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Home » Take-Two Interactive Software’s (TTWO) CEO Strauss Zelnick on Q1 2015 Results – Earnings Call Transcript

Take-Two Interactive Software’s (TTWO) CEO Strauss Zelnick on Q1 2015 Results – Earnings Call Transcript

Source: Seeking Alpha

Take-Two Interactive Software (NASDAQ:TTWO)

Q1 2015 Earnings Call

August 05, 2014 4:30 pm ET

Executives

Henry A. Diamond – Senior Vice President of Investor Relations & Corporate Communications

Strauss H. Zelnick – Chairman, Chief Executive Officer, Member of Executive Committee and Member of Special Litigation Committee

Karl Slatoff – President

Lainie Goldstein – Chief Financial Officer and Principal Accounting Officer

Analysts

Andrew E. Crum – Stifel, Nicolaus & Company, Incorporated, Research Division

Thomas F. Andrews – BMO Capital Markets Canada

Brian Patrick Fitzgerald – Jefferies LLC, Research Division

Zachary Arrick

Ryan Gee – BofA Merrill Lynch, Research Division

Operator

Greetings, and welcome to the Take-Two Interactive Software First Quarter Fiscal Year 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications for Take-Two Interactive. Thank you, Mr. Diamond, you may begin.

Henry A. Diamond – Senior Vice President of Investor Relations & Corporate Communications

Good afternoon. Welcome, and thank you for joining Take-Two’s conference call to discuss its results for the first quarter of fiscal year 2015 ended June 30, 2014. 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 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 annual report on Form 10-K for the fiscal year ended March 31, 2014.

I’d also like to note that, unless otherwise stated, all numbers we will be discussing today are non-GAAP. Please refer to our earnings release for a GAAP to non-GAAP reconciliation and further explanation. Our earnings 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.

Strauss H. Zelnick – Chairman, Chief Executive Officer, Member of Executive Committee and Member of Special Litigation Committee

Thanks, Hank. Good afternoon, and thank you for joining us today.

Take-Two’s fiscal year 2015 is off to a solid start, with the first quarter marking our eighth consecutive period of better-than-expected results. I’m especially pleased to report that we’re able to deliver non-GAAP revenue growth without the benefit of any major new releases, driven by our expanding portfolio of digitally delivered offerings, continued growth in our NBA 2K franchise and persistent demand for Grand Theft Auto V.

NBA 2K14 continues to expand its global audience and has become our first sports release to cross the 7 million unit selling mark. The title has captivated gamers on both current and next-gen platforms, surpassing both FIFA and Madden as the third highest unit selling title of any genre on PlayStation 4 and Xbox One in the United States. Over the past 5 releases, the NBA 2K franchise has grown at a compounded annual rate of 35%, reflecting the consistent ability of 2K and Visual Concepts to raise the bar for excellence and build the series into one of our company’s most important and durable franchises.

Last September, Grand Theft Auto V delivered the most successful launch in the history of entertainment, achieving $1 billion in retail sales in only 3 days. Nearly a year later, the title continues to attract new audiences in Xbox 360 and PlayStation 3, with worldwide selling now surpassing 34 million units. Fans can look forward to Rockstar Game’s release of the PlayStation 4, Xbox One and PC versions this fall, which Karl will have more to share about shortly.

During the first quarter, digitally delivered revenue grew 43% year-over-year, to $106.4 million. Nearly 90% of this growth came from recurrent consumer spending, which accounted for approximately 60% of our digitally delivered revenue during the period. The remainder came from full game downloads across console, PC and mobile platforms. The largest contributor to recurrent consumer spending was virtual currency for Grand Theft Auto Online and NBA 2K14.

Grand Theft Auto Online continues to outperform our expectations and was once again the single largest contributor to digitally delivered revenue. During the first quarter, Rockstar Games released several updates, including the Capture Creator, highlight pack, I’m Not a Hipster pack and the limited time Independence Day Special, which contributed to players’ ongoing strong engagement with Grand Theft Auto Online. We’re highly enthusiastic about the future of Grand Theft Auto Online, including its upcoming fall launch on PlayStation 4, Xbox One and PC

Recurrent consumer spending for NBA 2K also continued to grow during the first quarter, with revenues up 150% year-over-year. Online play, including multiplayer gaming, has become an important enhancement to most players’ engagement with our industry-leading basketball franchise.

Downloadable add-on content for our frontline titles is also a key contributor to recurrent consumer spending. During the first quarter, we broadened our offerings with the release of Borderlands 2, Headhunter 5.

Recurrent consumer spending was also enhanced by our free-to-play online games in Asia. In particular, NBA 2K Online, which we launched in partnership with Tencent in China, continues to deliver growth and revenues and player engagement. Gamers in Asia can also look forward to the commercial launch of Civilization Online, our massively multiplayer online game based on our successful Sid Meier’s Civilization franchise, which is being delivered — being developed by MMO design luminary Jake Song and his team at XLGAMES in Korea.

Catalog sales accounted for nearly 55% or $82.7 million of our first quarter revenue, led by the Grand Theft Auto series; Borderlands 2, which is now sold in more than 10 million units; Sid Meier’s Civilization V which is now sold in over 6 million units; and BioShock Infinite, which is now sold in nearly 7 million units.

Our company continues to benefit from creating the highest-quality titles that attract new audience as well after their initial launch. For the calendar year-to-date through June, Take-Two was the #1 third-party publisher in the United States in terms of catalog unit sales per SKU across Xbox One, Xbox 360, PlayStation 4 and PlayStation 3.

Take-Two had phenomenal success at this year’s E3 show in Los Angeles, which featured the first reveal of Rockstar Games’ Grand Theft Auto V for PlayStation 4 and playable demos from 2K’s extraordinary lineup. Our booth attracted thousands of attendees each day, who waited hours to experience 2K’s titles, which in total won more than 100 editorial awards and honors. Evolve won more than 50, including the coveted Best of Show Award. We’re incredibly proud of this achievement and believe that it bodes well for the title’s February lunch, which Karl will discuss shortly. I’d like to congratulate both Rockstar Games and 2K on their stellar performance at E3.

Fiscal 2015 is poised to be another strong year of revenues and profits for our organization, highlighted by a diverse array of new AAA releases and innovative digitally delivered offerings. With 16 titles we’ve announced to date, we’ve disclosed our complete frontline release schedule for the current fiscal year. There are no longer unannounced titles assumed in our guidance. The outlook for our lineup is stronger than ever, which, coupled with our better-than-expected first quarter results and current business trends, enables us to maintain our guidance for the full fiscal year. Our ability to project these strong results illustrates how our company has been transformed into a diversified interactive entertainment enterprise with numerous successful franchises and meaningful profits from recurrent consumer spending.

Looking beyond the current year, Take-Two has the 4 key attributes that should enable us to maintain our positive momentum: the best creative talent in the business, the strongest portfolio of intellectual property, leading-edge technology and ample cash. We have numerous titles in development, including both groundbreaking new intellectual properties and offerings from our established franchises. As a result, we’re well-positioned to deliver non-GAAP profits every year for the foreseeable future and returns for our shareholders over the long term.

I’ll now turn the call over to Karl.

Karl Slatoff – President

Thanks, Strauss. Today, I’ll provide an update on our release schedule for the remainder of fiscal 2015.

On October 7, Visual Concepts will step onto the court to continue our NBA 2K franchise’s resign as the #1 basketball game in our industry. NBA 2K15 promises, once again, to set new benchmarks for sports realism and game play on both current and next-gen consoles and PC. Oklahoma City Thunder superstar, 4-time NBA scoring champion and 2014 NBA Most Valuable Player, Kevin Durant, will make his solo debut as the game’s cover athlete and this year’s release will include more teams and players from the Turkish Airlines euro league. In addition, internationally renowned music artist and producer Pharrell Williams will curate the most extensive and unique soundtrack compilation in NBA 2K franchise history. 2K and Pharrell will unveil the soundtrack later this summer.

On October 14, 2K will release Borderlands: The Pre-Sequel for Xbox 360, PlayStation 3 and PC. For the first time in the series, Borderlands: The Pre-Sequel will transport players to Pandora’s Moon, where they will experience intense gravity bending gunfights using an array of all-new weapons and loot. Codeveloped by Gearbox Software and 2K Australia, the title takes place in between the stories of the original Borderlands and Borderlands 2 and will continue the franchise’s of tradition of innovative, cooperative multiplayer action. The Borderlands universe has become one of our company’s most popular series and we’re thrilled to provide fans with even more ways to experience its incredible gameplay.

On October 24, 2K will build on the successful Civilization franchise, which has entertained audience quarter of a century and sold in more than 25 million units worldwide, with the release of Sid Meier’s Civilization: Beyond Earth for PC. The title will feature the core and tactical elements for which the series is famous, while propelling players beyond the traditional timeline of a Civilization game by exploring humanity’s future on an alien world. Beyond Earth generated tremendous buzz at E3, winning more than 18 awards globally, including Best Strategy Game Honors from the E3 game critics, Game Informer, IGN, Destructoid and Game Revolution.

On October 28, 2K’s WWE franchise will make its next-gen debut, with the release of WWE 2K15, which promises to take the series to new heights. 15-time WWE world champion, John Cena, will be the cover athlete; and Sting, one of wrestlings most beloved competitor will play a key role in the title’s preorder campaign.

This fall, Rockstar Games will launch the blockbuster hit, Grand Theft Auto V, on PlayStation 4, Xbox One and PC, bringing across-the-board graphical and technical enhancement to the game’s already breathtaking open world experience. The current community of players will have the ability to transfer the Grand Theft Auto Online characters and progression to their choice of either PlayStation 4, Xbox One or PC. All content and Gameplay created for both Grand Theft Auto V and Grand Theft Auto Online will also be available for the PlayStation 4, Xbox One and PC, with more to come. Rockstar Games will continue to explore both Grand Theft Auto V and Grand Theft Auto Online with new offerings throughout the year, including regular content drops and limited time event updates.

The launch of Evolve, coming from 2K, has been moved to February 10, 2015. When we first acquired Evolve, we believe that Turtle Rock was creating something truly unique, which was poised to redefine the shooting genre. Coming out of E3, our instincts were proven correct and the reaction to Evolve, including its numerous awards, speaks volumes about its potential in the market. We are encouraged by the overwhelmingly positive response from press and fans and believe that extending development by a few months will allow the team enough time to fully realize their creative vision for Evolve, while enabling us to take advantage of a favorable release window. We very much appreciate consumer’s anticipation for Evolve and we’re confident they will be well rewarded when the game launches in February.

Our robust development pipeline extends far beyond fiscal 2015. We have numerous titles planned for release during fiscal 2016, such as 2K’s Battleborn, an all new intellectual property developed for next-gen and PC by Gearbox Software, the creative team behind our Borderlands franchise. Battleborn is a highly-stylized blended genre game, which combines frenetic first-person shooting, cooperative combat and an expansive collection of diverse characters to deliver a never-before-played hero shooter experience. The title is featured on the cover of the August issue of Game Informer, which provided an in-depth first look at the game. 2K will have more to share about Battleborn in the coming months.

Next week, 2K will have a major presence at gamescom, Europe’s largest interactive entertainment event, which attracts more than 300,000 attendees, including media and consumers. We will offer playable demos of NBA 2K15, WWE 2K15, Borderlands: The Pre-Sequel and Evolve, as well as private press and retail showings of Sid Meier’s Civilization: Beyond Earth.

Heading into this holiday season, we will fully leverage our worldwide marketing and distribution expertise to create must-have moments at retail and also continue to complement our core titles with innovative, digitally-delivered offerings. Rockstar Games and 2K will roll out campaigns that span all forms of traditional and online media to usher in what we believe is one of our most diverse and strongest lineups ever.

In closing, I’d like to join Strauss in thanking all of our colleagues around the world for their contributions in delivering a strong start to the year.

I’ll now turn the call over to Lainie.

Lainie Goldstein – Chief Financial Officer and Principal Accounting Officer

Thanks, Karl, and good afternoon, everyone. Today I’ll review our results for the fiscal first quarter and then discuss our outlook for the fiscal second quarter and full year 2015. All of the numbers I’ll be providing today are non-GAAP results from continuing operations and all comparisons are year-over-year unless otherwise stated. Our press release provides a reconciliation of our GAAP to non-GAAP measurements.

Starting with our results for the fiscal first quarter, net revenue increased 5% to $151.6 million. This exceeded our outlook range of $120 million to $135 million, due primarily to the continued strong performance of Grand Theft Auto V and Grand Theft Auto Online.

Digitally delivered revenue grew 43% to $106.4 million. The largest contributors were the Grand Theft Auto series, the NBA 2K franchise and offerings for Borderlands 2. Approximately 60% was derived from the recurrent consumer spending, including virtual currency, add-on content and online games.

Catalog sales accounted for $82.7 million in net revenue, led by the Grand Theft Auto series, Borderlands 2, Sid Meier’s Civilization V and BioShock Infinite. Gross margin increased 22.7 percentage points to 58.1% due to the absence of a $29 million impairment of capitalized software development costs which was recognized during the first quarter last year. Operating expenses were $95.8 million, up by $2.2 million due to higher personnel expense and depreciation. Interest and other expense was $2.3 million. And non-GAAP net loss narrowed to $11.2 million or $0.14 per share as compared to a loss of $47.1 million or $0.54 per share in fiscal first quarter 2014. This result was better than our projected loss of $0.25 to $0.35 per share.

On a GAAP basis, we reported revenue of $125.4 million and a loss from continuing operations of $35.4 million or $0.45 per share.

Turning to some key items from our balance sheet at June 30, 2014, as compared to March 31, 2014. Our cash and short-term investments balance decreased to $841.4 million. Our accounts receivable balance decreased to $43.2 million, primarily reflecting the collection of receivables from our fourth quarter and holiday sale. Inventory decreased to $23.1 million due primarily to continued sales of Grand Theft Auto V. And software development cost and licenses increased to $255.6 million, reflecting the development efforts around our pipeline of upcoming releases.

Now I will review our financial outlook for the second quarter and fiscal year 2015, which is provided on a non-GAAP basis.

Starting with the full year, we are reiterating our financial outlook including non-GAAP net revenue of $1.35 billion to $1.45 billion and non-GAAP net income per share of $0.80 to $1.05. The majority of our revenue is expected to come from new releases, including NBA 2K15; Grand Theft Auto V for PlayStation 4, Xbox One and PC; Evolve; WWE 2K15; Borderlands: The Pre-Sequel; and Civilization: Beyond Earth; and catalog sales led by the Grand Theft Auto series. We expect the revenue breakdown from our labels to be roughly 40% from Rockstar Games and 60% from 2K. We expect our geographic revenue split to be about 60% United States and 40% international. We expect gross margins in the mid-40s.

Total operating expenses are expected to increase by approximately 4%, driven primarily by rent for larger studio locations, personnel expense to increase headcount and higher depreciation expense. Selling and marketing expense is expected to be about 17% of net revenue based on the midpoint of our outlook range. And we project interest and other expense of approximately $9 million, tax expense of about $37 million and weighted average fully-diluted shares of approximately $114 million.

Interest on the convertible notes, net of tax, is approximately $7.4 million, which should be added to net income to calculate net income per share under the if-converted method.

As a result of working capital needs, we continue to expect our operations to use a modest amount of cash in fiscal 2015. However, we expect to generate cash from operations in fiscal 2016 and to be net cash flow positive over these 2 fiscal years.

Turning to the second quarter. We expect non-GAAP net revenue to range from $95 million to $110 million and non-GAAP net loss per share to range from $0.60 to $0.70.

Revenue in the second quarter is expected to be driven by Catalog sales, led by the Grand Theft Auto series, NBA 2K14 and Borderlands 2. We expect second quarter gross margins in the low- to mid- 60s due to a higher mix of digitally delivered revenues in the period.

Total operating expenses are expected to decrease by approximately 27%, primarily due to lower marketing expense for Grand Theft Auto V as compared to the second quarter last year. Selling and marketing expense is expected to be about 55% of net revenue based on the mid-point of our outlook range. Our second quarter outlook also reflects interest and other expense of approximately $2 million, a tax benefit of $2 million and weighted average shares of approximately 80 million. Additional details about our financial outlook are in the press release, reporting our first quarter results which was issued shortly before this call.

In closing, we are pleased that fiscal 2015 is off to a solid start, with better than expected first quarter results. Our industry-leading creative and intellectual property assets, coupled with an ample reserve of cash, provides Take-Two with a strong foundation to continue to execute our proven strategy and deliver positive results, both this year and over the long-term.

Thank you. Now I’ll turn the call back to Strauss.

Strauss H. Zelnick – Chairman, Chief Executive Officer, Member of Executive Committee and Member of Special Litigation Committee

Thanks, Karl and Lainie. On behalf of our entire management team, I’d like to thank our colleagues for their hard work. To our shareholders, I’d like to express our appreciation for your continued support. We’ll now take your questions. Operator?

Question-and-Answer Session

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