive titles in the market, including Fortnite. There's also plenty of other competition. We get competition from every form of entertainment and other activities that people engage in that would take them away from consuming our titles. So there is no one-for-one comparison to the titles. I don't believe for a minute that our results when they're great or our results when they're less than great are being influenced positively or negatively by another hit title in the marketplace. It's just not the way entertainment works. So it's not the way the movie business works. It's not the way the television business works or the music business or the software business. So if you have something great, people will show up for it. If you don't have anything great, they're not going to show up for it. And just by a way of example just to look at the last fiscal year, we had record results for Grand Theft Auto. We had record results for Grand Theft Auto Online, and Fortnite was booming. So there is room for plenty of hits in the marketplace. We've just had a stellar third quarter. Fortnite continues to perform, and we have these amazing results with Red Dead Redemption 2, NBA 2K19 and the rest of our lineup and our catalog. So I don't see any crossover. And I think if you want to step back from it, you'd say it's almost certainly a good thing when there is a multiplicity of hits. It brings in a bigger audience, perhaps a more diverse audience. We think that's the case. So we're not concerned about competition. We…

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

Without getting into the specifics of content releases, which I know you can't share, just wondering should we expect a somewhat staggered approach to new content in GTA and Red Dead in order to kind of maintain engagement for each title? Or is really the focus to shift resources primarily towards new content for Red Dead? And then just very high level, there's been some increasing chatter about an idea that perhaps the industry is getting closer to kind of a ceiling in what gamers are willing to spend for in-game content? And the concept, I guess, really being that the significant growth of in-game content spend in recent years was maybe low-hanging fruit, and now that opportunity is more saturated. I'm guessing you wouldn't agree with that line of thinking but just be interested in your take on it.

So in terms of content drops for GTA Online, for Red Dead Online or, frankly, for other of our titles because we have opportunities to engage post-release with virtually everything that we put out. No, we wouldn't see that there would be any relationship between the content drop for one title inside our organization and any other title. So no, I think they stand alone, and what we're trying to do is engage and captivate consumers for every title and to optimize each one for its own consumer base and to grow that consumer base. With regard to in-game spending, I think you're talking about in-game spending or which really speaks to free-to-play games. I don't think we're seeing any kind of a cap. I do think that consumers always pay attention to what they're getting and what they're spending. They're always paying attention to that -- to value. And you never ever want to be in a position of charging more than what you deliver, and you want everyone to leave the experience feeling great. So you know even anecdotally, if you have a really great experience, but you feel you were charged too much for it, your emotional experience overall is not good, even if the thing itself was good. You go to a restaurant, you get a great meal, but if you feel like you're overcharged, it doesn't feel like you had a great meal when you leave the restaurant. So we want to make sure that our consumers always feel like we're taking great care of them and that our consumers understand that we have to pay our folks in order to deliver content, but we always want to deliver more than what we charge. And I do think that certain of our competitors have gotten that upside down. And they even say it, we're data-driven business, and we're trying to maximize our revenue, and then they back into the entertainment experience. We're an entertainment company. We're trying to build incredible experience as we're trying to be the most creative company on earth. We believe we have the best creative teams on earth. And we encourage them, in fact, require them to pursue their passion and not work on anything that they're not passionate about. And as a result, we think we have the best creative properties in the business, and people will show up for those. But we have to be totally respectful of our customers, and that means delivering more than what we charge, and we're utterly focused on doing that. I think if you do that, there's plenty of room, and remember the cohorts going. So even if there is a particular pushback on how much any individual consumer will spend on any experience -- and by the way, we're not seeing that. Then what you have to do is create great experiences and encourage more consumers to get involved, which is happening.

Our next question is from the line of Todd Juenger with Sanford Bernstein.

At this point in the call, I'll keep it to just one, rather expansive one, though. Strauss, I'm loving the conversations on value and pricing. I hope you don't mind if I flex it one level even further. I mean, when you talk about some of the premier properties from the Rockstar Games, the Red Dead Redemption, for instance, and you've commented that, at a $60 price point, you believe that your consumers probably feel that's a fantastic value. And it doesn't -- you said something to the effect that it doesn't really matter what price you charge if the product's that good. So let me challenge you. Have you thought about why $60? I suppose that lots of Red Dead Redemption players would have thought USD 100 was a great value, but on the other end, too, right. I wonder what the elasticity really is when you've thought about it. If it were free, would you have twice as many players because a bunch of people are not willing to pay $60 to find how great it is? And as we think about revenue miles going forward, I just wonder if there's going to be a lot more dynamism in sort of that upfront pricing relationship and what you really think how the U.S. has evolved?

Yes. So I think, there's -- the price discrimination in entertainment is really tricky. The same question -- I was asked the same question when I was in the movie business. You're putting out Home Alone 2 -- I'm aging myself, but it's all true. And you knew how Home Alone 1 did. So why don't you charge much more at the box office? And the answer is, it's not really how consumers tend to see entertainment. They expect to pay the same price point for front-line entertainment, and their expectations are that it's high quality. And of course, in the video game business, because the Metacritic scores and reviews, they have some path to know typically what they're getting, more so than in many other businesses. So it seems as though your front-line pricing kind of has to be within a range without regard to the properties that you develop, especially because we never want a consumer to feel as though we're taking advantage of them, and that includes even if there is a lot of demand. On your second point, your question resonates in great success. But when you don't have any knowledge about where you're going, it'd be very difficult to pursue the model that you said. So the model works great retroactively. It doesn't work at all prospectively. Because prospectively, you could be in a terrible position where your monetization levels are exceedingly low. As they are for free-to-play games typically under 10% of the audience pays, and yet when you went and spent the money to create an enormous front-line experience. So we think you have to find a middle path, which is charge a reasonable amount to get people in the door and give them phenomenal quality for that. And then for the people who chose to continue along with your additional content, whatever form it takes, an online offering or downloadable add-on content, you want to make the friction for that low as well. And of course, over time, typically there's discounting of the front-line product, and that will reduce the threshold for people who don't want to initially participate at a higher price. Although in the case of Grand Theft Auto, of course, our retailers maintained a very high front-line price for a very long time. So I guess, the answer is we have to find a path in between.

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

Just 2 from me. Curious if you could share with us your relationship with Gearbox, how stable that studio is? It looks like there's a fair amount of disruption internally that you feel this is impacting the development time line for Borderlands 3. Second question on your unannounced 2K game, already been delayed once. It sounds like it's on track. We still don't know what it is. I guess, why the lingering mystery on what this game is?

Thanks, Mike. Our relationship with Gearbox, which is an external studio, is excellent. The company is stable. And they're doing a phenomenal job as they always do, and we support them greatly. In terms of the unannounced 2K title, that is very much on track. And we expect it to stay on track, and we have very high expectations.

The next question is from the line of Andrew Uerkwitz with Oppenheimer.

Just real quick on a modeling question, maybe I missed it. You mentioned there was some recurring revenue as pull-forward related to RDR. Could you let us know approximately how much that was? And I have one big-picture follow-up.

We don't share that level of detail on a title-by-title basis, so I can't answer that with you today.

Yes. No, no, fair enough. And then Strauss, just had a couple questions around Private Division. What were some of the -- now that we're getting the 2 games launched this year, what were some of the industry trends you identified a couple years ago that made you want to build Private Division out really aside from a focus on original content? And as a follow-up, how do you think about building a studio as what you do with Mr. Condrey versus finding third-party studios like what you're doing with Private Division?

Andrew, it's Karl. So in terms of the idea behind Private Division, I mean, look, we've had -- obviously, we've been around the industry a long time and when you see sort of ebbs and flows in terms of the amount of independent studios that are out there and also talent that's not necessarily associated with other enterprises and just within the last few years, we've seen an increase. And most of the people that we have -- that we signed up for Private Division, these are actually folks that have got real credibility in the industry and have done things before and want to try -- and they want to try creative -- a different creative approach than they have in the past and not necessarily work on titles with -- as big of budgets as they've had in the AAA or AAAA world. So there's just an opportunity -- it's really based on talent and availability of talent. And like I said earlier, we prided ourselves to be a home where -- and to have the flexibility to be a home for creative talent to allow them to pursue those endeavors. And the key ingredient there is passion. And that really is -- probably 95% of it is passion. Do we believe in them? Do they believe in themselves? And can we find a way for it to work within the business model that works for both for us? And that idea is something that was born here. And that we actually really believe -- and once we saw it work once, we said this could be a new business model for us. We can grow this out into a much bigger place because there has to be more than 1 or 2 of these folks out there that want to pursue this path. And as it turns out, we're absolutely right. And the pipeline has been incredible, and the number of titles that we've looked at is staggering over the past few years. I mean, there is no shortage of inbound interest for Private Division. So it's... [Technical Difficulty]

It appears we've lost our caller. Our next question is from Drew Crum with Stifel.

So I wonder if you could talk about your changed view for the NBA 2K full-game sales relative to your last update. What's led to the improved performance? Are you seeing an uptick in interest outside the U.S.? And then separately for Lainie, can you talk about implications for gross margin, given the 7-year renewal with the NBA license? [Technical Difficulty]

Ladies and gentlemen, please standby. We're experiencing technical difficulties.

Sorry, I think we may have lost you. If there are any other people left on the line, apologies. We had a technical lapse, and we'll be happy to continue with the questions if anyone is here.

Our next questioner is Matthew Harrigan with Buckingham Research.

Strauss, you have an unbelievably broad view of the entertainment business by virtue of your background. Do you have any thoughts on how you can better monetize the IP that you enviably have all the rights for in-house, even on the movie side, although everyone knows how difficult those adaptations can be. And I know this is a little far afield, but what's your reaction to Bandersnatch and that trying to embark on sort of new interactive entertainment genre? I don't know if it's at all pertinent to take 2. I suspect it's not, but I'd be curious to sort of get your laboratory reaction on that one?

So all good questions. We're very -- we have this wonderful intellectual property, more than 11 franchises that have sold at least 5 million units with one release, something like 60 releases that have sold at least 2 million units. So we have a terrific array of properties, and I think you've correctly noted that we have not exploited those in other media. I think the issue is that you have to make something great in every medium in which you operate. And if you're going to make a motion picture or television show based on the IP, it has to be utterly phenomenal, and we'd have to have a lot of creative control, and we're not in those businesses. And they have different economic constraints and opportunities. What we have found so far is that licensing the IP to others with sufficient creative control and appropriate financial participation on our end is very challenging to do and isn't necessarily great use of our time. We also -- we do very, very well in our core business, and it's behooved us to focus on our core business. And I'd also just note, it seemed to be very difficult creatively to take intellectual properly -- property driven by interactive entertainment, bring it to linear entertainment. There aren't so many examples of that being done successfully, and that gives us pause as well. In terms of sort of choose your venture applied to television, I've always been a little bit skeptical because my concern is that the more engagement you have in the outcome of a linear fiction, the less likely it is that you can maintain the suspension of disbelief. But consumers like it. There could be something there. I think we'll find out if it's a novelty. That's interesting as novelty, or if there is something there that's more long lived. I'd probably fall in the camp of the former, but the whole point creatively is that you got to be open minded and pursue the passions of your creators. And I would note that the biggest hits are often the most unexpected. So I'd be open minded.

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

This one is for Lainie. Just a quick one. On Red Dead Redemption 2 and recurrent consumer spending associated with the premium SKU units during the holiday quarter, just wondering if you could give us a sense as to how much of a contributor that was to recurrent consumer spending exceeding your expectations, just recognizing -- don't get specific commentary but some flavor would be helpful. And second, I think during the technical difficulties, Drew asked a question about -- Drew Crum from Stifel asked a question about the NBA relationship and implications for margins as you go forward. I thought that was a good question, so hoping you would address that, too.

So during Q3, the special and ultimate editions, additional content that was allocated to recurrent consumer spending was a large portion of why we overachieved during the quarter. About 17% of -- so the special and ultimate editions were about 17% of all of the units that were sold during the quarter.

And in terms of our relationship going forward with the NBA. We're thrilled to be in a long-term relationship with the NBA and the Players Association. We're grateful for their trust in us, and we're incredibly proud of what we believe the Players Association and we have achieved in the past years delivering this industry-leading title over and over and over again. In terms of our expectations under the terms of the new deal, there's plenty of room for everyone to do well. That's the best kind of deal, and we expect that our margins will be maintained. We do not see any reason to believe that our margins will be changed in a negative way.

The next question comes from the line of Gerrick Johnson with BMO Capital Markets.

Thanks for the commentary on Private Division, but can you remind us the economic relationship between Take-Two and the companies in Private Division like Obsidian? And what do you get -- what's your upside potential from Outer Worlds and games like that?

I won't get into the specific economics, but generally speaking, all the -- these are situations where the independent -- the studios that we work with, they actually maintain the ownership of the IP, but we have long-term publishing rights to that IP. We generally will fund developments and marketing of those expenses -- of those titles. And once all of that is recouped, and there is typically a profit share. But I can't get into the specifics of how -- what kind of profit share that is, et cetera, et cetera.

The next question is from the line of Doug Creutz with Cowen and Company.

One of your competitors has made the decision to do a PC launch of an upcoming major supply title exclusively to the Epic store. Just wondering how you view the tradeoff of the potentially better economics there versus the importance of having your content with as many distribution platforms as possible?

Well, generally speaking, our approach is to be wherever the consumer is, and we distribute very widely. Generally speaking, we have not been a believer in exclusive relationships. I wouldn't comment on any particular store. But for example, the question has been raised about shouldn't you, as a company, be exclusively direct-to-consumer. And I think our experience is that consumers want to shop in a place where they can get a multiplicity of titles. We have terrific titles coming from all of our labels. We have a very broad offering, but there are other titles besides titles coming through the Take-Two Enterprise that people want. So generally speaking, our strategy is to be broadly distributed. There are times when an exclusive distribution relationship can make sense. And I wouldn't be in a position to comment on one of our competitors chose to do. But on balance, we're happy that Epic is going into the business. We're happy to have someone else at the table.

At this time, I will turn the floor back to management for closing remarks.

First of all, I apologize for the fact that we lost you for a few minutes there, and we'll make sure that never happens again. Look, we're proud of the quarter that we just reported on. We're incredibly excited that our outlooks says we're going to have a record year for net bookings and adjusted cash flow provided by operations. We feel like we're firing on all cylinders, and the outlook is very strong. So we thank you so much for joining us today. I know it was a long call. Thanks for your support.

Today's conference has concluded. You may now disconnect your lines at this time. Thank you for your participation.