Take-Two Interactive Software Inc (TTWO) 2013 Q1 法說會逐字稿

Greetings and welcome to the Take-Two Interactive first quarter 2013 results.

(Operator Instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications for Take-Two Interactive Software.

Thank you Mr. Diamond, you may begin.

Good afternoon.

Welcome and thank you for joining Take-Two's conference call to discuss its results for the first quarter fiscal year 2013 ended June 30, 2012.

Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer; Karl Slatoff, our Chief Operating Officer 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 am obliged to review our Safe Harbor statement by reminding 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 filings with the SEC, including the Company's annual report on Form 10-K for the fiscal year ended March 31, 2012.

These documents may be obtained from our website at www.take2games.com.

And now I will turn the call over to Strauss.

Thanks, Hank.

Good afternoon and thank you for joining us.

Our results for the first-quarter of fiscal 2013 were below expectations primarily due to lower than anticipated sales of Spec Ops - The Line and Max Payne 3. As a hit-driven entertainment company, not every title that we produce will meet our sales targets.

Delivering high quality products supported by a robust marketing campaign is a recipe for success; however, it is not always a guarantee.

We firmly believe that Take-Two possesses all of the key attributes necessary to navigate through the inherent volatility of our core business over the long term.

Our creative teams are among the best in the industry.

We have built one of the strongest intellectual property portfolios in the business, including 9 franchises with individual titles that have sold in 5 million or more units.

We have cutting-edge development tools and technology and our strong balance sheet and liquidity provide a strong financial footing.

Today, consumers are increasingly discerning and have an appetite for only the highest-quality games that are true leaders within their genre.

We believe that our upcoming releases, including Borderlands 2, and the NBA 2K13, BioShock Infinite and Grand Theft Auto V among others will be just that.

And our groundbreaking titles are not limited to new releases.

Our diverse portfolio of catalog titles, especially Grand Theft Auto IV and Red Dead Redemption continues to attract new audiences years after launch.

In fact, sales of both these titles grew in the first quarter versus last year and our overall catalog sales were up 50%.

In addition to growing our core console and PC business, we are actively investing in digitally delivered content for online and mobile platforms.

These emerging areas of interactive entertainment are high-growth, not tied to the console cycle and present opportunities to generate more stable higher-margin revenue streams over time.

Some of our recent achievements include the following; we entered open beta for NBA 2K Online, our free to play MMO game, on the Tencent games portal in China.

Early user metrics for the game are encouraging.

We released our first mobile social game for Japan, NBA 2K All-Stars on GREE's social networking platform and announced our partnership to offer additional mobile social games in select global markets, including Pirates!

Legends and Civilization.

We expanded our lineup of core mobile titles with the release of Max Payne Mobile for iOS and Android devices and we announced a new slate of casual mobile games from our 2K Play division, including our recently released COMEDY CENTRAL'S Indecision Game which is our first mobile social offering for the US.

Karl will talk about our online and mobile strategy in more detail later in the call.

We continue to find ways to streamline our operations and enhance efficiency.

Earlier this month, Rockstar Games announced that it's expanding its development capabilities in Toronto due in part to financial support and tax incentives that were provided by the Ontario government.

In conjunction with that expansion, Rockstar is combining its Vancouver and Toronto development teams in a new facility.

Bringing these two groups together should make for a powerful creative team on future projects.

Despite our disappointing results for the first quarter, we continue to expect fiscal 2013 to be one of the best years in Take-Two's history.

Consumer enthusiasm suggests strong demand for our extraordinary lineup of upcoming releases, particularly Borderlands 2, NBA 2K13 and BioShock Infinite.

Karl will have more to share about our upcoming releases shortly.

The past five years has been a transformative period for Take-Two.

We have strengthened every facet of our enterprise and delivered some of the most critically and commercially successful titles in our industry.

We understand that there will be challenging periods when our well executed creative endeavors may not deliver their intended commercial results.

We firmly believe that we have the correct strategy and resources to deliver profits and shareholder value over the long term.

I will now turn the call over to Karl.

Thanks, Strauss.

I would like to begin by discussing our announced lineup of upcoming releases.

Beginning this summer, 2K Play will launch a new slate of titles for smartphones and tablets.

House Pest, starring Fiasco the Cat, features state-of-the-art animation and stars a mischievous cat who will turn your house upside down in no time.

GridBlock is an addictive puzzle game with a unique flipping mechanism.

Herd, Herd, Herd is an original physics-based games where players attempt to heard farm animals into their pens in a race against the clock.

And Carnival Games Minigolf is based on our million-unit selling miniature golf title for the Wii.

These titles, along with our recently launched COMEDY CENTRAL'S Indecision Game are just a few instances of Take-Two's overall mobile strategy which I will discuss in greater detail in a few minutes.

This summer and fall, Rockstar Games will release several Max Payne 3 downloadable content packs on Xbox live, PlayStation Network and PC which will feature new multi-player maps, modes, bursts, items, playable characters and challenges.

On September 18, 2K Games will launch Borderlands 2. Developed by Gearbox Software, Borderlands 2 allows gamers to play as one of four new vault hunters in seeking treasure and mayhem on the untamed planet of Pandora.

This title had an excellent showing at E3 2012 winning more than 20 awards, including best shooter from Game Informer.

Consumer anticipation is phenomenal and pre-orders are currently the third highest of any title in Take-Two's history behind only Grand Theft Auto IV and Grand Theft Auto San Andreas.

On October 2, 2K Sports will release NBA 2K13, the next installment of our number one rated and number one selling basketball franchise.

NBA 2K13 is poised to once again raise the bar for sports video games.

This year's game features a trio of players who represent the new dynasty of the NBA future legends -- Oklahoma City Thunder's Kevin Durant, Los Angeles Clippers' Blake Griffin and the Chicago Bulls' Derrick Rose.

Consumer anticipation for this title is incredibly strong with pre-orders up significantly as compared to NBA 2K12.

Later today, 2K Sports will kick off the NBA 2K13 campaign by formally announcing an unprecedented partnership with entertainment mogul, Shawn JayZ Carter, that will intrigue gamers of all kinds, even if they don't currently play sports videogames.

On October 9, one of gaming's most beloved franchises will make its eagerly awaiting return with 2K Games' XCOM Enemy Unknown.

Developed by Firaxis Games, the studio behind our Civilization franchise, XCOM Enemy Unknown combines strategy with intense combat as players fight to control the fate of the human rights by defending against a terrifying global alien invasion.

The title generated tremendous buzz at E3, winning more than 20 awards, including Best of Show from Game Informer and Electric Playground and Best Strategy Game from Game Critic Awards and IGN.

In addition, 2K Marin continues to move forward with the development of XCOM, a tactical squad-based shooter offering a strong character-driven experience which is planned for release during fiscal year 2014.

In November, 2K Play will release Nickelodeon titles for consoles and handhelds that highlight the imaginative and educational worlds of hit television preschool series, including Bubble Guppies, Dora and Team UmiZoomi's Fantastic Flight, and Nickelodeon Dance 2, the sequel to one of Parent Magazine's 15 best games of 2011.

BioShock Infinite is progressing in its development at Rational Games and is planned to launch on February 26, 2013.

This first-person shooter was voted the most anticipated game by IGN users in a May 2012 poll and is already generating strong consumer response.

Grand Theft Auto V is in full development and making substantial progress.

Rockstar recently released some new screenshots from the game that illustrate its vast detailed open world setting.

Now I would like to discuss our strategy to further diversify our business by expanding our digitally delivered offerings for online and mobile platforms.

To date, our online game strategy has focused on Asian markets.

Several years ago, our team recognized the potential to leverage our proven development expertise and renowned franchises in order to capitalize on the world's largest and fastest-growing market for free-to-play online games.

Our partnerships with the region's leading developers and publishers, including Tencent in China, and Nexon and XLGAMES in Korea, have enabled us to benefit from a wealth of market expertise and technology while mitigating our risks and retaining significant financial upside.

We recently launched an open beta for NBA 2K Online on the Tencent Games portal in China in early user metrics have been encouraging.

Our projects in Korea to develop an online baseball game with Nexon and an MMOG based on a leading 2K Games franchise with XLGAMES are also proceeding as planned and we expect to have more to say about these in coming months.

Given the scale of the Asian market and the favorable prospects of our content in the region, these initiatives have the potential to be significantly accretive to revenue and earnings while providing a more predictable and recurring revenue stream to complement our core business.

As Strauss said earlier, we believe that the popularity of video games on mobile platforms, especially tablets, will grow at a rapid pace.

This represents an exciting opportunity for Take-Two which we are actively pursuing through a multifaceted global strategy.

The first component of our mobile strategy is to bring our core gaming franchises to smartphones and tablets.

Our releases to date have focused on popular catalog titles, such as Grand Theft Auto III, 10th anniversary edition; Max Payne Mobile and Sid Meier's Civilization Revolution as well as mobile releases of current sports titles, including NBA 2K12.

Releasing our rich catalog on mobile devices can deliver incremental revenue at high margins due to the relatively low cost of adapting these games for mobile platforms.

As mobile technology continues to evolve, we fully expect to be releasing our most groundbreaking and immersive new titles on every mobile device that core gamers choose to embrace.

The second component of our mobile strategy is the integration of mobile applications with our core console releases.

By linking the mobile and console experience of our franchises, we can surround the consumer with our brands and encourage game-related activity both at home and on the go.

We will have more to say about some of these efforts in the weeks to come.

The third component of our mobile strategy is to build new intellectual property specifically for mobile devices.

Our new titles from 2K Play which I discussed earlier are just a few examples of our efforts in this area.

And the fourth component of our strategy is to pursue partnerships on mobile platforms in markets that require specific expertise which we don't currently have in-house.

Our partnerships with leading mobile and social players in Asia, such as GREE, are enabling us to expand the reach of our brands and participate in an exciting and lucrative market beginning with the NBA 2K All-Stars, Pirates!

Legends and Civilization.

In closing, we are very enthusiastic about the potential for our upcoming titles.

We are also focused on delivering results from our online and mobile initiatives which coupled with our core business provide a very positive long-term growth and profit outlook for Take-Two.

Thanks and I would now like to turn the call over to Lainie.

Thanks Karl, and good afternoon, everyone.

Today I will review our results for the first quarter and then discuss our updated (technical difficulty) for the full fiscal 2013 and our initial outlook for the second quarter.

All of the numbers I will be providing today are non-GAAP results from continuing operations unless otherwise stated.

Our press release provides a reconciliation of our GAAP to non-GAAP measurements.

Starting with our results for the first quarter of fiscal 2013, we delivered net revenue of $226.1 million down 32% from the prior year.

The decrease is primarily due to the releases of L.A. Noire and Duke Nukem Forever in the first quarter of fiscal 2012 which had higher combined sales than our first quarter fiscal 2013 releases.

The strongest contributors to revenue for the quarter were the release of Max Payne 3, catalog sales led by the Grand Theft Auto franchise and Red Dead Redemption, the release of Spec Ops - The Line and continuing sales of NBA 2K12.

Catalog sales grew 50% year-over-year and accounted for 26% of net revenues.

Revenue from digitally delivered content grew 33% year-over-year and accounted for 14% of net revenue, driven by offerings for the Sid Meier's Civilization, Grand Theft Auto and Max Payne franchises.

Gross margins for the first quarter was 20%, down from 38% in the prior year's first quarter.

The decrease resulted primarily from higher software development costs and royalties for our first quarter releases this year.

Operating expenses were approximately $138.2 million of about $18 million versus the prior year's first quarter, driven by the $15 million one-time contractual obligation and higher marketing expenses.

Interest and other expense increased primarily due to the convertible notes that we issued in November 2011, and non-GAAP net loss was $98.8 million, or $1.16 per share as compared to non-GAAP net income of $2 million or $0.02 per share in fiscal first quarter 2012.

GAAP net loss from continuing operations was $110.8 million or $1.30 per share.

Compared to the outlook we provided in May, our first quarter revenue was at the low end of our outlook range while our non-GAAP net loss per share was below the range by $0.41.

Due to the lower than expected sales of Spec Ops - The Line and Max Payne 3 in the first quarter we have lowered our outlook for continued sales of these titles.

As a result, we amortized a higher than projected proportion of their capitalized development costs during the first quarter rather than later in the year.

Turning to some key items from our balance sheet at June 30, 2012, as compared to March 31, 2012, our cash balance decreased to $367 million.

Our accounts receivable balance increased to $72 million primarily reflecting our first quarter releases.

Inventory increased to $28 million and software development costs and licenses decreased to $270 million, reflecting the amortization of development costs related to our first-quarter releases.

Now I will we view our financial outlook for the full year and second quarter of fiscal 2013 which is all provided on a non-GAAP basis.

We are revising our financial outlook for the full year of fiscal 2013 to reflect or lower than expected results for the first quarter partially offset by our strong outlook for our upcoming slate of new releases.

We now expect revenue to range from $1.7 billion to $1.8 billion and non-GAAP net income to range from $1.75 per share to $2 per share.

Turning to the details of our full-year outlook, our expected revenue range assumes the on-time release of the titles we have announced to date as well as other titles yet to be announced or released during fiscal 2013.

We expect the revenue breakdown from our labels to be roughly 55% from Rockstar and 45% from 2K.

We expect our geographic revenues split to be about 50% United States and 50% international.

We expect gross margins in the low 40s.

Total operating expenses are expected to increase by approximately 40% from fiscal 2012, primarily driven by higher marketing expense in support of our new releases and the $15 million one-time contractual obligation recognized in the first quarter.

Selling and marketing expense is expected to be about 17% of net revenue using the midpoint of our outlook range.

And we project interest and other expense of approximately $13 million, tax expense of about $9 million and fully diluted shares of approximately 118 million, which includes 6 million of participating shares for our un-vested restricted stock grants and 26 million shares representing the potential dilution of from our convertible notes under the if-converted method of accounting.

Turning to our outlook for the second quarter of fiscal 2013, we expect to deliver revenue ranging from $200 million to $250 million and a non-GAAP net loss ranging from $0.15 to $0.30 per share.

We continue to expect to be profitable on a non-GAAP basis in both the third and fourth quarters of fiscal 2013.

The majority of our revenue in the second quarter is expected to come from the release of Borderlands 2. We expect second quarter gross margins in the low to mid 40s.

Total operating expenses are expected to increase by approximately $45 million or 65% from the prior year's second quarter.

Selling and marketing expense is expected to be about 29% of net revenue based on the midpoint of our outlook range.

Our second quarter outlook also reflects interest and other expense of approximately $3 million, tax expense of about $2 million and a share count of approximately 86 million.

Take-Two's strong balance sheet and liquidity provide our organization with a sound foundation to pursue our many strategic initiatives.

For our product developments to new online and mobile platforms, we believe that our ability to aggressively invest in our future will deliver positive results over the long-term.

Thank you.

Now I will turn the call back to Strauss.

Thanks, Karl and Lainie.

We are exceedingly optimistic about our long-term outlook for growth and profitability.

Our ability to leverage our creative expertise, expand the global audience for intellectual property and capitalize on traditional emerging platforms is more promising than ever.

I would like to thank our colleagues for their hard work and dedication and our shareholders for their valued support.

We will now take your questions.

Operator?

(Operator Instructions).

Justin Post, Merrill Lynch.

Great.

A couple of things.

First, you said you have a few unannounced titles in the second half.

Obviously, maybe Rockstar is dictating when you can announce those, but when does it become a problem for retail and planning purposes when you haven't announced something?

Like, you know, if you're going to have to have something in the March quarter, when is as late as you can announce it and still get it out to retail and have a good marketing buzz around it?

And the second question is, obviously, Max Payne was disappointing versus expectations in the quarter.

What does that tell you about the industry and the opportunity for some of your titles, including GTA, just as far as how they the industry is receiving titles like that?

Thank you.

Good questions.

I will beg the first question.

It is not that delaying information is a problem for retail.

It's that we tailor the information we divulge to enhancing retail.

So our announcement about upcoming schedules is obviously a conjunction of our desire to be transparent and our desire to do what is right for the title.

But, obviously, we wouldn't be in a position where we would be delaying information at the peril of the release.

To the contrary, we schedule the information to enhance the quality of the release.

And on Max Payne, what does it tell us about the industry?

I think what it tells us first of all is that a 3 million unit initial ship is an excellent result by anyone's standards and certainly by the industry's standards and we don't want to imply otherwise.

And we are really proud of the work that team did and it's a highly rated title that got amazing reviews.

And we think it is a stellar game and so do the consumers.

The question that was posed was how high is up, and we are somewhat disappointed that up was not higher than it has turned out to be, at least so far.

I think what it does tell us is consumers at this stage in the hardware cycle are more selective than ever.

These are expensive propositions for consumers and with a limited release schedule in the first half of the year, not just ours but the industry's, there is less foot traffic, and as a result the bar is going to be higher, and I think that is true going forward.

So it puts further emphasis on our stated strategy of putting out the highest quality titles in the business.

And that strategy has served us well.

It has served us well in terms of our results over the past years.

It continues to serve us well.

It's reflected in the fact that our catalog sells so well.

It's very high percentage of our overall revenue and our catalog sales are up 50% in the quarter year-over-year.

So, clearly, consumers want the titles that we have to offer, otherwise our catalog would not be doing as well as it is.

And, clearly, the bar is higher and we are mindful of that.

We think that our upcoming releases surmount that bar.

The initial look on Borderlands 2 is very, very positive and we could not be more excited, also true for NBA 2K13 and the way that upcoming releases, including XCOM Enemy Unknown are shaping up.

So it looks very promising, and that is why we are able to have guidance for the year that is as strong as this guidance is, albeit somewhat lower than it had been before this quarter.

All right, and maybe a follow-up.

Obviously a few disappointing quarters in a row here.

When you look at the pre-order data and you've given your guidance, is there room for these titles to exceed?

And what would drive that as you look forward over the next three quarters?

We always aim to guide based on what we perceive to be the case.

And so we are guiding on what we believe is realistic and achievable.

We obviously don't guide to a disaster scenario, nor do we guide to a spectacular scenario.

And by the way, to be clear, you are quite right; we had a disappointing year last year and now we've had a disappointing first quarter and we take that on the chin, we acknowledge it.

I'm, frankly, disappointed by it; moreover I take responsibility for it.

That said, we have a company that is capitalized to withstand the normal ups and downs of a pure-play entertainment business.

And I have said on these calls many times, at times when we were doing well and I did not need to say it, that times were not always going to be great.

And occasionally there are disappointments and we have had a few in a row, and we take them all real seriously.

That said, the right thing to do is to recognize our many strengths, celebrate those strengths and move forward productively to our next body of releases which look fantastic.

And as I said, if you need evidence that people show up for good titles, take a look at our catalog sales.

People are actively buying our catalog titles as we speak.

Thanks, Strauss.

Eric Handler, MKM Partners.

Thanks for taking my question.

So when I look at your full-year guidance, you basically missed the first quarter by about $0.50 of the EPS, but you only took about $0.25 out of your full-year number.

What has changed in the last quarter, or can you give us a sense of what the puts and takes are as to where you are more optimistic now?

Sure.

Since the last quarter, we've revised some of our expectations for some of our upcoming releases for the rest of the year.

The other thing that changes the timing and the dynamics between the quarters is our capitalized development cost that we had scheduled for later in the year that got pulled back into the first quarter.

So even though we missed by a big amount, a lot of that were expenses that were for later on in the year.

Okay, thanks.

And then as one follow-up, in terms of the second quarter, you do expect losses and you obviously have one of your bigger games of the year with Borderlands 2 coming out.

Is part of it just timing in terms of advertising and when you recognize all the shipments that you expect for the game?

Yes, that's exactly what it is.

Borderlands ships at the end of the quarter and all of the marketing expenses related to it will be within the quarter, as well as some marketing for some of our Q3 releases.

And we also have a little bit left on the MLB losses that will hit us in that quarter.

So that is what is affecting it.

Great, thank you very much.

Mike Hickey, National Alliance Securities.

Hey guys, Strauss, we have heard next to nothing on GTA V development over the last couple of months.

We have seen a couple of screenshots.

The game is believed by the street to be implied by your guidance for this fiscal year.

But what believability do we have at this point that this game is actually going to come out this year?

Especially when you say the bar is higher reflecting on the performance of Max, how do your teams balance getting that quality bar higher versus the perceived need to get the game out before next year in consoles?

I mean, Mike, we just have not talked about a release date, so obviously we cannot talk about the credibility of a release date that we have not announced.

In terms of the quality bar I was not sending -- that remark was not intended to send some internal signal to our teams to work harder or smarter.

They do the very best job they can on absolutely everything they do and I think we are the best people in the business and I think many if not most people would agree with me.

I'm just saying that the standards are getting higher and that affects us as well.

Our teams are already trying to do groundbreaking work on absolutely everything they do.

Sometimes we succeed, sometimes we succeed mightily and occasionally we are disappointed, and we would like that to be even more occasionally than it has been of late.

Okay, fair enough.

And then I'm guessing that you are consistently -- can you just walk us through the communication you have with your Rockstar Studio in terms of development of GTA V?

Are you getting consistent updates in terms of that game's pacing of development?

Has anything changed in the last couple of months?

Mike, we would not talk publicly about the way that we communicate with our teams internally.

We are blessed to be in business with the Rockstar folks, and everyone knows that I feel that way.

We have the best creative teams in the business throughout our Company, at 2K, at 2K Sports, Visual Concepts, Rational, Firaxis, Rockstar, 2K Marin, 2K Czech.

It's an incredible group of people.

How do we communicate?

We have about as transparent a company as anyone has, and we encourage people to pursue their passions and to make hits.

And I say it here publicly, I say it privately, I am boringly consistent.

That is what we try to do.

As I said, we are not always successful.

That is part of pushing the envelope.

And sometimes, things don't go exactly as planned or as hoped.

It's the nature of an entertainment business.

And while we are not remotely cavalier about it, we are capitalized to withstand the ups and downs of this business.

Okay, thanks guys, best of luck.

Arvind Bhatia, Sterne, Agee.

Thank you very much for taking the question.

I wanted to go back to Borderlands real quick.

I heard you guys talk about a couple of times that pre-orders are looking pretty good.

That is what we pick up as well.

Maybe if you can provide a little bit more color in light of what has happened with Max Payne just relative to where the market is and how you spoke to the challenges in the marketplace for AAA titles or some of the AAA titles?

Has your expectation for Borderlands 2 been brought down just because of market conditions, or do you feel even stronger given the pre-orders on Borderlands?

And maybe one way to think about it is, although there are different titles, how does it look like versus Max Payne in terms of the volumes you expect to do?

I will answer the question very directly, the last point.

I think that the market conditions have not actually tempered our view on Borderlands 2. The consumer response -- we mentioned pre-orders.

There is other buzz factors that we look at.

It has been really, really fantastic.

The title is a very unique title.

There is nothing else like it out there.

It is a great window for us.

So I would say that the momentum continues to build for that title, not in the other direction.

Yes, we do think that the market conditions are relatively difficult in general, but great titles that are marketed well and are positioned well can do well in the face of that.

And I think that this one is unique in that regard just considering that there is really nothing else like it.

It leads a genre.

It is effectively the only game in its genre.

And I understand that.

I think what I'm asking is in the context of preorders perhaps are indicative of a certain amount of momentum.

We saw that with Max Payne as well.

Has the market shifted so much that pre-orders are maybe a less of an indication?

I know you are looking at other factors as well, but I just would like a little bit more comfort that what we saw with Max Payne, maybe there was some false positives that that is not the case here?

Well, look, I think strong pre-orders don't necessarily guarantee that you are going to have a 30 million-unit seller.

There is not a one-to-one correlation.

But I can tell you, I would rather have the momentum being built -- I would rather have strong pre-orders this far out and have momentum going in the right direction than otherwise.

So is there a change in the way -- where the pre-orders predict what is going to happen in the release?

I don't believe that there is a market changer.

I think it is really title by title.

You know, look, sports titles also pre-order -- the pre-orders are a very different indication of how sports titles do.

I think it really depends on the title and the nature of that title and the nature of the fan base buying into that title.

Great.

And last question, is Agent still going to be in the pipeline in the next 12 to 18 months, or should we not consider that as a factor?

Where are you on that title?

Yes, we have not announced anything about the title yet.

Okay great.

Thanks guys.

Hudson Square Research.

Good evening.

Thanks for taking the call.

Two questions if I might.

First, looking at where you have done exceptionally well as a company in putting out very creative titles that are different than what is in the market -- even I think GTA fits that and certainly something like BioShock Infinite and Red Dead was a Western that really redefined the genre where there was not a lot of competition, L.A. Noire very original.

Does the poor performance of something like Spec Ops which addresses a more traditional shooter category, a military category game, does the disappointment there make you rethink your title lineup overall, or as you go forward looking at green lighting new projects, does it make you change that process at all?

And then second question -- the sales and marketing expense in the quarter only up nominally year-over-year, but going back over your ten-year history, even when you had a GTA, the marketing budget is a lot bigger than it has been.

I wonder if you could address what is driving that, or in this quarter, was there an opportunity to maybe pull that back?

Was it maybe an overspend relative to the titles, or is that just the level of expense you need to make to get your voice heard in this environment?

Thanks.

It is Karl.

I will take the first question with just the innovation question.

I would say that we will never stop trying to innovate on titles.

I think you have got it exactly right.

Most of the titles that we do try to do something a little bit different.

They are not plain vanilla.

And Spec Ops is an interesting case, because Spec Ops actually reviewed quite well and I think most of the critics at least recognized there is some variation in the -- MetaCritic scores, of course -- but most recognized that Spec Ops was something very different than any other military shooter that was out there and at least gave the title kudos for attempting to be different.

Sometimes that resonates with consumers; sometimes it does not and I think in the case of Spec Ops, I think it was a fantastic game that is extremely different with a very, very strong story line.

And it begs the question does that ultimately matter in a military shooter genre?

So I think that in that specific case.

that is an interesting case study, but I think it is the only case study and it would never prevent us from taking risks and chances and innovating in the future because that is the only way that we are going to move our Company forward creatively, and that is how frankly we have had success in the past.

So if we let one title where innovation did not move -- did not create a breakout title for us dictate the way we behave in the future, I think that would be a huge mistake.

And the marketing budget?

So for the marketing, it's really on a title-by-title basis.

So it can change from quarter to quarter based on what title is released.

So last year we had L.A. Noire and Duke Nukem, and this year we have Max Payne and Spec Ops.

So each title has its own marketing budget that is built up by the labels based on what they think is required for the title.

So I would not say it is necessarily like a trending indicator on a quarter-by-quarter basis.

You have to really look at each title.

Got it.

Thanks.

Phil Anderson, Longbow Research.

I just wanted to clarify, what was the guidance for the fiscal year on gross margins?

In the low 40s.

Low 40s.

Okay thanks, that is all I had.

(Operator Instructions).

Can we move onto the next questioner please?

Thomas Andrews, BMO Capital Markets.

Standing in for Edward Williams tonight.

I was wondering if you could maybe elaborate a little bit if you can on what your business model is going to be for the Asian initiatives that you have going?

Is it going to be mostly a micro transaction type of business or a subscription business, or is it going to be some sort of combination of the two?

And does it matter on geography at all?

Certainly, it matters on geography, because we tailor our offerings and our business models to consumers wherever they are and tastes shift geographically.

The Asian games in the Asian market are currently thought to be free to play with the economic model being a micro transaction model.

Okay, thank you.

(Operator Instructions) Ben Schacter, Macquarie.

Thanks for taking my question.

This is Tom White on for Ben.

I was hoping you guys might be able to provide maybe some early comments on differences in mobile usage across smartphones and tablets, I guess maybe around engagement, monetization and maybe any demographic information that you might have between those two platforms?

Thanks.

It's Karl.

Look, I think there's a lot of research out there and I think you should check that out yourself, but obviously we look at this a lot and one thing we can say is that people -- tablet gaming, people tend to actually monetize better on tablets.

And I think that's one of the most interesting facts that we have noticed to date.

But it is still early, but I would encourage you to check out the research out there, because it's pretty robust.

Operator, do we have any more questions?

There are no further questions at this time.

I would like to turn the floor back over to management for any closing comments.

Okay, well, thanks all for joining us and we are looking forward to delivering on what we believe will be a very successful year.

Thank you.

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