Greetings and welcome to the Take-Two Second Quarter Fiscal Year 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nicole Shevins. Thank you. Nicole, you may begin.

Good afternoon. Thank you for joining our conference call to discuss our results for the second quarter of fiscal year 2022 ended September 30, 2021. Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer; Karl Slatoff, our President; and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q&A session following our prepared remarks. Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors. These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors. I'd also like to note that unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons are year-over-year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. Our press release also contains a reconciliation of any non-GAAP financial measure to the most comparable GAAP measure. In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at take2games.com. And now I'll turn the call over to Strauss.

Thanks, Nicole. Good afternoon, and thank you for joining us today. I'm pleased to report that we delivered another outstanding quarter, highlighted by net bookings of $985 million, which greatly exceeded our expectations and increased 3% over last year. We experienced consistently strong engagement trends across our key franchises, underscoring the durability of our offerings and the deep relationships that we've established with new, existing and returning players. We believe that we can maintain these favorable engagement patterns as we continue to deliver the highest quality entertainment experiences that are driven by our team's passion and commitment to creativity and innovation. We've been taking key actions to execute on our long-term strategic vision. We continue to enhance and diversify our pipeline across an array of platforms, business models and genres. To support this, we're investing in our infrastructure and making key hires, ranging from senior talent at our labels, to the addition of more than 350 new developers during the second quarter. We're pleased with the progress of T2 Mobile Games, which is helping us leverage our team's expertise across our enterprise. Additionally, Nordeus has already reached key integration milestones. We continue to build upon our ESG efforts, and we hope to share more in the coming months. Given our strong confidence in our company, we opportunistically repurchased 1.26 million shares of our stock during the second quarter for approximately $200 million with an average share price of $158.67. This marks the first time in over 2 years that we repurchased our stock, underscoring the deep value that we observed in our share price. In November, our Board of Directors authorized an additional 7.4 million shares that the company is permitted to repurchase, resulting in 10 million shares remaining available for repurchase as of the date of the additional authorization.…

Thanks, Strauss. I'd like to thank our teams for all their contributions as well as their continued passion and dedication to our business. Our unique and collaborative culture continues to be a key driver of our success. I'll now discuss our recent releases. On October 1, 2K and Hangar 13 launched the Mafia III: Definitive Edition for Stadia. Previously released on other platforms, the Definitive Edition offers many additional features and post-launch content that has since been incorporated into the game. We're pleased to continue our support for Stadia and expand the Mafia franchise to new audiences. On October 11, Nordeus released Top Eleven 2022 on iOS and Android, the latest installment of the world's most successful soccer management game. Top Eleven 2022 delivers a significant update to the gameplay and soccer management experience, pitting aspiring soccer managers against one another in league, cup and friendly matches. Top Eleven 2022 also provides a significant new layer of depth to player development via the Playstyles feature, which helps to enhance the soccer fantasy that Top Eleven has been providing to fans for more than a decade. On October 14, 2K and HB Studios launched the PGA TOUR 2K21 Baller Edition, which includes the base game, all previously released DLC courses and game modes, an assortment of adidas apparel and gear and the Golden Touch Pack that features a gold putter and driver. In addition, PGA TOUR 2K21 offers new multiplayer courses each month designed by a group of international content creators. We're thrilled that the community continues to grow with the title selling-in over 2.5 million units to date. On October 19, 2K launched NBA 2K22 Arcade Edition for Apple Arcade, building on the success of its predecessor, which continues to be listed as one of the platform's top games with…

Thanks, Karl, and good afternoon, everyone. Today, I'll discuss our second quarter results and then review our financial outlook for fiscal year 2022 and the third quarter. Please note that additional details regarding our actual results and outlook are contained in our press release. As Strauss mentioned, our business fundamentals remain exceptionally strong across our key franchises. Net bookings were $985 million, which was significantly above our guidance of $815 million to $865 million and up 3% as compared to last year. Our outperformance was primarily driven by Borderlands 3, NBA 2K and Grand Theft Auto V and Grand Theft Auto Online. During the period, overall engagement was outstanding, with recurrent consumer spending increasing 7% compared to our outlook of an 11% decline and accounting for 69% of total net bookings. Our outperformance was primarily driven by NBA 2K. Digitally delivered net bookings increased 9% compared to our outlook of a 5% decline and accounted for 89% of the total. This result was better than our outlook, primarily due to the outperformance of recurrent consumer spending. During the quarter, 65% of console game sales were delivered digitally, up from 57% last year. GAAP net revenue increased 2% to $858 million, while cost of goods sold increased 6% to $457 million. Cost of goods sold included a $53 million impairment charge related to our decision not to proceed with further development of an unannounced title in our pipeline. Operating expenses increased by 30% to $381 million. The variance is driven by higher personnel, marketing and IT expenses; the addition of Playdots and Nordeus and the revaluation of the Nordeus earnout. And GAAP net income was $10 million or $0.09 per share as compared to $99 million or $0.86 per share in the second quarter last year. We ended the quarter with…

Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to thank our colleagues for delivering another strong quarter. And to our shareholders, I want to express our appreciation for your continued support. We'll now take your questions. Operator?

[Operator Instructions] Our first question is from Mario Lu with Barclays.

I have one on NBA 2K and then another high-level question. So the first one on NBA 2K, I believe you guys mentioned a 58% increase in new user spending. So just curious if you could provide any additional color or specific features that was introduced in this game this year that attributed to this large increase.

It's Karl, Mario. I wouldn't necessarily want to attribute any specific features to the increase. I don't want to tag it, but there have been certainly a lot of additions to the game that we believe have increased engagement. Specifically, just generally speaking, the game is fantastic. I mean, the reviews have been great. User feedback has been great. Engagement has been really, really strong. One thing to note is that we did add the seasons feature to MyPLAYER this year, which obviously creates a lot more content drops and a lot more for folks to do. Every time you increase content and deliver content, that obviously leads to increased engagement and tends to lead to increased monetization. So it's really a combination of the game just being better. We had a lot of wind in our backs, too, from an increased player base, generally speaking. And it's just been, it's the great execution and people are really enjoying the incremental content.

Got it. And then Facebook or Meta recently announced a partnership with Rockstar for GTA: San Andreas on the Quest. Just curious what the background of this partnership was. And do you now think either VR or building a metaverse could be growth drivers for Take-Two as a company going forward?

We're really excited about all of our partnerships. So we have numerous partnerships. We've always said that we want to be where the consumer is. And when VR first emerged as a potential technology, while I expressed some skepticism about it becoming a very broad-based consumer application, I also thought it was really exciting technically and said that we would participate. Rockstar has already brought L.A. Noire to VR. NBA 2K has come to VR. I'm sure we'll have more VR titles in the future as well. So we're always excited when our creative teams can flex their collective muscles and do different things and remains to be seen just how big that can be. We never make projections like that, but we're very excited about the opportunity.

Our next question is from Mike Ng with Goldman Sachs.

I just have 2. First, with the upcoming launch of GTA: Trilogy on mobile, can you talk a little bit about your ambitions to create immersive core games on mobile and whether this foreshadows more mobile content in the future that may have historically been reserved for PC and console? And then second, just a housekeeping question on the improvement in guidance. What's driving the back half improvement? Despite the push out of Marvel Midnight Suns, are there any improved expectations by franchise you'd call out?

Mike, it's Karl. Just to answer your first question about mobile. We are obviously very excited about The Trilogy coming to mobile devices. It's actually not the first time we've had our franchises doing this. We've done this since the very beginning of our mobile days, both on the Rockstar and the 2K side. And we have a long history of bringing our franchises to the mobile space. We've done that in various different ways. Obviously, we've brought older games onto mobile platforms. We've done companion apps, and we've brought modified games or different iterations of franchises like WWE SuperCard or NBA SuperCard. So we are no stranger to bringing our core franchises to the mobile space. We definitely think that there's an opportunity for us to do more. Nothing to announce on the call. But look, obviously, we've invested significantly in this space, both through acquisition and also organically, and we don't expect that to stop anytime soon.

In terms of the back half of the year and the forecast, we are seeing a lot of improvement in the forecast. We have a lot of ups and downs, mostly up, and we're netting up. The titles are looking great. Engagement is great. So we don't have any specific things to call out. But overall, the titles are doing great.

Our next question comes from Matthew Cost with Morgan Stanley.

I have 2. So can you just talk about your expectations over the next, call it, year or 2? Obviously, you've brought on a lot of heads. You have a lot of content in development. There's a decent amount of it hitting between now and the end of the fiscal year and then obviously more to come in the years following. What do you guys expect at a high level in terms of like the margin impact? I would imagine there would be something along the lines of an increase in marketing as you bring games to market but then sort of benefits from scale as those heads actually produce content that is out and engaging people and monetizing actively. Then just the second question is on China. Obviously, you quantified that at about 3% of your business and mentioned how you expect the exposure to remain limited. Should we interpret that to mean that you don't intend to launch games in China in the future or under certain circumstances and sort of what's driving your strategy there going forward?

So in terms of the margins in the next couple of years, as you know, this year is a big year of investment for us in terms of our headcount and our space and IT expenses and our marketing expenses. So we have been talking about that a lot, and we've seen that this year. And next year, we'll see some annualization of a lot of those costs as we go into next year. But as we continue to build scale with our pipeline of titles over the next few years, we expect those margins to continue to grow for us. So that's our plan for the near and the future over the next couple of years.

And in terms of China, I was making the point about the percent of our net bookings that come from China. And it's quite small, roughly 3% at the moment. We expect our net bookings to grow. We expect sequential growth. We're really excited about our future. And at the same time, we're very focused on the region and particularly on the country in the context of what we're able to do and being compliant with regulations. So we remain highly optimistic about China. We absolutely would be very happy to launch additional and new titles there. We expect to do so. In fact, we remain optimistic. I'm simply making the point that it is a small part of our business.

Our next question is from Martin Yang with Oppenheimer.

I have one. Just curious about your philosophy on remastered games. How do you pick and choose from your pretty substantial library what games to bring back on? And as a follow-up, how does remastering games compete with resources for development of new games?

Sure. This is Karl, Martin. I'll answer the question. I'll answer the second one. They're actually related because the truth is remastering games, unless you really go truly out to third parties, which we've done in the past, but even in that case, you are actually competing with other resources. And therefore, that goes into your decision-making on which ones you bring to market, and it purely is an economic decision. An economic decision based on what we believe the fan base to be. How much is it going to cost for the game to be remastered? Are we going to make other changes to the game to enhance the experience? Because typically just pure remasters without -- just ports don't really perform as well as something that's truly remastered or truly enhanced. So all of those factors go into those decisions. But in the end, it is an economic decision. And it is a resource allocation decision, and that's just math that we do.

Our next question is from Drew Crum with Stifel.

Maybe a follow-up to an earlier question. Some of your peers have suggested challenges around recruiting talent, but it sounds like you've had a different experience. If I heard correctly, you added 350 developers during the quarter. What do you attribute that to? Are labor markets improving? Is reopening helping? And if the macro picture is getting better, is your plan to accelerate new hires? And then I have a follow-up.

Thanks for your question. Look, we're so grateful that we continue to attract the industry's top talent. In fact, we've hired over 1,500 developers over the last 2 years, and we've more than doubled our internal developer count in the last 5 years. And I don't want to overstate the case and so much always has to be done on a daily basis regarding culture. But I do think that, that's a reflection of who we are. And I think ultimately, everyone knows who you are, people inside and people outside. And we're really proud of the culture that we've built. A culture that starts with creativity, innovation and efficiency, but very importantly, includes accepting everyone as they are, as they show up, as long as they are equally focused on a very high ambition for excellence and hard work, a willingness to be honest and open and transparent and collaborative, and the agreement that we have with one another that we'll treat everyone with decency and kindness. And I think at this point, we're known for that. And we're imperfect and there's much more that we can do at any given time. We are highly focused on this culture and it has served us very well.

And my follow-up concerns the headlines related to FIFA. Just curious around your interest in furthering your exposure to soccer beyond Top Eleven.

We are so thrilled to have Nordeus in the Take-Two family. And they're just crushing it, which is great. Top Eleven is a great title, a beloved title. And I just couldn't be happier to be in the soccer manager business through Top Eleven with the Nordeus team. That's a big step forward for us. We haven't been in that sport before. And I think I'll leave it at that today.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Strauss Zelnick for any closing comments.

Well, thanks, everyone, for joining us. That was an incredibly short call for us. So you all must have better things to do for the rest of the day. We wish you very well. We're obviously really pleased with the results. And what that leads me to say is, how grateful everyone here is to our teams who deliver these results, who work hard every day to make the phenomenal entertainment that drives the success of the company on an ongoing basis. It's incredibly hard. We don't take it for granted. We never take success for granted. And so thank you to all of our colleagues who are listening today and the ones who aren't listening because they're hard at work. Thank you also to our shareholders for your ongoing support.

This concludes today's call. You may disconnect your lines at this time. Thank you for your participation.