Thanks for joining us today. It's nice to see November here because October was a rough month in the biopharma 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 things 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. That happens in this industry. That said, we're digging through it to understand it better. We continue to push the pipeline forward and add new assets to it.
You saw two weekends ago in Paris at the ECTRIMS conference, we showed the detailed data for ozanimod in multiple sclerosis, which I think is very promising. We may end up talking about that a little bit. Obviously, the core products that we have are doing very well. It is a competitive environment. Otezla, we had to kind of recalibrate some of the expectations for this year as we watch the psoriasis and psoriatic arthritis markets. Celgene is a strong company, tremendous financial resources. We're working in very exciting areas of science. We obviously have the two lead products, Revlimid and POM, which are cell mods. They're doing extremely well. They're the backbone therapy for multiple myeloma. 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.
We may end up getting into some of the cell mod opportunities that we see emerging as well. 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 at ASCO, one of the real exciting data sets that came out was the CAR T BCMA approach. There's no question that was phenomenal data. We have probably the leading program in BCMA with CAR T with our partner, Bluebird, and we're very excited about pushing that forward. 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.
Overall, we don't like to see our stock face some of the volatility it saw. On the other hand, we're committed as ever to drive it forward. We are excited about the pipeline we have. Sometimes 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. With that, back to review.
I'm going to start kind of with the base business and then kind of go into the pipeline, then we'll talk about what it means for strategy in the future. I guess the first question is, obviously, you guys pursued a contracting strategy for Otezla this year. I think maybe the expectation was it would drive volume, and it seems like possibly even volume sometime this year. How do you kind of rethink about that now? What were the kind of flips and takes that led to a different dynamic than what you forecasted?
Sure. Just I'll give a little background.
Sure.
Otezla is a product that's been on the market just a couple of years. It's primarily sold in psoriasis and psoriatic arthritis. As you know, these are very competitive environments. Psoriasis is the bigger market. As Alethia mentioned, as we came through last year at the end of 2016, we had actually reached the billion-dollar mark 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 the U.S., and we did set up three-year managed care contracts with three of the managed care organizations that constitute about 60% of the volume in the psoriasis market. Major players. Now that has two effects. One is immediately you end up with a very substantial gross to net discount for that 60% of the business right away.
Beginning in January, you in a sense step backwards on your gross to net, you could take a price reduction there. Hopefully with the improved access, no step edits in any of those accounts, you start to actually see some very nice volume lift. We've gone through this year, we have seen good volume lift in those channels, we've seen good market share performance in those channels. The one dynamic that we didn't anticipate was we had seen the psoriasis market overall grow about 16%-17% in each of the prior two years. 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.
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 and some market share erosion because we aren't contracting there, and that's something we may need to think about in the future as we want to get back and actually improve our access and availability of the product in those channels. Overall, that led us as we came into the third quarter and into the fourth quarter, we began to realize, okay, we're not going to be on the 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'd hoped. As a result, we recalibrated our revenue expectations. These are three-year contracts. In the first year, you're kind of taking the burden of the higher gross to net discount and trying to grow the volume to offset that. You hopefully get to about a break-even position in the first year. In the second year and the third year, you've got the same discount, but now you're continuing to grow past that. The intent was always that the first year would be a little choppy. Year two and year three, we'd end up with better upside from that.
As well as we get into 2018 and 2019, we need to think about the other 40% of the market. Overall, I'd say we're doing well. The market share evolution is about what we had hoped for. Definitely, though, the market is not growing as much as we had seen previously, but maybe some of that's on us to go about and regrow the market. Just as everyone may know, in psoriasis, a very small portion of the patients are actually on therapy, there's really a great opportunity to grow those number of patients who are on therapy by driving the use of drugs like Otezla.
We're positioning it ahead of the other biologics, 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. If they need to, they go onto biologics. In fact, it's very likely that they could do very well on Otezla and stay there for a very long time and be well treated. 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 continue driving forward in that space and continue to set ourselves up for 2018.
Like two things this year. One, obviously, the market was a little bit smaller than what you thought. The second one is that you had to take a hit to take two steps back to make a couple more steps forward.
Exactly.
Okay.
Perhaps the steps forward didn't come quite as quickly as we were hoping, but we are stepping forward and driving the volume up very nicely.
Probably the real headliner challenge for Otezla, and maybe you can talk a little bit more about this, is you've got to figure out how to grow the market. When you talk about this, can you talk about is that the dynamic that people are seeing with biologics? Like Enbrel or Humira? It seemed like they had pretty good numbers.
I just wonder, is it something about being in that pre-biologic market?
I do think perhaps as the new entrant into the market in the last two years. There are other products entering the biologic space this year. In the last two years, we may have been a big driver of increasing the market overall because we were in that pre-biologic space. We were bringing patients onto therapy who previously wouldn't have gone on to biologics, and they wanted to get some therapy. Yeah, in general, I think that our goal is to drive adoption, drive market access, quite frankly, and continue to get experience with doctors and patients that 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 experiences with it. You get nice long durations of therapy, and we just need to keep driving that forward.
Maybe talk a little bit about the changes that you've made to the 2020 guidance for I&I. Then, did you kind of titrate down, not only taking out Mongersen, but did you titrate down kind of how you thought about Otezla and that guidance maybe?
Yeah.
Also you had to alter it with psoriasis, which will now be on the other side of 2020, most likely.
Yep.
Talk about all those things.
Yes, you got it. Exactly. The first thing we did is we had to halt the Crohn's disease trials for GED-0301, Mongersen. Basically, that was a surprise to us. It was an interim look or just a review by the committee that monitors these trials, and the feedback we got was that we needed to consider halting the trial because we weren't seeing the efficacy profile that we were expecting. Now we have to dig into that because obviously we had very good phase II data, and it's very odd to not have that kind of result in phase III. Nonetheless, that digging is going on right now. For the moment, and for sure, those Crohn's disease trials are stopped. We had to take that, in a sense, out of the 2020 guidance.
We originally gave guidance, we did have revenue in 2020 of about $750 million, in that neighborhood, in the 2020 numbers. As you kind of pull forward to today and give a refresh on that, we had to pull that out. The other 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. I think we always have had a stronger view of Otezla than market consensus, let's say. In many ways, that's true. 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. That was the other change.
The third change, I'd say, is that we had to think about with ozanimod, while we have seen these data at ECTRIMS for MS, we still have phase III trials ongoing for ulcerative colitis. As we've seen those trials progress and we've seen enrollments of patients, 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 2020, which we originally thought. 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 the phase III data. It's just the timing of the trials causes us to pull that indication out of the 2020 guidance.
You still have a reasonable assumption for growth in 2020 for Otezla to make the well over $2 billion number, it seems like.
Yep.
It's still very reliant on the trend changing to some degree.
To some degree. Actually, I think what we're seeing with Otezla, as you go out into future years, is more and more growth coming around the world. We've launched in Japan. That's doing very well. We've launched in a couple of the key markets in Europe, then obviously continuing to contract and expand the adoption of Otezla in the U.S. Yes.
Revlimid is going really well for you, I'm not going to spend a lot of time on it.
Okay.
I do want to talk a little bit about how you thought about the guidance change to Revlimid. Do you feel like you're at a place where we're thinking reasonably about duration, or do you think there's still room that duration could be longer than what we all project even now?
I would say, first of all, Revlimid's got a long life ahead of it, so I think there's a lot that can evolve for Revlimid and Pomalyst going forward. Over the last couple of years, we've gotten, obviously a couple of years ago, the newly diagnosed indication, which is much more meaningful as an incremental growth opportunity in Europe. We've also gotten the post-transplant indication, and that also is a very large opportunity in Europe as well as a meaningful opportunity in the U.S. As you say, those are all things that would drive market share as well as duration. 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.
Right now in the U.S., we're in the, I think, the 23-24-month duration over the first four years of use. That really, 23-24 months out of 48 is actually a relatively small number versus what the clinical trials would indicate is optimal in terms of usage. 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 part, they do much better if they are combined with Revlimid or Pomalyst. As-
Greetings, welcome to the Take-Two 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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, thank you for joining Take-Two's conference call to discuss its results for the second quarter of fiscal year 2018, ended September 30, 2017. Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer, Karl Slatoff, our President, and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q&A session following our prepared remarks. Before we begin, I'd like to note that as previously announced, we have changed the name of our operational metric from net sales to net bookings. Our definition of net bookings is identical to our previous definition of net sales. I'd also like to remind everyone that the statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws.
These forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors. These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including risks summarized in the section entitled Risk Factors. I'd also like to note that all numbers we will be discussing today are GAAP, unless otherwise stated, all comparisons are year-over-year. Our press release and filings with the SEC may be obtained from our website at www.taketwogames.com. Now, I'll turn the call over to Strauss.
Thanks, Hank. Good afternoon, and thank you for joining us today. I'm pleased to report that our positive momentum continued in the second quarter, enabling Take-Two to deliver another period of better than expected operating results. The extraordinary performance of our business was driven by growth from both Grand Theft Auto Online and Grand Theft Auto V, along with the successful launch of NBA 2K18. Grand Theft Auto Online delivered another record quarter, exceeding our net bookings expectations and remains the single largest contributor to recurrent consumer spending. Rockstar Games has continued to sustain and increase engagement through the ongoing release of a rich array of free additional content, most recently the Smuggler's Run update and subsequent themed content drops, including the Motor Wars and Stockpile modes, transform races, and multiple new vehicles. Rockstar Games will support Grand Theft Auto Online with additional new content going forward.
The second quarter marked the fourth anniversary of the initial launch of Grand Theft Auto V, net bookings from the game grew during the period, confirming that Grand Theft Auto V remains the must-have title, especially as the install base of current generation consoles continues to expand. Grand Theft Auto V has now sold in more than 85 million units, and according to the NPD Group, the title has achieved 42 top 10 chart appearances during the 50 months since its release, the most by any single title in reported history. Grand Theft Auto V is now the all-time best-selling video game, both in revenues and units, based on combined U.S. digital and physical sales across PC, console, and portables.
As a result of these titles' better than expected performance in the quarter and increased outlook for the remainder of the year, we now expect combined net bookings from Grand Theft Auto Online and Grand Theft Auto V to grow during fiscal 2018. On September 15th, Visual Concepts and 2K successfully launched NBA 2K18, cementing further the series' dominant position as the premier basketball simulation. NBA 2K18 received positive reviews from influential critics, including 91 out of 100 from Forbes, nine out of 10 from Game Informer, and 4.5 out of five 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 has sold in over 6 million units, and both sell-in and sell-through of the title have grown more than 20% over the prior year's release, including a significant increase in digitally delivered sales. In addition to versions for Xbox, PlayStation, and PC, NBA 2K18 is our debut offering for the Nintendo Switch. 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 engagement and recurrent consumer spending. To date, total users and average daily users of NBA 2K18 on current generation platforms is up nearly 30% over last year's release. 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 Visual Concepts for their unparalleled skill in delivering consistently the authenticity 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 for and sales of XCOM 2. We continue to drive increased engagement with our games. During the second quarter, net bookings from recurrent 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 enhanced by a variety of other offerings.
In the free-to-play category, Social Point continued to outperform our expectations with combined net bookings from its two biggest games, Dragon City and Monster Legends, growing both sequentially and year-over-year in the second quarter. We view Social Point as an important long-term growth opportunity for Take-Two. WWE SuperCard also continued to grow, with net bookings from recurrent consumer spending on the game up 40%. WWE SuperCard is 2K's highest-grossing mobile game and has been downloaded more than 15 million times. NBA 2K Online remains the number 1 PC online sports game in China, with over 36 million registered 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 2016 award-winning strategy titles from Firaxis Games, along with offerings from Mafia III and Sid Meier's Civilization.
As a result of our stellar second 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. Looking ahead, fiscal 2019 promises to be one of our best years ever, led by the launches of Rockstar Games' Red Dead Redemption 2 and a highly anticipated new title from one of 2K's biggest franchises. Through the advent of new technologies, platforms, and business models, our industry continues to evolve and grow, providing exciting new ways for our teams to create groundbreaking entertainment experiences that captivate and engage audiences throughout the world.
Take-Two 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 esports, and to deliver value to customers and returns for shareholders over the long term. I'll now turn the call over to Karl.
Thanks, Strauss. 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 WWE 2K18, the latest installment in our popular simulation-based WWE series. Co-developed by Yuke's and Visual Concepts, WWE 2K18 received positive review scores, including an 84 out of 100 from COGconnected and an 8.3 out of 10 from Forbes. Critics are praising the title for its brand-new graphics engine, the largest roster of playable superstars in the series' history, and a host of gameplay additions and improvements. According to Forbes, quote, "WWE 2K18 is now the standard-bearer in visual excellence in sports-themed video games." WWE 2K18 already is off to a solid start, and later this fall, 2K will release the title for Nintendo Switch, marking the first time in five years that a WWE game has been available on a Nintendo platform.
In keeping with our focus on driving engagement and recurrent consumer spending, WWE 2K18 is being supported with a series of post-launch downloadable content, including a season pass. The worldwide popularity of WWE is as vibrant as ever, and we believe that there remains a substantial long-term opportunity to grow our WWE 2K series by leveraging further the development and marketing expertise of 2K and Visual Concepts. On October 19th, 2K and Firaxis Games released Sid Meier's Civilization VI: Khmer and Indonesia Civilization & Scenario Pack, which introduced two new leaders representing civilizations from Southeast Asia. This content was made available automatically at no extra cost for purchasers 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, "L.A. Noire," for the Nintendo Switch, PlayStation 4, and Xbox One.
Following these three new console versions in December comes "L.A. Noire: The VR Case Files," featuring seven select cases from the original game rebuilt specifically for a virtual reality experience on the HTC Vive system. "L.A. Noire" 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 a unique type of facial capture technology called MotionScan, "L.A. Noire" breathes unprecedented life into character performances, creating brand-new gameplay out of the art of interrogation. Originally released in May 2011, "L.A. Noire" 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 has sold in over 7.5 million units.
With a choice of spectacular virtual reality, stunning 4K, or the freedom of portable play, these new enhanced versions of L.A. Noire 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 twist.
We view Kerbal Space Program as a new long-term franchise that complements our portfolio of own intellectual property as we continue to capitalize on opportunities across the independent development landscape. The growing popularity of esports is an exciting trend in our industry, and both our team and NBA are hard at work on preparing for the May 2018 launch of NBA 2K League. Beginning in February, the league will introduce its online qualification system to identify the best NBA 2K players, which will be followed by a draft to fill each team's five-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 has a long-term potential to create deeper engagement with the player community and to be a meaningful driver of profits for our company. Social Point is also hard at work and has a number of exciting games planned for launch over the next two years. Looking ahead, we have a robust development pipeline across our labels, including new releases from our popular series and groundbreaking original intellectual property. We remain committed to providing our audiences with the highest quality entertainment, including innovative offerings designed to drive growth in engagement and recurring consumer spending. Excuse me. 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, Karl. Good afternoon, everyone. Today, I will discuss our second quarter results and then review our financial outlook for the third quarter and fiscal year 2018. Please note that additional details regarding our actual results and financial outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. I would also like to note that as we announced last week, we have changed the name of our operational metric from net sales to net bookings. We have made this change to avoid confusion with the net sales caption used by some companies in their GAAP financial statements and to be consistent with operational metrics provided by our peers. The definition of net bookings is identical to our previous definition of net sales.
As mentioned by Strauss, we had an outstanding second quarter from an operating perspective, driven by the continued outperformance of Grand Theft Auto Online and Grand Theft Auto V, as well as the stronger than expected launch of NBA 2K18. Total net bookings grew 20% to $577 million. Of this amount, 62% were digitally delivered net bookings, which grew 52% to $356 million. Our digitally delivered net bookings were driven by record recurring 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 three 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 sales until future (vend periods)
Second, because of the better than expected performance of Grand Theft Auto V and Grand Theft Auto Online, we recorded higher than forecasted internal royalties, which are calculated using results that are adjusted to exclude the impact of deferrals, and unlike certain other costs of goods sold, are not deferred. Third, we recorded higher stock-based compensation expense, primarily due to the increase in our share price. Turning to some details from our second quarter income statement. GAAP net revenue exceeded our outlook and grew by 6% to $444 million. Cost of goods sold increased by 20% to $247 million. Operating expenses increased by 24% to $208 million. 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.
Our GAAP results reflect a $12 million tax benefit, which was driven primarily by tax deductions related to stock compensation expense. These additional tax deductions were due to the increase in our stock price from the date that stock was granted to the date that it vested. This benefit had no effect on our management reporting tax rate, which is 22%. We recorded GAAP net loss of $3 million or $0.03 per share, versus net income of $36 million 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 from $610 million to $660 million.
The largest contributors to net bookings are expected to be "Grand Theft Auto Online" and "Grand Theft Auto V," "NBA 2K18" and "WWE 2K18." We expect GAAP net revenue to range from $440 million to $490 million, and cost of goods sold to range from $262 million to $291 million. Operating expenses are expected to range from $220 million to $230 million. At the midpoint, this represents a 16% increase over last year, driven by the inclusion of Social Point, as well as higher R&D and stock compensation expense. We expect GAAP net loss to range from $29 million to $40 million or $0.25 to $0.35 per share. Turning to our outlook for the full fiscal year. As a result of our better-than-expected second quarter operating results 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 $1.93 billion to $2.03 billion, up from our prior outlook of $1.65 billion to $1.75 billion, and up from $1.9 billion 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 our lighter release slate. We now expect net bookings from current consumer spending to increase approximately 50%, and we expect digitally delivered net bookings to grow around 25%. The largest contributors to net bookings are expected to be "Grand Theft Auto Online," "Grand Theft Auto V," "NBA 2K," and "WWE 2K18." We expect the net bookings breakdown from our labels to be roughly 50% 2K, 45% Rockstar Games, and 5% Social Point and other.
We expect the geographic net bookings split to be about 60% U.S. and 40% international. We now expect to generate approximately $300 million in net cash provided by operating activities, up from our prior outlook of $200 million, and we plan to deploy approximately $60 million for capital expenditures. Turning to our income statement, we expect GAAP net revenues to range from $1.74 billion to $1.84 billion, and cost of goods sold to range from $893 million to $944 million. Total operating expenses are expected to range from $805 million to $825 million. At the midpoint, this represents a 22% increase over the prior year, driven by the inclusion of Social Point, higher R&D expense, and higher stock-based compensation expense. Although our operating performance is exceeding expectations, 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 two factors. First, because of the strong ongoing performance of "Grand Theft Auto," we expect to record higher internal royalties, which unlike certain other costs of goods sold, are not deferred. 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 million to $91 million or $0.55 to $0.80 per share. In closing, we are very pleased with our operating results for the first half of fiscal 2018, 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 $2.5 billion and $700 million respectively. With our industry-leading creative assets, commitment to operational excellence, and strong financial foundation, Take-Two is well positioned to generate growth and margin expansion over the long term. Thank you. Now I'll turn the call back to Strauss.
Thanks, Karl and Lainie. On behalf of our entire management team, I'd like to thank our colleagues for delivering another strong quarter for our organization. To our shareholders, I want to express our appreciation for your continued support. We'll now take your questions. Operator?
Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue, and you may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment please while we poll for questions. 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 two. 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. Then second, on Take-Two specifically, you haven't raised your outlook for 2019. Clearly, all your digital trends are way above where you thought six 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. 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. The other news is, entertainment is a want-to-have business, not a must-have business. People vote ultimately with the usage. The usage on the title is up 30% in terms of average daily users. The title itself, say unit sales are up 20% year-over-year. People clearly are voting that they love "NBA 2K18," and the reviews reflect that as well. That said, we are concerned about any perception, any negative feedback, and we're focused on it, and we're taking it really seriously. Lainie, you want to talk about next year.
Sure. For 2019, we are reiterating the guidance that we've given so far on that year. We continue to look at it. We said that we're going to exceed $2.5 billion and exceed $700 million in operating cash flow. 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. Good quarter.
Our next question comes from the line of Timothy O'Shea of Jefferies. Please proceed with your question. Mr. O'Shea, your line is open. Please proceed with your question.
Yes. Hi. Thank you for taking my question. GTA Online continues to impress. It's another record-breaking quarter. As you mentioned, it's the fourth anniversary of GTA V. On prior calls, we've heard a bunch of questions asking when GTA Online would start to tail off, but given the continued record-breaking quarters, I'm just curious how many more years GTA Online might continue to thrive. How does the upcoming launch of Red Dead influence your thinking here? 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 and how much of this is coming from GTA Online and how much from NBA. Thanks.
Yeah. Well, thank you. Look, GTA Online continues to delight consumers, and therefore our results are also excellent. Rockstar Games has said they'll continue to support Grand Theft Auto Online with content going forward. 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. To the extent that we are competitive, we compete with all of our own titles and everyone else's titles too.
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. Certainly, that's our aim. We think Red Dead stands alone. Naturally, we're incredibly excited. I think the whole market is. It will stand alone and succeed on its own merits.
For the full year, when we looked at raising our guidance, we looked at how much we beat the second 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, 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 for last year's game, as you look back the last 12 months, what % of revenue was attributable to the full game sale, be it retail and full game downloads, and what % of revenue was related to micro-transactions? Secondly, wondered if you could talk a little bit about Social Point. It looks like internationally, or I don't know if it's beta or what type of test you're running for a game, League of Dragons. 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've got it.
Oh, sorry. Okay. Hi, Eric. We'll start with Social Point. Yes, we did actually launch. We had a soft launch of a title called League of Dragons, and it was a very limited soft launch 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 associated with the title, we decided that it didn't make sense to move forward. That title will not be getting a worldwide release.
That being said, the two games that Social Point has right now in the market, Monster Legends and Dragon City, are both performing above our expectations and are growing quarter-over-quarter and also year-over-year. They're very positive for us. 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. In terms of the NBA 2K, the % that you wanted to hear about, we don't give that kind of detail by title in terms of micro-transactions, full game downloads, et cetera.
Okay. Thanks a lot. Appreciate the color.
Our next question comes from the line of Evan Wingren of Pacific Crest Securities. Please proceed with your question.
Thanks. Following up on NBA a little bit, I was wondering if you could share what % of the unit sales that you did disclose came from digital this quarter. Secondarily, you mentioned the growth in recurrent spending in NBA, I just wondered if you could break apart whether you're seeing growth in all components or if it's just from new players.
Karl.
Evan, for full game downloads on new consoles, we're seeing about 35%. We're not getting it specifically by title, overall, that's what we're seeing in Q2 for the business, that's what we would expect to see for the full year.
In terms of the components on NBA, like we said before, we are seeing growth in our users, our daily active users. That is up, 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 Christopher Merwin of Goldman Sachs. Please proceed with your question.
All right, great. Thank you. Just a couple of questions. First for GTA Online. Last quarter year, I think you guided to a moderation in the back half of the year. Of course, you posted another record quarter in the fiscal 2Q. Do you continue to expect to see a moderation for that title in the back half, or do you expect to see growth? Secondly, Lainie, I know you just mentioned, I think 35% was the expectation for digital download for the year. I think last quarter you talked about a 30% expectation. Can you just talk about what sort of change that and how, if at all, 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 said, it'll be another record year, which is obviously very gratifying. On the digital download side for full games, we are continuing to see growth in that area. Obviously, for PC titles, it's over 90%, and for non-PC titles, it's running around 35%, as Lainie said, across the board.
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. It's a good thing for us naturally. We do make more dollars per unit sold digitally, and we have a higher percentage margin. That said, we are where the consumer is, and physical distribution still is the lion's share of our business.
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 broadcasts will be primarily online, or could there be also broadcast TV viewing opportunities? Will there be marketing for the league during traditional NBA games, or how will you kind of tie those two together? Thanks.
We haven't given that detail yet. There will be media rights associated with the NBA 2K League, and that'll be announced in due time. Our crew over there, led by Brendan Donohue, 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 participating. More details to come. Obviously, there will be media available and not much more detail to give out right now.
All right. Thanks.
Our next question comes from the line of Ray 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 two?
We are always adding talent across the company. Our headcount grows, but our headcount grows only on the side of creating great games and great content, and that's everywhere in our business. 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. Also a quick follow-up on talent. There has been some studio closures in the space, one public and some layoffs at a private competitor today. Longer term, I guess, where are you 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.
As I said, we're in growth mode. We're blessed. We get to work with the best and the brightest around the world. It's no secret that hiring phenomenal engineering and artistic talent in the U.S. is exceedingly challenging. 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. As I said, we're in growth mode, and I suspect we will be broadening our physical presence to make sure that we are where the talent is.
Our next question comes from the line of Mike Hickey of The Benchmark Company. 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 add too much color to the Rockstar team, but it looks like as it relates to GTA Online, the marketing efforts from the team there as it relates to incremental content coming in seems to have intensified. Curious if that's true and how impactful you think that's been for the ongoing success of that game. I have a quick follow-up.
Sorry, Mike. I'm sorry. I missed the marketing part of that question.
Yeah. That was the question. Just curious, it looks like the marketing of additional content for Grand Theft Auto Online has intensified, just in terms of some of the trailers and maybe the energy put behind it. I'm curious if that was true, and if that's at all impactful to the success of that game.
Yeah. Sorry, I'm a little slow on the uptake today, Mike. The answer is that the marketing is related to the content drops. As content drops come out, if they're significant and meaningful, it's important that we let people know about them. I think the marketing is informative and entertaining, and certainly we wouldn't do it if we didn't think it had a beneficial impact. What drives consumption and delight is obviously the content itself.
Yeah, fair enough. Good. I guess under the theme of extending your player base, Rockstar Games is obviously preparing to launch L.A. Noire for the Switch. Curious how you think about the opportunity for other Rockstar Games content on that platform. Also thinking about China, I think you've obviously been seemingly more optimistic over time in terms of getting content into that region. Curious your thoughts on the potential opportunity of Red Dead being a commercial opportunity in China, especially as that pay-to-play model seems to be working with other games.
Yeah. In terms of other titles for the Switch from Rockstar hasn't made any announcements yet. Of course, as you know, our labels make announcements about what's coming out. We don't tend to do that on these calls. Clearly the install base for Switch has grown rapidly, and it's potentially an exciting platform. We've already put out a title for basketball. We are supportive of the platform corporately. In terms of China, look, this is a massive market, as you know. It's also a market that is constrained in any number of ways. I'm hopeful that over time, those constraints will lessen. Intellectual property is a particularly challenging area in China, and we think there's great opportunity. We're thrilled to work with local partners. We're working with Tencent for a long time.
They're a wonderful partner on NBA 2K Online, and we've had phenomenal results. 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. America's second biggest export category after aerospace is entertainment. We're not alone in these interests. I will say that we are ready when China's ready, and we think that providing the best quality entertainment on Earth is always a benefit to a population. Of course, we feel that way.
All right. Thanks, guys.
Our next question comes from the line of Benjamin Schachter of Macquarie . Please proceed with your question.
Yeah. A few questions for you. What do you think are really the key lessons from GTA that you expect to bring to other titles in the future? Should we expect you to continue to move down the price curve on the full game in order to drive more players to Grand Theft Auto Online? Separately, on NBA 2K, should we expect any meaningful revenue from the online tryouts this year? Finally, on mobile, beyond Social Point, should we expect intellectual property from other Take-Two areas to come to mobile in any meaningful way in FY 2019 and beyond? Thanks.
Thanks, Ben. I think the key lesson from Grand Theft Auto Online, remember we launched that title four years ago. We certainly have learned a lot from what we knew four years ago. One of the things that we've learned is, if we create a robust opportunity and a robust world in which people can play delightfully in a bigger and bigger way, that they will keep coming back, and they will engage, and if there's an opportunity to monetize that engagement. We've announced that there will be an online component to Red Dead. Furthermore, we've said that we aim to have recurrent consumer spending opportunities for every title that we put out at this company. It may not always be an online model.
It probably won't always be a virtual currency model, but there'll be some ability to engage on an ongoing basis with our titles after release across the board. That's a sea change in our business, recurring consumer spending is 42% of our net bookings in the quarter. It's been transformative for us. The only reason it's transformative for us is because it's transformative to our consumers. The business that once upon a time was a big chunky opportunity to engage for tens of hours or perhaps 100 hours has turned into ongoing engagement day after day, week after week. You fall in love with these titles, and they become part of your daily life. That's immensely exciting, and it's the beginning of the maturation of interactive entertainment as a part of the audiovisual entertainment industry. I just saw a study.
The American media day, average media day is about 22 hours. Obviously, people are sleeping and eating. What it means is they're parallel processing, they're consuming a lot of different kinds of media. Within that 22-hour day, only about an hour and 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, but this 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 League's management talk about that when the time comes. We have said that we have not modeled in or guided against revenues or profits coming from the NBA 2K League. That's not what this is about.
This is about creating a brand-new business, a brand-new sport, and continuing to grow our footprint in our basketball business and to interact with consumers in that way. Do I think there is a revenue and profit opportunity? Unquestionably. Are we prepared to say more about it at this time? We are not. Finally, on mobile and free-to-play, yes, selectively beyond Social Point, there will be opportunities with the rest of our enterprise. As you can see, our success has been driven when we're very selective. 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 existing core intellectual property. We think we sort of have the one-two punch now.
Standalone new intellectual property brought to you by Social Point, intellectual property that is known and beloved, brought to you by the rest of our company, that's super exciting to us.
Well, excellent. Good luck going forward.
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. 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. What do you feel has been the biggest difference for Take-Two achieving and then maybe sustaining the margins of your peers, let's call it, 30% plus range? Along those lines, what do you see over the next two to three years changing for Take-Two specifically that could get you guys there and more importantly, keep you guys in that 30% plus range? Thanks.
Right. Let's distinguish gross margins from operating margins. I assume you're referring to operating margins. On the gross margin side, we're highly competitive, and our gross margins continue to go up, and they're phenomenal. A couple of our competitors account slightly differently. It's not necessarily apples to apples. 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 operating margins are a bit lower than our two biggest competitors, and they need to grow, and it's a matter of scale. Obviously, you can't gain scale and sacrifice success. You have to have successful scale. We can't improve our margins with lost properties. It's not as simple as just doing more. We have to do better and do more.
What we're focused on here entirely is do better, and that's served us incredibly well. The good news is we're in a growth business. We've seen that with our net bookings this year. Lainie talked about our expectations for next year. We have to continue to grow. We have incredibly ambitious people here, both at the corporate level and emphatically at the label level. Everyone's pulling in the same direction. What will cause us to grow 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 first and foremost on making the consumers happy and meeting consumers' needs. All good things will come from that path.
Great. Maybe just one more follow-up on an earlier question. When you think about the kind of the long-lived success of GTA Online and kind of the high margin recurring nature of that, has that changed Rockstar's view in any way in terms of when they want to release another product in the franchise? In other words, do they still believe a standalone release makes sense versus continuing to support GTA Online with extra content? Thanks.
As you know, we don't speak for our labels. We're thrilled to have a setup here where our labels speak to consumers when they're ready. I think all we can express here is enormous gratitude for the success of Grand Theft Auto Online and an enormous belief in Rockstar's ongoing success.
Okay, great. Congratulations on the quarter.
Our next question comes from the line of Scott Krazek 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 L.A. Noire did, and if that's a good guide for what's in the guidance for this year. Then I know you don't talk about the GTA Online attach rates or how many people are playing, but as you've added new users from GTA V, what has been the behavior of those people? Have they transferred at the same rate as historically? What's the opportunity for people maybe that you've lost over the last three or four years?
Sorry, maybe somewhat unsatisfying. L.A. Noire sold in about seven and a half million units over the course of the franchise across the various SKUs, which is terrific. We haven't singled it out going forward from a guidance point of view. We don't typically do that with our titles. On Grand Theft Auto Online, we don't share information on specific data around users or attach rates. We've, at this point, pretty much shared the data that we're going to be sharing on Grand Theft Auto Online today.
Less looking for data, more about behavior. Have people shifted? Is there opportunities to reengage people who may have dropped off?
There's unquestionably opportunity to reengage people based on content drops. When we drop new content, we see results in terms of engagement, and engagement typically does drive revenue.
Okay, thanks.
Our next question comes from the line of Doug Creutz of Cowen and Company. Please proceed with your question.
Yeah, 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 it for the last few years? 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. I think we're having success across all of our label groups. We are definitely in growth mode. I probably am not going to get more granular than that.
Okay, thanks.
There are no further questions over the audio portion of the conference. I'd now like to turn the conference back over to Take-Two management for closing remarks.
Well, first of all, I'd just like to thank everyone for joining us today. I want to take a moment to thank our colleagues across the company who delivered these phenomenal results. I want to thank our consumers who support us and are absolutely passionate about what we do. That drives us and excites us and makes us want to come to work every day. On behalf of the company, I'd like to wish all of you a happy and healthy holiday season and a great new year.
This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.