Thanks for joining us today. It's nice to see November here because October was a rough month in the pharma sector and it certainly was volatile for us as well. That said, we feel very good about our future and we're obviously working very hard to be building the pipeline and do all the right for the company. And we are sitting on some very exciting pipeline assets and we're looking forward to some strong commercial performance going forward. We did need to recalibrate a little bit of where our guidance was.
And unfortunately, we did have one product in our pipeline where we had to halt some of the trials. So that happens in this industry. That said, we're digging through it to understand it better. We're continuing to push the pipeline forward and add new assets to it. You saw 2 weekends ago in Paris at the Etrims conference.
We showed the detailed data for ozanimod in multiple sclerosis, which I think is very promising. We may talking about that a little bit. And obviously, the core products that we have are doing very well. It is a competitive environment So Tesla, we had to kind of recalibrate some of the expectations for this year as we watch the Thriasis and periodic arthritis markets. Celgene is a strong company, tremendous financial resources.
We're working in very exciting areas of science. We obviously have the 2 lead products we're able to make in POM, which are cell mods. They're doing extremely well. They're the backbone therapy for multiple sclerosis, sorry, multiple myeloma, but Obviously, behind that, we have a whole portfolio of next generation cell mods that are coming through the pipeline and offer a lot of potential. So we may end up getting into some of the cell mods up that we see emerging as well.
And then finally, we're working in some emerging technology areas such as CAR T. And I think there's no surprise to anybody, but last year it one of the real exciting datasets that came out was the CAR T BCMA approach. There's no question that was phenomenal data. Have, by the leading program in BCMA with CAR T, with our partner Bluebird, and we're very excited about pushing that forward. And so as we develop that, both for late line therapy, but also pushing it ahead to earlier lines of therapy and more substantial uses for it.
I think that's going to be a very promising future for people to consider as part of Celgene as well. So overall, we don't like to see our stock stay the volatility it's all. On the other hand, we're committed as ever to drive it forward. We are excited about the pipeline we have sometime you get surprises in your pipeline, unfortunately, but we redouble our efforts to drive forward and continue the great momentum that we've had as a company. So, with that,
Alright.
Over to you.
Yeah. I'm gonna start kinda with the base business and then kinda go into the pipeline, then we'll talk about what it means for strategy in the future. But I guess the first question is, obviously you guys pursued a contracting strategy for Otezla this year. And I think maybe the expectation wasn't it would drive volume. And it seems like possibly even sometime this year.
So, you know, how do you kind of rethink about that now? And, like, what were the kind of puts and takes that led to, a different dynamic than what you forecasted.
Sure. So just I'll give a little background. So Otezla is a product that's been on the market just a couple of years primarily sold in psoriasis and psoriatic arthritis. And as you know, these are very competitive environments. Psoriasis is the bigger market.
And as Alethia mentioned, as we came through last year at the end of 2016, we had actually reached Worldwide for Otezla. We now had the scale and the revenue base to be able to actually work with some of the managed care organizations in US, and we did set up 3 year managed care contracts with 3 of the managed care organizations that constitute about 60 of the volume, in the psoriasis market. So major, major players. Now that has 2 effects. 1 is immediately you end up a very substantial gross to net discount for that 60% of the business right away.
So beginning in January, you in a sense step backwards on your gross to net, you could take a price reduction there. But hopefully with the improved access, no step edits in any of those accounts, you start to actually see some very nice volume lift. As we've gone through this year, we have seen good volume lift in those channels, and we've seen good market share performance in those channels But the one dynamic that we didn't anticipate was we had seen the psoriasis market overall grow about 16% to 17% in each of the prior 2 years. And this year, it has not grown as much. It's been somehow constrained.
It's only growing about 6% or 7% on a year to date basis. So, one of our jobs is to get back to helping drive the overall market growth, but that has caused us to recalibrate what our expectations are for this year in the U. S. The other thing I'd say is in the other 40% of the business, we've seen a little bit less volume performance in some market share erosion we aren't contracting there. And that's something we may need to think about in the future.
So we want to get back and actually improve our access and availability of the products in those channels. Overall, that led us as we came into the 3rd quarter and into 4th quarter, we began to realize, okay, we're not going to be on trajectory that we had hoped in psoriasis. There is some seasonality. You tend to see the market volume really pick up in terms of scripts and so forth as you come into the fall. We have not seen that happen as much as we had hoped.
And so as a result, we recalibrate our revenue expectations. Now, these are 3 year contracts So in the 1st year, you're kind of taking the burden of the higher gross to net discount and trying to grow the volume to offset that. So you hopefully get to about a breakeven position in the 1st year. In the 2nd year 3rd year, you've got the same discount, but now you're continuing to grow past that. So the intent was always that the 1st year would be a little choppy.
Year 2 year 3, we'd end up with better upside from that as well as we get into 'eighteen and 'nineteen, we need to think about the other 40% of the market. So overall, I'd say we're doing well. The market share evolution is about what we'd hoped for. Definitely though the market is not growing as much as we've seen previously, But, you know, maybe some of that's on us to go about and re grow the market. Just as everyone may know, in psoriasis, a very small poor the patients are actually on therapy.
And so there's really a great opportunity to grow those number of patients who are on therapy by driving the use of drugs like Otezla. And we're positioning it ahead of the other biologics. So it is a situation where there's a lot of patients not on therapy and we could bring them into Otezla on a pre biologic basis. And then if they need to, they go into biologics. But in fact, it's very likely that they could do very well on a Tesla's day there, a very long time to be well treated.
So overall, we had to recalibrate. I would say it's not like a redo of everything we're doing. The market's not growing quite as fast as we had hoped. But we will see you driving forward in that space and continue to set ourselves up for 2018.
So kind of like 2 things this year. 1, obviously, the market was smaller than what you thought. And then the second one is that, you know, you had to take a hit to kinda take two steps back to make
a couple steps more steps
forward. Exactly. And and perhaps the steps forward didn't quite as quickly as we are hoping, but they are stepping forward in driving the volume up pretty nicely. So
probably the real headwind or challenge for Otezla and maybe you can talk a little bit more about this is you've gotta kind of figure out how to grow the market. And when you talk about this, can you talk about, is that the dynamic that people are seeing with biologics, like, you know, maybe like, Enbrel or HUMIRA? Because it seemed like they kinda had, like, pretty good numbers. So I just wonder is it something about being in that pre biologic market? Well, I
do think perhaps as the new entrant into the market Latin 2 years. Now there are other products entering the biologic space this year, but in the last 2 years, we may have been a big driver of increasing the market overall because we were in that pre biologic we were bringing patients on to therapy who previously wouldn't have gone on to biologics and they wanted to get some therapy. But yeah, in general, I think that's our goal is to drive adoption, drive market access, quite frankly, and continue to get experience with doctors and patients to give sustained therapy. We have a great therapeutic profile on the drug. So once patients try the drug, they tend to do very well, have great experience with it.
And so you get nice long durations of therapy, and, we just need to keep driving that forward.
And maybe, as talk a little bit about the changes that you've made to the 2020 guidance for I and I. And then, you know, did you kind of titrate down not only taking out Moncarcin, but did you titrate down kind of how you thought about Otezla in that guidance maybe in, you know, help and also you had daltry of Clients, which will now be on the other side of 2020 most likely.
So those are the 3. Yeah. You got it. Exactly. So, so the first thing we did is we had to halt the Crohn's disease trials for GED-three zero one mungerson So basically that was a surprise to us.
It was an interim look or just a review by the, by the committee that monitors these trials And the feedback we got was that we needed to consider halting the trials. We weren't seeing the efficacy profile that we were expecting. Now, we have to dig into that because obviously a very good phase 2 data and it's very hard to not have that kind of result in phase 3, but unless that digging is going on right now. But for the moment and for sure, those Crohn's disease trials are stopped. And so we had to take that in a sense out of the 2020 guidance.
So we originally gave guidance. We did have revenue in 2020 of about $750,000,000 in that neighborhood in the 2020 number. So as you kind of pull forward today and give a refresh on that, we had to pull that out. Thing we did is we adjusted Otezla for the revised view in the U. S.
Now that was not that big of an adjustment, to be honest, relative to what we had originally. So I think we always have had a stronger view of Otezla than market consensus, let's say. And so in many ways, we that's true. And so we just had to recalibrate that down a little bit and basically we were lined up more or less now with where the street is. And so that was the other change And then the 3rd change, I'd say, is that we had to think about in with ozanimod, while we have seen these data electrodes for MS we still have Phase III trials ongoing for ulcerative colitis.
As we've seen those trials progress and we've seen enrollments in patients, a patient We've come to the conclusion that actually, if you think about when it's likely to finish those trials and file, we're more likely to be launching that product in 2021 than 20 20, which we originally thought. So, no change in terms of what we think the peak sales or other outlook could be for that at this point because we don't have a Phase III data. It's just the timing of the trials causes us to pull that indication out of the 2020 guidance.
But you still have
a reasonable assumption for growth in 2020 for a Tesla to make the well over $2,000,000,000 number things.
Yep. Yep.
So it's still very reliant on the trend changing to some degree?
To some degree. Actually, I think, you know, what we're seeing with Otezla, if you go out in a few years is more and more growth coming around the world. We've launched in Japan and that's doing very well. We've launched in a couple of the key markets in Europe and those are the uptake there is very good. And then obviously continuing to contract and expand the adoption of a Tesla in the U.
S.
Yes. The Revlim is going really well So I'm not gonna spend a lot of time on it. Okay. But, I do wanna talk a little bit about how you thought about the guidance change to Revlimid. And, you know, do you feel like you're at a place where you we're thinking reasonably about duration, or do you think there's still room that duration could be longer than where we all project even even now?
So,
I would say, 1st of all, Redmond has got a long life ahead of it. So, it's, you know, I think there's a lot that can evolve revlimid and POMLIS going forward. Over the last couple of years, we've gotten, you know, obviously a couple of years ago, the newly diagnosed indication, which is much more as an incremental as well as a meaningful opportunity in the U. S. And as you say, those are all things that would drive market share as well as duration.
But then in the core indications, really the use of the drug still is nowhere near what's been proven to be possible in all the clinical trials. And so right now, we're in the U. S. We're in the I think the 23 to 24 month duration over the 1st 4 years of use and that really 23 to 24 months out of 48 is actually a relatively small number versus what the clinical trials would indicate as optimal in terms of usage. So the opportunity to continue to grow that, is out there and is really outstanding.
The other factor that's coming into play now is that you've seen increasingly as new agents have come into the market. For the most parts, they do much better if they are combined repliment or pomalyst. And so
Greetings, and welcome to the Take 2 Second Quarter Fiscal Year 2018 Earnings Call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. 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 Takeuse conference call 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 2'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 And 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 law. These forward looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to us. We have no obligation to update these forward looking statements. Actual operating results may vary significantly from these forward looking statements based on a variety of factors.
These important factors are described recent annual report on Form Ten K and quarterly report on Form 10 Q, including risks summarized in the section in titled 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. Tape2games.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 2 to deliver another period of better than expected operating results. The extraordinary performance of our business was driven by growth from both Grand Theft Auto Online and Grand Theft Auto V, along with the successful launch of NBA 2K18. Grant 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 and increase engagement through the ongoing release of a rich array of free additional content. Most recently, the smugglers run update and subsequent teams content drops, including the Motor Wars and Stockpile modes, transform races and multiple new vehicle, Rockstar Games will support Grand Theft Auto Online with additional new content going forward. The 2nd quarter marked the 4th and of the initial launch of grant theft auto 5 and net bookings from the game grew during the period, confirming that grant theft auto 5 remains the must have tight especially as the installed base of current generation consoles continues to expand. Grand Theft Auto5 is now sold in more than 85,000,000 units And according to the MPD 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 in An Theft Auto V to grow during fiscal 2018. On September 15th, visual concepts in 2K successfully launched NDA 2K18, cementing further the series dominant position of the premier basketball simulation. NBA 2K team received positive reviews from influential critics, including 91 out of 100 from Forbes, 9 out of 10 from game informer and 4.5 out of 5 from digital trends.
Visual Concepts was lauded for the title's exciting new features, including this year's edition of the neighborhood, which for the first time enables gamers to explore and play in an immersive live world NBA environment. To date, NBA 2K18 is sold in over 6,000,000 units, and both sell in and sell through of the title have grown more than 20% over the prior year's including a significant increase in digitally delivered MDA 2K18 is our debut offering for the Nintendo switch. So far, we're very pleased with the title's performance on this new platform, and we anticipate continued strong demand across all platforms heading into the holiday season. Along with growth in game sales, our NBA 2K Series continues to benefit from increasing average daily users of NBA 2k18 on current generation platforms is up nearly 30% over last year's release. And during the second quarter, recurrent consumer spending on NBA 2k grew 57%, once again, exceeding our expectations.
We believe that NBA 2k18 will become our most successful sports title ever, both in terms of units sold and recurrent consumer spending. I'd like to congratulate of the NBA and all of its pop culture influences to our passionate community of fans. Our second quarter results also benefited from a number of other titles, including NBA 2k17, Social Point's mobile games, and downloadable add on content 4 sales of Xcom II. We continue to drive increased engagement with our games. During the second quarter, net bookings from our current consumer spending, which are almost entirely digitally delivered, grew 84% to their highest level ever, and accounted for 42% of total net bookings.
In addition to virtual currency for Grand Theft Auto Online and NBA 2K recurrent consumer spending was in by a variety of 2 biggest games: Dragon City And Monster Legends, growing both sequentially and a year over year in second quarter. We view Social Point as an important long term growth opportunity for Take 2. WWE SuperCard also continued to grow with net bookings recurrent consumer spending on the game up 40%. WWE SuperCard is 2K's highest grossing mobile game and has been download in or users. In addition, net bookings from add on content more than doubled, led by Xcom 2, war of the chosen, the expansion pack for the 20 seen award winning strategy titles from Firaxis Games, along with offerings for mafia 3 and Sid Meier's Civilization.
As a result of our stellar 2nd quarter operating results and increased outlook for the balance of the year, we've raised our fiscal 2018 outlook for net bookings and net cash provided by operating activities. We now expect fiscal 2018 to be another year of net bookings growth as well as strong cash flow. And looking ahead, fiscal 2019 promises to be one of our best years ever, led by the launch of the Rockstar Games Red Dead Redemption 2, and a highly anticipated new title from 1 of 2K's biggest franchises. Through the advent of new technologies, platforms and business models, our industry continues throughout the world. Take 2 is better positioned than ever creatively, operationally and financially to capitalize on our numerous opportunities, both in our core business and in emerging areas such as mobile and e sports, and to deliver value to customers and returns for shareholders over
Today, I'll discuss our recent releases and then review our lineup for the remainder of this fiscal year. On October 13th, 2K successfully launched WW 2K18, the latest installment in our popular simulation based WWE series. For co developed by Yuke's and visual concepts, WWE 2K18 received positive review scores, including an 84 out of 100 from GEO COG connected and an 8.3 out of 10 from Forbes. Critics are praising the title for brand new graphics engine, the largest roster of playable superstars in the series history, and a host of gameplay additions and improvements. According to Forbes, quote, WWE 2K18 is now the standard bearer in visual excellence in sports themed video games.
WW-two K18 already is off to a solid start. And later this fall, 2 cable released the title for Nintendo Switch, marking the first time in 5 years that a WWE game has been available on an Nintendo platform. In keeping with our focus on driving engagement and recurrent consumer spending, WWE 2K18 is being supported with a series of post launch downloadable content, including a season pass, The worldwide popularity of WWE is as vibrant as ever, and we believe that there remains 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 Civilization VI, Chimera and Indonesia Civilization scenario stack, which 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 14th, Rockstar Games will release new versions of their blockbuster detective thriller LA noir for the Nintendo Switch, PlayStation 4, and Xbox 1. Following these 3 new console versions in December comes Eleanor, the VR case files, featuring 7 select cases from the original game rebuilt specifically for virtual reality experience on the HTC Vive system. LA Noir takes place in the seedy and violent underbelly of 1940s Los Angeles as decorated veteran and newly minted detective, Cole Phelps, investigates an escalating series of cases inspired by real world crimes. Utilizing unique type of facial capture technology called motion scan, L.
A. Warbury's President of Life into character performances, creating brand new gameplay out of the art of interrogation. Originally released in May 2011, L. A. N.
W. Received critical acclaim and was the first video game ever to be featured as an official selection of the Tribeca film festival. To date, the title play. These new enhanced versions of Eleonore are a perfect opportunity for players to experience this richly detailed world in an entirely new way. During the fourth quarter, our independent development partner, squad, will release the Kerbal Space Program making history expansion for PC.
Adding exciting new content, including the mission builder and history pack, the expansion will enhance our recently acquired physics based space simulation game. Mission Builder enables players to create and edit missions that can be shared with the game's vibrant online community. History pack challenges players to relive historic missions from humankind's own space program, complete with a unique Kerbal Space Program Review Kerbal Space Program as a new long term franchise that complements our portfolio of owned intellectual property as we continue to capitalize on opportunities across independent development landscape. The growing popularity of Esports is an exciting and both our team and NBA are hard at work on preparing for the May 2018 launch of NBA 2K LEAP. Beginning in February, the league introduced its online qualification system to identify the best NBA 2K players, which will be followed by a draft to fill each team's 5 player roster.
League team members will play the game using newly created avatars, and therefore, playing ability will be determined strictly by skill. NBA 2K league players will live in their team's market during the season, which we believe will create deeper and stronger team bonds and dynamics. We are thrilled that the NBA 2K league is taking shape and look forward to expanding our presence in competitive gaming, which is a long term potential create deeper engagement with the player community and to be a meaningful driver of profits for our company. Has a number of exciting games planned for launch over the next 2 years. Looking ahead, we have a robust development pipeline across our including new releases from payments, including innovative offerings designed to drive growth in engagement and recurring consumer spending.
Coupled with our many opportunities for expanding our business through emerging platforms, business models and geographies. There has never been a more exciting time for our company and industry. I will now turn the call over to Lainie.
Thanks, Carl. Good afternoon, everyone. They all discuss our SEC results and then review our financial outlook for the third quarter fiscal year 2018. Please note that additional details regarding our actual results financial outlook are contained in results in order to evaluate our operating performance. I'd also like to note that as we announced last week, we have changed the name of our operational metrics from net sales to net bookings.
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 2nd 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 Of this amount, 52% were digitally delivered net bookings, which grew 52% to 3 56 $1,000,000. 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 are required to defer and therefore, our GAAP revenues and profits will not fully benefit from these until future periods. 2nd, because it was better than expected performance of Grand Theft Auto V and Grand Theft Auto Online, we recorded higher than 4 tested internal royalties, which are calculated using results that are adjusted to exclude the impact of deferral and unlike certain other costs of goods sold are not deferred. And third, we recorded higher stock based compensation expense, primarily due to the increase in our share price. Turning to some details from our 2nd quarter income statement.
GAAP net revenue exceeded our outlook and grew by 6% to $444,000,000. Cost of goods sold increased by 20 percent to $247,000,000. Operating expenses increased by 24% to $208,000,000, due primarily to the inclusion of Social Point as well as higher stock based compensation, bonus and headcount expenses, which were partially offset by lower marketing expense. Expense. These additional asset.
This benefit had no effect on our management reporting tax rate, which is 22%. And we recorded GAAP net loss of $3,000,000 or $0.03 per share versus net income of $36,000,000 or $0.39 per share in the prior year period. Now, I will review the highlights of our fiscal 2018 financial outlook. Starting with the fiscal third quarter, we expect net bookings to range $610,000,000 to $660,000,000. The largest contributors to net bookings are expected to be Grand Theft Auto Online and Grand Theft Auto V, MBA 2K18 and WWE 2K18.
We expect GAAP net revenue to range from $440,000,000 to $490,000,000. And cost of goods sold to range from $262,000,000 to $291,000,000. Operating expenses are expected to range $220,000,000 to $230,000,000. At the midpoint, this represents a 16% increase over higher R and D and stock compensation expense. We expect GAAP net loss to range from $29,000,000 to $40,000,000 in $2.5 to $0.35 per share.
Turning to our outlook for the full and improved forecast for the remainder of the year, we are increasing our outlook for net bookings and net cash provided by operating activities. We now expect net bookings to range from $1,930,000,000 to $2,030,000,000, up from our prior outlook of $1,650,000,000 to 1 $750,000,000. And up from $1,900,000,000 last year. Net bookings are expected to increase in fiscal 2018, driven by growth from NBA 2k and Grand Theft Auto as well as the inclusion of a full year of net bookings from Social Point, partially offset by a lighter release slate. We now expect net bookings from recurrent consumer spending to increase approximately 50% and we expect digitally delivered net bookings to grow around 25%.
Largest contributors to net bookings are expected to be Grand Theft Auto Online, Grand Theft Auto Five, NBA 2K, and WWE 2K18. We expect the net bookings breakdown from our labels to be roughly 50% 2K, 45% roster gained 5% Social Point and Other. And we expect the geographic networking split to be about 60% in United States and 40% international. We now expect to generate approximately $300,000,000 in net cash provided by operating activities, up from our prior outlook of $200,000,000, and we plan to deploy approximately $60,000,000 for capital expenditures. Turning to our income statement, we expect GAAP net revenues to range to 1.74 $1,840,000,000 and cost of goods sold to range from $893,000,000 to $944,000,000.
Total operating expenses are expected to range $805,000,000 to $825,000,000. At the midpoint, this represents a 22% increase over the prior year. Driven by the inclusion of Social Point, higher R and D expense and higher stock based compensation expense. Although our operating performance is exceeding stations, we are increasing our fiscal 2018 outlook for net bookings and net cash provided by operating activities. We are reducing our forecast for GAAP net income.
This is due to 2 factors. 1st, because of the strong ongoing performance of Grand Theft Auto, we expect to record higher internal royalty which unlike certain other cost of goods sold are not deferred. And second, we now expect higher stock based compensation due primarily to the increase in our share price. As a result, we now expect GAAP net income to range from $63,000,000 to $91,000,000 or $0.55 to $0.80 per share. In closing, we are very pleased with our operating results for the first half of fiscal twenty eighteen, which is poised to be another year of net bookings growth and strong cash flow for our organization.
However, we believe that fiscal 2019 will be a record year for both net bookings and net cash provided by operating activities, which are expected to exceed $2,500,000,000 $700,000,000, respectively. But of industry leading creative assets, commitment to operational excellence and strong financial foundation takes to as well positioned to generate growth in March expansion over the long term.
Colleagues for delivering another strong quarter for support. We'll now take your
Our first question comes from the line of Justin Post of Merrill Lynch. Please proceed with your question.
Thank you for taking my question. I guess 2 Strauss, one industry question there were some concerns about NBA, and we hear it with other games about maybe too much monetization opportunities for MTX, taking away from the game. It clearly doesn't seem to be happening in NBA, but just give me your high level thoughts on that. And then second, on take 2 specifically, you haven't raised your outlook for 2019. Clearly, all your digital trends were 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? Thank you.
Thanks, Justin. Look, we take consumer feedback very, very seriously indeed. And you're right. There's 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 is a want to have business, not a must have business. And people, though, ultimately, with the use and the usage on the title is up 30% in terms of average daily users. The title itself, unit sales were up 20 percent year over year. So people clearly are voting that they lost 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. Lenny 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 $2,500,000,000 and exceed $700,000,000 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.
Great. Thank you and good quarter.
Our next question comes from the line of Tim O'Shea of Jefferies. Please proceed with your question. Mr. O'Shea, your line is open. Please proceed with your question.
GTA online continues to impress. It's another record breaking quarter. And as you mentioned, it's the 4th anniversary of GTA5. 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 you're 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 MBA? Thanks.
Yes.
Well, thank you. Look, GT Online continues to delight consumers. And therefore, our results are also excellent. And Rockstar Games has said they'll continue 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 about 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 it with great content, people will continue to show up. That's historically the case.
And certainly that's our aim. So we think, you know, 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.
So for the full year, when we looked at raising our guidance, we looked at how, much we beat the 2nd quarter by and then we also looked 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.
Great. Thanks so much and congrats again on the quarter.
Our next question comes from the line of Eric Handler of MKM Partners. Please proceed with your question.
Yes, two questions. First, wonder if you'd be willing to dig in on, NBA 2k a little bit in terms of 4 last last year's games, you looked 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, microtransactions? And then secondly, I wondered if you could talk a little bit, about social point. It looks like internationally I don't know if it's beta or what type of test 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.
Okay. Hi, Eric. We'll start with Social Point. So, yes, we did actually launch me the soft launch of a title called League of Dragons. And, it was a very limited to select markets.
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've seen and the KPIs and Social of 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 the two games that Social Point has right now in the market Masha Legends And Dragon City are both performing above our expectations and are growing, quarter over quarter and also year over year.
So the very positive for us And as we said in our opening remarks, Social Point has a number of games that are 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 don't give that kind of detail by title in terms of micro transactions, full game downloads, etcetera.
Our next question comes from the line of Evan Wingren of Pacific Crest Securities. Please proceed with your question.
Thanks. Following up with the MBA a little
bit, I was wondering if you could share what percentage of the unit sales that you did disclose came from digital quarter. And then secondarily, you mentioned the growth in recurrent spending in the MBA. And I just wondered if you could break apart the whether you're seeing growth in the component in all components or if it's just from new players?
So, Evan, for, full game downloads on new console, 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
Right. And in terms of the components, on NBA, like we said before, we are seeing growth in our users, the daily active users. And, in So that is up and our unit growth is up in general. We haven't broken it down any more specifically than that. Thanks.
Our next question comes from the line of Chris Merwin of Goldman Sachs. Please proceed with your question.
All right, great. Thank you. So just a couple of questions. First for GTN online, last quarter, I think you 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 or do you expect to see growth? I mean, just secondly, Lenny, 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, you know, what sort of change that? I mean, and how if at all your, your, you know, you started to really try to incentivize gamers to download more.
Thank you.
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 effort will be another record year, which is obviously very gratifying. And on the digital download side for full we are continuing to see growth in that area.
Obviously, for PC titles, it's over 90% and for non PC title, it's running around 35% of when you said across the board.
And our catalog is also running us about 50%. And, there is a big mix of our catalog business throughout the remainder of the year.
Right. 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 in physical distribution still is the lion's share of our business.
Got it. Thank you.
Our next question comes from the line of Mike Olson of Piper Jaffray. Please proceed with your question.
Hey, good afternoon. As far as the NBA 2k league, do you have any plans for broadcast will 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 rights associated with the NBA 2k League and that'll be announced in due time. Our crew over there led by Brandon Donahue is doing a phenomenal job. Carl talked a little bit about what's coming in 2018. We're super excited to have teams, have a draft, have teams and to have a season with 17 teams stating, 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 Race Stochel of Consumer Edge Research. Please proceed with your question.
Hi, guys. Thanks for taking the call. 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, creating great games and great content. That's everywhere in our business. So we across the board, we are a growth enterprise and we are always looking for the 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, you know, some studio closures in the space, one public, and, and, you know, some layoffs at a private competitor today. Longer term, I guess, where are you seeing 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? Thanks.
We, as I said, we're in growth mode. And, we were blessed. We get to work with the best in the around the world. It's no secret that hiring phenomenal engineering and artistic talent in the United States is exceedingly challenging. 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, and I suspect we will be broadening our physical presence to make sure that we are where
next question comes from the line of Mike Hickey of the Benchmark Company. Please proceed with your question.
Hey guys. Congrats on an awesome quarter. Becoming a habit for you here. I guess, it's always, I think, hard for you to to add too much color to the Rockstar team, but it looks like the, I relates to GT Online. The marketing efforts from the team there as it relates to, incremental content coming in seems to have intensified.
I'm curious if that's true and, how impactful you think that's been for the 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 the marketing of, additional content for GTN line is is intensified just in terms of, some of the trailers and maybe energy put behind it. I'm curious if that was true and if that's at all impactful to the success of that game?
Yes, 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 props. So as content drops come out, is there 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. The, I guess under the theme of extending your player base, Rockstar is obviously preparing to launch LA in the war 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 to that region.
Curious your thoughts on the potential opportunity of Red Dead being a commercial opportunity in China. Especially as 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 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 mass 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 wonderful on NBA to Can Line, 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. The foreign markets become open, and, America's 2nd biggest export category after aerospace's 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.
Alright. Thanks guys.
Our next question comes from the line of Ben Schachter of Macquarie Group. Please proceed with your question.
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 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, undertake to areas to come to mobile in any meaningful way in FY 2019 and beyond?
Thanks. 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.
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 spending opportunities for every title that we put out at this company and may not always be an online model, it may not probably won't always be a currency model, but there'll be some ability to engage on an ongoing basis with our titles after release across the board. And that is that's a sea change in our business and recurrent consumer spending is 42% of our net bookings in the quarter. It's been transformative for us.
And the only reason it's transformative for us is because it's transformative to our consumers. The business of point of 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, your their your daily life. And, that's immensely exciting. And it's the beginning of the maturation of interactive entertainment as a part of the audio of your entertainment industry. I just saw a study, you know, the the American media day, average media day is about 22 hours.
Obviously, people are sleeping and eating. It means that they're parallel processing on, they're consuming a lot of different kinds of media. But within that 22 hour day, only about an hour a half is interactive entertainment. There's a lot of room for growth. This is just the beginning.
In terms of, price curve on Grand Theft Auto, we really haven't talked about that has been largely a full price business, which is super exciting. In terms of revenues with regard to the NBA 2k league, we're going to let leads management talk about that when the time comes. We have said that we have not modeled in or guided against revenues or coming from the NBA 2k league. That's not what this is about. This is about creating brand new business, brand new sport, and continuing to grow our footprint in our basketball business and to interact with consumers in that way.
Do there is a revenue and profit opportunity unquestionably, and we're prepared to say more about it at this time. We are not. And finally, on mobile and to play, yes, selectively beyond Social Point, there will be opportunities at the rest of our enterprise as you can see our success has been driven when we're very select we've done very well with the NBA 2K app. We've done phenomenally well with WWE SuperCard. We think there will continue to be opportunities that are driven by in core intellectual property.
So we think we sort of have the 1, 2 punch now. Standalone new intellectual property bought to you by social point intellectual property that is known and beloved brought to you by the rest of our company. And that's super exciting to us.
Our next question comes from the line of Ryan Gee of Barclays. Please proceed with your question.
Yes. Hi, guys. Thanks for taking my question. 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 2 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 2 specifically that could get you guys there and more importantly keep you guys in that 30% plus range? Thanks.
Right. So let's distinguish gross margins from 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
a couple
of our competitors account slightly differently. And so, it's not necessarily apples to apples, but on an 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 go and submit our 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. We've seen that with our net bookings this year. Laney 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 is continuing to build our collection of the best intellectual property continuing to attract retain and lead the best creative talent and continue to focus 1st and foremost on making the consumers happy and meeting consumers' needs all good things will come from that
on an earlier question. So when you think about the kind of the long lived success of Cheetah 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 standalone release makes sense versus continuing to support GT online with extra content? Thanks.
You know, we, as you know, we don't speak for our labels. We're thrilled to, to have a set up here where our labels speak to consumers when they're ready. And I think all we can express here is enormous gratitude for this success of Grant Theft Auto Online and a belief in an enormous belief in Rockstar's ongoing success.
Our next question comes from the line of Scott Crazak of Buckingham Research Group. Please proceed with your question.
Yeah, hey, everyone. Let me add my congratulations Two questions. I guess first, can you just remind us what the last LA noir did and if that's good guide for what's in the guidance for this year. And then I know you don't talk about the GTM line attach rates or how many people are playing it. But as you've added new users from GTA5, what has been the behavior of those?
Do you have a trans further at the same rate as historically? And what's the opportunity for people maybe that you've lost over the last 3 or 4 years?
So, sorry, maybe somewhat unsatisfying. LANOR is sold in about 7,500,000 units, over the course of the franchise across across the various skews, which is terrific. We haven't singled it out going forward from the guidance point. 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 more about year. Have people shifted as their opportunities to reengage people who may have dropped off?
There's unquestionably opportunity to re engage people based on content drops. And when we drop new content, you know, we see results in terms of engagement and engagement typically does drive revenue.
Our next question comes from the line of Doug Crudes of Cowen And Company. Please proceed with your question.
Yes, thanks. 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've sort of had working on for the last few years? Or have you been allocating more resources to it to drive the growth? Thanks.
Rockstar is growing. 2K is growing. Social Point is growing to support the existing opportunities and the new opportunities And I think, you know, we're having success across all of our label groups. We are definitely in growth mode. I probably am not gonna more granular than that.
There are no further questions over the audio portion of the conference. Take to management for closing remarks.
Well, first of all, I'd just like to thank everyone for joining us today. I wanna 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 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.